<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 0-27401
------------------------
INTERSPEED, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3333365
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
39 HIGH STREET
NORTH ANDOVER, MASSACHUSETTS 01845
(Address of Principal Executive Offices) (Zip Code)
(978) 688-6164
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 31, 2000, 10,958,904 shares of $0.01 par value common stock of the
registrant were outstanding.
EXPLANATORY NOTE
This amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000, as filed by the Registrant on August
7, 2000, and is being filed to reflect the restatement of the Registrant's
condensed financial statements (see Note M to the condensed financial
statements).
Page 1 of 24 Total Pages
(Exhibit Index appears on Page 22)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Unaudited Condensed Balance Sheets as of June 30, 2000 and September 30, 1999 3
2. Unaudited Condensed Statements of Operations
for the three and nine months ended June 30, 2000 and 1999 4
3. Unaudited Condensed Statements of Cash Flows for the nine months ended
June 30, 2000 and 1999 5
4. Notes to Unaudited Condensed Financial Statements 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10-21
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 21
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURE PAGE 24
</TABLE>
Page 2 of 24 Total Pages
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERSPEED, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
-------- -------------
(As Restated,
See Note M)
<S> <C> <C>
Assets
Current assets:
Cash............................................................................ $ 6,426 $ 21,227
Accounts receivable, net........................................................ 1,101 808
Inventory....................................................................... 3,284 2,445
Inventory consigned to others................................................... 5,111 --
Prepaid expenses and other...................................................... 244 168
----------- -----------
Total current assets............................................................ 16,166 24,648
Property and equipment, net..................................................... 1,972 1,178
Other assets.................................................................... -- 54
----------- -----------
Total assets.................................................................... $ 18,138 $ 25,880
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................................................ $ 4,350 $ 2,789
Accrued expenses................................................................ 1,023 662
Short-term note payable - due Brooktrout........................................ -- 129
Deferred revenue................................................................ 44 26
----------- -----------
Total current liabilities....................................................... 5,417 3,606
Deferred rent................................................................... 154 104
Contingencies (Note L)..........................................................
Stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares authorized,
10,950,578, and 10,702,658 shares issued and outstanding..................... 110 107
Additional paid-in capital...................................................... 43,448 41,995
Accumulated deficit............................................................. (27,872) (15,825)
Deferred compensation........................................................... (3,119) (4,107)
----------- -----------
Total stockholders' equity...................................................... 12,567 22,170
----------- -----------
Total liabilities and stockholders' equity ..................................... $ 18,138 $ 25,880
=========== ===========
</TABLE>
The Condensed Balance Sheet as of September 30, 1999 has been derived
from the Company's audited Balance Sheet as of that date.
See notes to condensed financial statements.
Page 3 of 24 Total Pages
<PAGE>
INTERSPEED, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
(As Restated, (As Restated,
See Note M) See Note M)
<S> <C> <C> <C> <C>
Revenue before sales discounts - warrants $ 473 $ 950 $ 5,451 $ 1,341
Sales discounts - warrants .............. -- -- (280) --
-------- -------- -------- --------
Net revenue ............................. 473 950 5,171 1,341
Cost of revenue ......................... 481 514 3,495 826
-------- -------- -------- --------
Gross profit (loss) ..................... (8) 436 1,676 515
Operating expenses:
Research and development ................ 1,659 1,335 5,251 3,747
Selling, general and administrative ..... 2,737 976 7,131 1,898
Stock compensation and warrant charges .. 285 1,850 1,837 1,944
-------- -------- -------- --------
Loss from operations .................... (4,689) (3,725) (12,543) (7,074)
Interest income ......................... 111 -- 497 --
-------- -------- -------- --------
Loss before income taxes ................ (4,578) (3,725) (12,046) (7,074)
Income tax expense ...................... -- -- -- --
-------- -------- -------- --------
Net loss ................................ $ (4,578) $ (3,725) $(12,046) $ (7,074)
======== ======== ======== ========
Net loss per share-basic and diluted .... $ (0.42) $ (0.47) $ (1.12) $ (0.88)
======== ======== ======== ========
Shares used to compute net loss per
Share - basic and diluted ............... 10,891 8,001 10,793 8,001
======== ======== ======== ========
</TABLE>
See notes to condensed financial statements.
Page 4 of 24 Total Pages
<PAGE>
INTERSPEED, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
2000 1999
--------------------------
(As Restated
See Note M)
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................. $(12,046) $ (7,074)
Adjustments to reconcile net loss to cash used by
operating activities:
Depreciation and amortization ........................ 619 212
Amortization of stock compensation and warrant charges 1,864 1,944
Sales discounts - warrants ........................... 280 --
Increase (decrease) in cash from:
Accounts receivable .................................. (293) (1,302)
Inventory ............................................ (5,950) (235)
Prepaid expenses and other ........................... (22) (91)
Deferred offering costs .............................. -- (463)
Accounts payable ..................................... 1,561 1,164
Accrued expenses ..................................... 360 487
Payable to Brooktrout ................................ (129) --
Deferred revenue ..................................... 17 39
Deferred rent ........................................ 50 60
-------- --------
Net cash used for operating activities .................... (13,689) (5,259)
-------- --------
Cash flows used for investing activities:
Purchases of property and equipment ....................... (1,413) (588)
-------- --------
Cash flows from financing activities:
Proceeds from the issuance of common stock ................ 301 2
Proceeds from long-term debt-due Brooktrout ............... -- 5,849
-------- --------
Net cash provided by financing activities ................. 301 5,851
-------- --------
Net decrease in cash ...................................... (14,801) 4
Cash, beginning of period ................................. 21,227 132
-------- --------
Cash, end of period ....................................... $ 6,426 $ 136
======== ========
</TABLE>
See notes to condensed financial statements.
Page 5 of 24 Total Pages
<PAGE>
INTERSPEED, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared by
Interspeed, Inc. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting. They
should be read in conjunction with the audited financial statements included in
the Company's Annual Report on Form 10-K/A for the year ended September 30,
1999.
In the opinion of management, the accompanying unaudited condensed financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the interim periods presented.
The operating results for the interim periods presented are not necessarily
indicative of the results which could be expected for the full year.
