10-Q/A 1 a2031765z10-qa.txt 10-Q/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-Q/A ------------ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________ COMMISSION FILE NUMBER 0-27401 ------------------------ INTERSPEED, INC. (Exact name of registrant as specified in its charter) DELAWARE 04-3333365 State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 39 HIGH STREET 01845 NORTH ANDOVER, MASSACHUSETTS (Zip Code) Address of Principal Executive Offices) (978) 688-6164 (Registrant's telephone number, including area code) NOT APPLICABLE (Former Name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: As of February 7, 2000, 10,774,462 shares of $0.01 par value common stock of the registrant were outstanding. EXPLANATORY NOTE This amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999, as filed by the Registrant on February 14, 2000, and is being filed to reflect the restatement of the Registrant's condensed financial statements (see Note L to the condensed financial statements). Page 1 of 25 Total Pages (Exhibit Index appears on Page 24) PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS

Page 2 of 25 Total Pages PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERSPEED, INC. CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (Unaudited)

The Condensed Balance Sheet as of September 30, 1999 has been derived from the Company's audited Balance Sheet as of that date. See notes to condensed financial statements. Page 3 of 25 Total Pages INTERSPEED, INC. CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (Unaudited)

See notes to condensed financial statements. Page 4 of 25 Total Pages INTERSPEED, INC. CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited)

See notes to condensed financial statements. Page 5 of 25 Total Pages INTERSPEED, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS A. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared by Interspeed, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. They should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K/A for the year ended September 30, 1999. In the opinion of management, the accompanying unaudited condensed financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results which could be expected for the full year. Subsequent to December 31, 1999, the Company has continued to use significant amounts of cash in operations resulting in a cash balance of approximately $612,000 as of September 30, 2000. The Company is taking actions to reduce cash outflows by, among other things, reducing headcount and curtailing certain marketing activities. Subsequent to September 30, 2000, the Company's majority stockholder, Brooktrout, Inc. ("Brooktrout"), agreed to provide the Company with a revolving line of credit which will provide the Company with up to $2.5 million. Advances under this line of credit are at Brooktrout's sole discretion and as of November 10, 2000, the Company has drawn down approximately $600,000. The Company has engaged Broadview International, LLC, a global merger and acquisition advisor, to assist with the review of strategic alternatives, including a possible sale of the Company. If the Company is unable to complete a strategic transaction, secure additional sources of financing, or achieve positive cash flow from operations, the Company may be required to significantly curtail operations or cease doing business as a going concern. The condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty. B. RECENT ACCOUNTING PRONOUNCEMENTS In June of 1998, the Financial Accounting Standards Board released Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, establishes new standards of accounting and reporting for derivative instruments and hedging activities and will be effective for the Company in fiscal 2001. Management is currently evaluating the effect of adopting SFAS No. 133 on the condensed financial statements. In December 1999, the Securities and Exchange Commission (the "SEC") released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements and will be effective for the Company in the fourth quarter of fiscal 2001. Management is currently evaluating the effect of adopting SAB No. 101. C. NET LOSS PER SHARE Basic net loss per share is computed using the weighted average number of common shares outstanding during each period. Outstanding stock options have been excluded from the computation of diluted per share amounts since the effect would be antidilutive. Had the impact of stock options, using the treasury stock method, been included in the computation, weighted average shares would have increased by 1,083,000 and 1,197,000 for the quarters ended December 31, 1999 and 1998, respectively. D. INCOME TAXES The Company's quarterly effective tax rate is based on the estimated tax rate for the fiscal year. E. COMPREHENSIVE INCOME There was no difference between the Company's net loss and its total comprehensive loss for any of the periods presented. F. SEGMENT INFORMATION The Company currently operates in one business segment: designing, developing and marketing advanced communications products which enable service providers to deliver high speed data access to small and medium sized businesses, multi-tenant units ("MTUs"), and other organizations. Page 6 of 25 Total Pages G. CONCENTRATIONS To date, the Company's activities have been conducted primarily in the United States. The Company performs ongoing credit evaluations of its customers and generally requires no collateral. At December 31, 1999, approximately 84% of the receivable balance was comprised of balances due from one customer. The Company relies on contract manufacturers and some single source suppliers of materials for certain product components. As a result, should the Company's current manufacturers or suppliers not produce and deliver inventory for the Company to sell on a timely basis, operating results could be adversely impacted. H. INVENTORY Inventory consisted of the following (in thousands):

I. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION The Company currently targets its sales efforts to data communications service providers, MTUs, and other service organizations to both public and private network providers and users across four related market segments. For the three months ended December 31, 1999, sales to United States customers amounted to $1,807,000 and export sales amounted to $185,000. One customer accounted for approximately 85% of revenue for the three months ended December 31, 1999. J. RELATED PARTY TRANSACTIONS From its inception through the completion of its initial public offering on September 24, 1999 ("IPO"), the Company's operations were funded through contributions of capital and loans from Brooktrout, its parent company. At September 24, 1999, in connection with the Company's IPO, Brooktrout contributed $13,598,000, the majority of the outstanding note balance, to the capital of the Company. The Company and Brooktrout entered into a Transition Services Agreement (the "Agreement") which expired on December 31, 1999. The Agreement outlined certain services that would continue to be performed on behalf of the Company by Brooktrout through December 31, 1999. The Agreement required that these services be phased out over a period beginning on October 1999 to December 1999. The services included payroll processing and administration, human resources, benefits, marketing, information technology and telecommunications, accounts receivable, accounting and finance and order entry. The fees for such services were on an "as used" basis and were specified in the Agreement. During the three months ended December 31, 1999, fees for services totaled $43,000. Page 7 of 25 Total Pages K. CONTINGENCIES Subsequent to the issuance of the Company's unaudited condensed financial statements as of and for the three months ended December 31, 1999, certain shareholder class action complaints have been filed in the United States District Court for the District of Massachusetts against the Company and certain other parties, including certain former officers and directors of the Company. The claims in the litigation include allegations that the Company, and certain of its former directors and officers, made false or misleading statements regarding the Company's financial results for each of the prior quarters in the fiscal year ended September 30, 2000. The Company is currently reviewing the allegations in those lawsuits. L. RESTATEMENT Subsequent to the issuance of the Company's unaudited condensed financial statements as of and for the three months ended December 31, 1999, the Company's management has determined that revenue from a transaction with a reseller was incorrectly recognized. The accompanying unaudited financial statements have been restated to reflect the transaction as a consignment of inventory rather than a sale. A summary of the significant effects of the restatement is as follows:

