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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
[ ] 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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
695 ATLANTIC AVENUE
BOSTON, MASSACHUSETTS 02111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (617) 428-4444
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) on February 28, 2001, was
$443,036,075 based on the last bid price as reported by The Nasdaq Stock Market.
As of February 28, 2001, the registrant had 31,694,595 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in
Part III of this Annual Report on Form 10-K is incorporated from the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 31, 2001.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading provider of software products and professional services
that enable enterprises, communications carriers, and voice portals 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. We currently offer two speech recognition solutions for
over-the-telephone applications, the SpeechWorks 6.5 platform and the
industry-first SpeechSite package. Our text-to-speech, or speech SYNTHESIS
solutions allow callers to hear text read to them by a computer in a natural
sounding voice. We offer two text-to-speech products, Speechify and SpeechWorks
ETI-Eloquence. Finally, we offer a speaker VERIFICATION solution, called
SpeechSecure, which authenticates callers by their unique voice print. We
complement our products with a professional services organization that offers a
range of services including application development and project management.
Since shipping our first products in 1996, we have received numerous awards
for our product capabilities and our industry leadership, including Industry
Week's Technology of the Year Award and Frost & Sullivan's Market Strategy
Leadership Award. To date, we have licensed our software to more than 250
clients worldwide in a variety of industries including retail, financial
services, pharmaceuticals, telecommunications, technology, distribution and
travel. Our clients include America Online, Amtrak, AT&T, BellSouth
IntelliVentures, CellularOne, Continental Airlines, CSFB, e-Plus, E*TRADE, First
Union Corporation, GMAC Commercial Mortgage, Hyundai Securities, iBasis/Price
Interactive, McKessonHBOC, NetByTel, Nortel Networks, United Airlines, and
WorldCom.
INDUSTRY BACKGROUND
Businesses and consumers today share a common vision of e-business as a
means of communicating information and completing transactions anywhere,
anytime, through any communications device. This vision has been fueled by the
growth of the internet and the rapid growth in wireless communications
technologies and services. In order to take advantage of these communications
channels and to reach the widest population possible, businesses have made
significant investments in their e-business infrastructures. Businesses are now
seeking to maximize the return on their e-business investments, improve their
customer service responsiveness, and capitalize on the substantial growth of the
wireless telephone network as a new distribution channel.
THE INTERNET AND E-BUSINESS
In the past decade, the internet has emerged as a global communications
network and channel for business and has fundamentally changed the way consumers
and businesses obtain information, communicate, purchase goods and transact
business. Many businesses now define their strategy and assess their ability to
compete based on the quality and diversity of the information, products or
services they offer online. Increasingly, consumers are retrieving information
from online databases and buying goods and services--tickets, stocks,
books--without going to a business in person or even speaking with a customer
service representative over the telephone. International Data Corporation
("IDC") estimates that the internet will continue to grow as a medium for
commerce, with over $1.6 trillion in sales being initiated over the internet by
the end of 2003.
THE TELEPHONE AND E-BUSINESS
Despite the internet's growing acceptance, the telephone network is still
more widely and readily accessible. Telephones are simple to operate and use the
most natural form of communication, the human voice. IDC estimates that in 1999
there were over 932 million telephone lines installed
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worldwide as compared to approximately 240 million internet users worldwide. IDC
also estimates that in the same year there were over 427 million wireless
telephone subscribers worldwide and projects this number will grow to over one
billion subscribers worldwide by 2003.
To manage the growth in telephone-based interactions, businesses have made
significant investments in customer service infrastructures such as call centers
staffed with customer service representatives. IDC estimates that worldwide
spending on customer relationship management services, which includes
expenditures on call centers, exceeded $40 billion in 1999. Gartner estimates,
personnel costs are from 70 percent to 90 percent of overall call center
expenditures.
In addition, new technologies are being used, primarily by communications
service providers, to provide internet information services such as e-mail,
news, stock quotes, weather and sports information to wireless subscribers. With
these technologies, businesses are looking to extend access to their e-business
infrastructure to cellular telephones and other wireless handheld devices such
as personal digital assistants or PDAs.
NEED FOR ENHANCED ACCESS TO E-BUSINESS
The growth of the internet as a global medium for communications and
commerce has been driven, in part, by the increased availability of personal
computers and easy to use, visual web browser interfaces. However, access to the
internet over a personal computer is limited because consumers must have access
to a computer and a working internet connection. Further, using a web browser on
a personal computer can be difficult and slow. Wireless access to the internet
over cellular telephones and other handheld devices has the potential to resolve
the mobility and internet connectivity issues presented by internet access over
a personal computer. However, while the number of these devices has increased in
recent years, display screens on these devices are small and the ability to
input information using portable keyboards is constrained, limiting the
usability and convenience of this solution. Therefore, the goal of anytime,
anywhere access to a wide variety of information services has not yet been fully
realized.
Access to businesses and information over the telephone is somewhat easier
than access over the internet because of the greater availability of landline
and wireless telephones. Although businesses have made significant investments
in staffed call centers, consumers are frequently required to wait on hold for
extended periods due to the lack of call center capacity or are unable to speak
to a customer service representative due to the high cost of having customer
service representatives available around the clock. Businesses have attempted to
alleviate this problem by automating call center services using touch-tone
technologies. However, the range of services that can be automated using
touch-tone is limited, and the interface itself can be very frustrating for
users. Touch-tone menus can be difficult to follow and callers often dial "0" to
wait for a human operator or hang up rather than use such a system.
SPEECH-ACTIVATED SOLUTIONS FOR E-BUSINESS
To conduct e-business in a truly mobile, device-independent fashion, the
ability to communicate and conduct transactions in a hands-free manner is
essential. Speech recognition technology allows businesses to leverage their
investment in their e-business and existing telephony infrastructures to offer
their customers quick and easy access to information and services over the most
readily available communications device--the telephone. For example, businesses
can offer their customers the ability to obtain information and complete
transactions using words and natural sentences such as:
"I'd like to transfer $5,000 from my checking account to my savings
account."
"Is the 5 o'clock flight from New York to Boston on time?"
"When will my shipment be delivered?"
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Speech recognition and text-to-speech technologies allow callers who would
otherwise have to wait for a live call center agent to be serviced
automatically, and those who might otherwise be frustrated by having to choose
from many touch-tone options, to speak directly to the e-business application,
thereby achieving their objective faster and easier. Speech-activated services
also constitute a key differentiator for companies seeking to provide a
convenient, flexible and robust interface for customers to conduct internet
transactions through a medium other than a personal computer or PDA.
Although basic speech recognition technology has existed for decades, until
recently, it has not been widely used in telephone applications due to a number
of technical and commercial limitations. In order to provide high-quality,
speech-activated services to callers, businesses require a solution that:
- recognizes a large vocabulary with low error rates,
- allows users to speak in natural phrases or sentences and to interrupt
when they are ready,
- allows automated services to speak to the user with a natural-sounding yet
synthesized voice,
- provides high-level development and operations tools that are integrated
in accepted platforms, including platforms based on new industry
standards,
- includes professional services to assist in one or more phases of the
deployment lifecycle, and
- is sufficiently cost-effective and scalable that it promises an attractive
return on investment.
THE SPEECHWORKS SOLUTION
In addition to enhancing existing telephony-based customer service
applications, our speech recognition and synthesis technologies enable our
clients to extend the reach of their e-business solutions beyond the web and
beyond screen-based interfaces to anyone with access to a wireless or landline
telephone.
Enterprises are building speech-activated services with our products that
will automate and enhance customer service by making it easier for customers to
retrieve information and conduct transactions without waiting on hold or
speaking to an agent. Examples of phrases that can be understood by applications
enabled by our software are: "What is my checking account balance?" and "Buy 100
shares of General Electric at the market price." These services can improve the
caller's experience and save expensive customer service representative costs and
"on hold" telephone times.
Communication carriers and their partners are building speech-activated
services with our products that we believe have the potential to change the way
people use the telephone for network services. Applications have been built, and
enabled by our software, that can understand phrases such as "Call Mike Phillips
at home," and "Forward this message to Bill O'Farrell." These services can
differentiate one carrier's service offering from another thereby increasing the
ability of carriers to attract and retain users.
In addition, a relatively new class of service providers known as voice or
speech portals and unified messaging companies, is using our software to build
applications that can understand phrases such as: "What is the weather in
Paris?" and "What was the score of the Red Sox game today?" as well as read-back
e-mail or text-based messages in a natural sounding, intelligible voice.
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, assist our partners and improve our clients'
competitive position. We are focused on developing and extending our products
and services to provide our partners and clients with a comprehensive means for
building, managing and delivering sophisticated e-business applications and
services that can be accessed over the telephone.
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Our solutions are designed to provide the following benefits to our clients:
LOWER OPERATIONAL COSTS. Our enterprise clients can decrease their
telephone expense by shortening the average customer call length and by
answering common customer questions with a speech application rather than
requiring callers to hold for a live agent or employee. Speech-enabled call
routing, such as that provided by our SpeechSite product, can increase customer
service efficiency by classifying call types and collecting pertinent
information prior to transferring calls to an appropriate representative. This
means that the same number of customer service representatives can answer a
significantly higher volume of calls. We believe that off-loading repetitive
calls to a speech application and routing the more challenging transactions to
highly-trained customer service representatives can also increase employee job
satisfaction and decrease staff turnover. Additionally, our solutions can
support multiple languages on a single system, thereby reducing the number of
platforms and telephone numbers required. We believe our efficient speech
recognition engine and our single system architecture obviate the need for
dedicated recognition servers which results in a lower total cost of ownership
than many other alternative architectures.
INCREASED REVENUES. Companies that implement speech-activated solutions can
use the additional, ubiquitous access to their online services to differentiate
their e-business offering from their competition and thereby increase customer
loyalty and reduce customer turnover. Many e-business applications that were
difficult to use with touch-tone technology, such as stock trading and flight
booking, can be more readily provided over the telephone with our speech
solutions. Online brokerages, for example, have used our products to extend
their automated services to new users who are not online and to enable existing
online subscribers to conduct trades when they are unable to access the web with
a visual internet browser. Increased automation of incoming calls can free up
call center agents to take on cross-selling and other revenue-generating
activities. In some cases, the speech service itself can offer cross- and
up-sell to callers, thereby automating revenue generation. Using our products,
communications carriers can offer new, revenue-generating services to wireless
or landline telephone users, such as speech-activated dialing and voice access
to instant messaging and information or voice portals.
INCREASED CUSTOMER SATISFACTION AND RETENTION. Our speech-activated
services provide our clients' customers with a variety of services that are
accessible from any telephone, 24 hours-a-day, seven days-a-week. A caller is
generally not required to wait on hold or navigate complex touch-tone menus. Our
clients can personalize an application's dialog to match their callers' needs,
for example "Would you like to ticket your regular trip to Chicago,
Mrs. Jones?" Our speech-activated solutions also include barge-in technology
that enables callers to interrupt an application prompt with responses or new
queries, thereby completing the transaction more efficiently. Customers that are
becoming accustomed to accessing account or other information on the web can now
benefit from easy telephone access to the same information or services.
Customers are ultimately given more control if they can choose how--web browser,
mobile device, or telephone--and when to retrieve information or conduct
transactions.
SUPERIOR TECHNOLOGY AND ARCHITECTURE. Our recognition technology allows our
clients' applications to recognize spoken words and phrases based in part on a
self-learning feedback loop that can be configured to automatically adapt the
system to user characteristics such as accents and pronunciations. Natural
language processing capabilities allow callers to speak in complete phrases and
sentences and can be configured to provide hints that alert novice or first-time
users to these capabilities. Taking advantage of dramatic increases in host
processing power, we offer speech recognition solutions that operate in one
integrated system. We also offer a client-server configuration of our software,
and software that functions within the emerging industry standard, VoiceXML. Our
speech synthesis technology enables callers to hear dynamically-generated text
read to them in a voice that sounds natural in pronunciation, tone and cadence.
These elements of our technology, integration and
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architecture, enable our clients to develop and deploy speech-activated
applications reliably and cost-effectively.
HIGH LEVEL TOOLS FOR RAPID TIME TO MARKET. We offer patented, high-level
building blocks, known as DialogModules, that make it easy for developers to
build speech applications with proven and consistent call flows and user
interfaces. The availability of DialogModules tailored for specific situations
gives our clients the ability to more easily create and maintain applications
and achieve significant reductions in development cycle time and cost per
deployed application. DialogModules have been tightly integrated into well-known
toolkits from leading vendors such as InterVoice-BRITE, Aspect Communications,
Comverse Technology, Avaya Technologies and Intel so that developers can become
effective quickly. We also offer operations and tuning tools that enable our
clients to evaluate and improve deployed applications, based on actual caller
experiences, quickly and easily.
PRODUCTS
We offer five speech recognition, synthesis and verification products for
over-the-telephone applications:
- SpeechWorks 6.5, a comprehensive set of software tools and core speech
recognition technology that can be used to build state-of-the-art,
speech-activated services.
- SpeechSite, a packaged application that answers and directs telephone
calls and delivers company information.
- Speechify, speech synthesis software that allows callers to hear text read
to them by a computer in a natural sounding voice.
- SpeechWorks ETI-Eloquence, a text to speech engine that uses formant
synthesis to produce synthesized speech in a variety of languages, speeds
and voice types.
- SpeechSecure, speaker verification software that authenticates callers by
their unique voice print.
SPEECHWORKS 6.5. SpeechWorks 6.5, released in June 2000, is the current
release of our software platform for developing and deploying customized speech
applications in a variety of languages. SpeechWorks 6.5 runs on Windows NT- and
UNIX-based operating systems and supports multiple telephony interfaces.
SpeechWorks 6.5 includes our patented barge-in technology that enables
callers to interrupt an application with responses or new queries. SpeechWorks
6.5 also includes our:
- SMARTRecognizer core recognition engine,
- DialogModule building blocks,
- natural language tools for building and maintaining grammars, vocabularies
and pronunciations, and
- operations and tuning tools for monitoring and improving deployed
applications.
SMARTRECOGNIZER. The SMARTRecognizer provides advanced technology for
speech recognition over the telephone. It can recognize more than 65,000
different words or phrases at a time, including customized vocabularies. It can
also recognize complete phrases and sentences such as, "I'd like to transfer
$500 from checking to savings today." The SMARTRecognizer can understand
different speakers without user training and it supports continuous speech,
allowing callers to speak at a normal rate without pausing between words.
DIALOGMODULES. DialogModules are patented, pre-packaged software building
blocks that enable our clients to build speech applications quickly and easily.
Each DialogModule performs a particular
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task within an application, ranging from simple tasks such as capturing a yes/no
response or a telephone number from a caller, to more complex tasks such as
selecting an item from a large vocabulary list. DialogModules include pre-built
grammars, user interface design, call flow and error recovery routines to
provide developers with easily configurable functionality. Our newest
"plug-n-play" DialogModules include an Address DialogModule and a Verification
DialogModule. The Address DialogModule encapsulates mechanisms for interacting
with a caller to solicit and recognize U.S. residential, post office box and
rural route addresses and the Verification DialogModule supports integration
with third-party speaker verification algorithms to perform authentication of
callers by matching their voices to previously enrolled "voiceprints" or
templates. To further aid the development of speech applications, SpeechWorks
DialogModules have been integrated as graphical icons in a number of application
development toolkits provided by our distribution partners.
NATURAL LANGUAGE TOOLS. Natural language tools include a vocabulary editor
that enables developers to generate and maintain large vocabulary lists of words
that are recognized at specific times during a call. Developers can add new
words by typing them in or pointing to a text database. SpeechWorks 6.5
generates the pronunciations automatically using either its built-in dictionary
of 250,000 words or by following standard phonetic rules. The vocabulary editor
also allows the developer to specify synonyms and alternative pronunciations for
each of the vocabulary items. A grammar editor enables developers to build and
test complex natural language grammars. Another SpeechWorks tool, the
pronunciation editor, allows the developer to edit pronunciations of each
vocabulary item.