For the nine months ended June 30, 2000, the Company used $13,689,000 of cash
in operations. Subsequent to June 30, 2000, the Company has continued to use
significant amounts of cash in operations resulting in a cash balance of
approximately $612,000 as of September 30, 2000. The Company is taking
actions to reduce cash outflows by, among other things, reducing headcount
and curtailing certain marketing activities. Subsequent to September 30,
2000, the Company's majority stockholder, Brooktrout, Inc. ("Brooktrout"),
agreed to provide the Company with a revolving line of credit which will
provide the Company with up to $2.5 million. Advances under this line of
credit are at Brooktrout's sole discretion and as of November 10, 2000, the
Company has drawn down approximately $600,000. The Company has engaged
Broadview International, LLC, a global merger and acquisition advisor, to
assist with the review of strategic alternatives, including a possible sale
of the Company. If the Company is unable to complete a strategic transaction,
secure additional sources of financing, or achieve positive cash flow from
operations, the Company may be required to significantly curtail operations
or cease doing business as a going concern. The condensed financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
B. RECENT ACCOUNTING PRONOUNCEMENTS
In June of 1998, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, establishes new
standards of accounting and reporting for derivative instruments and hedging
activities and will be effective for the Company in fiscal 2001. Management is
currently evaluating the effect of adopting SFAS No. 133 on the condensed
financial statements.
In December 1999, the Securities and Exchange Commission (the "SEC") released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements and will be effective for the Company in the fourth quarter of fiscal
2001. Management is currently evaluating the effect of adopting SAB No. 101.
C. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of common
shares outstanding during each period. Outstanding stock options have been
excluded from the computation of diluted per share amounts since the effect
would be antidilutive. Had the impact of stock options, using the treasury stock
method, been included in the computation, weighted average shares would have
increased by 804,000, 957,000, 1,233,000, and 1,205,000 for the three and nine
months ended June 30, 2000 and 1999, respectively.
D. INCOME TAXES
The Company's quarterly effective tax rate is based on the estimated tax rate
for the fiscal year.
Page 6 of 24 Total Pages
<PAGE>
E. COMPREHENSIVE INCOME
There was no difference between the Company's net loss and its total
comprehensive loss for any of the periods presented.
F. SEGMENT INFORMATION
The Company currently operates in one business segment: designing, developing
and marketing advanced communications products which enable service providers to
deliver high speed data access to small and medium sized businesses,
multi-tenant units ("MTUs"), and other organizations.
G. CONCENTRATIONS
To date, the Company's activities had been conducted primarily in the United
States. The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. At June 30, 2000, approximately 65% of
accounts receivable were comprised of balances due from one customer.
The Company relies on contract manufacturers and some single source suppliers of
materials for certain product components. As a result, should the Company's
current manufacturers or suppliers not produce and deliver inventory for the
Company to sell on a timely basis, operating results could be adversely
impacted.
H. INVENTORY
Inventory consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
Raw material ...................... $1,397 $1,622
Work in process ................... 140 5
Finished goods .................... 1,747 818
------ ------
Total ............................. $3,284 $2,445
------ ------
------ ------
Inventory on consignment
(See Note M)..................... $5,111 $ 0
------ ------
------ ------
</TABLE>
I. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
The Company currently targets its sales efforts to data communications service
providers, MTUs, and other service organizations to both public and private
network providers and users across four related market segments. For the three
months and nine months ended June 30, 2000, gross sales to customers in the
United States amounted to $350,000 and $5,000,000, and export sales for the same
periods amounted to $150,000 and $450,000, respectively. For the three months
ended June 30, 2000, one domestic customer and one international customer
accounted for approximately 64% and 16% of gross revenue, respectively. For the
nine months ended June 30, 2000, one domestic customer accounted for
approximately 79% of gross revenue.
Page 7 of 24 Total Pages
<PAGE>
J. RELATED PARTY TRANSACTIONS
From its inception through the completion of its initial public offering on
September 24, 1999 ("IPO"), the Company's operations were funded through
contributions of capital and loans from Brooktrout, its parent company. At
September 24, 1999, in connection with the Company's IPO, Brooktrout contributed
$13,598,000, the majority of the outstanding note balance, to the capital of the
Company.
The Company and Brooktrout entered into a Transition Services Agreement (the
"Agreement") which expired on December 31, 1999. The Agreement outlined certain
services that would continue to be performed on behalf of the Company by
Brooktrout through December 31, 1999. The Agreement required that these services
be phased out over a period beginning on October 1999 to December 1999. The
services included payroll processing and administration, human resources,
benefits, marketing, information technology and telecommunications, accounts
receivable, accounting and finance and order entry. The fees for such services
were on an "as used" basis and were specified in the Agreement. During the three
and nine months ended June 30, 2000 and 1999, fees for these services totaled
$0, $43,000, $469,000 and $1,102,000, respectively.
K. WARRANTS
In consideration for entering into certain long-term reseller agreements, the
Company granted to the customers vested warrants to purchase 55,000 shares of
the Company's common stock at the market price of the Company's common stock on
the dates the warrants were granted. The value of the warrants was calculated by
applying the Black-Scholes option pricing model using the fair market value of
the Company's common stock on the date the agreements were executed. The value
of the warrants has been charged to expense as a component of stock compensation
and warrant charges in the condensed statement of operations.
The Company also granted to the customers warrants to purchase up to 150,000
shares of the Company's common stock that vest in installments as the customers
attain certain revenue milestones over the terms of the agreements. The Company
is accounting for these warrants as a sales discount. The exercise price of the
warrants is the fair market value of the Company's common stock on the date that
the warrants vest. As revenue is recognized on sales to these customers, the
Company is recording a sales discount based on the relationship of the
customers' sales to date to the specified revenue milestone. The amount of the
discount is being estimated by valuing the warrants using the Black-Scholes
option pricing model. The value of the warrants is being adjusted at the end of
each quarter until the revenue levels are attained and the warrants vest.
L. CONTINGENCIES
Subsequent to the issuance of the Company's unaudited condensed financial
statements as of and for the three and nine months ended June 30, 2000, certain
shareholder class action complaints have been filed in the United States
District Court for the District of Massachusetts against the Company and certain
other parties, including certain former officers and directors of the Company.
The claims in the litigation include allegations that the Company, and certain
of its former directors and officers, made false or misleading statements
regarding the Company's financial results for each of the prior quarters in the
fiscal year ended September 30, 2000. The Company is currently reviewing the
allegations in those lawsuits.
