<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[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: 000-31097
SPEECHWORKS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-3239151
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
695 ATLANTIC AVENUE, BOSTON, MA 02111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 428-4444
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 [_] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 31, 2000, the registrant had 30,041,661 shares of common stock,
par value $0.001 per share, outstanding.
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<PAGE>
SPEECHWORKS INTERNATIONAL, INC. & SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
<S> <C> <C>
Item 1. Consolidated Financial Statements 1
Consolidated Balance Sheet as of June 30, 2000 and December 31, 1999 1
Consolidated Statement of Operations for the Three and Six Months Ended June
30, 2000 and 1999 2
Consolidated Statement of Cash Flow for the Six Months Ended June 30, 2000 and
1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 6
Item 3. Quantitative and Qualitative Disclosure about Market Risk 11
PART II - OTHER INFORMATION 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
</TABLE>
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except share information)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 16,210 $ 11,474
Accounts receivable, net of allowance for
doubtful accounts of $150 and $60, respectively.. 8,572 4,097
Prepaid expenses and other current assets......... 1,702 463
Restricted investments............................ 534 573
-------- --------
Total current assets............................. 27,018 16,607
Fixed assets, net.................................. 4,596 3,408
Intangible assets, net............................. 11,497 -
Other assets....................................... 498 551
-------- --------
Total assets..................................... $ 43,609 $ 20,566
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 1,339 $ 845
Accrued expenses.................................. 3,325 2,092
Deferred revenue.................................. 3,175 854
Current portion of capital lease obligations...... 39 183
Current portion of notes payable.................. 500 500
-------- --------
Total current liabilities........................ 8,378 4,474
Notes payable, net of current portion.............. 542 833
-------- --------
Total liabilities................................ 8,920 5,307
-------- --------
Redeemable convertible preferred stock:
Redeemable convertible preferred stock,
$0.001 par value; 11,920,273 and 9,375,592
shares authorized; 11,791,670 and 9,246,989
shares issued and outstanding, respectively...... 64,923 43,507
-------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value; 22,000,000 and
22,000,000 shared authorized; 7,124,482 and
5,888,327 shares issued and outstanding,
respectively..................................... 7 6
Additional paid-in capital........................ 36,705 5,978
Deferred stock compensation....................... (17,589) (4,905)
Accumulated deficit............................... (49,357) (29,327)
-------- --------
Total stockholders' equity (deficit)............. (30,234) (28,248)
-------- --------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity
(deficit)....................................... $ 43,609 $ 20,566
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per shares amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- -------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Revenue:
Product licenses.......................... $ 2,776 $ 1,053 $ 5,383 $ 1,394
Professional services..................... 2,364 1,637 4,522 2,736
Other revenue............................. 892 1,114 1,214 2,964
-------- ------- -------- -------
Total revenue......................... 6,032 3,804 11,119 7,094
-------- ------- -------- -------
Cost of revenue:
Cost of product licenses.................. 66 32 111 41
Cost of professional services (excluding
stock compensation of $135, $12, $228
and $17, respectively)................... 1,856 1,265 3,550 2,239
Cost of other revenue..................... 659 814 809 2,053
-------- ------- -------- -------
Total cost of revenue (excluding stock
compensation of $135, $12, $228 and $17,
respectively).............................. 2,581 2,111 4,470 4,333
-------- ------- -------- -------
Gross profit (excluding stock compensation
of $135, $12, $228 and $17, respectively).. 3,451 1,693 6,649 2,761
-------- ------- -------- -------
Operating expenses:
Selling and marketing (excluding stock
compensation of $259, $13, $452 and $15,
respectively)............................ 4,478 2,135 8,272 3,681
Research and development (excluding stock
compensation of $120, $10, $192 and $12,
respectively)............................ 2,006 965 3,816 1,864
General and administrative (excluding
stock compensation of $150, $7, $185
and $10, respectively)................... 3,652 1,338 6,960 2,424
Non-cash stock compensation............... 664 42 1,057 54
-------- ------- -------- -------
Total operating expenses.................... 10,800 4,480 20,105 8,023
-------- ------- -------- -------
Loss from operations..................... (7,349) (2,787) (13,456) (5,262)