OPERATIONS AND TUNING TOOLS. Operations and tuning tools enable developers
to review application performance data in an easily understood graphical form.
These tuning tools provide detailed reports regarding recognition performance
and user interface effectiveness, peak usage times and call duration, execution
results for DialogModules and potential problem areas.
SPEECHSITE. Our SpeechSite product is a packaged application solution that
is built on our SpeechWorks 6.5 platform and is designed to bring the web model
of self-service to the telephone. SpeechSite can provide callers with a wide
variety of company information, direct calls and support custom built
transactions using spoken words.
We offer SpeechSite as a turnkey solution using content supplied by our
clients. Our pre-packaged SpeechSite applications are designed to be deployed
and fully functional in less than two weeks. Our SpeechSite solution includes
all required hardware, software and professional services, including
configuration of the system, professional recordings of corporate information,
and implementation and training at the client's facility.
The hardware platform for a SpeechSite currently consists of a Dell PC
running Windows NT utilizing Intel's Dialogic cards. SpeechSite software
consists of two major components: a SpeechSite engine and a SpeechSite
administration function. The SpeechSite engine is responsible for executing the
speech interface and connecting with the telephony system, while the SpeechSite
administration component is responsible for all configurations, reporting and
monitoring interfaces. In addition, SpeechSite uses Artisoft's Visual Voice Pro
as well as other complementary applications to provide enhanced features and
functionality. These complementary applications include WinFax Pro and
pcAnywhere from Symantec.
SPEECHIFY. In June 2000, we entered into a development and license
agreement with AT&T Corp. to develop and sell products that use AT&T speech
technology. In November 2000, we introduced Speechify, a text-to-speech or TTS
solution, which is the first product we have developed based on the speech
technology we license from AT&T.
TTS technology is computer software that converts text input into audible
speech output. Using a concatenative approach, Speechify synthesizes speech,
producing a natural-sounding voice. With Speechify, companies can provide
personalized or fast-changing information to callers. Speechify
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supports AOL by Phone and Yahoo! by Phone, allowing users to have e-mail
messages read to them in a clear, natural sounding voice. TTS is used in
applications where there is too much content to pre-record effectively, such as
weather, directions and account information.
Speechify runs on a Linux server with an NT client communicating through
TCP/IP and is currently available in a male or female U.S. English voice. A
straightforward programming interface or API allows customers to easily write
applications to incorporate Speechify and get them running quickly. In addition,
an optional e-mail preprocessor prepares e-mail for reading. We believe that
Speechify is a next-generation TTS engine that sets the standard for natural
voice tone and intelligibility. Speechify won Product of the Year Awards for
2000 from Communications Solutions and Customer Inter@ction Solutions Magazines.
SPEECHWORKS ETI-ELOQUENCE. In January 2001, we acquired Eloquent
Technology, Inc., a leader in TTS synthesis. The SpeechWorks ETI-Eloquence
product is a highly efficient and flexible TTS engine that uses parametric
synthesis technology to turn text-based content into spoken audio. Ideal for
embedded devices based on its less than 1.5Mb footprint, SpeechWorks
ETI-Eloquence is available in male, female and children's voices in U.S.
English, U.K. English, Castilian Spanish, Mexican Spanish, Continental French,
Canadian French, German, Brazilian Portuguese, Italian, Finnish, Mandarin
Chinese and Japanese. Korean is currently in development. With TTS embedded in
devices such as PDAs, consumers will be able to hear information such as emails
or directions rather than reading them on a screen. The flexibility to vary
speed, pitch, and voice characteristics makes SpeechWorks ETI-Eloquence well
suited for applications such as reading to the blind who typically listen at a
much faster rate.
Supported platforms include Win 95/98/NT, Win CE, Solaris and Linux.
SpeechWorks ETI-Eloquence can be used in conjunction with our Speechify solution
for applications where languages other than U.S. English are required.
SPEECHSECURE. SpeechSecure is a speaker verification technology that
provides enhanced security and convenience to callers who access personal
information and conduct commerce over the phone. SpeechSecure is offered based
on technology licensed from both T-Netix and Veritel. SpeechSecure uses
biometric technology to sample a caller's voice, extract the characteristic
features pertaining to the caller's physiology and vocal patterns, and create a
voiceprint which can be stored with the caller's account for subsequent
comparison. We currently offer SpeechSecure as a DialogModule that our clients
may include in their speech recognition applications. When used in combination
with automated speech recognition solutions, SpeechSecure recognizes and
verifies an ID or account number as a caller speaks, eliminating the need to
remember a separate password altogether. For a second layer of security, the
caller can be prompted for his/her password, confirming that the right person
said the correct password.
A key distinguishing feature of SpeechSecure is that the caller can select
any text and/or digit passphrase in any language, even if the passphrase is not
within the particular speech application's vocabulary. Furthermore, the security
threshold can be tuned to achieve a business' desired balance between high
security (minimizing false acceptances) and high convenience (minimizing false
rejections).
OPEN SPEECH WEB. In June 2000, we launched an initiative called the Open
Speech Web which we believe will be the next phase in the evolution of speech
services. The Open Speech Web will connect a variety of speech services,
including portals, enterprise SpeechSites and directory services allowing
callers to freely navigate among speech-enabled services based on open standards
such as VoiceXML. VoiceXML is a programming language for building speech
applications. To enable the Open Speech Web, we have made available to a global
developer base the OpenVXI, an open source VoiceXML Interpreter that developers
can integrate into their speech browser platforms. In addition,
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we made available standards-based linking technology, the speechlink, as open
source code. The Open VXI is intended for use by platform providers, service
bureaus and telecommunications companies that want to add VoiceXML services to
existing platforms or to create new, VoiceXML-based solutions. Speechlinks can
be used to interconnect speech services based on other vendors' technology to
those based on our technology.
SOLUTIONS AND SUPPORT SERVICES
We recognize that many clients and partners want more than a software-only
solution. We therefore complement our products with a high quality professional
services organization that offers a wide range of services. Our professional
services organization supports our partners and our clients with business and
systems consulting, project management and application development assistance.
We have designed these professional services to shorten time-to-market, assist
our partners, reduce project implementation risk and improve our clients'
competitive position. We believe that our ability to successfully deliver an
integrated solution to our clients provides us with a significant competitive
advantage in the market for speech-activated solutions for e-business.
These solution services are provided by staff located in Boston, New York
and San Francisco as well as in our international centers of excellence in
Canada, Mexico, the United Kingdom, France, and Singapore. We provide dedicated
teams of professionals who follow our speech application development lifecycle
to help our clients and partners get their speech applications working as
quickly as possible and achieve maximum caller satisfaction. The primary
solutions and support services we offer our clients and partners include the
following:
RAPID PROTOTYPING CENTER. We offer a rapid prototyping center that allows
potential clients to explore quickly and cost effectively the capabilities of
over-the-telephone, speech-activated applications. In our rapid prototyping
center, clients can experiment with speech recognition technology, user
interfaces and the tools required to build speech-activated services. An
application prototype helps potential clients experience real-world caller
interactions and can serve as the foundation for a full-scale production system.
SPEECH APPLICATION DEVELOPMENT LIFECYCLE. We have created a proprietary
speech application development lifecycle, or SADL, which is a disciplined
project management process to ensure successful implementation of our solutions.
Our lifecycle approach is based on three primary phases: specification,
development and deployment. In the specification phase, we assess the
functional, design and integration requirements of the system and prepare a
preliminary user interface specification. During the development and deployment
phases, developers are trained to pay particular attention to the iterative
testing and tuning of the application's user interface. In addition, this
approach supports parallel development of database and telephony system
integration requirements ensuring efficient and timely deployments. We believe
that our speech application development lifecycle has been an important reason
for our success, and our partners' success, with major client deployments to
date.
USER INTERFACE DESIGN. We employ a team of user interface engineers and
human factors experts who study how people interact with computers to design the
most effective interface for a client's specific application. This team follows
a three-phase process: research, design and testing. In the research phase, our
engineers seek to understand the needs and desires of our clients and their
callers. In order to help make a callers' experience effective and enjoyable, in
the design phase, our engineers consider the implications that our interface
design may have on callers by taking into account call flow, functionality, and
the application's personality. Then our interface engineers conduct usability
tests and periodically monitor and improve call flow, prompts, and recognition
accuracy.
TRAINING. We offer training programs that provide clients with a review of
our products and services and an introduction to the process of building speech
applications. Our lectures and interactive
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workshops provide instruction on embedding our software in a production-quality,
runtime environment and developing state-of-the-art natural language recognition
capabilities.
MAINTENANCE AND SUPPORT. We also offer our clients and partners a range of
maintenance and support programs. These support programs include telephone and
e-mail support, web access to knowledge databases, technical support, software
patches and upgrades, and varying service level options. Application consulting,
user interface design and tuning services are also available to our clients and
partners.
SPEECHCARE. We provide our SpeechSite clients with a technical support and
services package, SpeechCare, which consists of three services: voice prompt
recording and management, operations and technical support, and software
maintenance, patches and updates.
TECHNOLOGY
Our core technologies consist of speech recognition and text-to-speech
synthesis or TTS. In addition, we have been helping to drive evolving standards
in a number of areas in the telephone-based speech recognition industry.
SPEECH RECOGNITION. The distinguishing features of our speech recognition
technology include the following:
- SEGMENT-BASED STATISTICAL MODELS. Our speech recognition system is based
on work on segmental systems performed for many years at the Massachusetts
Institute of Technology ("MIT") and other research groups. The segmental
approach, unlike the frame-based, Hidden Markov Model approach, is able to
take into account the entire phonetic segment. This allows our product to
better account for the static and dynamic properties of individual speech
sounds which increases accuracy and reduces the overall amount of
computation needed for a given recognition task.
- BARGE-IN. Barge-in technology allows callers to interrupt the outgoing
prompts by speaking over them and allows our recognizer to understand what
the user said when interrupting. We have developed patented technologies
to provide state-of-the-art barge-in performance. We believe that clients
using our technology were the first to support barge-in functionality in
large scale, production applications.
- DYNAMIC VOCABULARIES. Many traditional speech recognition engines require
that the recognition vocabulary be defined and compiled at application
development time. However, there are many applications where the necessary
vocabulary must be generated while the application is running. We have
therefore engineered our speech recognition engine to allow rapid, dynamic
updates of recognition vocabularies.
- AUTOMATIC ADAPTATION. We have incorporated a process to support automatic
adaptation of the recognition models of our engine. The result is that,
through a fully automated process, the SpeechWorks engine is able to
reduce error rates by 30-60% over time as it is used for some
applications.
TEXT-TO-SPEECH (TTS). The ability to take plain text and convert it
automatically into speech utilizes two basic methods to build the voice output,
concatenative and formant synthesis. Concatenative TTS reads text by
reassembling tiny slices of pre-recorded speech in real time. Formant-based TTS
is synthetically generated according to preprogrammed pronunciation rules. We
offer products using both these technologies to meet our clients needs.
Speechify uses concatenative technology, licensed from AT&T and enhanced by us,
to generate natural, human sounding speech. Our SpeechWorks ETI-Eloquence
product uses formant technology to create highly intelligible speech which is
compact enough to be embedded in mobile devices.
10
STANDARDS. We have been helping to drive evolving standards in a number of
areas in the telephone-based speech recognition industry. This includes
participation in the Enterprise Computer Telephony Forum, or ECTF, to define the
S.100 and S.300 APIs for speech recognition along with driving development of
standards for Dialog Application Components in the ECTF architecture. We have
also been an active participant in the World Wide Web Consortium, or W3C, Voice
Browser working group, which is developing standards such as VoiceXML for speech
applications and interfaces using web-based programming methods.
SALES AND MARKETING
SALES
We sell our products and services both directly through a sales force and
indirectly through third-party value added resellers and system integrators.
SALES FORCE. We have a sales force in North America that consists of three
vice presidents, nine regional sales directors, 14 sales engineers, and 43 sales
representatives located in twelve states and Canada. This sales force represents
our products and services to enterprises, channel partners and communications
carriers in North America. We support the sales efforts of our value added
resellers and system integrators outside of North America with an international
sales force of thirteen located throughout Europe, Asia Pacific, and Latin
America.
INDIRECT SALES/CHANNEL PARTNERS. We have a network of over 100 resellers,
OEMs, application service providers and systems integration partners located in
the United States, Canada, United Kingdom, France, Germany, South Korea,
Australia, Singapore and other countries that distribute and implement our
solutions around the globe. Our value added resellers and system integrators
have experience in interactive voice response platforms, system integration of
communication applications or hosting expertise for interactive voice response
applications. Our resellers increase our coverage of global markets and fulfill
the diverse application and service opportunities for our software and services.
MARKETING
Our marketing strategy is focused on building brand awareness of SpeechWorks
as a leading provider of software products and professional services that enable
enterprises and communications carriers to offer automated, speech-activated
services. In March 2000, our marketing efforts were formally recognized with a
Marketing Leadership Award and designation as U.S. market share leader in the
telephony-based speech technology industry by the Frost & Sullivan research
firm. The Marketing Leadership Award acknowledges leadership in marketing
campaigns, educational programs and customer programs like the SpeechWorks Here
Guarantee, which we believe is the industry's first results assurance program
for customers.
Our strategic advertising campaigns use both traditional and online media.
Our print advertising focuses on targeted trade and business publications,
including e-business, telecommunications and other categories. We conduct both
live seminars and web seminars and participate in a number of trade shows and
other industry events. We also provide speakers from our company to represent us
at a number of industry forums.
Our marketing strategy also includes aggressive public relations efforts
designed to convey our message to appropriate audiences. We reinforce this
through our ongoing communications with a number of key industry analysts and
press representatives.
11
COMPETITION
A number of companies have developed, or are expected to develop, products
that compete with our products. Competitors in the speech recognition and TTS
software market include IBM, Lernout and Hauspie Speech Products,
InfoSpace/Locus Dialogue, Lucent Technologies, Nuance Communications, Philips
Electronics and Phonetic Systems. We expect additional competition from other
companies such as Microsoft, which has made investments in speech technology and
acquired a speech recognition technology company. Furthermore, our competitors
may combine with each other, and other companies may enter our markets by
acquiring or entering into strategic relationships with our competitors. Current
and potential competitors have established, or may establish, cooperative
relationships among themselves or with third parties to increase the abilities
of their advanced speech and language technology products to address the needs
of our prospective clients.
We believe that the principal competitive factors affecting our market
include the breadth and depth of solutions, product quality and performance,
core technology, product scalability and reliability, product features, client
service, the ability to implement solutions, the value of a given solution, the
creation of a base of referenceable clients and the strength and breadth of
reseller and developer relationships. Although we believe that our solutions
currently compete favorably with respect to these factors, particularly with
respect to product quality and performance, our market is relatively new and is
evolving rapidly.
RESEARCH AND DEVELOPMENT
We have made substantial investments in research and development through
both internal development and technology licenses. The majority of our research
and development activity has been directed towards feature extensions to our
family of products. This development consists primarily of adding new
competitive product features and additional tools and products as we expand into
new markets.
Our research and development expenses for 2000, 1999 and 1998 were
$9.1 million, $5.2 million and $1.9 million, respectively. We expect that we
will continue to commit significant resources to research and development in the
future. All research and development expenses have been expensed as incurred.