M. RESTATEMENT
Subsequent to the issuance of the Company's unaudited condensed financial
statements as of and for the three and nine months ended June 30, 2000, the
Company's management has determined that consignment inventory transactions
with certain resellers were incorrectly recorded as sales. In addition, the
Company's management has determined that a document relied upon to record a
sale had been falsified. Accordingly, the revenue has been reversed and the
inventory reclassified as consigned inventory; the Company will recognize
revenue only as payments are received. Bonus accruals and unpaid commissions
have also been adjusted to reflect the reduction in recorded revenue. A
summary of the significant effects of the restatement is as follows:
Page 8 of 24 Total Pages
<PAGE>
M. RESTATEMENT (CONTINUED)
<TABLE>
<CAPTION>
As Previously
In thousands, except per share amounts Reported As Restated
-------- -----------
<S> <C> <C>
For the three months ended June 30, 2000:
Revenue before sales discounts-warrants ................ $ 7,007 $ 473
Sales discounts-warrants ................... -- --
Net revenue ................................ 7,007 473
Cost of revenue ............................ 4,596 481
Research and development ................... 1,793 1,659
Selling, general and administrative expense 2,626 2,737
Net loss ................................... (2,182) (4,578)
Net loss per share - basic and diluted ..... (0.20) (0.42)
For the nine months ended June 30, 2000:
Revenue before sales discounts-warrants .... $ 14,162 $ 5,451
Sales discounts-warrants ................... (439) (280)
Net revenue ................................ 13,723 5,171
Cost of revenue ............................ 8,558 3,495
Research and development ................... 5,385 5,251
Selling, general and administrative expense. 7,020 7,131
Net loss ................................... (8,580) (12,046)
Net loss per share - basic and diluted ..... (0.79) (1.12)
As of June 30, 2000:
Accounts receivable, net ................... $ 10,233 $ 1,101
Inventory consigned to others .............. -- 5,111
Accrued expenses ........................... 1,418 1,023
Accumulated deficit ........................ (24,405) (27,872)
</TABLE>
Page 9 of 24 Total Pages
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED FINANCIAL
STATEMENTS AND NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS QUARTERLY
REPORT. THIS DOCUMENT CONTAINS CERTAIN STATEMENTS THAT ARE "FORWARD-LOOKING
STATEMENTS" AS THAT TERM IS DEFINED UNDER THE PRIVATE SECURITIES LEGISLATION
REFORM ACT OF 1995 AND RELEASES ISSUED BY THE SECURITIES AND EXCHANGE
COMMISSION. THE WORDS "BELIEVE," EXPECT," "ANTICIPATE," "INTEND," "ESTIMATE,"
AND OTHER EXPRESSIONS, WHICH ARE PREDICTIONS OF OR INDICATE FUTURE EVENTS AND
TRENDS AND WHICH DO NOT RELATE TO HISTORICAL MATTERS, IDENTIFY
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM
THE ANTICIPATED FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES
INCLUDE, AMONG OTHER THINGS, RISKS RELATED TO MARKET GROWTH, PRODUCT
ACCEPTANCE AND PRODUCT DEMAND, RAPID CHANGES IN TECHNOLOGY, THE IMPACT OF
COMPETITION, RISKS RELATED TO THE COMPANY'S FINANCIAL POSITION AND LIQUIDITY,
THE IMPACT, IF ANY, OF THE ANNOUNCED RESTATEMENT ON INTERSPEED'S STOCK PRICE,
THE OUTCOME OF THE STRATEGIC ALTERNATIVE PROCESS AND THE ABILITY OF THE
COMPANY TO CLOSE A STRATEGIC TRANSACTION OR RAISE ADDITIONAL CAPITAL, THE
UNCERTAINTIES ASSOCIATED WITH THE RECENTLY FILED LITIGATION, THE EFFECT OF
THE RECENTLY ANNOUNCED INTERNAL CONTROLS AND PROCEDURES ON INTERSPEED'S
FUTURE OPERATIONS AND PERFORMANCE, THE IMPACT OF SUBSEQUENT MANAGEMENT
REVIEWS AND OTHER RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION,
THOSE FACTORS DESCRIBED UNDER "RISK FACTORS." THE READER SHOULD CAREFULLY
REVIEW ALL OF THESE FACTORS, AND SHOULD BE AWARE THAT THERE MAY BE OTHER
FACTORS THAT COULD CAUSE THESE DIFFERENCES. WE DO NOT UNDERTAKE TO UPDATE ANY
FORWARD-LOOKING STATEMENTS TO REFLECT CHANGES IN UNDERLYING ASSUMPTIONS OR
FACTORS, NEW INFORMATION, FUTURE EVENTS OR OTHER CHANGES.
As discussed in Note M to the condensed financial statements, the condensed
financial statements as of and for the three and nine months ended June 30, 2000
have been restated.
OVERVIEW
REVENUE BEFORE SALES DISCOUNTS - WARRANTS. Our revenue is generated primarily
from sales of our products and related maintenance services to data
communications service providers and their customers. Revenue from product
sales is recognized when the product has been shipped, the customer's
obligation is fixed and collectibility is considered probable. No revenue is
recognized on either products shipped on a trial basis or products shipped
under consignment type arrangements. Our products generally carry a one year
warranty from the date of purchase. We estimate sales returns and warranty
costs at the time the product revenue is recognized and an accrual is
recorded. Customers may contract for support services over and above that
provided by our warranty policy. Revenue from such contracts and from the
extended warranty contracts is recognized ratably over the service period. We
do not recognize revenue on beta units until beta testing on such units is
completed.
SALES DISCOUNTS - WARRANTS. We have granted to certain customers warrants to
purchase up to 150,000 shares of our common stock that vest in installments as
the customers attain certain revenue milestones over the terms of the
agreements, with an exercise price equal to the fair market value of the common
stock at the time of vesting. We are accounting for these warrants as a sales
discount. The exercise price of the warrants is the fair market value of the
Company's common stock on the date that the warrants vest. As revenue is
recognized on sales to these customers, we are recording a sales discount based
on the relationship of the customers' sales to date to the specified revenue
milestone. The amount of the discount is being estimated by valuing the warrants
using the Black-Scholes option pricing model at the end of each fiscal period.
The value of the warrants is being adjusted in each fiscal period until the
revenue levels are attained and the warrants vest.
COST OF REVENUE. Cost of revenue consists of direct product costs such as
standard parts and components for our products and the cost of third party
products purchased for resale, salaries and employee benefits for manufacturing
personnel and overhead such as equipment and facility costs.
GROSS PROFIT. We expect our gross profit to be affected by many factors
including pricing, product mix, cost factors such as component prices, internal
and external manufacturing costs as well as manufacturing efficiencies
Page 10 of 24 Total Pages
<PAGE>
due to higher volume of product shipments which we believe will result in the
improvement of overhead absorption.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
salaries and employee benefits for engineering personnel and costs relating to
prototypes including components, non-recurring engineering charges and tools.
Product enhancements and new features are key objectives. We expect research and
development expenses to increase in absolute dollars in the future.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries,
employee benefits, trade shows, public relations, marketing materials, travel
and other marketing expenses. Future sales and marketing activities will involve
additional costs related to the expansion of the sales and sales engineering
organization, product branding, advertising and public relations costs. We
expect sales and marketing expenses to increase in absolute dollars in the
future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
personnel costs for executive officers, administrative and support activities
including payroll administration, workers' compensation and general liability
insurance, accounting and finance, legal, tax, human resources and transaction
processing.