Interest and other income, net 97 107 105 122
-------- ------- -------- -------
Net loss.................................... (7,252) (2,680) (13,351) (5,140)
Accretion on redeemable convertible
preferred stock............................ (6,055) (454) (6,655) (697)
-------- ------- -------- -------
Net loss attributable to common
stockholders............................... $(13,307) $(3,134) $(20,006) $(5,837)
======== ======= ======== =======
Basic and diluted net loss per common share $(2.12) $(0.59) $(3.36) $(1.16)
Shares used in computing basic and diluted
net loss per common share.................. 6,281 5,285 5,963 5,036
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
6 MONTHS ENDED
JUNE 30,
-------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(13,351) $ (5,140)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................... 840 260
Non-cash stock compensation expense.............. 1,057 54
Provision for doubtful accounts.................. 90 -
Changes in operating assets and liabilities:
Accounts receivable........................... (4,565) (1,002)
Prepaid expenses and other current assets..... (1,239) (250)
Other assets.................................. 53 (411)
Accounts payable.............................. 493 (10)
Accrued expenses.............................. 1,232 611
Deferred revenue.............................. 2,321 152
-------- --------
Net cash used in operating activities....... (13,069) (5,736)
-------- --------
Cash flows from investing activities:
Purchases of fixed assets........................... (2,028) (1,084)
Maturities of short-term investments................ 39 -
-------- --------
Net cash used in investing
activities................................. (1,989) (1,084)
-------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations..... (144) (122)
Proceeds from notes payable......................... - 1,000
Principal payments on notes payable................. (291) (28)
Proceeds from issuance of preferred stock, net
of issuance costs.................................. 19,930 23,832
Proceeds from exercise of stock options 299 47
Repayment of notes receivable from stockholders..... - 12
-------- --------
Net cash provided by financing
activities................................. 19,794 24,741
-------- --------
Net increase in cash and cash
equivalents................................ 4,736 17,921
Cash and cash equivalents, beginning of period........ 11,474 4,486
-------- --------
Cash and cash equivalents, ending of period........... $ 16,210 $ 22,407
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................ $ 76 $ 48
======== ========
Supplemental disclosure of non-cash investing and financing activities:
On June 30, 2000, the Company issued America Online warrants to purchase up to
765,422 shares of common stock at $12.46 per share. The value ascribed to these
warrants using the Black-Scholes valuation method, based on an assumed IPO
price of $14.00 per share at that date, was $8.5 million.
On June 5, 2000, the Company issued 1,045,158 shares of its common stock, at a
fair market value of $11.00 per share, to AT&T in return for technology
totaling $11.5 million.
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements have been prepared by the
Company in accordance with instructions to Form 10-Q and Article 10 of
Regulation S-X. The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments considered
necessary for a fair presentation, have been included. The results of operations
for the six month period ended June 30, 2000 are not necessarily indicative of
the results to be expected for the full year or for any future periods. The
accompanying consolidated financial statements should be read in conjunction
with the audited consolidated financial statements contained in the Company's
Registration Statement on Form S-1 (Reg. No. 333-35164) filed with the
Securities and Exchange Commission.
2. NET LOSS PER SHARE
The Company computes net loss per common share in accordance with SFAS 128
"Earnings per Share." Under the provisions of SFAS 128, basic net loss per
common share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding. There
is no difference between basic and diluted net loss per share since potential
common shares from the conversion of redeemable convertible preferred stock and
the exercise of options and warrants were antidilutive for all periods
presented. The calculation of diluted net loss per common share for the three
and six month periods ended June 30, 2000 and 1999 does not include 22,501,342;
21,371,791; 16,085,829 and 15,079,908 potential shares of common stock
equivalents, respectively, related to common stock options, common stock
warrants and redeemable convertible preferred stock.
The pro forma net loss per common share for the three and six month periods
ended June 30, 2000 and 1999 is calculated assuming the automatic conversion of
all preferred stock outstanding had occurred as of the beginning of the period
or as of the date of issuance of the preferred stock, if later. Therefore,
accretion of the dividends on the redeemable convertible preferred stock is
excluded from the calculation of pro forma net loss per common share.