The market for our products and services is characterized by rapid
technological change, frequent new product introductions and enhancements,
evolving industry standards, and rapidly changing client requirements. The
introduction of products incorporating new technologies and the emergence of new
industry standards could render existing products obsolete and unmarketable. Our
future success will depend in part on our ability to anticipate changes, enhance
our current products, develop and introduce new products that keep pace with
technological advancements and address the increasingly sophisticated needs of
our clients.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We regard our patents, copyrights, service marks, trademarks, trade secrets
and other intellectual property as important to our success. We rely on a
combination of patent, trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, consultants,
clients, partners and others to protect our proprietary rights. Our employees
execute confidentiality and assignment of invention agreements. Prior to
disclosing confidential information to third parties, we generally require them
to sign confidentiality or other agreements restricting the use and disclosure
of our confidential information.
To date we have obtained five U.S. patents, and have 12 pending U.S. patent
applications, six pending patent applications under the Patent Cooperation
Treaty, two pending patent applications in
12
the European Patent Office, two pending patent applications in Hong Kong and one
pending patent application in each of Australia, Canada, China, and Singapore.
Additionally, we pursue registration of our key trademarks and service marks in
the U.S. and, in many cases, internationally. However, effective patent,
trademark, service mark, copyright and trade secret protection may not be
available or sought by us in every country in which our products and services
are sold.
We license software technology from MIT under a nonexclusive license
agreement. This license agreement will terminate upon the expiration of MIT's
copyrights related to such technology. We do not anticipate that this will
restrict our ability to use or license the software technology or any derivative
works in any way. In June 2000, we entered into an agreement to license certain
speech technology from AT&T on a non-exclusive basis. The technology includes
AT&T speech recognition software and text-to-speech software, as well as certain
other technology related to computer processing of the human voice, including
large vocabulary recognition, natural language understanding and dialog
management. As part of the Eloquent acquisition in January 2001, we assumed
obligations of Eloquent under a license agreement between IBM and Eloquent. The
license provides us with nonexclusive access to certain text-to-speech
technologies and multi-language capabilities.
We currently own a number of internet domain names, including
speechworks.com.
EMPLOYEES
As of December 31, 2000, we had 317 employees worldwide, including 86 in
research and development, 103 in service and support, 84 in sales and marketing
and 44 in finance and administration.
ITEM 2. PROPERTIES
Our principal offices are located at 695 Atlantic Avenue, in Boston,
Massachusetts, where we lease approximately 53,600 square feet under leases that
expire in September 2004. We also maintain regional sales and development
offices in New York, San Francisco, Montreal (Canada), Puebla (Mexico),
Singapore and Woking (England), as well as regional sales offices in Chicago,
Atlanta, Dallas, Sydney (Australia), Paris (France), Tokyo (Japan) and Seoul
(Korea). The leases for the regional offices are short-term. We believe that our
existing facilities are adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
To our knowledge, we are not engaged in any legal proceeding that we expect
to have a material adverse effect on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2000.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning our executive
officers:
NAME AGE POSITION
- ---- -------- --------
Stuart R. Patterson......... 44 President, Chief Executive Officer and Director
Richard J. Westelman........ 43 Chief Financial Officer
Mark A. Holthouse........... 45 Senior Vice President of Operations
Michael S. Phillips......... 39 Chief Technology Officer and Director
Steven Chambers............. 38 Vice President of Worldwide Marketing
Joseph Murphy............... 45 Vice President of Sales
Howard A. Gross............. 43 Vice President of International
William Ledingham........... 39 Vice President of Product Development
Charles Rutledge............ 36 Vice President of Customer Solutions
Alan Schwartz............... 35 Vice President of Business Development
Alexandra LaMaster.......... 31 Vice President of People Strategy
Rick Olin................... 43 Vice President and General Counsel
Stuart R. Patterson has served as our President since September 1997, our
Chief Executive Officer since May 1998 and as a director since May 1998. Prior
to joining us, from May 1997 to September 1997, he served on the board of BBG
New Media, Inc., a developer of high-end web sites, which was bought by Think
New Ideas, Inc., now AnswerThink Consulting Group, in September 1997. From
May 1996 to March 1997, he served as Vice President and Line of Business Manager
at Voxware, Inc., a developer of digital speech and audio technologies and
solutions. Previously, from August 1994 to May 1996, he served on the Advisory
Board of Voxware. From September 1987 to April 1996, he co-founded and served as
the chief executive officer of Vicorp Interactive Systems, Inc., a developer of
large-scale voice and data applications based on open systems tools and
platforms.
Richard J. Westelman has served as our Chief Financial Officer since
August 1998. Prior to joining us, from June 1996 to August 1998, he served as
Chief Financial Officer and Director of Dove Associates, a strategy consulting
firm. From January 1994 to June 1996, he served as Chief Financial Officer of
Vicorp Interactive Systems, Inc.
Mark A. Holthouse has served as our Senior Vice President of Operations
since March 1996. In 1987, he co-founded Vicorp Interactive Systems, Inc., a
developer of large-scale voice and data applications based on open systems tools
and platforms. He served as Managing Director of Technology and Operations of
Vicorp from April 1987 to March 1996.
Michael S. Phillips co-founded SpeechWorks and has served as our Chief
Technology Officer since September 1994 and as a director since May 1994. From
May 1987 to August 1994, he served as a research scientist in the Spoken
Language Systems Group at the Massachusetts Institute of Technology, a
non-profit think-tank dedicated to the development of a conversational interface
between computers and human spoken words.
Steven Chambers has served as our Vice President of Worldwide Marketing
since September 1999. From October 1998 to July 1999, he served as Vice
President of Marketing at Arbortext, Inc., an XML-based information solutions
company. From October 1997 to October 1998, he was the Vice President of
Marketing for VDOnet, a company specializing in streaming media over the
internet. From November 1991 to October 1997, he served as Vice President of
Worldwide Marketing at PictureTel Corporation, a visual communications company.
Joseph Murphy has served as our Vice President of Sales since August 1999.
From July 1998 to August 1999, he was Vice President of Sales at Rubric, Inc., a
web-based marketing vendor. From August 1996 to June 1998, he was Director of
Sales at Genesys Telecommunications, Inc., a computer
14
telephony integration and enterprise interaction management software company.
From January 1995 to April 1996, he served as Vice President of Worldwide Sales
for GeoTel Communications, a software company.
Howard A. Gross joined us as our Vice President of International in
February 2001. From 1999 to February 2001, he was President & Chief Operating
Officer of IT Network, Inc., a provider of unbranded audio and text content for
wireless and wireline telephony and Internet companies. From 1988 through 1998,
he was with Brite Voice Systems, Inc. (now InterVoice-Brite), where he held
various positions, including Vice President and Managing Director, Asia Pacific,
Vice President Operations, and Vice President Corporate and Legal Affairs.
William Ledingham has served as our Vice President of Product Development
since July 1995. From 1989 to 1994, he held a number of marketing management
positions at Stratus Computer.
Charles Rutledge has served as our Vice President of Customer Solutions
since November 1998. From 1993 to 1998, he was a manager with Andersen
Consulting (now Accenture) in their Financial Services practice.
Alan Schwartz has served as our Vice President of Business Development since
July 2000. From March 1997 until July 2000, he held various positions at AT&T
including New Market Development Director for AT&T Labs. From August 1995 to
March 1997, he worked as an attorney for the New York office of Debevoise &
Plimpton and from September 1994 to August 1995 he worked as an attorney for the
Toyko office of Nishimura & Partners.
Alexandra LaMaster joined us in January 1999 as Director of People Strategy
and has served as our Vice President of People Strategy since November 2000.
From June 1995 to December 1998 she held various positions at The Open Group
(previously Open Software Foundation) including Human Resource Manager.
Rick Olin joined us in March 1999 and has served as our General Counsel
since January 2000. From October 1996 until February 1999, he was Deputy Legal
Counsel at Open Market, Inc., an internet commerce software company. From
May 1995 until September 1996, he was Vice President and General Counsel of Long
Term Care Services, Inc., a regional health care company. Prior to that he was
an attorney at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on The Nasdaq Stock Market on August 1, 2000
under the symbol "SPWX." The following table sets forth, for the period
indicated, the high and low bid prices for the common stock, as reported by
Nasdaq, since the common stock commenced public trading. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions:
COMMON STOCK
-------------------
HIGH LOW
-------- --------
2000: Fourth Quarter........................................ $99.50 $25.63
On February 28, 2001, the last sale price of the common stock was $16.44.
STOCKHOLDERS
As of February 28, 2001, there were approximately 614 stockholders of record
of the 31,694,595 outstanding shares of common stock.
DIVIDENDS
We have not paid dividends to our stockholders since our inception and we do
not plan to pay cash dividends in the foreseeable future. We currently intend to
retain earnings, if any, to finance our growth. Additionally, our credit
facility currently prohibits the payment of cash dividends on our capital stock.
USE OF IPO PROCEEDS
On August 4, 2000, we completed our initial public offering of 5,462,500
shares of common stock. The offering raised approximately $100 million, net of
offering expenses, for us. The following table sets forth our cumulative use of
the net offering proceeds as of December 31, 2000:
Purchase and installation of machinery and equipment........ $ --
Acquisition of other business............................... --
Repayment of indebtedness................................... --
Working capital............................................. --
Temporary investments:
Cash and cash equivalents................................... 98,325,000
All other purposes.......................................... --
The foregoing use of net proceeds does not represent a material change in
the use of net proceeds described in our Registration Statement on Form S-1,
filed on April 19, 2000, File No. 333-35164.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of operations data for the years ended December 31, 2000,
1999 and 1998 and the consolidated balance sheet data as of December 31, 2000
and 1999 have been derived from our audited consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K. The consolidated
statement of operations data for the years ended December 31, 1997 and 1996 and
the consolidated balance sheet data as of December 31, 1998, 1997 and 1996 are
derived from our audited consolidated financial statements not included in this
Annual Report on Form 10-K. There is no difference between historical basic and
diluted net loss per common share since potential shares of common stock from
the conversion of preferred stock and the exercise of options and warrants are
anti-dilutive for all periods presented. The pro forma basic and diluted net
loss per common share reflects the automatic conversion of all our outstanding
convertible preferred stock into common stock upon completion of our initial
public offering as if converted on January 1, 1998 or, if later, the date of
original issue.
17
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product licenses............................................ $ 16,356 $ 3,680 $ 1,567 $ 949 $ 542
Professional services....................................... 11,260 5,944 2,873 982 172
Other revenues.............................................. 2,681 4,387 1,410 111 137
Non-cash stock compensation................................. (273) -- -- -- --
-------- -------- -------- ------- -------
Total revenues.............................................. 30,024 14,011 5,850 2,042 851
-------- -------- -------- ------- -------
Cost of revenues:
Cost of product licenses.................................... 214 153 52 54 166
Cost of professional services -- non-cash stock
compensation.............................................. 538 139 -- -- --
-- all other expenses............... 8,374 4,991 1,982 678 218
Cost of other revenues...................................... 1,844 2,987 890 90 65
-------- -------- -------- ------- -------
Total cost of revenues...................................... 10,970 8,270 2,924 822 449
-------- -------- -------- ------- -------
Gross profit................................................ 19,054 5,741 2,926 1,220 402
-------- -------- -------- ------- -------
Operating expenses:
Selling and marketing -- non-cash stock compensation........ 3,045 225 -- -- --
-- all other expenses.................... 19,802 9,254 3,867 1,074 387
Research and development -- non cash stock compensation..... 472 97 -- -- --
-- all other expenses................ 8,652 5,164 1,881 1,969 942
General and administrative -- non-cash stock compensation... 398 47 -- -- --
-- all other expenses................ 17,300 6,693 3,157 1,057 507
Amortization of acquired intellectual property and
collaborative rights...................................... 1,916 -- -- -- --
-------- -------- -------- ------- -------
Total operating expenses.................................... 51,585 21,480 8,905 4,100 1,836
-------- -------- -------- ------- -------
Loss from operations........................................ (32,531) (15,739) (5,979) (2,880) (1,434)
Interest and other income (expense), net.................... 3,244 276 219 360 99
-------- -------- -------- ------- -------
Net loss before income taxes................................ (29,287) (15,463) (5,760) (2,520) (1,335)
Provision for income taxes.................................. 309 -- -- -- --
-------- -------- -------- ------- -------
Net loss.................................................... (29,596) (15,463) (5,760) (2,520) (1,335)
Accretion and deemed dividend on redeemable convertible
preferred stock........................................... (6,955) (1,904) (789) (533) (532)
-------- -------- -------- ------- -------
Net loss attributable to common stockholders................ $(36,551) $(17,367) $ (6,549) $(3,053) $(1,867)
======== ======== ======== ======= =======
Basic and diluted net loss per common share................. $ (2.29) $ (3.28) $ (1.44) $ (0.83) $ (0.51)
Shares used in computing basic and diluted net loss per
common share.............................................. 15,935 5,298 4,537 3,696 3,695
Pro forma basic and diluted net loss per common share....... $ (1.19) $ (0.87) $ (0.43)
Shares used in computing pro forma basic and diluted net
loss per common share..................................... 24,959 17,686 13,357
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 99,203 $ 11,474 $ 4,486 $ 426 $ 1,008
Marketable securities....................................... 14,370 -- -- -- --
Working capital............................................. 115,920 12,133 5,156 4,764 4,897
Total assets................................................ 144,374 20,566 9,162 6,437 5,786
Long-term debt, net of current portion...................... 292 833 161 414 199
Redeemable convertible preferred stock...................... -- 43,507 17,749 9,974 6,942
Total stockholders' equity (deficit)........................ 131,439 (28,248) (11,457) (4,948) (1,881)
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THAT ARE INCLUDED
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
OVERVIEW
We are a leading provider of software products and professional services
that enable enterprises, communications carriers and portals 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 6.5 platform and our SpeechSite package.
SpeechWorks 6.5 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 6.5 platform, companies can
quickly design and deploy speech-activated applications, in multiple languages,
that enable their customers to buy travel tickets, trade stocks, update account
information, 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.
SpeechSite, which is based on the SpeechWorks 6.5 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.
In addition to these speech recognition solutions, we offer text-to-speech,
or speech synthesis technology with our Speechify product. Using Speechify,
portals and carriers can allow their callers to hear dynamically generated text,
such as e-mails and news updates, read to them by a computer in a natural
sounding voice. We complement all of our products with a professional services
organization that offers a range of services including application development,
user-interface design consulting and project management. We offer these services
to shorten our customers 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.
REVENUE. We derive our revenue from three sources. We sell product
licenses, either directly to clients or through third-party distribution
channels. To support the sale, installation and operation of our products, we
also provide professional services, consisting of developing custom software
applications, user interface design consulting, training, maintenance and
technical support. We resell hardware products made by third parties, including
products such as voice-processing equipment that run our software, as well as
facilities management services that are provided by third-party call-centers. We
expect the resale component of our total revenues to decrease as a percentage of
our total revenues over time. We only resell hardware or facilities management
services when clients expressly request that we do so and therefore, such
revenue is considered other revenue.
19
We recognize revenue from the licensing of software in three ways, provided
that no significant obligations remain, evidence of the arrangement exists, the
fees are fixed or determinable, and collectibility is reasonably assured:
- When we license our software and do not provide any professional services,
we recognize the license revenue when we ship the software to the client
provided that no significant obligations remain.
- When original equipment manufacturers, or OEM's, license our software, we
receive a royalty. We recognize the revenue from these royalties upon
delivery to the third party when such information is available, or when we
are notified by the OEM of the sale.
- When we license software in connection with custom software applications
developed by us, we recognize the revenue over the life of the development
project, concurrent with the related services fees as described below.
We recognize the revenue from professional services in three ways, provided
that evidence of the arrangement exists, the fees are fixed or determinable and
collectibility is reasonably assured.