STOCK COMPENSATION AND WARRANT CHARGES. Stock options have been granted with
exercise prices that were less than the estimated fair value of our common
stock. Compensation cost associated with these options is the difference between
the fair value of the stock and the exercise price.
In consideration for entering into certain long-term reseller agreements, we
granted to the customers vested warrants to purchase 55,000 shares of our common
stock at the market value of our stock on the dates the warrants were granted.
The value of the warrants was calculated by applying the Black-Scholes option
pricing model using the fair market value of our common stock on the date the
agreements were executed. The value of the warrants has been charged to expense
as a component of stock compensation and warrant charges in the condensed
statement of operations.
INCOME TAX EXPENSE. Prior to our IPO, we had been included in Brooktrout's
consolidated income tax filings and these losses have been used to reduce the
group's taxes payable. Brooktrout has not and does not intend to reimburse us
for the value of the net losses used to reduce Brooktrout's consolidated taxable
income. Accordingly, we have not recorded any benefit related to these losses.
We are no longer included in Brooktrout's consolidated income tax filings. We do
not anticipate recognizing any benefits from losses generated in the short term
due to our limited operating history. We expect to continually evaluate the
recoverability of net loss carryforwards.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUE BEFORE SALES DISCOUNTS - WARRANTS. Gross revenue for the three and
nine months ended June 30, 2000 was $473,000 and $5,451,000, compared to
$950,000 and $1,341,000 for the same three and nine month periods in fiscal
year 1999, which represented a decrease of $477,000 and an increase of
$4,111,000 for the three and nine month periods, respectively. The
year-to-date increase is attributable to increased revenue shipments during
fiscal 2000, versus the comparatively low level of revenue during the first
nine months in fiscal 1999. The decrease in revenue for the three month
period compared to the corresponding period of the prior year is attributable
to reduced unit shipments, which resulted primarily from reduced orders from
a significant customer. For the three months ended June 30, 2000, one
domestic customer and one international customer accounted for approximately
62% and 16% of gross revenue, respectively.
SALES DISCOUNTS-WARRANTS. During the nine months ended June 30, 2000, we
recognized $280,000 of sales discounts related to warrants granted to certain
customers. Since these equipment purchase contracts were executed during fiscal
year 2000, no such sales discounts were recorded in the prior fiscal year.
Page 11 of 24 Total Pages
<PAGE>
COST OF REVENUE. Cost of revenue was $481,000 and $3,495,000, or approximately
102% and 64% of gross revenue, for the three and nine months ended June 30,
2000, compared to $514,000 and $826,000 for the three and nine months ended June
30, 1999. The higher cost of revenue for the nine months ended June 30, 2000 is
due to the increased revenue volume compared to the same period of fiscal 1999.
Cost of revenue for the three months ended June 30, 2000 was lower than the same
period of fiscal 1999 as a result of the decrease in revenue.
GROSS PROFIT (LOSS). Gross profit (loss) for the three months ended June 30,
2000 was a loss of $8,000, compared to a gross profit of $436,000 for the three
months ended June 30, 1999. Gross profit was $1,676,000 for the nine months
ended June 30, 2000 compared to gross profit of $515,000 for the nine months
ended June 30, 1999. The loss for the three months ended June 30, 2000 is
attributable to the amount of fixed costs incurred by the Company in shipping
and handling of products which were not recovered due to the lower sales. The
increase in year-to-date gross profit was due to the substantially greater
revenue recognized during the fiscal 2000. Gross profit percentage for the three
and nine months ended June 30, 2000 declined from prior fiscal periods in fiscal
year 2000 due to unfavorable product mix and reduced shipment volume during the
three months ended June 30, 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
approximately 24% and 40% to $1,659,000 and $5,251,000, respectively, during the
three months and nine months ended June 30, 2000 from $1,335,000 and $3,747,000
for the three and nine months ended June 30, 1999. These increases were due
primarily to increases in payroll-related expenses from the year-to-year growth
in the number of engineering employees, and to third-party consulting expenses
for specific development projects during the three and nine months of fiscal
2000.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the three and nine months ended June 30, 2000 were $2,385,000 and
$6,779,000, compared to $976,000 and $1,898,000 for the three and nine months
ended June 30, 1999, increases of $1,409,000 and $4,881,000, respectively. These
increases were due primarily to payroll-related expenses, travel,
advertising/marketing and trade show expenses associated with the build-up in
sales and marketing staff and activities, as well as expenses relating to the
implementation of internal Year 2000 compliant systems.
STOCK COMPENSATION AND WARRANT CHARGES. In prior fiscal years, stock options
have been granted with exercise prices that were less than the estimated fair
value of our common stock. Compensation cost associated with such options was
determined as the difference between the fair value of the stock and the
exercise price. Stock compensation costs were $285,000 and $988,000 for the
three and nine months ended June 30, 2000, as compared to $1,850,000 and
$1,944,000 for the three and nine months ended June 30, 1999, as the
compensation cost is being charged to expense over the option vesting period.
During the nine months ended June 30, 2000, we recognized $849,000 in warrant
charges related to certain long-term reseller agreements. Since the equipment
purchase contracts containing the warrant grant provisions were executed during
fiscal year 2000, no such charges were recorded in fiscal year 1999.
INCOME TAX EXPENSE. Prior to our IPO, we had been included in Brooktrout's
consolidated income tax filings and the losses associated with the Company have
been used to reduce the group's taxes payable. Brooktrout has not and does not
intend to reimburse us for the value of the net losses used to reduce
Brooktrout's consolidated taxes. Accordingly, we have not recorded any benefit
related to these prior losses. We have not recognized any for the losses
generated for the three and nine months ended June 30, 2000 as we believe that
it is more likely than not that such benefits will not be recoverable. We will
continue to evaluate the recoverability of net loss carryforwards.
NET LOSS. Net losses for the three and nine months ended June 30, 2000 were
$4,226,000 and $11,694,000 compared to net losses of $3,725,000 and $7,074,000
for the three and nine months ended June 30, 1999. The increased net loss for
the nine months ended June 30, 2000 is due primarily to the increases in
operating expenses, and warrant-related charges, as described above, that more
than offset the increase in gross profit from increased revenue resulting from
the shipment of our product during the nine months ended June 30, 2000.
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LIQUIDITY AND CAPITAL RESOURCES
From inception through the IPO, our operations had been funded through
contributions of capital and loans from Brooktrout. Subsequent to the IPO, our
operations have been funded through the proceeds from the IPO.
Cash decreased by $14,801,000 from $21,227,000 at September 30, 1999 to
$6,426,000 at June 30, 2000. The decrease in cash is due primarily to a
$5,950,000 increase in inventory, a $452,000 increase in accounts receivable,
and the net loss for the nine months ended June 30, 2000, being partially offset
by non-cash operating charges and a net increase in current liabilities.