The following table presents the calculation of basic and pro forma net loss
per common share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss......................................................... $ (7,252) $(2,680) $(13,351) $(5,140)
Accretion on redeemable convertible preferred stock.............. (6,055) (454) (6,655) (697)
-------- ------- -------- -------
Net loss attributable to common stockholders..................... $(13,307) $(3,134) $(20,006) $(5,837)
======== ======= ======== =======
Weighted average shares used in computing basic and diluted net
loss per common share........................................... 6,281 5,285 5,963 5,036
Basic and diluted net loss per common share...................... $ (2.12) $ (0.59) $ (3.36) $ (1.16)
Net loss......................................................... $ (7,252) $(2,680) $(13,351) $(5,140)
======== ======= ======== =======
Pro forma:
Shares used above................................................ 6,281 5,285 5,963 5,036
Pro forma adjustment to reflect the weighted average effect of
assumed conversion of redeemable convertible preferred stock.... 16,107 11,886 14,989 10,880
-------- ------- -------- -------
Weighted average shares used in computing pro forma basic and
diluted net loss per common share............................... 22,388 17,171 20,952 15,916
Pro forma basic and diluted net loss per common share............ $ (0.32) $ (0.16) $ (0.64) $ (0.32)
</TABLE>
<PAGE>
3. DEFERRED STOCK COMPENSATION
In connection with the grant of certain stock options to employees through
June 30, 2000, the Company recorded deferred stock compensation within
stockholders' equity of $10.7 million, representing the difference between the
estimated fair value of the common stock for accounting purposes and the option
exercise price of these options at the date of grant. Such amount is presented
as a reduction of stockholders' equity and is being amortized over the vesting
period of the applicable options. The Company recorded amortization of deferred
compensation for the three and six months ended June 30, 2000 and 1999 of
$664,000, $1,057,000, $42,000 and $54,000, respectively.
On June 30, 2000 the Company issued warrants to a business partner in
connection with a long-term marketing arrangement. In accordance with EITF 96-
18, the value ascribed to this warrant upon its issuance, utilizing the Black-
Scholes valuation model was $8.5 million, which will be amortized to sales and
marketing expense over the expected three-year term of the agreement. This
amortization will commence and the value of the warrant will be measured final
upon completion of the initial public offering, the date at which the exercise
price of the warrants will be fixed. Assumptions used in the Black-Scholes
computation included the following: fair value of the Company's common stock of
$14.00 per share; exercise price of $12.46 per share; risk free interest rate of
return of 6.2%; volatility of 100%; expected term of 3 years; and no dividend
yield. We anticipate recording additional deferred stock compensation charges of
$2.7 million from these warrants which reflects the increase in the initial
public offering price from $14.00 to $20.00 as of the date of the closing of the
initial public offering on August 4, 2000.
4. SEGMENT REPORTING
The Company operates in a single segment and has no organizational
structure dictated by product lines, geography or customer type.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133, as recently amended by SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," is effective for fiscal years
beginning after June 15, 2000. Because the Company does not currently hold any
derivative instruments and does not currently engage in hedging activities, it
expects the adoption of SFAS No. 133 will not have a material impact on its
financial position or operating results.
In December 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to
require recognition of revenue using the "residual method" in circumstances
outlined in SOP 98-9. Under the residual method, revenue is recognized as
follows: (1) the total fair value of undelivered elements, as indicated by
vendor specific objective evidence, is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2 and (2) the difference between
the total arrangement fee and the amount deferred for the undelivered elements
is recognized as revenue related to the delivered elements. SOP 98-9 is
effective for transactions entered into during years beginning after March 15,
1999 (year 2000 for the Company), however, early adoption is permitted. The
Company has adopted SOP 98-9.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 will
become effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998
<PAGE>
or January 12, 2000. The Company does not expect the application of FIN 44 to
have a material impact on its financial position or results of operations.
6. SUBSEQUENT EVENTS
On August 4, 2000, the Company completed its initial public offering of
5.46 million shares of common stock. The offering raised approximately
$100 million, net of offering expenses, for the Company. Concurrent with the
initial public offering, the Company completed two private placements of common
stock which raised an additional $9 million. As of the date of the offering,
approximately 16.4 million shares of preferred stock were automatically
converted into common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this report. The
results shown herein are not necessarily indicative of the results to be
expected for the full year or any future periods.