- When we provide professional services for a fixed fee, we recognize
revenue from the fees for such services and any related software licenses
as we complete the project using the percentage-of-completion method. We
determine the percentage-of-completion by comparing the labor hours we
have incurred to date to our estimate of the total labor hours required to
complete the project.
- When we provide services on a time and materials basis, we recognize
revenue as we perform the services.
- When we provide support and maintenance services, we recognize the revenue
ratably over the term of the related contracts, typically one year.
When we resell hardware, we recognize the revenue when we deliver the
hardware. We recognize the revenue from resold facilities management services in
the period that the services are provided.
We market our products and services primarily in North America, Europe, and
AsiaPacific. We sell our products and professional services to our enterprise
and carrier clients through our direct sales force, and indirectly through
value-added resellers and OEMs. We also sell our products and services to
service bureaus, application service providers, and portals who use them to
offer speech-enabled services to their customers. We currently have
relationships with approximately 100 value-added resellers and OEMs. We are
aggressively expanding both our direct sales force and our reseller and OEM
relationships. Product revenue from our resellers, OEMs and application service
providers accounted for 38.2% of our total revenue for 2000, 14.8% of our total
revenue for 1999 and 9.7% of our total revenue for 1998. We expect that revenue
derived from sales to resellers and OEMs will continue to increase as a
percentage of our total revenue for the foreseeable future as we focus on and
expand our distribution channels.
In 2000, InterVoice-BRITE represented 16.1% of our total revenue. In 1999,
United Airlines represented 33.7% of our total revenue and InterVoice-BRITE
represented 10.9% of our total revenue. In 1998, United Airlines represented
32.4% of our total revenue and Digitrade represented 13.0% of our total revenue.
We began selling our products and services to clients outside the United
States in 1999, and these sales accounted for 2.6% of our total revenue for 1999
and 13.8% of our total revenue for 2000. We expect the portion of our total
revenue derived from sales to clients outside the United States to continue to
increase as we expand our international sales efforts and distribution channels.
20
COST OF REVENUE. Our cost of revenue consists of the cost of our product
licenses, cost of professional services and cost of resold hardware and
services, including SpeechSite hardware. Cost of product licenses consists of a
royalty that we pay to Massachusetts Institute of Technology ("MIT") that is
equal to a percentage of our product license revenue. This percentage was 1.3%
in 2000, 4.2% in 1999 and 3.3% in 1998. During 2000, the royalty decreased to 1%
of qualified product license revenue based on achieving cumulative product
license revenue milestones. Cost of professional services revenue consists of
our direct labor and related benefits costs, taxes and project-specific travel
expenses. Cost of resold hardware and facilities management services consists of
the cost of third-party hardware which we resell and payments to the third-party
providers of outsourced facilities management services and SpeechSite hardware.
OPERATING EXPENSES. Our selling and marketing expenses consist primarily of
compensation and related expenses, sales commissions and travel expenses, along
with other marketing expenses, including advertising, trade shows, public
relations, direct mail campaigns, seminars and other promotional expenses. Our
research and development expenses consist primarily of compensation and related
expenses for our personnel and, to a lesser extent, independent contractors, who
work on new products, enhancements to existing products and the implementation
of our products in new languages. Our general and administrative expenses
consist primarily of compensation for our administrative, financial and
information technology personnel, occupancy and overhead expense, and
company-wide professional fees, including recruiting, legal and accounting fees,
as well as bad debts. Our stock compensation expenses result from non-cash
charges for options and warrants issued with exercise prices that are less than
the fair market value of our common stock on the date of grant or the date of
issue.
INTEREST AND OTHER INCOME (EXPENSE), NET. We receive interest income by
investing the proceeds that we raised in our prior equity financings and our
initial public offering. Interest expense is generated primarily from amounts we
owe under our line of credit and capital lease lines of credit.
INCOME TAXES. Due to our operating losses, we have recorded no provision or
benefit for U.S. federal or state income taxes in relation to these losses for
any period since our inception. During 2000, we recorded a provision for income
taxes of $309,000 representing amounts owed in foreign jurisdictions related to
income of our foreign operations. As of December 31, 2000, we had $41.9 million
of net operating loss carryforwards for federal income tax purposes, which
expire beginning in 2011. Our ability to use these net operating losses in
future periods is not sufficiently assured and therefore, these tax assets carry
no value on the balance sheet.
RECENT DEVELOPMENTS
On January 5, 2001, we acquired Eloquent Technology, Inc., a supplier of
speech synthesis or text-to-speech ("TTS") technology. In connection with this
acquisition, we paid $5.25 million in cash and issued 299,873 shares of our
common stock. This acquisition will be accounted for under the purchase method
of accounting. This acquisition will allow us to expand our successful Speechify
solution into global markets. The acquisition will also allow us to accelerate
development of TTS for embedded devices and associated applications.
On January 24, 2001, we were issued a U.S. Patent for the design and use of
our DialogModules technology. DialogModules, introduced in 1996, are
pre-packaged application building blocks used by developers to deliver
speech-enabled applications quickly with high quality.
21
RESULTS OF OPERATIONS
The following table sets forth consolidated financial data for the periods
indicated as a percentage of our total revenue.
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Product licenses.......................................... 54% 27% 27%
Professional services..................................... 38 42 49
Other revenues............................................ 9 31 24
Non-cash stock compensation............................... (1) -- --
---- ---- ----
Total revenues............................................ 100% 100% 100%
==== ==== ====
Cost of revenue:
Cost of product licenses.................................. 1% 1% 1%
Cost of professional services -- non-cash stock
compensation............................................ 2 1 --
-- all other expenses............. 28 36 34
Cost of other revenues.................................... 6 21 15
---- ---- ----
Total cost of revenues.................................... 37 59 50
---- ---- ----
Gross profit............................................ 63 41 50
---- ---- ----
Operating expenses:
Selling and marketing -- non-cash stock compensation...... 10 2 --
-- all other expenses.................. 66 66 66
Research and development -- non-cash stock compensation... 2 1 --
-- all other expenses.............. 29 37 32
General and administrative -- non-cash stock
compensation............................................ 1 -- --
-- all other expenses.............. 58 48 54
Amortization of acquired intellectual property and
collaborative rights.................................... 6 -- --
---- ---- ----
Total operating expenses.................................. 172 154 152
---- ---- ----
Loss from operations........................................ (109) (113) (102)
Interest and other income (expense), net.................... 11 2 4
---- ---- ----
Net loss before income taxes................................ (98) (111) (98)
Provision for income taxes.................................. 1 -- --
---- ---- ----
Net loss.................................................... (99)% (111)% (98)%
==== ==== ====
COMPARISON OF YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
TOTAL REVENUES. Our total revenues (net of discount) increased by 114.3% to
$30.0 million in 2000 from $14.0 million in 1999 and increased 139.5% from
$5.9 million in 1998. Revenue from international sales commenced in 1999 with
revenue of $362,000, representing 2.6% of total revenues, and increased 1042.8%
to $4.1 million, representing 13.8% of total revenues, in 2000. We had no
revenue from international sales prior to 1999.
REVENUE FROM PRODUCT LICENSES. Revenue from the licensing of proprietary
software increased 344.5% to $16.4 million in 2000 from $3.7 million in 1999 and
increased 134.8% from $1.6 million in 1998. This growth in product license
revenue from 1998 to 2000 resulted from a growing market acceptance of our
speech activated solutions by enterprises, carriers and portals, our expanded
sales
22
and marketing efforts, and the improved productivity of our distribution
channels, primarily OEMs. We expect that revenue from product licenses will
continue to represent more than 50% of our total revenue in the future.
REVENUE FROM PROFESSIONAL SERVICES. Revenue from fees we receive for
professional services increased 89.4% to $11.3 million in 2000 from
$5.9 million in 1999 and increased 106.9% from $2.9 million in 1998. The growth
in revenue from professional services resulted primarily from the increased
demand for custom speech applications from existing and new clients over these
years and the growing maintenance revenue from an increasing installed license
base.
OTHER REVENUES. Other revenues accounted for 8.9% of total revenue in 2000,
31.3% of total revenue in 1999 and 24.1% of total revenue in 1998. Other revenue
decreased from 1999 to 2000 due to fewer customers purchasing hardware as part
of the solution sold to them. The increase in other revenue from 1998 to 1999
resulted primarily from several clients that requested us to provide the
hardware to host our software products sold to them. We anticipate that resold
hardware and facilities management revenue will continue to decline as a
percentage of total revenue in the future.
NON-CASH STOCK COMPENSATION OFFSET TO REVENUE. In connection with the sale
of common stock in private placements to Net2Phone and America Online, Inc.
("AOL"), concurrent with our initial public offering, we recorded deferred stock
compensation within stockholders' equity of $5.4 million. This amount represents
the difference between the price of the public offering of $20.00 per share and
the price paid by Net2Phone and AOL of $12.46 per share. This amount is
presented as a reduction of stockholders' equity and is being amortized to the
statement of operations over the three-year term of the concurrently entered
revenue-producing arrangements. In each quarterly reporting period, such
amortization will be reflected as a reduction of revenues resulting from the
arrangements; to the extent that the amortization exceeds such revenues, the
residual will be reflected in operating expenses. For the year ended
December 31, 2000, we recognized revenue from Net2Phone and AOL and,
accordingly, the related amortization of $21,000 and $252,000, respectively, was
recorded as a non-cash stock compensation charge which reduced revenue.
Amortization of deferred stock compensation for Net2Phone and AOL of $315,000
and $168,000, respectively, which was in excess of revenue recognized in each
quarter was recorded as selling and marketing stock compensation expense.
COST OF PRODUCT LICENSES REVENUES. Cost of product licenses revenue
increased by 39.9% to $214,000 in 2000 from $153,000 in 1999 and increased
194.2% from $52,000 in 1998. This cost represented 1.3% of product license
revenues in 2000, 4.2% in 1999 and 3.3% in 1998. The decrease in the percentage
of revenue from 1999 to 2000 reflects the decrease in the royalty rate owed to
MIT based on achieving a cumulative product license sales milestone. The
increase from 1998 to 1999 resulted from a $60,000 payment to a client as a
royalty for our resale of an application originally developed for that client.
COST OF PROFESSIONAL SERVICES REVENUE. Cost of professional services
revenue increased 67.8% to $8.4 million in 2000 from $5.0 million in 1999 and
increased 151.8% from $2.0 million in 1998. The increases from 1998 to 2000 are
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 74.4% of professional
services revenue in 2000, 84.0% in 1999 and 69.0% in 1998. The lower cost of
professional services as a percentage of related revenue in 2000 reflects
improvements in margins as certain lower-margin projects were completed and
replaced with higher-margin projects. The higher cost of professional services
as a percent of related revenue in 1999 reflects costs associated with
significant hiring in anticipation of revenue growth in late 1999 and 2000 and
client delays on several large fixed-fee projects.
COST OF OTHER REVENUES. Cost of resold hardware and resold facilities
management services decreased 38.3% to $1.8 million in 2000 from $3.0 million in
1999 and increased 235.6% from $890,000 in 1998. The cost of other revenue as a
percent of other revenue increased to 68.8% in 2000 from
23
68.1% in 1999, and increased from 63.1% in 1998. 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 increased 140.2% to
$51.6 million in 2000 from $21.5 million in 1999 and increased 141.2% from
$8.9 million in 1998. These increases occurred in all categories of operating
expense over the three-year period as we grew our organization. These
investments included the addition of 119 employees in 2000, 112 employees in
1999 and 50 employees in 1998. As a percentage of total revenue, our operating
expenses were 171.8% in 2000, 153.3% in 1999 and 152.2% in 1998. Non-cash
charges are also included in 2000 and 1999 as noted below.
SELLING AND MARKETING. 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. These expenses increased 114.0% to $19.8 million in 2000 from
$9.3 million in 1999 and increased 139.3% from $3.9 million in 1998. Selling and
marketing expenses, as a percentage of revenue, was 66.0% in 2000, 66.0% in 1999
and 66.1% in 1998. The increases in selling and marketing expenses from 1998 to
2000 resulted primarily from our investment in sales and marketing personnel.
During this period, the number of sales personnel in North America increased
from 12 to 50 and the number of employees in marketing increased from 6 to 25.
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
years.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of labor costs and related travel for personnel involved in new
product development and enhancements. These expenses increased by 67.5% to
$8.7 million in 2000 from $5.2 million in 1999 and increased 174.5% from
$1.9 million in 1998. Research and development expenses as a percentage of
revenue decreased to 28.8% in 2000 from 36.9% in 1999 and 32.2% in 1998. The
overall increase from 1998 to 2000 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 to 86 in 2000 from 43 in 1999 and 20 in
1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
labor costs and related travel for personnel involved in supporting the
financial, legal, recruiting and system administration infrastructure, all
occupancy related and corporate overhead costs including costs associated with
being a public company. These expenses increased 158.5% to $17.3 million in 2000
from $6.7 million in 1999 and increased 112.0% from $3.2 million in 1998. The
increases from 1998 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, increased recruiting costs, and the addition of senior level
management to lead our growth.
NON-CASH STOCK COMPENSATION. Non-cash stock compensation charges are being
recorded as a separate component of cost of professional services, selling and
marketing expenses, research and development expenses and general and
administrative expenses. In connection with the grant of certain options to
employees through June 30, 2000, we 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. During the six months ended December 31, 2000,
no deferred stock compensation was recorded as all stock options issued during
the period were issued with an exercise price equal to the fair value on the
date of grant. We recorded amortization of deferred stock compensation of
$2.4 million in 2000 and $508,000 in 1999. We expect the amortization of
deferred
24
stock compensation relating to employee stock options to be approximately
$2.7 million per year through 2002 and decreasing thereafter through 2004.
Sales and marketing expenses--non-cash stock compensation charges also
includes non-cash stock compensation of $1.6 million related to warrants issued
to AOL, valued at $11.2 million, which is being recognized as expense over the
related three-year marketing agreement. Additionally, sales and marketing
expenses--non-cash stock compensation charges includes $315,000 and $168,000 of
expense associated with Net2Phone and AOL, respectively, common stock issued at
below fair market value as further described above in revenue- non-cash stock
compensation.
AMORTIZATION OF ACQUIRED INTELLECTUAL PROPERTY AND COLLABORATIVE RIGHTS. On
June 5, 2000, we entered into a development and license agreement with AT&T
Corp. to develop and sell products that use AT&T speech technology. Pursuant to
this agreement, in exchange for 1,045,158 shares of our common stock, we
received development and distribution licenses to AT&T's speech software,
text-to-speech software and certain other technology related to computer
processing of the human voice. In addition, the parties agreed to collaborate in
certain marketing efforts and additional technology development. In connection
with this agreement we recorded $11.5 million for the acquired intellectual
property and collaborative rights, equal to the fair value of the common stock
issued, which is being amortized over a three-year period. Amortization expense
for the acquired intellectual property and collaborative rights for the year
ended December 31, 2000 was $1.9 million.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income was $3.6 million
in 2000, $549,000 in 1999 and $299,000 in 1998. Interest expense was $131,000 in
2000, $113,000 in 1999 and $72,000 in 1998. The increase in interest income from
1999 to 2000 was due to higher cash balances available for investing during 2000
as a result of the initial public offering proceeds. The increase in interest
income from 1998 to 1999 is a result of net increasing cash balances, due to the
preferred stock financing raised in early 1999, partially offset by cash being
used to fund operations. The increase in interest expense is primarily due to
increases in debt payable under our line of credit and capital equipment leases.
Other expenses include other non-operating costs.