The increase in inventory to was due to the increased inventory under
consignment type arrangements and the expectation of increased shipment
volumes during subsequent quarters, while the increase in accounts receivable
was due to substantially higher gross revenue billings during the first nine
months of fiscal 2000. We anticipate that a significant portion of our
inventory under consignment type arrangements will be returned to us. For the
nine months ended June 30, 2000 and 1999, we purchased fixed assets of
approximately $1,413,000 and $588,000, respectively. We currently have no
material commitments for additional capital expenditures.
For the nine months ended June 30, 2000, we used $13,689,000 of cash in
operations. Subsequent to June 30, 2000, we have continued to use significant
amounts of cash in operations resulting in a cash balance of approximately
$612,000 as of September 30, 2000. We are taking actions to reduce cash
outflows by, among other things, reducing headcount and curtailing certain
marketing activities. Subsequent to September 30, 2000, the Company's
majority stockholder, Brooktrout, Inc., agreed to provide the Company with a
revolving line of credit which will provide the Company with up to $2.5
million. Advances under this line of credit are at Brooktrout's sole
discretion and as of November 10, 2000, the Company has drawn down
approximately $600,000. We have engaged Broadview International, LLC, a
global merger and acquisition advisor, to assist us with the review of
strategic alternatives, including a possible sale of the Company. If we are
unable to complete a strategic transaction, secure additional sources of
financing, or achieve positive cash flow from our operations, we may be
required to significantly curtail our operations or cease doing business as a
going concern.
In addition, as discussed in Note L to the condensed financial statements,
shareholder class action complaints have been filed in the United States
District Court for the District of Massachusetts against Interspeed and certain
former officers and directors of the Company. While we are currently reviewing
the allegations in those lawsuits, the defense or possible settlement of these
lawsuits could involve significant expenses.
We do not believe that inflation has had a significant effect on our operations
to date.
RECENT ACCOUNTING PRONOUNCEMENTS
In June of 1998, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, establishes new
standards of accounting and reporting for derivative instruments and hedging
activities and will be effective for the Company in fiscal 2001. Management is
currently evaluating the effect of adopting SFAS No. 133 on the condensed
financial statements.
In December 1999, the Securities and Exchange Commission (the "SEC") released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements and will be effective for the Company in the fourth quarter of
fiscal 2001. Management is currently evaluating the effect of adopting SAB
No. 101.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER
INFORMATION IN THIS REPORT. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS COULD BE HARMED BY ANY OF THE FOLLOWING RISKS.
IF CLASS ACTION LAWSUITS RECENTLY FILED AGAINST US ARE DETERMINED OR SETTLED IN
A MANNER ADVERSE TO US, IT MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION
Shareholder class action suits have been filed against Interspeed , which if
determined or settled in a manner adverse to Interspeed could adversely affect
our financial condition. The shareholder class action suits, all of which are
pending in the United States District Court for the District of Massachusetts,
each arise out of the same alleged conduct and pertain to the disclosures made
by the Company in a press release dated October 6, 2000. Each of the actions
alleges that the defendants, which include Interspeed, its former President and
Chief Financial Officer, as well as two of its former Vice Presidents, violated
Section 10(b) of the Securities Exchange Act of 1934, or the 1934 Act, in
connection with the Company's historical recognition of its revenues. In
addition, each complaint alleges that the individual defendants are controlling
persons of the Company under Section 20(a) of the 1934 Act, and as such caused
the Company to engage in conduct which purportedly violated Section 10(b) of
1934 Act. The plaintiffs seek damages in an undisclosed amount. We are currently
reviewing the allegations in those lawsuits. The defense of these lawsuits could
involve significant litigation-related expenses. In the event that any of the
claims set forth in the class action complaints are determined or settled in a
manner adverse to Interspeed, then such determination or settlements could
adversely affect our financial position or results of operations in the period
in which the litigation is resolved.
IF WE ARE UNABLE TO COMPLETE A STRATEGIC TRANSACTION, IT MAY HAVE A MATERIAL
ADVERSE AFFECT ON OUR FINANCIAL CONDITION AND OUR ABILITY TO CONTINUE DOING
BUSINESS AS A GOING CONCERN.
We have engaged Broadview LLC to assist us with the review of strategic
alternatives, including a possible sale of the Company. We are actively
considering all of our strategic alternatives, including a sale or merger of the
Company, sales of certain of the Company's assets, or a potential restructuring,
recapitalization or bankruptcy reorganization of the Company. At this time,
however, we cannot predict the success of any of these alternatives. If we are
unable to complete one of the above mentioned strategic transactions or secure
additional sources of financing, we may have to significantly curtail our
operations or cease doing business as a going concern.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES
We have accumulated losses of approximately $27.5million since inception in
October 1996 through June 30, 2000 and expect to incur net losses in the
future. Losses were approximately $10.5 million for the year ended September
30, 1999 and approximately $11.7 million for the nine months ended June 30,
2000. We anticipate continuing to incur significant sales and marketing,
research and development and general and administrative expenses. We cannot
be certain we will realize sufficient revenues to achieve profitability.
BECAUSE OF OUR LIMITED OPERATING HISTORY IT IS DIFFICULT FOR US TO PREDICT
FUTURE RESULTS OF OPERATIONS
We commenced operations in March 1997 and our first product became generally
available in February 1999. Due to our limited operating history, it is
difficult for us to predict future results of operations. You should consider
our business and prospects in light of the risks typically encountered by
companies in their early stages of development, particularly those in rapidly
evolving markets such as the data communications equipment market. We cannot be
certain that we will successfully address these risks.
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OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND CAUSE OUR STOCK
PRICE TO BE VOLATILE WHICH COULD CAUSE THE VALUE OF YOUR INVESTMENT IN OUR
COMPANY TO DECLINE
Our quarterly or annual operating results are likely to fluctuate significantly
in the future due to a variety of factors, many of which are outside of our
control. If our operating results do not meet the expectations of securities
analysts, the trading price of our common stock could significantly decline
which may cause the value of your investment in our company to decline. In
addition, the value of your investment could be impacted by investor perception
of the Internet and emerging data communications sectors generally, independent
of the operating performance of our company or other similar companies. Some of
the factors that could affect our quarterly or annual operating results or
impact the market price of our common stock include:
o our ability to develop, manufacture, market and support our products
and product enhancements;
o the timing and amount of, or cancellation or rescheduling of, orders
for our products, particularly large orders from key customers;
o our ability to retain key management, sales and marketing and
engineering personnel;
o announcements, new product introductions and price reductions in
products offered by our competitors;
o our ability to obtain sufficient supplies of sole or limited source
components for our products;
o a decrease in the average selling prices of our products;
o changes in costs of components which we include in our products; and
o the mix of products that we sell and the mix of distribution channels
through which they are sold.