This Report on Form 10-Q contains forward-looking statements, within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, including but not limited to our expectations for results over the balance
of the year, regarding expense trends, cash positions and our outlook for the
Company, as well as our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this Report on
Form 10-Q are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements. Factors that
could cause future results to differ materially from such expectations include:
the timing of sales of the Company's products and services; market acceptance of
the Company's speech-activated systems; the Company's reliance on a limited
number of large orders for substantially all its revenue; the Company's ability
to develop new products and services in the face of rapidly evolving technology;
the uncertainties related to the Company's planned international operations; the
Company's ability to manage growth of its business; the Company's ability to
protect its intellectual property; the Company's reliance on resellers and
original equipment manufactures for a portion of its sales; the Company's
ability to respond to competitive developments; and the Company's reliance on
attracting, retaining and motivating key technical and management personnel.
These and other risk factors are detailed in the Company's filings with the
Securities and Exchange Commission. As a result of these and other factors,
there can be no assurances that the Company will not experience material
fluctuations in future operating results on a quarterly or annual basis.
OVERVIEW
SpeechWorks is a leading provider of software products and professional
services that enable enterprises and communications carriers to offer automated,
speech-activated services over any telephone. With our speech recognition
solutions, consumers can direct their own calls, obtain information and conduct
transactions automatically, simply by speaking naturally over any telephone,
anytime. Our solutions are designed to help businesses build sustainable
customer relationships over the telephone, provide improved and cost-effective
customer service systems, increase the returns on their internet-related
investments and capitalize on a variety of new business opportunities.
We currently offer two speech recognition solutions for over-the-telephone
applications, the SpeechWorks 6 platform and our recently introduced SpeechSite
package. SpeechWorks 6 is a comprehensive set of software tools and core speech
recognition technologies that can be used to build state-of-the-art, speech-
activated services. With our SpeechWorks 6 platform, companies can quickly
design and deploy speech-activated applications, in multiple languages, that
enable their customers to buy travel tickets, trade mutual funds, get health
care referrals, update account records, send messages and conduct a myriad of
other transactions that extend web-based e-business to any telephone.
<PAGE>
SpeechSite, which is based on the SpeechWorks 6 platform, is a packaged
application that brings the web model of self-service to the telephone.
SpeechSite answers and directs telephone calls and delivers company information.
Like a website, SpeechSite can link to other services and deliver various types
of information services to callers. However, SpeechSite uses a spoken interface
rather than a visual browser.
We complement our products with a professional services organization that
offers a range of services including application development and project
management. We have designed these services to shorten time-to-market, reduce
project implementation risk and improve our clients' competitive position. We
believe that our ability to successfully deliver an integrated solution to our
clients that includes both software and professional services provides us with a
significant competitive advantage.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net revenue represented by certain items in our statements of operations
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- ------------
2000 1999 2000 1999
---- ---- ---- ----
(as a percentage of total revenue)
<S> <C> <C> <C> <C>
Revenue:
Product licenses................... 46% 28% 48% 20%
Professional services.............. 39 43 41 38
Other revenue...................... 15 29 11 42
---- --- ---- ---
Total revenue...................... 100% 100% 100% 100%
==== === ==== ===
Cost of revenue:
Cost of product licenses........... 1% 1% 1% 1%
Cost of professional services...... 31 33 32 31
Cost of other revenue.............. 11 21 7 29
---- --- ---- ---
Total cost of revenue.............. 43 55 40 61
---- --- ---- ---
Gross profit....................... 57 45 60 39
---- --- ---- ---
Operating expenses:
Selling and marketing.............. 74 56 74 52
Research and development........... 33 25 34 26
General and administrative......... 61 35 63 34
Non-cash stock compensation........ 11 1 10 1
---- --- ---- ---
Total operating expenses........... 179 117 181 113
---- --- ---- ---
Loss from operations................. (122) (72) (121) (74)
Interest and other income
(expense), net...................... 2 3 1 2
---- --- ---- ---
Net loss............................. (120)% (69)% (120)% (72)%
==== === ==== ===
</TABLE>
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Total revenue. Our total revenue for the three months ended June 30, 2000
increased 58.6% to $6.0 million from $3.8 million for the same period of 1999.
For the first six months of the 2000, revenues increased 56.7% to $11.1 million
from $7.1 million during the same period of 1999. Revenues from
<PAGE>
international sales during the three and six months periods ended June 30, 2000
were $1.0 million and $1.7 million, respectively. International sales were
$135,000 for the three and six-month periods ended June 30, 1999.