LIQUIDITY AND CAPITAL RESOURCES
From inception through July 31, 2000, we funded our operations primarily
through private placements of convertible preferred stock totaling
$60.0 million and, to a lesser extent, through bank borrowings and capital
equipment lease financing. In August 2000, we raised approximately $109 million
through completion of our initial public offering of common stock and the
concurrent private placement of common stock with AOL and Net2Phone. As of
December 31, 2000, we had cash and cash equivalents of $99.2 million, marketable
securities of $14.4 million and $515,000 available under our revolving line of
credit, which expires on May 31, 2001. Our operating activities resulted in net
cash outflows of $23.6 million in 2000, $14.6 million in 1999 and $6.4 million
in 1998. 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 of
marketable securities of $14.4 million in 2000 and capital expenditures for
property and equipment, including $3.8 million of capital expenditures in 2000,
$3.1 million in 1999 and $926,000 in 1998. The increase in our capital
expenditures in 1999 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. We anticipate that investment in capital equipment will continue,
similar to the rate of increase as seen between 1999 and 2000 for the next
12 months. Total investing activities used cash of $3.2 million, excluding
marketable securities investments of $14.4 million, in 2000, used cash of
$3.5 million in 1999 and generated net cash of $3.7 million in 1998.
25
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% (9.5% at December 31, 2000), and principal and interest under
the term loan are payable in 36 monthly installments through September 2002. As
of December 31, 2000, $513,500 was outstanding under this facility.
Our financing activities generated cash of $128.8 million, $25.0 million and
$6.7 million in 2000, 1999 and 1998, respectively. Of these financing
activities, the issuance of convertible preferred stock and common stock
generated net proceeds of $129.6 million, $23.8 million and $6.9 million in the
same respective periods. We had proceeds from bank borrowings of none,
$1.5 million and none during the same respective years. Repayment of bank
borrowings and capital leases was $724,000, $398,000 and $222,000 during 2000,
1999 and 1998, respectively.
On August 4, 2000, we completed our 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,
we completed two private placements of common stock which raised an additional
$9.0 million. As of the date of the offering, all outstanding shares of our
preferred stock automatically converted into an aggregate of 16.4 million shares
of common stock.
We believe that the net proceeds from our initial public offering and the
concurrent private placements, together with existing cash and cash equivalents
and marketable securities, will be sufficient to meet our working capital and
capital expenditure requirements for at least the next 12 months. In the event
we require additional financing, we believe that we would be able to obtain such
funding, however, there can be no assurances that we would be successful in
doing so or that we could do so on terms favorable to us.
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 we do not currently hold any derivative
instruments and do not currently engage in hedging activities, we expect the
adoption of SFAS No. 133 will not have a material impact on our financial
position or operating results.
26
ITEM 7A. 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. The functional currency of our foreign
subsidiaries is the local currency. Substantially all of our revenues are
invoiced and collected in U.S. dollars. Assets and liabilities of foreign
subsidiaries which are denominated in foreign currencies are remeasured into
U.S. dollars at rates of exchange in effect at the end of the year. Revenue and
expense amounts are remeasured using the average exchange rates for the period.
Net unrealized gains and losses resulting from foreign currency remeasurement
are included in other comprehensive income (loss), which is a separate component
of stockholders' equity. Net realized gains and losses resulting from foreign
currency transactions are included in the consolidated statement of operations
as other income or expense.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains a number of forward-looking
statements. These forward-looking statements are not historical facts but rather
are based on current expectations, estimates and projections about our industry,
our beliefs and our assumptions. Words such as "anticipate," "expect," "intend,"
"plan," "believe," "seek," "estimate" and variations of these words and similar
expressions, are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ significantly from
those expressed, implied or forecasted in the forward-looking statements. These
risks and uncertainties include, among others, those described in Exhibit 99 to
this Annual Report on Form 10-K and elsewhere in this Annual Report on
Form 10-K. All forward-looking statements included in this Annual Report on
Form 10-K are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect our management's view only as of the date of this Annual Report on
Form 10-K.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Accountants........................... 29
Consolidated Balance Sheet as of December 31, 2000 and
1999...................................................... 30
Consolidated Statement of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... 31
Consolidated Statement of Changes in Redeemable Convertible
Preferred Stock and Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998.................... 32
Consolidated Statement of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... 33
Notes to Consolidated Financial Statements.................. 34-49
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of SpeechWorks International, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in redeemable convertible
preferred stock and stockholders' equity, and of cash flows present fairly, in
all material respects, the financial position of SpeechWorks
International, Inc. and its subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
January 25, 2001, except for the
second paragraph of Note 16 for
which the date is February 28, 2001
29
SPEECHWORKS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
-------------------------
2000 1999
-------- --------
(IN THOUSANDS, EXCEPT
SHARE INFORMATION)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 99,203 $ 11,474
Marketable securities..................................... 14,370 --
Accounts receivable, net of allowance for doubtful
accounts of $600 and $60, respectively.................. 12,502 4,097
Prepaid expenses and other current assets................. 2,488 463
Restricted investments.................................... -- 573
-------- --------
Total current assets.................................... 128,563 16,607
Fixed assets, net........................................... 5,337 3,408
Intangible assets, net...................................... 9,581 --
Other assets................................................ 893 551
-------- --------
Total assets............................................ $144,374 $ 20,566
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 640 $ 845
Accrued compensation...................................... 4,639 1,104
Accrued expenses.......................................... 2,991 988
Deferred revenue.......................................... 3,873 854
Current portion of capital lease obligations.............. -- 183
Current portion of long-term debt......................... 500 500
-------- --------
Total current liabilities............................... 12,643 4,474
Long-term debt, net of current portion...................... 292 833
-------- --------
Total liabilities....................................... 12,935 5,307
-------- --------
Commitments (Note 11)
Redeemable convertible preferred stock:
Redeemable convertible preferred stock, $0.001 par value;
zero and 9,375,592, shares authorized; zero and
9,246,989 shares issued and outstanding, respectively... -- 43,507
-------- --------
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 and zero
shares authorized, respectively; zero shares issued and
outstanding............................................. -- --
Common stock, $0.001 par value; 100,000,000 and
22,000,000, shares authorized; 30,583,333 and 5,584,775
shares issued and outstanding, respectively............. 31 6
Additional paid-in capital................................ 219,519 5,978
Deferred stock compensation............................... (22,151) (4,905)
Accumulated other comprehensive loss...................... (8) --
Accumulated deficit....................................... (65,952) (29,327)
-------- --------
Total stockholders' equity (deficit).................... 131,439 (28,248)
-------- --------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity........................ $144,374 $ 20,566
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
30
SPEECHWORKS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Product licenses.......................................... $ 16,356 $ 3,680 $ 1,567
Professional services..................................... 11,260 5,944 2,873
Other revenues............................................ 2,681 4,387 1,410
Non-cash stock compensation............................... (273) -- --
-------- -------- -------
Total revenues.......................................... 30,024 14,011 5,850
-------- -------- -------
Cost of revenues:
Cost of product licenses.................................. 214 153 52
Cost of professional services -- non-cash stock
compensation............................................ 538 139 --
-- all other expenses............. 8,374 4,991 1,982
Cost of other revenues.................................... 1,844 2,987 890
-------- -------- -------
Total cost of revenues.................................. 10,970 8,270 2,924
-------- -------- -------
Gross profit................................................ 19,054 5,741 2,926
-------- -------- -------
Operating expenses:
Selling and marketing -- non-cash stock compensation...... 3,045 225 --
-- all other expenses.................. 19,802 9,254 3,867
Research and development -- non-cash stock compensation... 472 97 --
-- all other expenses.............. 8,652 5,164 1,881
General and administrative -- non-cash stock
compensation............................................ 398 47 --
-- all other expenses.............. 17,300 6,693 3,157
Amortization of acquired intellectual property and
collaborative rights.................................... 1,916 -- --
-------- -------- -------
Total operating expenses................................ 51,585 21,480 8,905
-------- -------- -------
Loss from operations........................................ (32,531) (15,739) (5,979)
Interest income............................................. 3,554 549 299
Interest expense............................................ (131) (113) (72)
Other expenses, net......................................... (179) (160) (8)
-------- -------- -------
Net loss before income taxes................................ (29,287) (15,463) (5,760)
Provision for income taxes.................................. 309 -- --
-------- -------- -------
Net loss.................................................... (29,596) (15,463) (5,760)
Accretion and deemed dividend on redeemable convertible
preferred stock........................................... (6,955) (1,904) (789)
-------- -------- -------
Net loss attributable to common stockholders................ $(36,551) $(17,367) $(6,549)
======== ======== =======
Basic and diluted net loss per common share................. $ (2.29) $ (3.28) $ (1.44)
Shares used in computing basic and diluted net loss per
common share.............................................. 15,935 5,298 4,537
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
31
SPEECHWORKS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
REDEEMABLE COMMON
CONVERTIBLE STOCK NOTES
PREFERRED STOCK ------------------- ADDITIONAL DEFERRED RECEIVABLE
-------------------- PAR PAID-IN STOCK FROM
SHARES AMOUNT SHARES VALUE CAPITAL COMPENSATION STOCKHOLDERS
--------- -------- -------- -------- ---------- ------------ ------------
(IN THOUSANDS)
Balance at December 31, 1997....... 4,917 $ 9,974 3,696 $ 4 $ 350 $ -- $ --
Issuance of preferred stock........ 33 100
Issuance of preferred stock,
including related issuance costs
of $85........................... 1,620 6,886
Issuance of common stock upon
exercise of employee stock
options.......................... 987 1 69 (28)
Repayment of notes receivable from
stockholders..................... 16
Issuance of common stock in
exchange for services............ 101 -- 67
Accrual of cumulative dividends on
redeemable convertible preferred
stock............................ 789
Net loss...........................
------- ------- ------ --- --------- -------- ---------
Balance at December 31, 1998....... 6,570 17,749 4,784 5 486 -- (12)
Issuance of preferred stock........ 6 25
Issuance of preferred stock,
including related issuance costs
of $24........................... 2,671 23,829
Issuance of common stock upon
exercise of employee stock
options.......................... 801 1 79
Repayment of notes receivable from
stockholders..................... 12
Accrual of cumulative dividends on
redeemable convertible preferred
stock............................ 1,904
Deferred compensation related to
employee stock option grants..... 5,413 (5,413)
Amortization of deferred stock
compensation..................... 508
Net loss...........................
------- ------- ------ --- --------- -------- ---------
Balance at December 31, 1999....... 9,247 43,507 5,585 6 5,978 (4,905) --
Issuance of preferred stock,
including related issuance costs
of $74........................... 2,545 20,001
Accrual of cumulative dividends on
redeemable convertible preferred
stock............................ 1,765
Issuance of common stock upon
initial public offering, net of
issuance
costs of $1,820.................. 5,463 6 99,777
Sale of common stock in private
placement........................ 722 1 8,999
Accretion of redeemable convertible
preferred stock to redemption
value............................ 5,190
Conversion of redeemable
convertible preferred stock to
common stock in connection with
the initial public offering...... (11,792) (70,463) 16,415 16 70,447
Issuance of common stock upon
warrant exercises................ 431 -- 85
Issuance of common stock upon
acquiring intellectual property
and collaborative rights......... 1,045 1 11,494
Issuance of common stock upon
exercise of employee stock
options.......................... 922 1 767
Deferred compensation related to
employee stock option grants,
issuance of warrants and issuance
of common stock at less than fair
market value..................... 21,972 (21,972)
Amortization of deferred stock
compensation..................... 4,726
Unrealized gain on marketable
securities.......................
Foreign currency translation
adjustment.......................
Net loss...........................
Comprehensive loss.................
------- ------- ------ --- --------- -------- ---------
Balance at December 31, 2000....... -- $ -- 30,583 $31 $ 219,519 $(22,151) $ --
======= ======= ====== === ========= ======== =========
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE ACCUMULATED EQUITY COMPREHENSIVE
LOSS DEFICIT (DEFICIT) LOSS
------------- ----------- ------------- -------------
(IN THOUSANDS)
Balance at December 31, 1997....... $ -- $ (5,302) $ (4,948)
Issuance of preferred stock........ --
Issuance of preferred stock,
including related issuance costs
of $85........................... (85) (85)
Issuance of common stock upon
exercise of employee stock
options.......................... 42
Repayment of notes receivable from
stockholders..................... 16
Issuance of common stock in
exchange for services............ 67
Accrual of cumulative dividends on
redeemable convertible preferred
stock............................ (789) (789)
Net loss........................... (5,760) (5,760) $ (5,760)
--------- -------- -------- ========
Balance at December 31, 1998....... -- (11,936) (11,457)
Issuance of preferred stock........
Issuance of preferred stock,
including related issuance costs
of $24........................... (24) (24)
Issuance of common stock upon
exercise of employee stock
options.......................... 80
Repayment of notes receivable from
stockholders..................... 12
Accrual of cumulative dividends on
redeemable convertible preferred
stock............................ (1,904) (1,904)
Deferred compensation related to
employee stock option grants..... --
Amortization of deferred stock
compensation..................... 508
Net loss........................... (15,463) (15,463) $(15,463)
--------- -------- -------- ========
Balance at December 31, 1999....... -- (29,327) (28,248)
Issuance of preferred stock,
including related issuance costs
of $74........................... (74) (74)
Accrual of cumulative dividends on
redeemable convertible preferred
stock............................ (1,765) (1,765)
Issuance of common stock upon
initial public offering, net of
issuance
costs of $1,820.................. 99,783
Sale of common stock in private
placement........................ 9,000
Accretion of redeemable convertible
preferred stock to redemption
value............................ (5,190) (5,190)
Conversion of redeemable
convertible preferred stock to
common stock in connection with
the initial public offering...... 70,463
Issuance of common stock upon
warrant exercises................ 85
Issuance of common stock upon
acquiring intellectual property
and collaborative rights......... 11,495
Issuance of common stock upon
exercise of employee stock
options.......................... 768
Deferred compensation related to
employee stock option grants,
issuance of warrants and issuance
of common stock at less than fair
market value..................... --
Amortization of deferred stock
compensation..................... 4,726
Unrealized gain on marketable
securities....................... 4 4 $ 4
Foreign currency translation
adjustment....................... (12) (12) (12)
Net loss........................... (29,596) (29,596) (29,596)
--------
Comprehensive loss................. $(29,604)
--------- -------- -------- ========
Balance at December 31, 2000....... $ (8) $(65,952) $131,439
========= ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
32
SPEECHWORKS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(29,596) $(15,463) $(5,760)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,891 785 466
Amortization of acquired intellectual property and
collaborative rights.................................... 1,916 -- --
Stock compensation expense................................ 4,726 508 --
Common stock issued in exchange for services.............. -- -- 67
Provision for doubtful accounts........................... 540 (15) 75
Translation (gains) losses, net........................... (33) 4 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (8,967) (1,080) (2,641)
Prepaid expenses and other current assets............... (2,039) (286) (141)
Other assets............................................ (330) (347) (161)
Accounts payable........................................ (200) (557) 1,137
Accrued compensation and other expenses................. 5,565 1,282 499
Deferred revenue........................................ 2,946 610 44
-------- -------- -------
Net cash used in operating activities................. (23,581) (14,559) (6,415)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets................................. (3,777) (3,100) (926)
Purchases of restricted investments....................... -- (573) --
Maturities of restricted investments...................... 573 -- --
Purchases of short-term investments....................... -- -- (1,378)
Maturities of short-term investments...................... -- 200 6,042
Purchases of marketable securities........................ (14,366) -- --
-------- -------- -------
Net cash (used in) provided by investing activities... (17,570) (3,473) 3,738
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations........... (183) (231) (222)
Proceeds from notes payable............................... -- 1,500 --
Principal payments on notes payable....................... (541) (167) --
Proceeds from issuance of redeemable convertible preferred
stock, net of issuance costs............................ 19,927 23,830 6,901
Proceeds from exercise of common stock options and
warrants................................................ 853 80 42
Proceeds from sale of common stock, net of issuance
costs................................................... 108,783 -- --
Repayment of notes receivable from stockholders........... -- 12 16
-------- -------- -------
Net cash provided by financing activities............. 128,839 25,024 6,737
-------- -------- -------
Effects of changes in exchange rates on cash.............. 41 (4) --
Net increase in cash and cash equivalents............. 87,729 6,988 4,060
Cash and cash equivalents, beginning of year................ 11,474 4,486 426
-------- -------- -------
Cash and cash equivalents, ending of year................... $ 99,203 $ 11,474 $ 4,486
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 126 $ 113 $ 72
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On June 5, 2000, the Company issued 1,045,158 shares of its common stock,
valued at $11.5 million, to AT&T in exchange for intellectual property and
collaborative rights.