Due to these and other factors, quarterly or annual revenues, expenses and
results of operations could vary significantly in the future, and
period-to-period comparisons should not be relied upon as indications of future
performance.
THE LOSS OF ANY SIGNIFICANT CUSTOMER COULD CAUSE OUR REVENUE TO DECLINE
The loss of any of our significant customers could cause our revenue to decline
and thus have a material adverse effect on our business, financial condition and
results of operations. Our products became generally available in February 1999
and to date we have only sold products to a limited number of customers. Unless
and until we diversify and expand our customer base, our future success will
significantly depend upon a limited number of customers.
FAILURE TO ADEQUATELY DEVELOP OUR SALES CHANNELS COULD CAUSE OUR REVENUE TO
DECLINE
We sell our products directly through our sales force and indirectly through
original equipment manufacturers, value added resellers and system integrators.
Our failure to adequately develop these sales channels may cause our revenue to
decline and, thus, have a material adverse effect on our business, financial
condition and results of operations. We are currently continuing to develop
these sales channels and expect to expend significant resources in this area. As
of July 31, 2000, we had a total of 24 employees responsible for direct sales,
marketing and sales engineering in the United States and international markets.
To the extent we are able to enter into agreements with additional original
equipment manufacturers, value added resellers or systems integrators, the
amount and timing of resources which they devote to the sale of our products may
not be within our control, and they may not perform their obligations as
expected.
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IF WE ARE UNABLE TO DEVELOP AND OPERATE AN EFFECTIVE CUSTOMER SUPPORT
ORGANIZATION, SALES OF OUR PRODUCTS MAY BE REDUCED
Purchasers of data communications equipment assign significant weight in their
purchasing decisions to a vendor's capabilities and reputation in supporting its
products. We will be required to expend significant resources and management
attention on developing and operating a customer support organization. If our
level of customer support does not satisfy customer expectations, our reputation
and future sales could be adversely affected. Accordingly, we have emphasized
customer support in our business strategy and marketing. Because our products
were recently introduced for sale, we have limited experience in operating a
customer support program.
IF OUR TARGET CUSTOMERS DO NOT ACCEPT DSL TECHNOLOGY, WE MAY BE UNABLE TO
SUSTAIN OR GROW OUR BUSINESS
Our future success is substantially dependent upon whether digital subscriber
line, or DSL, technology gains widespread market acceptance by data
communications service providers and the small to medium sized business users to
whom they market their services. In the event that our customers or potential
customers adopt technologies other than digital subscriber line, or DSL, we may
be unable to sustain or grow our business. Our business strategy and current
products are focused on DSL technology. Various alternative technologies,
including T-1, cable and broadband wireless, are currently available to deliver
high speed data communications, and each of the alternatives has comparative
advantages and disadvantages. Data communications service providers continually
evaluate alternative high speed data access technologies and may at any time
adopt technologies other than DSL.
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, OUR REVENUES MAY DECLINE
We have recently introduced our products to the market. Market acceptance of our
products is critical to our future success. Factors that may affect the market
acceptance of our products include:
o market acceptance of DSL technology;
o the features, performance, price and total cost of ownership of our
products;
o the availability of competing products and technologies;
o the success and development of our direct sales force and distribution
channels;
o the quality of our customer service and support of our products; and
o the breadth and depth of our product offerings.
Failure of our existing or future products to achieve and maintain meaningful
levels of market acceptance would materially adversely affect our business,
financial condition and results of operations.
BECAUSE WE CURRENTLY DEPEND ON A SINGLE FAMILY OF PRODUCTS, ANY DECLINE IN
DEMAND FOR THOSE PRODUCTS MAY HARM OUR OPERATING RESULTS
We expect to derive substantially all of our revenues from our DSL access
routers, or DSLARs, product family and related modules for the foreseeable
future. The market may not continue to demand our current products, and we may
not be successful in marketing any new or enhanced products. Any reduction in
the demand for our current products or our failure to successfully develop or
market and introduce new or enhanced products could materially adversely affect
our business, financial condition and results of operations.
UNLESS WE ARE ABLE TO KEEP PACE WITH THE EVOLUTION OF THE DATA COMMUNICATIONS
EQUIPMENT MARKET WE WILL NOT BE ABLE TO GROW OR SUSTAIN OUR BUSINESS
The data communications equipment market is characterized by:
o rapid technological advances;
Page 16 of 24 Total Pages
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o evolving industry standards;
o changes in end-user requirements;
o frequent new product introductions; and
o evolving offerings by data communications service providers.
We believe our future success will depend, in part, on our ability to anticipate
or adapt to such changes and to offer, on a timely basis, products that meet
customer demands. We intend to continue to invest significantly in product and
technology development. The development of new or enhanced products is a complex
and uncertain process requiring the anticipation of technological and market
trends. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent our development, introduction or
marketing of new products and enhancements and result in unexpected expenses.
The introduction of new or enhanced products also requires that we manage the
transition from older products in order to minimize disruption in customer
ordering patterns and ensure that adequate supplies of new products can be
delivered to meet anticipated customer demand. Our inability to develop on a
timely basis new products or enhancements to existing products, or the failure
of such new products or enhancements to achieve market acceptance, could have a
material adverse effect our business, financial condition and results of
operations.
IF WE LOSE KEY PERSONNEL, WE MAY BE UNABLE TO SUCCESSFULLY OPERATE OUR BUSINESS
Our prospects depend to a significant degree upon the continued contributions
of our principal management, engineering and sales personnel, many of whom
perform important management functions and would be difficult to replace. We
do not have employment contracts with our key personnel. Because of recent
business reversals, retention of our employees may be more difficult. The
loss of the services of any key personnel could materially adversely affect
our business, financial condition and results of operations.
IF WE ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL, WE MAY BE
UNABLE TO SATISFY CUSTOMER DEMANDS WHICH MAY CAUSE OUR REVENUES TO DECLINE
We have at times experienced, and continue to experience, difficulty in
recruiting qualified personnel. Recruiting qualified personnel is an
intensely competitive and time consuming process. We may not be able to
attract and retain the necessary personnel to accomplish our business
objectives, and we may experience constraints that will adversely affect our
ability to satisfy customer demand in a timely fashion or to support our
customers and operations. Because of recent business reversals, retention of
our employees may be more difficult. In addition, companies in the data
communications industry whose employees accept positions with competitors
frequently claim that such competitors have engaged in unfair hiring
practices. We could incur substantial costs in defending ourselves against
any such litigation, regardless of the merits or outcome of such litigation.