Revenue from product licenses. Revenue from the sale of software licenses
during the three-month period ended June 30, 2000 increased 163.6% to $2.8
million from $1.1 million in the same period of 1999. For the six-month period
ended June 30, 2000, revenues from product license sales increased 286.2% to
$5.4 million from $1.4 million during the same period in 1999. The growth in
sales of product licenses resulted from a growing market acceptance of our
speech-activated e-business solutions, our expanded sales and marketing efforts
and the improved productivity of our distribution channels. We expect that
revenue from product licenses will represent more than 50% of our total revenue
in the future.
Revenue from professional services. Revenue from fees we received for
professional services during the three-month period ended June 30, 2000
increased 44.4% to $2.4 million from $1.6 million in the second quarter of 1999.
For the six-month period ended June 30, 2000, revenues from professional
services increased 65.3% to $4.5 million from $2.7 million during the same
period in 1999. The growth in revenue from professional services resulted
primarily from the increased demand for custom speech applications from existing
and new clients.
Other revenue. Other revenue accounted for 14.8% of total revenue for the
three-month period ended June 30, 2000, compared to 29.3% of revenue for the
same period in 1999. For the six-month period ended June 30, 2000, other revenue
accounted for 10.9% of total revenue compared to 41.8% of total revenue for the
same period in 1999. Other revenue consists primarily of resold hardware and
facility management services. We anticipate that resold hardware and facilities
management revenue will continue to decline as a percentage of total revenue in
the future.
Cost of product licenses revenue. Cost of product licenses revenue
increased for the three-month period ended June 30, 2000 to $66,000, or 2.4% of
product license revenue, from $32,000, or 3.0% of product license revenue in
1999. For the six-month period ended June 30, 2000 the cost of product licenses
increased to $111,000, or 2.1% of product license revenue from $41,000, or 2.9%
of product license revenue in 1999. The decrease in the percentage of revenue
reflects the decrease in royalties owed to MIT based on achieving the second
milestone of cumulative product license sales.
Cost of professional services revenue. Cost of professional services
revenue for the three months ended June 30, 2000 increased 46.7% to $1.9 million
from $1.3 million for the same period in 1999. For the six-month period June 30,
2000, the cost of professional services revenue increased 58.6% to $3.6 million
from $2.2 million in 1999. The increase in cost is due primarily to the hiring
of additional project managers, developers, user interface designers, speech
scientists and technical support staff to expand our professional services
organization. This cost represented 78.5% of professional services revenue for
the three-month period ended June 30, 2000, compared to 77.3% of professional
services revenue in the same period of 1999. For the six-month period ended June
30, 2000, the cost of professional services revenue as a percentage of
professional services revenue was 78.5% compared to 81.8% for the same period in
1999. The lower cost of professional services as a percent of related revenue
for the six months ended June 30, 2000 reflects improvements in margins as
certain lower-margin projects were completed and replaced with higher-margin
projects.
Cost of other revenue. Cost of resold hardware and resold facilities
management services for the three-month period ended June 30, 2000 decreased to
$659,000 from $814,000 in the same period of 1999. For the six-month period
ended June 30, 2000, the cost of other revenues were $809,000 compared to $2.1
million for the same period in 1999. The decrease in cost of other revenue from
1999 to 2000 reflects fewer shipments of hardware to customers during 2000.
Total operating expenses. Our total operating expenses for the three-
month period ended June 30, 2000 increased 141.1% to $10.8 million from $4.5
million during the same period of 1999. For the six-month period ended June 30,
2000, total operating expenses increased 150.6% to $20.1 million from $8.0
million in 1999. These increases occurred in all categories of operating
expense as we grew our
<PAGE>
organization. Total headcount grew to 250 as of June 30, 2000, compared to a
headcount of 120 as of June 30, 1999. As a percentage of revenue, our operating
expenses were 179.0% for the three-month period ended June 30, 2000, compared to
117.8% for the second quarter of 1999. For the six-month periods ended June 30,
2000 and 1999, operating expenses as a percentage of revenue were 180.8% and
113.1%, respectively.