In August 2000, in connection with the Company's initial public offering,
all outstanding shares of preferred stock automatically converted into an
aggregate 16,415,158 shares of the Company's common stock.
In October 2000, a warrant holder exercised their warrant for the purchase
of 36,000 shares of common stock in a cashless exercise resulting in the Company
issuing 35,686 shares of common stock.
In December 2000, America Online exercised a portion of their warrant for
the purchase of 510,281 shares of common stock in a cashless exercise resulting
in the Company issuing 365,248 shares of common stock.
During 1998, the Company issued 280,000 shares of its common stock to
employees upon the exercise of stock options in exchange for notes receivable
totaling $28,000.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
33
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
SpeechWorks International, Inc. (the "Company") was incorporated in
May 1994 and began operations in September 1994 under the name Applied Language
Technologies, Inc. In October 1998, the Company's stockholders voted to change
its name to SpeechWorks International, Inc. The Company is engaged in the
development and marketing of speech recognition software and interactive systems
using speech understanding software, and related products and services.
Principal markets include both domestic and international companies. The Company
operates in one reportable segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements reflect the operations of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents; all other
securities are classified as marketable securities. All investments are
classified as available for sale and are carried at fair value, with unrealized
gains and losses included in other comprehensive income or loss, which is a
separate component of stockholders' equity, until realized. The Company
recognizes realized gains and losses on a specific identification basis. The
Company invests excess cash primarily in commercial paper, municipal notes and
bonds, money market funds of major financial institutions, U.S. government
agencies and corporate debt securities.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially expose the Company to concentrations
of credit risk are primarily comprised of cash investments and trade accounts
receivable. The Company places its excess cash in marketable investment grade
securities. There are no significant concentrations in any one issuer of
securities. The Company places its cash, cash equivalents and investments with
financial institutions with high credit standing. Management believes its credit
policies reflect normal industry terms and business risk. The Company does not
anticipate nonperformance by the counterparties and, accordingly, does not
require collateral.
At December 31, 2000, 13% of the Company's accounts receivable was due from
one customer. At December 31, 1999, 21%, 17%, 11% and 10% of the Company's
accounts receivable were due from four customers.
Revenue from one customer represented 16% of total revenues during the year
ended December 31, 2000. Revenue from two customers represented 34% and 11% of
total revenues during the year ended December 31, 1999. Revenue from two
customers represented 32% and 13% of total revenues during the year ended
December 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash, cash equivalents, accounts
receivable, accounts payable, accrued expenses and long-term debt are carried in
the consolidated financial statements at amounts that approximate their fair
value as of December 31, 2000 and 1999.
34
FIXED ASSETS
Fixed assets are recorded at cost and depreciated using the straight-line
method over their estimated useful lives. Leasehold improvements are amortized
over the shorter of the useful life of the improvement or the remaining term of
the lease. Fixed assets held under capital leases are stated at the lower of the
fair market value of the related asset or the present value of the minimum lease
payments at the inception of the lease and are amortized on a straight-line
basis over either the life of the related asset or the term of the lease.
Repairs and maintenance costs are charged to expense as incurred.
INTANGIBLE ASSETS
Intangible assets result from the Company's purchase of speech technology
from AT&T Corp. (Note 6). Intangible assets are recorded at cost, net of
accumulated amortization. Intangible assets are amortized on a straight-line
basis over their estimated useful lives of three years. The Company periodically
evaluates its intangible assets for events and circumstances which indicate a
potential impairment. Recoverability of these assets is assessed based on
undiscounted expected cash flows from these assets, considering a number of
factors, including past operating results, budgets and economic projections,
market trends and product development cycles. An impairment in the carrying
value of each asset is assessed when the undiscounted expected cash flows
derived from the asset are less than its carrying value. Through December 31,
2000, the Company had not recognized an impairment loss on its intangible
assets.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Statement of Position 97-2
"Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position
98-9 and the Securities and Exchange Commission's Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements." Revenue from the sale of
licenses to end users, value-added resellers and system integrators to use the
Company's software products is recognized upon delivery, provided that no
significant obligations remain, evidence of the arrangement exists, the fees are
fixed or determinable, and collectibility is reasonably assured. Revenue from
royalties on sales of the Company's products by OEMs to third parties is
recognized upon delivery to the third party when such information is available,
or when notified by the reseller that such royalties are due as a result of a
sale, provided that collectibility is reasonably assured. Arrangements for the
sale of software licenses sold without professional services may or may not
include maintenance and support services.
Professional services revenue primarily consists of fees for custom
development services, consulting services, and support and maintenance services
provided to end users, value-added resellers, system integrators and
OEMs. Revenue relating to the development of custom software applications and
nonrecurring platform development work for third parties, including fees for
licenses to use the Company's software products in the related development
effort and thereafter in conjunction with the delivered custom application, as
well as revenue relating to consulting services provided on a fixed-fee basis
are recognized using the percentage-of-completion method of accounting, provided
that collection of the related receivable is reasonably assured. In applying
this method, the Company measures each project's percentage-of-completion by the
ratio of labor hours incurred to date to estimated total labor hours to complete
the project. This method is used because management considers expended labor
hours to be the best available measure of progress on these projects.
Adjustments to contract estimates are made in the periods in which the facts
requiring such revisions become known. When the estimate indicates a loss, such
loss is provided for in its entirety. When services are provided on a time and
materials basis, revenue is recognized as the services are rendered. Revenue
related to maintenance and support arrangements is recognized ratably over the
contract period. The Company does not consider professional services, other than
the development of custom software applications, to be
35
essential to the functionality of the other elements of its software
arrangements. These other professional services are limited and primarily
include training and feasibility studies.
Other revenue primarily consists of hardware sales and other resold services
provided to end users. Resold hardware revenue is recognized upon delivery
provided that collectibility is probable and no significant post-delivery
obligations remain relating to the sale.
The Company's sales frequently include, under related contracts, software
licenses, related professional services and a maintenance and support
arrangement. The total contract value is attributed first to the maintenance and
support arrangement based on its fair value, equal to its stated list price as a
fixed percentage of the related software product's price. The remainder of the
total contract value is then attributed to the software license and related
professional services, with the effect that discounts inherent in the total
contract value are attributed to the software license and related professional
services.
Under its maintenance and support arrangements, the Company offers
unspecified upgrades and enhancements on software products only on a
when-and-if-available basis. The Company does not contract in advance for
specified upgrades, enhancements or additional software products. The Company
does not offer rights of return to its customers. In situations where negotiated
contracts require rights of return, the Company does not recognize revenue until
all significant obligations have been delivered and accepted by the client.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Costs incurred in the research and development of new software products and
enhancements to existing products, other than certain software development costs
that qualify for capitalization, are expensed as incurred. Software development
costs incurred subsequent to the establishment of technological feasibility, but
prior to general release of the product, are capitalized and amortized to cost
of software license revenues over the estimated useful life of the related
products. In the years ended December 31, 2000, 1999 and 1998, costs eligible
for capitalization were not material.
ACCOUNTING FOR STOCK COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation expense is recorded for options issued to employees in
fixed amounts to the extent that the fixed exercise prices are less than the
fair market value of the Company's common stock at the date of grant. The
difference between the fair value of the Company's common stock and the exercise
price of the stock option is recorded as deferred stock compensation, as a
reduction of stockholders' equity. Deferred stock compensation is amortized to
compensation expense over the vesting period of the underlying stock option. The
Company follows the disclosure provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
(Note 10). All stock-based awards to nonemployees are accounted for at their
fair value in accordance with SFAS No. 123 and related interpretations.
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. During the years ended
December 31, 2000, 1999 and 1998, advertising expense totaled $1,598,000,
$1,334,000 and $407,000, respectively.
36
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. A valuation allowance against deferred tax assets is recorded if,
based upon the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. The Company does
not provide for U.S. income taxes on the undistributed earnings of its foreign
subsidiaries, which the Company considers to be permanent investments.
COMPREHENSIVE INCOME
Comprehensive income (loss) consists of net income (loss) and other
comprehensive income (loss), which includes foreign currency translation
adjustments and unrealized gains and losses on certain investments. For the
purposes of comprehensive income (loss) disclosures, the Company does not record
tax provisions or benefits for the net changes in foreign currency translation
adjustment, as the Company intends to permanently reinvest undistributed
earnings in its foreign subsidiaries.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries is the local
currency. Substantially all of the Company's revenues are invoiced and collected
in U.S. dollars. Assets and liabilities of foreign subsidiaries which are
denominated in foreign currencies are remeasured into U.S. dollars at rates of
exchange in effect at the end of the year. Revenue and expense amounts are
remeasured using the average exchange rates for the period. Net unrealized gains
and losses resulting from foreign currency remeasurement are included in other
comprehensive income (loss), which is a separate component of stockholders'
equity. Net realized gains and losses resulting from foreign currency
transactions are included in the consolidated statement of operations as other
income or expense.
NET LOSS PER SHARE
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. Diluted net loss per share is computed by dividing the net
loss attributable to common stockholders by the weighted average number of
shares of common stock and potential common stock outstanding during the period,
if dilutive. There is no difference between basic and diluted net loss per share
for all periods presented since potential common shares from the conversion of
redeemable convertible preferred stock and the exercise of options and warrants
were anti-dilutive for all periods presented.
The following table sets forth the potential common stock excluded from the
calculation of diluted net loss per share:
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
--------- ---------- ----------
Options to purchase common stock.......... 5,692,249 4,836,202 3,396,882
Warrants to purchase common stock......... 1,044,088 807,237 807,237
Redeemable convertible preferred stock.... -- 13,870,477 9,854,565
--------- ---------- ----------
6,736,337 19,513,916 14,058,684
========= ========== ==========
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets
37
and liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Components particularly subject to estimation
include estimates of costs to complete custom software development arrangements.
Actual results could differ from those estimates and would impact future results
of operations and cash flows.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been
reclassified to conform to current year presentation. These reclassifications
had no effect on reported net loss.
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.
3. INVESTMENTS
Cash equivalents consist of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Commercial paper........................................... $62,545 $ --
Municipal notes and bonds.................................. 16,481 --
Money market funds......................................... 9,494 6,444
U.S. government agencies................................... 4,997 --
Corporate debt securities.................................. 3,003 --
U.S. Treasury securities................................... -- 3,061
------- ------
$96,520 $9,505
======= ======
Marketable securities at amortized cost, including accrued interest, and at
fair value as of December 31, 2000 consist of the following:
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
Commercial paper......................................... $11,345 $11,338
Corporate debt securities................................ 3,021 3,032
------- -------
$14,366 $14,370
======= =======
Gross realized and unrealized gains and losses on marketable securities for
the year ended December 31, 2000 were immaterial. All marketable securities held
at December 31, 2000 mature within one year.
38
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Accounts receivable........................................ $10,191 $2,723
Unbilled accounts receivable............................... 2,911 1,434
------- ------
13,102 4,157
Less -- allowance for doubtful accounts.................... 600 60
------- ------
$12,502 $4,097
======= ======
Unbilled accounts receivable are primarily revenues earned under percentage
of completion accounting that have not yet been billed under the terms of the
arrangement.
5. FIXED ASSETS
Fixed assets consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIFE -------------------
(YEARS) 2000 1999
----------- -------- --------
(IN THOUSANDS)
Computer and office equipment..................... 3 $6,448 $3,157
Computer and office equipment under capital
leases.......................................... 3 -- 765
Leasehold improvements............................ 5 1,232 607
Furniture and fixtures............................ 5 969 352
Furniture and fixtures under capital leases....... 5 -- 35
------ ------
8,649 4,916
Less -- accumulated depreciation and
amortization.................................... 3,312 1,508
------ ------
$5,337 $3,408
====== ======
Depreciation and amortization expense for the years ended December 31, 2000,
1999 and 1998 was $1,804,000, $785,000, and $466,000, respectively, of which
$114,000, $227,000 and $267,000 related to fixed assets under capital leases for
2000, 1999 and 1998, respectively. Assets under capital leases collateralized
the related lease obligations.
6. INTANGIBLE ASSETS
On June 5, 2000, the Company entered into a development and license
agreement with AT&T Corp. to develop and sell products that use AT&T speech
technology. Pursuant to this agreement, in exchange for 1,045,158 shares of the
Company's common stock, the Company received development and distribution
licenses to AT&T's speech software, text-to-speech software and certain other
technology related to computer processing of the human voice. In addition, the
parties agreed to collaborate in certain marketing efforts and additional
technology development. In connection with this agreement, the Company recorded
$11,497,000 of acquired intellectual property and collaborative rights, equal to
the fair value of the common stock issued, which is being amortized over a
three-year period. Accumulated amortization and amortization expense for the
acquired intellectual property and collaborative rights as of and for the year
ended December 31, 2000 was $1,916,000.
39
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock, $0.001 par value, consists of the
following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Series D; 0 and 2,800,000 shares authorized; 0 and 2,671,389
shares issued and outstanding at December 31, 2000 and
1999, respectively........................................ $ -- $24,761
Series C; 0 and 1,626,092 shares authorized, issued and
outstanding at December 31, 2000 and 1999, respectively... -- 7,560
Series B; 0 and 2,474,500 shares authorized, issued and
outstanding at December 31, 2000 and 1999, respectively... -- 8,073
Series A; 0 and 2,475,000 shares authorized, issued and
outstanding at December 31, 2000 and 1999, respectively... -- 3,113
---- -------
$ -- $43,507
==== =======
On April 11, 2000, the Company sold 2,544,681 shares of its Series E
redeemable convertible preferred stock (the "Series E preferred stock") for net
proceeds of $19,927,000. Because the deemed fair value of the Company's common
stock for financial reporting purposes was greater than the conversion price of
the Series E preferred stock of $7.86 per share, in accordance with EITF 98-5,
the Company recorded a beneficial conversion feature of $5,190,000 on the
Series E preferred stock. The beneficial conversion feature was treated as a
preferred stock dividend on the date of issue, thus increasing the net loss
attributable to common stockholders.
In connection with the Company's initial public offering in August 2000, all
outstanding shares of preferred stock automatically converted into an aggregate
16,415,158 shares of the Company's common stock. Prior to the conversion, each
share of preferred stock, except Series E preferred stock, was convertible into
one and one-half shares of the Company's common stock; each share of Series E
preferred stock was convertible into one share of the Company's common stock.
All holders of the preferred stock were also entitled to dividends at a rate of
6% per year and were entitled to one vote for each share of common stock into
which the redeemable preferred stock was convertible. In the event of
liquidation, dissolution, merger, sale or winding up of the Company while the
preferred stock was outstanding, the holders of all shares of redeemable
preferred stock would have been entitled to receive the original issue price per
share, subject to certain anti-dilution adjustments, plus any accrued but unpaid
dividends. Prior to the conversion, the holders of all preferred stock, upon the
election of a majority of any series of preferred stock on or after March 31,
2002, could have required the Company to redeem all shares of the series of
preferred stock, at the original issue price per share plus any accrued but
unpaid dividends, in three equal annual installments.