FAILURE TO MANAGE OUR GROWTH EFFECTIVELY MAY PREVENT US FROM MAXIMIZING OUR
EARNINGS
We have expanded and plan to continue to expand our operations, including our
sales and marketing activities, our accounting, billing and human resource
departments and the establishment of additional sales offices. This expansion
may place significant strains on our ability to manage our growth, including our
ability to monitor operations, bill customers, control costs and maintain
effective quality controls. Until the end of December 1999, we relied upon
Brooktrout, our parent company, to provide us with administrative and support
services, including accounting, human resources and computer systems. Since
then, we have implemented systems that provide the functions and services that
were previously provided by Brooktrout. If we fail to manage our growth
effectively, it could have a material adverse effect on our business, financial
condition and results of operations.
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INTENSE COMPETITION IN THE MARKET FOR HIGH SPEED DATA ACCESS EQUIPMENT MAY
PREVENT US FROM ACHIEVING OR SUSTAINING PROFITABILITY
The market for data communications equipment is highly competitive, particularly
in the emerging DSL equipment market. If we are unable to compete effectively in
the market for high speed data access equipment, our results of operations could
be materially adversely affected. We compete directly with Ascend
Communications, Inc., which was acquired by Lucent Technologies Inc.; Copper
Mountain Networks, Inc.; Diamond Lane, which was acquired by Nokia, Inc.;
Paradyne Networks, Inc.; and Tut Systems, Inc. Many of our current and potential
competitors have significantly greater selling and marketing, technical,
manufacturing, financial, and other resources. Moreover, our competitors may
foresee the course of market developments more accurately than we do and could
in the future develop new technologies that compete with our products. The
strength and capabilities of our competitors may be increased as a result of the
trend toward consolidation in the data communications market. Capitalizing on
and maintaining our technological advantage will require a continued high level
of investment in research and development, marketing and customer service and
support. Due to the rapidly evolving markets in which we compete, additional
competitors with significant market presence and financial resources may enter
those markets, thereby further intensifying competition. We may not have
sufficient resources to continue to make the investments or achieve the
technological advances necessary to compete successfully with existing
competitors or new competitors.
IF WE ARE UNABLE TO DEVELOP INTERNATIONAL MARKETS FOR OUR PRODUCTS, WE MAY BE
UNABLE TO GROW AS PLANNED
Our strategy emphasizes the development of international markets for our
products. We may be unsuccessful in marketing, selling and distributing our
products in foreign markets. Conducting business outside of the United States is
subject to risks, including:
o longer accounts receivable collection cycles;
o possible foreign currency exchange risk and conversion issues;
o difficulties in managing operations across disparate geographic areas;
o difficulties associated with enforcing agreements and collecting
receivables through foreign legal systems;
o changes in a specific country's or region's political or economic
conditions;
o trade protection measures;
o import or export licensing requirements;
o potential adverse tax consequences;
o unexpected changes in regulatory requirements; and
o reduced or limited protection of our intellectual property rights in
some countries.
We cannot be certain that one or more of such factors will not have a material
adverse effect on our future international operations, and consequently, our
business, financial condition and results of operations.
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OUR DEPENDENCE ON SOLE AND SINGLE SOURCE SUPPLIERS AND INDEPENDENT MANUFACTURERS
EXPOSES US TO SUPPLY INTERRUPTIONS THAT COULD RESULT IN PRODUCT DELIVERY DELAYS
Although we generally use standard parts and components for our products, some
key components are purchased from sole or single source vendors for which
alternative sources are not currently available. Our inability to obtain
sufficient quantities of these components may result in future delays or
reductions in product shipments which could materially adversely affect our
business, financial condition and results of operations. We currently purchase
proprietary components from Conexant and Motorola for which there are no direct
substitutes. These components could be replaced with alternatives from other
suppliers, but that would involve redesign of our products. Such redesign would
involve considerable time and expense. We currently enter into purchase orders
with our suppliers for materials based on forecasts, but have no guaranteed
supply arrangements with these suppliers.
In addition, we currently use a small number of independent manufacturers to
manufacture printed circuit boards, chassis and subassemblies to our design. Our
reliance on independent manufacturers involves a number of risks, including the
potential for inadequate capacity, unavailability of, or interruptions in access
to, process technologies, and reduced control over delivery schedules,
manufacturing yields and costs. If our manufacturers are unable or unwilling to
continue manufacturing our components in required volumes, we will have to
transfer manufacturing to acceptable alternative manufacturers whom we have
identified, which could result in significant interruption of supply. Moreover,
the manufacture of these components is extremely complex, and our reliance on
the suppliers of these components exposes us to potential production
difficulties and quality variations, which could negatively impact cost and
timely delivery of our products. We currently enter into purchase orders with
independent manufacturers of materials based on forecasts, but have no
guaranteed arrangements with these manufacturers. Any significant interruption
in the supply, or degradation in the quality, of any component would have a
material adverse effect on our business, financial condition and results of
operations.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY PREVENT US FROM
RETAINING OUR COMPETITIVE ADVANTAGE
Our success and our ability to compete are dependent, in part, upon our
proprietary technology. Taken as a whole, we believe our intellectual property
rights are significant and any failure to adequately protect our proprietary
rights could result in our competitors offering similar products, potentially
resulting in loss of a competitive advantage and decreased revenues. In
addition, the laws of many foreign countries do not protect our intellectual
property to the same extent as the laws of the United States. Also, it may be
possible for unauthorized third parties to copy or reverse engineer aspects of
our products, develop similar technology independently or otherwise obtain and
use information that we regard as proprietary. Furthermore, policing the
unauthorized use of our products is difficult. Litigation may be necessary in
the future to enforce our intellectual property rights, to protect our trade
secrets or patents that we may obtain, or to determine the validity and scope of
the proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on our
future operating results.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND RESTRICT OUR BUSINESS
The data communications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. As the number of entrants in our market increases and the
functionality of our products is enhanced and overlaps with the products of
other companies, we may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. Any claims
asserting that our products infringe or may infringe proprietary rights of third
parties, if determined adversely to us, could have a material adverse effect on
our business, financial condition or results of operations. Any claims, with or
without merit, could be time-consuming, result in costly litigation, divert the
efforts of our technical and management personnel, cause product shipment delays
or require us to enter into royalty or licensing agreements, any of which could
have a material adverse effect upon our operating results. Legal action claiming
patent infringement may be commenced against us. We cannot assure you that we
would prevail in such litigation given the complex technical issues and inherent
uncertainties in patent litigation. In the event a claim against us was
successful, and we could not obtain a license to the relevant technology on
acceptable terms or license a substitute technology or redesign to avoid
infringement, this could have a material adverse effect on our business,
financial condition and results of operations.