Selling and marketing expenses. Selling and marketing expenses consist
primarily of salaries, commissions and related travel costs for the selling and
marketing personnel, along with spending on marketing activities, including
advertisements, tradeshows, public relations activities and educational
seminars. For the three-month period ended June 30, 2000, selling and marketing
expenses increased 109.7% to $4.5 million from $2.1 million during the same
period of 1999. Selling and marketing expenses as a percentage of revenue
increased to 74.2% for the three months ended June 30, 2000 from 56.1% for the
same period of 1999. For the six-month period ended June 30, 2000, selling and
marketing expenses were $8.3 million compared to $3.7 million for the same
period in 1999, an increase of 124.7%. The increase in selling and marketing
expenses during 2000 from 1999 resulted primarily from our investment in sales
and marketing personnel. During this period, the number of sales personnel in
North America increased to 33 from 16 and the number of employees in marketing
increased to 19 from 10. In addition, the cost of engineers devoted to technical
sales support, recorded as a selling expense, has increased steadily with
increased sales. The increase in selling and marketing expenses also reflects
higher commissions associated with higher sales and increased marketing
activities, including advertisements, tradeshows, public relations activities
and educational seminars during these periods.
Research and development expenses. Research and development expenses
consist primarily of labor costs and related travel for personnel involved in
new product development and enhancements. Research and development expenses for
the three-month period ended June 30, 2000 increased to $2.0 million from
$965,000 during the same period of 1999, an increase of 107.9%. For the six-
month period ended June 30, 2000, research and development expenses increased
104.7% to $3.8 million from $1.9 million for the same period in 1999. Research
and development expenses as a percentage of revenue for the three-month period
ended June 30, 2000 increased to 33.3% from 25.4% during the same period in
1999. For the six-month period ended June 30, 2000, research and development
expenses as a percentage of revenue was 34.3%, compared to 26.3% for the same
period in 1999. The increase in research and development expenses was driven by
the increased hiring of software developers, quality assurance and testing
personnel and speech scientists to develop and enhance our products. The number
of personnel involved in research and development increased from 42 as of June
30, 1999 to 68 as of June 30, 2000.
General and administrative expenses. General and administrative expenses
consist of labor costs and related travel for personnel involved in supporting
the financial, legal and system administration infrastructure, along with all
occupancy related and corporate overhead costs. For the three-month period
ended June 30, 2000, general and administrative expenses increased 172.9% to
$3.7 million from $1.3 million during the same period in 1999. For the six-month
period ended June 30, 2000, general and administrative costs were $7.0 million
compared to $2.4 million for the same period in 1999, an increase of 187.1%.
The increase in general and administrative expenses from 1999 to 2000 was
primarily due to additional infrastructure necessary to support our growing
operations in the United States and internationally, an increase in professional
services fees incurred to support our growth and increased recruiting costs.
Non-cash stock compensation. In connection with the grant of stock options
during the three months ended June 30, 2000, we recorded deferred stock
compensation charges of $4.2 million compared to $550,000 for the same period in
1999. For the six-month period ended June 30, 2000, deferred stock compensation
charges were $5.3 million compared to $881,000 for the same period in 1999.
Deferred stock compensation charges represent the difference between the deemed
fair value for financial reporting purposes of our common stock on the date of
grant and the exercise price of options granted to employees to acquire our
common stock during this period, multiplied by the number of option shares.
Deferred stock compensation is amortized to expense ratably over the vesting
period of the options granted, which is typically four years. For the three-
month period ended June 30, 2000 we recorded amortization of deferred stock
compensation of $664,000 compared to $42,000 during the same period in 1999. For
the six-month period ended June 30, 2000, the amortization of deferred stock
compensation was $1.1 million compared to
<PAGE>
$54,000 for the same period in 1999. We expect the amortization of deferred
stock compensation to be approximately $2.7 million per year through 2002 and
decreasing thereafter through 2004.
On June 30, 2000 we issued warrants to a business partner in connection with
a long-term marketing arrangement. In accordance with EITF 96-18, the value
ascribed to this warrant upon its issuance, utilizing the Black-Scholes
valuation model was $8.5 million, which will be amortized to sales and marketing
expense over the expected three-year term of the agreement. This amortization
will commence and the value of the warrant will be measured final upon
completion of the initial public offering, the date at which the exercise price
of the warrants will be fixed. Assumptions used in the Black-Scholes computation
included the following: fair value of the Company's common stock of $14.00 per
share; exercise price of $12.46 per share; risk free interest rate of return of
6.2%; volatility of 100%; expected term of 3 years; and no dividend yield. We
anticipate recording additional deferred stock compensation charges of $2.7
million from these warrants which reflects the increase in the initial public
offering price from $14.00 to $20.00 as of the date of the closing of the
initial public offering on August 4, 2000.