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized up to 10,000,000 shares of preferred stock,
$0.001 par value, for issuance. Each series of preferred stock shall have
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the Board of Directors upon the issuance
of the preferred stock.
40
COMMON STOCK
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of the Company's stockholders. Common stockholders are not
entitled to receive dividends unless declared by the Board of Directors.
In January 2000, the Company effected a three-for-two stock split of all
common stock. All common stock share and per share amounts in these consolidated
financial statements have been restated to reflect this stock split.
DEFERRED STOCK COMPENSATION
In connection with the sale of common stock in private placements to
Net2Phone and America Online (AOL), concurrent with the Company's initial public
offering, the Company recorded deferred stock compensation within stockholders'
equity of $5.4 million. This amount represents the difference between the price
of the public offering of $20.00 per share and the price paid by Net2Phone and
AOL of $12.46 per share. This amount is presented as a reduction of
stockholders' equity and is being amortized to the statement of operations over
the three-year term of the concurrently entered revenue-producing arrangements.
In each quarterly reporting period, such amortization will be reflected as a
reduction of revenues resulting from the arrangements; to the extent that the
amortization exceeds such revenues, the residual will be reflected in operating
expenses. For the year ended December 31, 2000, the Company recognized revenue
from Net2Phone and AOL and, accordingly, the related amortization of $21,000 and
$252,000, respectively, was recorded as a non-cash stock compensation charge
which reduced revenue. Amortization of deferred stock compensation for Net2Phone
and AOL of $315,000 and $168,000, respectively, which was in excess of revenue
recognized during the year, was recorded as selling and marketing stock
compensation expense.
WARRANTS
On June 30, 2000, the Company issued a warrant to purchase up to 765,422
shares of common stock to AOL 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
$11.2 million, which is being amortized to selling and marketing stock
compensation expense over the three-year term of the agreement. The Company
recognized $1,558,000 of stock compensation expense during the year ended
December 31, 2000. The warrant becomes exercisable upon the earlier of June 30,
2002 or in three equal installments upon the achievement of certain performance
targets. The warrant may be exercised at the option of the holder, in whole or
in part, at any time on or before the fifth anniversary from the date that
portion of the warrant becomes exercisable. As of December 31, 2000, two of the
three performance targets had been achieved and accordingly, the warrant was
exercisable for 510,281 shares. As of December 31, 2000, in accordance with the
original terms of the warrant, AOL exercised a portion of their warrant for the
purchase of 510,281 shares of common stock in a cashless exercise, resulting in
the Company issuing 365,248 shares of common stock.
On May 31, 2000, the Company issued to a Series E preferred investor a
warrant to purchase 47,710 shares of common stock at an exercise price of $7.86
per share subject to certain anti-dilution adjustments. The warrant was
exercisable at the option of the holder, in whole or part, at any time on or
before May 2002. The fair value ascribed to this warrant upon its issuance,
utilizing the Black-Scholes valuation model, was $330,630. On January 24, 2001,
the warrant was exercised in full in a cashless exercise resulting in the
Company issuing 37,020 shares of common stock.
In November 1998, in connection with the acquisition of the name
"SpeechWorks," the Company issued a warrant to an unrelated third party to
purchase 30,000 shares of the Company's common stock at a price of $2.83 per
share, subject to certain anti-dilution adjustments. This warrant was
exercisable at the option of the holder, in whole or in part, at any time on or
before November 2003. The value
41
ascribed to this warrant upon its issuance, utilizing the Black-Scholes
valuation model, was not significant. On October 19, 2000, the warrant was
exercised in full for proceeds to the Company of approximately $85,000.
In January 1997, the Company issued to a customer a warrant to purchase
741,237 shares of the Company's common stock at a price of $2.05 per share,
subject to certain anti-dilution adjustments. This warrant was exercisable at
the option of the holder, in whole or in part, at any time on or before
January 2002, subject to a maximum of three exercises. At any time, the Company
may, at its option, redeem the warrant at a redemption price equal to 200% of
the market value of this warrant. The value ascribed to this warrant upon its
issuance, utilizing the Black-Scholes valuation model, was not significant.
In connection with a leasing agreement entered in 1996, the Company issued a
warrant to purchase 36,000 shares of its common stock at a price of $0.67 per
share. The warrant was subject to certain anti-dilution adjustments and was
exercisable, in whole or in part, on or before October 2002. The value ascribed
to this warrant upon its issuance, utilizing the Black-Scholes valuation model,
was not significant. On October 31, 2000, the warrant was exercised in full in a
cashless exercise resulting in the Company issuing 35,686 shares of common
stock.
RESERVED SHARES
At December 31, 2000, the Company had 6,736,337 shares of its common stock
reserved for issuance upon the exercise of outstanding options issued under the
Company's stock option plans and upon exercise of outstanding common stock
warrants.
9. NET LOSS PER SHARE
The pro forma net loss per common share for the years ended December 31,
2000, 1999 and 1998 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
and deemed dividends on the redeemable convertible preferred stock are 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):
YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net loss.................................................... $(29,596) $(15,463) $(5,760)
Accretion and deemed dividends on redeemable convertible
preferred stock........................................... (6,955) (1,904) (789)
-------- -------- -------
Net loss attributable to common stockholders................ $(36,551) $(17,367) $(6,549)
======== ======== =======
Weighted average shares used in computing basic and diluted
net loss per common share................................. 15,935 5,298 4,537
Basic and diluted net loss per common share................. $ (2.29) $ (3.28) $ (1.44)
Pro forma (unaudited):
Net loss.................................................... $(29,596) $(15,463) $(5,760)
======== ======== =======
Shares used above........................................... 15,935 5,298 4,537
Pro forma adjustment to reflect the weighted average effect
of assumed conversion of redeemable convertible preferred
stock..................................................... 9,024 12,388 8,820
-------- -------- -------
Weighted average shares used in computing pro forma basic
and diluted net loss per common share..................... 24,959 17,686 13,357
Pro forma basic and diluted net loss per common share....... $ (1.19) $ (0.87) $ (0.43)
42
10. STOCK OPTION PLANS
During April 2000, the Company's Board of Directors approved the 2000
Employee, Director and Consultant Stock Plan (the "2000 Plan") which was
approved by the Company's stockholders in May 2000. The 2000 Plan provides for
the grant of incentive stock options ("ISOs") as well as non-qualified options
to employees, directors and other individuals providing services to the Company.
The Compensation Committee of the Board of Directors determines the term of each
option, exercise price, number of shares for which each option is granted,
whether restrictions will be imposed on the shares subject to options and the
rate at which each option is exercisable. The exercise price for ISOs cannot be
less than the fair market value per share of the underlying common stock on the
date granted. The exercise price for ISOs granted to holders of more than 10% of
the voting stock of the Company cannot be less than 110% of the fair market
value per share of the underlying common stock on the grant date. The term of
ISOs and non-qualified options cannot exceed ten years. The term of ISOs granted
to holders of more than 10% of the voting stock of the Company cannot exceed
five years. Options granted under the 2000 Plan typically vest over 4 years. A
maximum of 5,000,000 shares of common stock have been authorized for issuance
under the 2000 Plan.
During May 2000, the Company's Board of Directors and stockholders approved
the 2000 Employee Stock Purchase Plan (the "Purchase Plan"), which became
effective upon completion of the Company's initial public offering. The plan
authorizes the issuance of up to a total of 200,000 shares of common stock to
participating employees. Under the Purchase Plan, the Company makes two
offerings each fiscal year, at the end of which employees may purchase shares of
the Company's common stock through payroll deductions made over the term of each
offering period. The per-share purchase price at the end of each offering period
is equal to the lesser of 85% of the closing price of the Company's common stock
at the beginning or end of the offering period. The first plan period began
September 1, 2000 and will end on February 28, 2001. As of December 31, 2000, no
shares were issued under the Purchase Plan.
During August 1995, the Company adopted the Amended and Restated 1995 Stock
Option Plan (the "1995 Plan"). The 1995 Plan provides for the grant of incentive
stock options ("ISOs") as well as non-qualified options to employees, directors
and other individuals providing services to the Company. The Board of Directors
determines the term of each option, exercise price, number of shares for which
each option is granted, whether restrictions will be imposed on the shares
subject to options and the rate at which each option is exercisable. The
exercise price for ISOs cannot be less than the fair market value per share of
the underlying common stock on the date granted. The exercise price for ISOs
granted to holders of more than 10% of the voting stock of the Company cannot be
less than 110% of the fair market value per share of the underlying common stock
on the grant date. The term of ISOs and non-qualified options cannot exceed ten
years. The term of ISOs granted to holders of more than 10% of the voting stock
of the Company cannot exceed five years. Options granted under the 1995 Plan
typically vest over 4 years. A maximum of 5,184,319 shares of common stock have
been authorized for issuance under the 1995 Plan.
43
A summary of the status of options granted under the Company's stock option
plan as of December 31, 2000, 1999 and 1998 and changes during the years then
ended is presented below:
2000 1999 1998
-------------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------------- --------- -------------- --------- -------------- ---------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Outstanding at beginning of Year..... 4,836 $ 1.51 3,397 $0.36 3,296 $0.15
Granted.......................... 2,103 15.71 2,795 2.51 1,150 0.69
Exercised........................ (922) 0.83 (801) 0.10 (987) 0.07
Canceled......................... (325) 3.14 (555) 1.47 (62) 0.19
----- ----- -----
Outstanding at end of year........... 5,692 6.77 4,836 1.51 3,397 0.36
===== ===== =====
Options exercisable at December 31... 1,821 $ 1.62 1,423 $0.51 1,265 $0.17
Options available for future grant at
December 31........................ 3,770 5,547 7,772
Weighted average fair value of
options granted during the year
ended December 31.................. $12.69 $0.65 $0.21
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
--------------- -------------- ---------------- -------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
$0.010 -- $0.333 953 5.89 $ 0.25 803 $ 0.23
0.433 -- 0.833 901 7.69 0.73 367 0.69
1.000 -- 2.167 1,064 8.26 2.00 293 1.98
4.000 -- 4.133 1,144 8.76 4.03 257 4.07
8.000 -- 20.000 1,322 9.30 10.02 101 8.66
30.063 -- 92.250 308 9.87 57.37 -- --
----- ------ -----
$0.010 -- $92.250 5,692 8.20 $ 6.77 1,821 $ 1.62
===== ====== =====
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. During the six months ended December 31, 2000,
no deferred stock compensation was recorded as all stock options issued during
the period were issued with an exercise price equal to the fair value on the
date of grant. The Company recorded amortization of deferred stock compensation
for the years ended December 31, 2000, 1999 and 1998 of $2,411,000, $508,000,
and $0, respectively. Had compensation expense for all stock awards been
determined based on the fair value at the date of grant, consistent with the
method prescribed by SFAS No. 123, the Company's net loss attributable to
44
common stockholders and net loss per common share for the years ended
December 31, 2000, 1999 and 1998 would have increased to the pro forma amounts
indicated below:
2000 1999 1998
------------------------- ------------------------- -------------------------
NET LOSS NET LOSS NET LOSS
ATTRIBUTABLE NET LOSS ATTRIBUTABLE NET LOSS ATTRIBUTABLE NET LOSS
TO COMMON PER COMMON TO COMMON PER COMMON TO COMMON PER COMMON
STOCKHOLDERS SHARE STOCKHOLDERS SHARE STOCKHOLDERS SHARE
------------ ---------- ------------ ---------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
As reported......................... $(36,551) $(2.29) $(17,367) $(3.28) $(6,549) $(1.44)
Pro forma........................... $(41,565) $(2.61) $(17,719) $(3.34) $(6,664) $(1.47)
For this purpose, the fair value of options at the date of grant was
estimated using the Black-Scholes valuation model after the Company's initial
registration filing and the minimum value method before the Company's initial
registration filing with the following weighted-average assumptions for 2000:
risk-free interest rate of 6.14%, volatility factor of 100.0%, no dividend
yields; and expected life of the options of 6.36 years. For this purpose, the
fair value of options at the date of grant was estimated using the minimum value
method with the following weighted-average assumptions for 1999 and 1998:
risk-free interest rates of 5.44% and 5.41%, respectively; no volatility factors
or dividend yields; and expected life of the options of 7.53 years and 5 years,
respectively. The pro forma effects of applying the fair value method may be
materially different in future years.
11. COMMITMENTS
OPERATING LEASES
The Company leases its primary office space under noncancelable operating
leases which expire through September 30, 2004. Under the terms of the lease
relating to its main facility, the Company is required to maintain an
irrevocable standby letter of credit stating the lessor as the beneficiary. The
letter of credit must be in the amount of $120,000 through December 31, 2000,
with such amount being reduced by $40,000 each succeeding year through the
expiration of the lease. During 1999, the Company leased additional office space
under a noncancelable operating lease which expires in 2004. Under the terms of
the lease, the Company is required to maintain an irrevocable letter of credit
stating the lessor as beneficiary. The letter of credit must be in the amount of
$413,500 through September 2001, with such amount reduced by $100,000 after
September 2001 and an additional $100,000 after September 2002.
During 2000, the Company leased office space in New York under a
noncancelable operating lease which expires in 2016. Under the terms of the
lease, the Company is required to maintain an irrevocable letter of credit
stating the lessor as beneficiary. The letter of credit must be in the amount of
$711,000 through 2016.
During 1999, the Company leased office space in Montreal, Canada under a
noncancelable operating lease which expires in 2010. Additional office space in
Montreal, Canada was leased as an addendum to the 1999 lease during 2000. Under
the terms of the lease, the Company is required to maintain an irrevocable
letter of credit stating the lessor as beneficiary. The letter of credit must be
in the amount of $240,000 through November 2000, with such amount reduced by
$24,000 each succeeding year through expiration of the lease.
Rent expense under operating leases was $2,951,000, $1,050,000 and $488,000
for the years ended December 31, 2000, 1999 and 1988 respectively.
45
Future minimum lease obligations under operating leases as of December 31,
2000 are as follows:
OPERATING
YEAR LEASES
- ---- ---------
2001........................................................ $ 2,382
2002........................................................ 2,897
2003........................................................ 2,963
2004........................................................ 2,352
2005........................................................ 813
Thereafter.................................................. 8,178
-------
Total minimum lease payments................................ $19,585
=======
ROYALTY AGREEMENT
In August 1994, the Company entered into a license agreement last amended in
July 1996 under which the Company obtained a nonexclusive right to use certain
software technology through the term of the licensor's copyrights on such
technology. In exchange, the Company is required to pay royalties on net sales
of licensed product. These royalties begin at 5% of licensed product sales and
decrease as a percentage of sales based on cumulative life to date sales. In
addition, the Company was required to pay annual minimum royalties totaling
$80,000 and $90,000 for the years ended December 31, 2000 and 1999,
respectively, and $50,000 annually thereafter. Any payments that exceed these
minimums can be used to offset future royalties payable under the agreement.
Under the amended agreement, the Company recorded royalty expense totaling
$175,000, $93,000 and $52,000 during the years ended December 31, 2000, 1999 and
1998, respectively. Also, in 1999, cost of product license revenue included a
$60,000 payment to a client as a royalty for the resale of an application
originally developed for that client.
12. NOTES PAYABLE AND LINE OF CREDIT
In March 1999, the Company entered into an equipment financing agreement
with a bank. Under this agreement, the Company entered into two lines of credit
under which the Company obtained the right to draw down up to $1,500,000 to
finance purchases of fixed assets. Borrowings under these lines are
collateralized by the fixed assets purchased and bear interest at an annual rate
of prime plus 0.75% (9.75% at December 31, 2000) which is payable monthly.