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CHANGES TO REGULATIONS AFFECTING THE TELECOMMUNICATIONS INDUSTRY COULD REDUCE
DEMAND FOR OUR PRODUCTS
Any changes to the legal requirements relating to the telecommunications
industry, including the adoption of new regulations by federal or state
regulatory authorities under current laws or any legal challenges to existing
laws or regulations relating to the telecommunications industry, could have a
material adverse effect upon the market for our products. Moreover, our
distributors or customers may require, or we may otherwise deem it necessary or
advisable, that we modify our products to address actual or anticipated changes
in the regulatory environment. Our inability to modify our products or address
any regulatory changes could have a material adverse effect on our business,
financial condition or results of operations.
CONTROL BY BROOKTROUT MAY LIMIT STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME
OF MATTERS REQUIRING STOCKHOLDER APPROVAL
At June 30, 2000, Brooktrout owned approximately 56% of the outstanding shares
of common stock. Accordingly, Brooktrout will be able to control or
significantly influence matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions. This concentration of ownership could have
the effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquiror from attempting to obtain control of us, which
in turn could have a material adverse effect on the market price of our common
stock or prevent our stockholders from realizing a premium over the market
prices for their shares of common stock.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO FALL
The market price of our common stock could fall as a result of future sales of a
large number of shares of our common stock in the public market. As of July 31,
2000, we had approximately 10,958,904 shares of common stock outstanding, of
which approximately 4,003,311 shares are freely transferable without restriction
or registration under the Securities Act of 1933, unless such shares are held by
our affiliates. The remaining 6,955,593 shares of common stock held by existing
stockholders and 141,735 shares subject to outstanding options vested as of July
31, 2000 are restricted securities and may only be sold in the public market if
registered or if they qualify for an exemption from registration under the
Securities Act; 122,326 shares subject to outstanding options vested as of July
31, 2000 are freely transferable without restriction or registration under the
Securities Act of 1933. Under specified circumstances and subject to customary
conditions, Brooktrout has the right, with respect to 6,075,000 shares of common
stock, to require us to register its shares of common stock under the Securities
Act, and Brooktrout will have rights to participate in any future registrations
of securities by us.
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BECAUSE WE HAVE NO SPECIFIC PLAN FOR ANY SIGNIFICANT PORTION OF THE NET PROCEEDS
OF OUR IPO, OUR MANAGEMENT WILL HAVE THE DISCRETION TO ALLOCATE THE NET PROCEEDS
OF OUR IPO TO USES THE STOCKHOLDERS MAY NOT DEEM DESIRABLE
Although we expect to use the net proceeds of our IPO for general corporate
purposes such as working capital, product development and sales and marketing,
we currently have no other specific plan for any significant portion of the net
proceeds of our IPO. As a consequence, our management will have the discretion
to allocate the net proceeds of our IPO to uses the stockholders may not deem
desirable. We may not be able to invest these net proceeds to yield a
significant return. Substantially all of the net proceeds of our IPO will be
invested in short-term, interest-bearing, investment grade securities or
guaranteed obligations of the U.S. government for an indefinite period of time.
WE DO NOT INTEND TO PAY DIVIDENDS
To date, we have never declared or paid any cash dividends on shares of our
common stock. We currently intend to retain our earnings for future growth and
development of our business and, therefore, do not anticipate declaring or
paying any dividends in the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential change in a financial instrument's value caused by
fluctuations in interest and currency exchange rates and equity and commodity
prices. Our operating activities expose us to many risks that are continually
monitored, evaluated, and managed. Proper management of these risks helps reduce
the likelihood of earnings volatility.
We are not a party to any derivative arrangement and we do not engage in
trading, market-making or other speculative activities in the derivatives
markets. At June 30, 2000, we had no outstanding foreign currency exchange
contracts, and no short-term or long-term debt obligations.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) We completed our IPO in September 1999. The IPO was made pursuant to a
registration statement on Form S-1, originally filed with the Securities and
Exchange Commission on June 18, 1999, as amended (Commission File No.
333-81071), which was declared effective on September 23, 1999. The IPO
commenced on September 24, 1999 and terminated shortly thereafter after the sale
into the public market of all of the registered shares of common stock.
The shares of common stock sold in the IPO were offered for sale by a syndicate
of underwriters represented by U.S. Bancorp Piper Jaffray, Warburg Dillon Read
LLC, Tucker Anthony Cleary Gull and DLJdirect Inc.
We registered an aggregate of 3,500,000 shares of common stock (including
1,500,000 sold by Brooktrout as a selling shareholder) in the IPO at a per share
price of $12.00, for an aggregate offering price of $42,000,000. As of the date
of the filing of this report, 3,925,000 registered shares (including 425,000
shares previously owned by Brooktrout that were sold upon the exercise of the
underwriters' overallotment option) have been sold at an aggregate offering
price of $47,100,000. Of the 3,925,000 shares sold in the IPO, 2,000,000 shares
were registered for our account.
We incurred the following expenses in connection with the IPO:
<TABLE>
<S> <C>
Underwriting discounts and commissions ................... $1.68 million
Other expenses ........................................... 1.53 million
-------------
Total expenses ........................................... $3.21 million
</TABLE>
After deducting the expenses set forth above, we received $20,790,000 in net
proceeds for the IPO. From the period commencing on September 23, 1999 through
June 30, 2000, we have used approximately $14.8 million of the net proceeds, of
which approximately $13.7 million was used to fund operating activities
including the net loss for the three months ended June 30, 2000, and
approximately $1.4 million which was used to purchase equipment.
Recent Sales of Unregistered Securities
(1) In January 2000, we granted a warrant to purchase 50,000 shares of
the common stock to a customer at an exercise price of $18.75 per
share in reliance upon the exemption from registration under
Section 4(a) of the Securities Act of 1933.
(2) In February 2000, we granted a warrant to purchase 5,000 shares of
the common stock to a customer at an exercise price of $21.25 per
share in reliance upon the exemption from registration under
Section 4(a) of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 The Amended and Restated Certificate of Incorporation of the Company is
incorporated herein by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K, filed with the Securities and Exchange Commission
on December 29, 1999 ("10-K").
3.2 The Amended and Restated By-Laws of the Company are incorporated herein
by reference to Exhibit 3.2 to the 10-K.
27.1 Restated Financial Data Schedule
Page 22 of 24 Total Pages
<PAGE>
(b) Reports on Form 8-K during the quarter ended June 30, 2000. The registrant
filed no Reports on Form 8-K during the quarter ended June 30, 2000.
Page 23 of 24 Total Pages
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERSPEED, INC.
Dated: November 29, 2000 By: /s/ RAJEEV AGARWAL
-------------------------------
Rajeev Agarwal
President and Chief
Executive Officer
(principal executive officer)
Dated: November 29, 2000 By: /s/ STEVEN E. SARTOR
-------------------------------
Steven E. Sartor
Vice President, Finance and
Controller
(chief accounting officer)
Page 24 of 24 Total Pages