Interest and other income (expense), net. For the three months ended June
30, 2000, interest income was $252,000 compared to $144,000 during the same
period in 1999. Interest expense was $41,000 during the three-month period ended
June 30, 2000 compared to $34,000 during the same period of 1999. For the six-
month period ended June 30, 2000, interest income was $344,000 compared to
$182,000 for the same period in 1999. For the six-month period ended June 30,
2000, interest expense was $76,000 compared to $48,000 for the same period in
1999. The increase in interest income from 1999 to 2000 was the result of
higher cash balances available for investing during 2000 as a result of the
series E redeemable convertible preferred stock proceeds received during the
quarter ended June 30, 2000. Other expenses include other non-operating costs.
LIQUIDITY AND CAPITAL RESOURCES
Since 1995, we have funded our operations primarily through the private
placement of convertible preferred stock totaling $60.0 million through June 30,
2000, and to a lesser extent, through bank borrowings and capital equipment
lease financing. As of June 30, 2000, we had cash and cash equivalents of $16.2
million and $2.0 million available under our revolving line of credit. Our
operating activities resulted in net cash outflows of $13.1 million in the six-
month period ended June 30, 2000 and $5.7 million for the same period in 1999.
The operating cash outflows for these periods resulted primarily from our
significant investment in research and development, sales and marketing and
infrastructure.
To date, our investing activities have consisted primarily of purchases and
maturities of short-term investments and capital expenditures for property and
equipment, including $2.0 million of capital expenditures in the six month
period ended June 30, 2000, compared to $1.1 million for the same period in
1999. The increase in our capital expenditures in the first six months of 2000
was the result of building our infrastructure and expanding operations into new
locations in the United States, Canada, Singapore, the United Kingdom and
Mexico. These capital expenditures have consisted primarily of computer
hardware, software and furniture and fixtures for our growing employee base.
At June 30, 2000, following an amendment to our bank agreement, we had $2.0
million available under our revolving line of credit. The revolving line of
credit expires on May 31, 2001.
We had an equipment line of credit which we converted into a term loan in
the amount of $1.5 million. The term loan bears interest at an annual rate of
prime plus 0.75% (10.25% at June 30, 2000), and principal and interest under the
term loan are payable in 36 monthly installments through September 2002.
Our financing activities generated cash of $19.8 million for the six-month
period ended June 30, 2000, compared to $24.7 million for the same period of
1999.
On April 11, 2000, we closed an additional round of private financing in
which we raised net proceeds of $19.9 million through the issuance of our series
E convertible preferred stock. Because the
<PAGE>
deemed fair market value of our common stock for financial reporting purposes
was greater than the issuance price of the series E convertible preferred stock,
we recorded a beneficial conversion feature of $5.2 million on the series E
convertible preferred stock, which was treated as a preferred stock dividend as
of the date of issue.
On May 31, 2000, we issued to a series E investor a warrant to purchase
47,710 shares of common stock at an exercise price of $7.86 per share. The
warrant is exercisable on or before May 31, 2002.
On August 4, 2000, the Company completed its initial public offering of 5.46
million shares of common stock. The offering raised approximately $100 million,
net of offering expenses, for the Company. Concurrent with the initial public
offering, the Company completed two private placements of common stock which
raised an additional $9 million. As of the date of the offering, approximately
16.4 million shares of preferred stock were automatically converted into common
stock.
We believe that the net proceeds of the initial public offering and the
concurrent private placements, together with existing cash and cash equivalents,
will be sufficient to meet our working capital and capital expenditure
requirements for at least the next 12 months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A portion of our business is conducted outside the United States through our
foreign subsidiaries and branches. We have foreign currency exposure related to
our operations in international markets where we transact business in foreign
currencies and accordingly are subject to exposure from adverse movements in
foreign currency exchange rates. Our foreign subsidiaries maintain their
accounting records in their local currencies. Consequently, changes in currency
exchange rates may impact the translation of foreign statements of operations
into U.S. dollars, which may in turn affect our consolidated statements of
operations. Our functional currency is the U.S. dollar for all of our foreign
subsidiaries and branches, and therefore, translation gains and losses are
included as a component of net income or loss. Substantially all of our revenues
are invoiced and collected in U.S. dollars.