Borrowings made between March 1999 and May 1999 and between June 1999 and
November 1999 converted into term loans on May 31, 1999 and November 30, 1999,
respectively, at which point monthly payments of principal plus interest became
due over a period of 36 months. During 1999, the Company borrowed the entire
$1,500,000 available under these lines. At December 31, 2000, $792,000 was
outstanding under the resulting notes payable; maturing $500,000 in 2001 and
$292,000 in 2002. Under the financing agreement, the Company is obligated to
comply with certain financial covenants.
Also in March 1999, the Company entered into a $750,000 revolving line of
credit with the same bank. A loan modification in November 1999 increased the
line of credit to $1,300,000. Effective June 1, 2000, the Company modified its
revolving line of credit to increase available borrowings from $1,300,000 to
$2,000,000. The revolving line of credit expires on May 31, 2001. Amounts
available for borrowing are based upon certain eligible accounts receivable.
Borrowings under the revolving line of credit bear interest at the bank's prime
rate plus 0.5% (9.50% at December 31, 2000), and all outstanding borrowings are
due June 1, 2001. At December 31, 2000, no amounts were outstanding under the
revolving line of credit and $515,000 was available for borrowing. Under the
financing agreement, the Company is obligated to comply with certain financial
covenants.
46
13. SEGMENT REPORTING
The Company operates in a single segment and has no organizational structure
dictated by product lines, geography or customer type.
The following table presents total revenue and long-lived assets, excluding
intangible assets, information by geographic area as of and for the years ended
December 31, 2000, 1999 and 1998:
TOTAL REVENUE LONG-LIVED ASSETS
------------------------------ ------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
United States.................... $25,887 $13,649 $5,850 $5,065 $3,499 $1,268
Canada........................... -- -- -- 673 -- --
Other foreign countries.......... 4,137 362 -- 492 460 29
------- ------- ------ ------ ------ ------
$30,024 $14,011 $5,850 $6,230 $3,959 $1,297
======= ======= ====== ====== ====== ======
Revenue classification above is based on the country in which the sale
originates.
14. INCOME TAXES
During the year ended December 31, 2000, the Company changed from the cash
receipts and disbursements accounting method to the accrual accounting method
for federal and state income tax purposes. As a result of taxable losses
generated in the United States, the Company has not recorded any domestic
provision for income taxes for the years ended December 31, 2000, 1999 and 1998
but it has recorded a foreign income tax provision for the year ended
December 31, 2000 related to income from its foreign operations. The following
is a reconciliation between the amount of the Company's income taxes utilizing
the U.S. federal statutory rate and the Company's actual provision for income
taxes for the years ended December 31, 2000, 1999 and 1998:
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
At U.S. federal statutory rate.................... $(9,958) $(5,328) $(1,958)
State taxes, net of federal effect................ (1,576) (1,045) (386)
Effect of change in valuation allowance........... 8,870 6,416 2,431
Foreign rate differential......................... 3,024 -- --
Other............................................. (51) (43) (87)
------- ------- -------
Provision for income taxes........................ $ 309 $ -- $ --
======= ======= =======
47
The Company's net deferred tax assets consist of the following:
DECEMBER 31,
-------------------------
2000 1999
-------- --------
(IN THOUSANDS)
Net operating loss carryforwards....................... $17,041 $ 9,524
Tax credit carryforwards............................... 1,144 638
Accrual to cash adjustment............................. -- 364
Accrued expenses....................................... 1,177 --
Other.................................................. 64 30
------- -------
Gross deferred tax assets.............................. 19,426 10,556
Deferred tax asset valuation allowance................. (19,426) (10,556)
------- -------
Net deferred tax asset................................. $ -- $ --
======= =======
At December 31, 2000 and 1999, the Company provided a valuation allowance
for the full amount of its net deferred tax assets since, based on the weight of
available evidence, management could not conclude that it is more likely than
not that these future benefits will be realized. At December 31, 2000, the
Company has federal and state net operating loss carryforwards of $41,900,000
and $44,100,000, respectively, available to reduce future income, which expire
at various dates through 2020. The Company also has federal and state research
and development credit carryforwards of $707,000 and $642,000, respectively,
available to reduce future income tax liabilities, which expire at various dates
through 2020. Under the Internal Revenue Code, certain substantial changes in
the Company's ownership could result in an annual limitation on the amount of
net operating loss and tax credit carryforwards which can be utilized in future
years to offset future taxable income and tax liabilities.
15. 401(K) SAVINGS PLAN
The Company has established a retirement savings plan under Section 401(k)
of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan covers
substantially all employees of the Company who meet minimum age and service
requirements, and allows participants to defer a portion of their annual
compensation on a pre-tax basis. Company contributions to the 401(k) Plan may be
made at the discretion of the Board of Directors. The Company has not made any
contributions to the 401(k) Plan through December 31, 2000.
16. SUBSEQUENT EVENTS
On January 5, 2001, the Company acquired Eloquent Technology, Inc., a
supplier of speech synthesis or text-to-speech technology. In connection with
the acquisition, the Company paid $5.25 million in cash and issued 299,873
shares of the Company's common stock. This acquisition will be accounted for
under the purchase method of accounting.
During January and February 2001, warrant holders exercised warrants
pertaining to 788,947 shares of the Company's common stock to receive 727,072
shares of the Company's common stock in cashless exercises.
48
17. QUARTERLY RESULTS (UNAUDITED)
The following information has been derived from unaudited consolidated
financial statements that, in the opinion of management, include all recurring
adjustments necessary for a fair presentation of such information.
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
Revenues:
Product licenses...................... $ 6,120 $ 4,853 $ 2,776 $ 2,607 $ 1,553 $ 733 $ 1,053 $ 341
Professional services................. 3,642 3,096 2,364 2,158 1,905 1,303 1,637 1,099
Other revenues........................ 793 674 892 322 901 522 1,114 1,850
Non-cash stock compensation........... (273) -- -- -- -- -- -- --
------- ------- -------- ------- ------- ------- ------- --------
Total revenues........................ 10,282 8,623 6,032 5,087 4,359 2,558 3,804 3,290
------- ------- -------- ------- ------- ------- ------- --------
Cost of revenue:
Cost of product licenses.............. 59 44 66 45 93 19 32 9
Cost of professional services
-- non-cash stock compensation...... 154 156 135 93 87 36 12 4
-- all other expenses............... 2,478 2,346 1,856 1,694 1,440 1,312 1,265 974
Cost of other revenues................ 477 558 659 150 719 215 814 1,239
------- ------- -------- ------- ------- ------- ------- --------
Total cost of revenues................ 3,168 3,104 2,716 1,982 2,339 1,582 2,123 2,226
------- ------- -------- ------- ------- ------- ------- --------
Gross profit........................ 7,114 5,519 3,316 3,105 2,020 976 1,681 1,064
------- ------- -------- ------- ------- ------- ------- --------
Operating expenses:
Selling and marketing
-- non-cash stock
compensation.................... 1,392 1,201 259 193 146 62 13 4
-- all other expenses........... 5,737 5,793 4,478 3,794 3,659 1,913 2,135 1,547
Research and development
-- non-cash stock
compensation.................... 140 140 120 72 65 21 10 1
-- all other expenses........... 2,676 2,160 2,006 1,810 1,854 1,447 965 898
General and administrative
-- non-cash stock
compensation.................... 106 107 150 35 27 10 7 3
-- all other expenses........... 5,858 4,482 3,652 3,308 2,765 1,504 1,338 1,086
Amortization of acquired
intellectual property and
collaborative rights............ 958 958 -- -- -- -- -- --
------- ------- -------- ------- ------- ------- ------- --------
Total operating expenses.......... 16,867 14,841 10,665 9,212 8,516 4,957 4,468 3,539
------- ------- -------- ------- ------- ------- ------- --------
Loss from operations.................... (9,753) (9,322) (7,349) (6,107) (6,496) (3,981) (2,787) (2,475)
Interest and other income (expense),
net................................... 1,805 1,334 97 8 (39) 193 107 15
------- ------- -------- ------- ------- ------- ------- --------
Net loss before income taxes............ (7,948) (7,988) (7,252) (6,099) (6,535) (3,788) (2,680) (2,460)
Provision of income taxes............... 309 -- -- -- -- -- -- --
------- ------- -------- ------- ------- ------- ------- --------
Net loss................................ (8,257) (7,988) (7,252) (6,099) (6,535) (3,788) (2,680) (2,460)
Accretion and deemed dividend on
redeemable convertible preferred
stock................................. -- (300) (6,055) (600) (600) (600) (460) (244)
------- ------- -------- ------- ------- ------- ------- --------
Net loss attributable to common
shareholders.......................... $(8,257) $(8,288) $(13,307) $(6,699) $(7,135) $(4,388) $(3,140) $ (2,704)
======= ======= ======== ======= ======= ======= ======= ========
Basic and diluted net loss per common
share................................. $ (0.27) $ (0.39) $ (2.12) $ (1.19) $ (1.28) $ (0.79) $ (0.59) $ (0.57)
Shares used in computing basic and
diluted net loss per common share..... 30,180 21,419 6,281 5,644 5,560 5,552 5,285 4,784
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Management" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy
Statement for the 2001 Annual Meeting of Stockholders and under the caption
"Executive Officers of the Registrant" in Part I of this Annual Report on
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation" in the Company's
Proxy Statement for the 2001 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the Company's Proxy Statement for the 2001 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Certain Relationships and Related
Transactions" and "Executive Compensation--Employment Agreements, Termination of
Employment and Change of Control Arrangements" in the Company's Proxy Statement
for the 2001 Annual Meeting of Stockholders.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
ITEM 14(A). The following documents are filed as part of this annual
report on Form 10-K.
ITEM 14(A)(1) See "Index to Consolidated Financial Statements" at Item 8
AND (2) to this Annual Report on Form 10-K. Financial statement
schedules have not been included because they are not
applicable or the information is included in the
consolidated financial statements or notes thereto.
ITEM 14(A)(3) EXHIBITS
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------------------- ----------------------
3.1 Restated Certificate of Incorporation of SpeechWorks
International, Inc., incorporated herein by reference to
Exhibit 4.2 to the Registrant's Registration Statement on
Form S-8, filed on August 9, 2000, File No. 333-43398
3.2 Amended and Restated Bylaws of SpeechWorks International,
Inc., incorporated herein by reference to Exhibit 3.3 to the
Registrant's Registration Statement on Form S-1, filed on
April 19, 2000, File No. 333-35164
4.1 Form of Common Stock Certificate, incorporated herein by
reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1, filed on April 19, 2000, File No.
333-35164
+10.1 License Agreement, dated August 3, 1994, between the
Registrant and Massachusetts Institute of Technology, as
amended, incorporated herein by reference to Exhibit 10.1 to
the Registrant's Registration Statement on Form S-1, filed
on April 19, 2000, File No. 333-35164
10.2 Fourth Amended and Restated Registration Rights Agreement,
dated as of April 11, 2000, among the Registrant and the
investors party thereto, incorporated herein by reference to
Exhibit 10.2 to the Registrant's Registration Statement on
Form S-1, filed on April 19, 2000, File No. 333-35164
10.3 Lease Agreement, dated February 21, 1997, between the
Registrant and Landman Omnibus V Limited Partnership,
incorporated herein by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1, filed on
April 19, 2000, File No. 333-35164
10.4 Sublease Agreement, dated April 1, 1998, between the
Registrant and Exchange Applications, Inc., incorporated
herein by reference to Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1, filed on April 19, 2000,
File No. 333-35164
10.5 Amended and Restated 1995 Stock Option Plan, incorporated
herein by reference to Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1, filed on April 19, 2000,
File No. 333-35164
10.6 2000 Employee, Director and Consultant Stock Plan,
incorporated herein by reference to Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1, filed on
April 19, 2000, File No. 333-35164
10.7 2000 Employee Stock Purchase Plan, incorporated herein by
reference to Exhibit 10.7 to the Registrant's Registration
Statement on Form S-1, filed on April 19, 2000, File No.
333-35164
51
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------------------- ----------------------
10.8 Form of Incentive Stock Option Agreement entered into by the
named executive officers, incorporated herein by reference
to Exhibit 10.9 to the Registrant's Registration Statement
on Form S-1, filed on April 19, 2000, File No. 333-35164
10.9 Employment Agreement, dated June 21, 2000, between
Registrant and Richard J. Westelman, incorporated herein by
reference to Exhibit 10.10 to the Registrant's Registration
Statement on Form S-1, filed on April 19, 2000, File No.
333-35164
+10.10 Development and License Agreement, dated June 5, 2000
between the Registrant and AT&T Corp., incorporated herein
by reference to Exhibit 10.11 to the Registrant's
Registration Statement on Form S-1, filed on April 19, 2000,
File No. 333-35164
10.11 First Amendment to the Fourth Amended and Restated
Registration Rights Agreement, incorporated herein by
reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1, filed on April 19, 2000, File No.
333-35164
10.12 Second Amendment to the Fourth Amended and Restated
Registration Rights Agreement, incorporated herein by
reference to Exhibit 10.13 to the Registrant's Registration
Statement on Form S-1, filed on April 19, 2000, File No.
333-35164
+10.13 Software License and Professional Services Agreement, dated
June 30, 2000, between America Online, Inc. and the
Registrant, incorporated herein by reference to Exhibit
10.14 to the Registrant's Registration Statement on Form
S-1, filed on April 19, 2000, File No. 333-35164
++10.14 Master Software License Agreement, dated as of September 1,
2000 between Net2Phone, Inc. and the Registrant
10.15 Third Amendment to the Fourth Amended and Restated
Registration Rights Agreement
10.16 Fourth Amendment to the Fourth Amended and Restated
Registration Rights Agreement
10.17 Silicon Valley Bank Loan Arrangement with SpeechWorks
International, Inc., dated March 26, 1999, between Silicon
Valley Bank and the Registrant, as modified by the Second
Loan Modification Agreement, dated June 1, 2000
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
99 Forward-Looking Information
- ------------------------
+ Confidential treatment granted as to certain portions.
++ Confidential treatment requested as to certain portions.
ITEM 14(B) Reports on Form 8-K
On December 21, 2000, the Company filed a report on Form 8-K announcing its
plans to acquire Eloquent Technology, Inc. pursuant to an Agreement and Plan of
Merger dated as of December 19, 2000.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SPEECHWORKS INTERNATIONAL, INC.
By: /s/ STUART R. PATTERSON
-----------------------------------------
Stuart R. Patterson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated below and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chief Executive Officer,
/s/ STUART R. PATTERSON President and Director
------------------------------------------- (principal executive March 16, 2001
Stuart R. Patterson officer)
/s/ RICHARD J. WESTELMAN Chief Financial Officer
------------------------------------------- (principal financial and March 16, 2001
Richard J. Westelman accounting officer)
/s/ MICHAEL S. PHILLIPS
------------------------------------------- Chief Technology Officer and March 16, 2001
Michael S. Phillips Director
/s/ WILLIAM J. O'FARRELL
------------------------------------------- Chairman of the Board March 14, 2001
William J. O'Farrell
/s/ AXEL BICHARA
------------------------------------------- Director March 16, 2001
Axel Bichara
/s/ RICHARD BURNES
------------------------------------------- Director March 16, 2001
Richard Burnes
/s/ ROBERT FINCH
------------------------------------------- Director March 16, 2001
Robert Finch
/s/ JOHN C. FREKER, JR.
------------------------------------------- Director March 16, 2001
John C. Freker, Jr.
53