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1, 3 AND 5. NOT APPLICABLE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 11, 2000, the Company issued and sold a total of 2,544,681 shares of
series E convertible preferred stock, $.001 par value per share (the "Series E
Preferred"), to 17 accredited investors at a price per share of $7.86 in a
private placement exempt from registration pursuant to Rule 506 of Regulation D
under the Securities Act of 1933, as amended (the ("Securities Act") for gross
proceeds of $20,001,193. Each outstanding share of Series E Preferred converted
into one share of the Company's common stock, $.001 par value per share (the
"Common Stock") upon the closing of the Company's initial public offering on
August 4, 2000.
On June 5, 2000, the Company issued a total of 1,045,158 shares of Common
Stock to AT&T Corp. in a private placement exempt from registration pursuant to
Rule 506 of Regulation D under the Securities Act in connection with the
execution of a development and license agreement with AT&T.
On June 30, 2000, the Company issued to America Online, Inc. a warrant to
purchase 765,442 shares of common stock at an exercise price of $12.46 per share
in a transaction exempt from registration pursuant to Rule 506 of Regulation D
under the Securities Act in connection with the execution of a software license
and professional services agreement. The warrants will become exercisable upon
the earlier of America Online achieving specified voice portal milestones or
June 30, 2002.
From April 1, 2000 to June 30, 2000, the Company issued an aggregate of
191,466 shares of Common Stock to employees upon the exercise of stock options
pursuant to Rule 701 of the Securities Act for aggregate gross proceeds of
$175,085.
In connection with the Company's initial public offering, the Company sold
5,462,500 shares of Common Stock and received net offering proceeds of
approximately $98,325,000. On July 31, 2000, the Securities and Exchange
Commission declared the Company's Registration Statement on Form S-1 (File No.
333-35164) effective. The managing underwriters of the offering were Chase H&Q,
J.P.Morgan & Co., and U.S. Bancorp Piper Jaffray. The following table sets forth
the Company's cumulative use of the net offering proceeds as of August 31, 2000:
<TABLE>
<S> <C>
Purchase and installation of machinery and equipment............. $ 0
Acquisition of other business.................................... 0
Repayment of indebtedness........................................ 0
Working capital.................................................. 0
Temporary investments:
Cash and cash equivalents........................................ 98,325,000
All other purposes............................................... 0
</TABLE>
The foregoing use of net proceeds does not represent a material change in the
use of net proceeds described in the Registration Statement.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
On May 10, 2000, the Company's stockholders acted by written consent in lieu
of an annual meeting to approve the following matters:
(i) The adoption of an amendment to, and the restatement of, the Certificate
of Incorporation of the Company and to authorize the President of the
Company to execute and file a Restated Certificate
<PAGE>
of Incorporation with the Secretary of the State of Delaware,
immediately prior to the closing of the Company's initial public
offering.
(ii) The approval of the recommendation of the Board of Directors of the
Company to amend and restate the Company's By-Laws, simultaneously with
the closing of the Company's initial public offering.
(iii) The adoption of the Company's 2000 Employee, Director and Consultant
Stock Plan.
(iv) The adoption of the Company's 2000 Employee Stock Purchase Plan.
(v) The election of the following persons to the Board of Directors of the
Company:
Axel Bichara
Richard Burnes
Robert Finch
John C. Freker, Jr.
William J. O'Farrell
Stuart R. Patterson
Michael S. Phillips
Item 6. Exhibits And Reports On Form 8-K
(A) Exhibits
Exhibit 27 Financial Data Schedule
Exhibit 99 Forward-Looking Information
(B) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SPEECHWORKS INTERNATIONAL, INC.
Date: September 13, 2000 By: /s/ Richard J. Westelman
-----------------------------------
RICHARD J. WESTELMAN
CHIEF FINANCIAL OFFICER
<PAGE>
SPEECHWORKS INTERNATIONAL, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
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27 Financial Data Schedule
99 Forward-Looking Information