Page 8 of 25 Total Pages ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT. THIS DOCUMENT CONTAINS CERTAIN STATEMENTS THAT ARE "FORWARD-LOOKING STATEMENTS" AS THAT TERM IS DEFINED UNDER THE PRIVATE SECURITIES LEGISLATION REFORM ACT OF 1995 AND RELEASES ISSUED BY THE SECURITIES AND EXCHANGE COMMISSION. THE WORDS "BELIEVE," EXPECT," "ANTICIPATE," "INTEND," "ESTIMATE," AND OTHER EXPRESSIONS, WHICH ARE PREDICTIONS OF OR INDICATE FUTURE EVENTS AND TRENDS AND WHICH DO NOT RELATE TO HISTORICAL MATTERS, IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THE ANTICIPATED FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS, RISKS RELATED TO MARKET GROWTH, PRODUCT ACCEPTANCE AND PRODUCT DEMAND, RAPID CHANGES IN TECHNOLOGY, THE IMPACT OF COMPETITION, RISKS RELATED TO THE COMPANY'S FINANCIAL POSITION AND LIQUIDITY, THE IMPACT, IF ANY, OF THE ANNOUNCED RESTATEMENT ON INTERSPEED'S STOCK PRICE, THE OUTCOME OF THE STRATEGIC ALTERNATIVE PROCESS AND THE ABILITY OF THE COMPANY TO CLOSE A STRATEGIC TRANSACTION OR RAISE ADDITIONAL CAPITAL, THE UNCERTAINTIES ASSOCIATED WITH THE RECENTLY FILED LITIGATION, THE EFFECT OF THE RECENTLY ANNOUNCED INTERNAL CONTROLS AND PROCEDURES ON INTERSPEED'S FUTURE OPERATIONS AND PERFORMANCE, THE IMPACT OF SUBSEQUENT MANAGEMENT REVIEWS AND OTHER RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, THOSE FACTORS DESCRIBED UNDER "RISK FACTORS." THE READER SHOULD CAREFULLY REVIEW ALL OF THESE FACTORS, AND SHOULD BE AWARE THAT THERE MAY BE OTHER FACTORS THAT COULD CAUSE THESE DIFFERENCES. WE DO NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENTS TO REFLECT CHANGES IN UNDERLYING ASSUMPTIONS OR FACTORS, NEW INFORMATION, FUTURE EVENTS OR OTHER CHANGES. As discussed in Note L to the condensed financial statements, the condensed financial statements as of and for the three months ended December 31, 1999 have been restated. OVERVIEW REVENUE. Our revenue is generated primarily from sales of our products and related maintenance services to data communications service providers and their customers. Revenue from product sales is recognized when the product has been shipped, the customer's obligation is fixed and collectibility is considered probable. No revenue is recognized on either products shipped on a trial basis or products shipped under consignment type arrangements. Our products generally carry a one year warranty from the date of purchase. We estimate sales returns and warranty costs at the time the product revenue is recognized and an accrual is recorded. Customers may contract for support services over and above that provided by our warranty policy. Revenue from such contracts and from the extended warranty contracts is recognized ratably over the service period. We do not recognize revenue on beta units until beta testing on such units is completed. COST OF REVENUE. Cost of revenue consists of direct product costs such as standard parts and components for our products, salaries and employee benefits for manufacturing personnel and overhead such as equipment and facility costs. GROSS PROFIT. We expect our gross profit to be affected by many factors including pricing, product mix, cost factors such as component prices, internal and external manufacturing costs as well as manufacturing efficiencies due to higher volume of product shipments which we believe will result in the improvement of overhead absorption. RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of salaries and employee benefits for engineering personnel and costs relating to prototypes including components, non-recurring engineering charges and tools. Product enhancements and new features are key objectives. We expect research and development expenses to increase in absolute dollars in the future. SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries, employee benefits, trade shows, public relations, marketing materials, travel and other marketing expenses. Future sales and marketing activities will involve additional costs related to the expansion of the sales and sales engineering organization, product Page 9 of 25 Total Pages branding, advertising and public relations costs. We expect sales and marketing expenses to increase in absolute dollars in the future. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of personnel costs for executive officers, administrative and support activities including payroll administration, workers' compensation and general liability insurance, accounting and finance, legal, tax, human resources and transaction processing. STOCK COMPENSATION. Stock options have been granted with exercise prices that were less than the estimated fair value of the Company's common stock. Compensation cost associated with these options is the difference between the fair value of the stock and the exercise price. INCOME TAX EXPENSE. Prior to our IPO, we had been included in Brooktrout's consolidated income tax filings and these losses have been used to reduce the group's taxes payable. Brooktrout has not and does not intend to reimburse us for the value of the net losses used to reduce Brooktrout's consolidated taxable income. Accordingly, we have not recorded any benefit related to these losses. We are no longer to be included in Brooktrout's consolidated income tax filings; we do not anticipate recognizing any benefits from losses generated in the short term due to our limited operating history. We expect to continually evaluate the recoverability of net loss carryforwards. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998 REVENUE. Revenue for the three months ended December 31, 1999 was $1,992,000, compared to $64,000 for the three months ended December 31, 1998. During the first fiscal quarter of 1999, we recognized our first sale after our product successfully completed beta testing; commencement of commercial operations and the general release of our products began in February 1999. COST OF REVENUE. Cost of revenue was $1,256,000, or approximately 63% of revenue, for the three months ended December 31, 1999, compared to $36,000 for the three months ended December 31, 1998. The significantly higher cost of revenue in the first fiscal quarter of 2000 is due to the increased revenue volume. GROSS PROFIT. Gross profit was $736,000, and gross profit percentage was approximately 37%, for the three months ended December 31, 1999, compared to gross profit of $28,000 for the three months ended December 31, 1998. This increase was due to the substantially greater revenue recognized in the first fiscal quarter of 2000. RESEARCH AND DEVELOPMENT. Research and development expenses increased by approximately 30% to $1,652,000 during the three months ended December 31, 1999 from $1,273,000 for the three months ended December 31, 1998. This increase was due primarily to increases in payroll related expenses from growth in the number of engineering employees from the first fiscal quarter of 1999 to the first fiscal quarter of 2000, and to a lesser extent, consulting expenses for specific development projects during the first fiscal quarter of 2000. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for the three months ended December 31, 1999 were $2,090,000 compared to $346,000 for the three months ended December 31, 1998, an increase of $1,744,000. This increase was due primarily to payroll-related expenses, travel, advertising/marketing and trade show expenses associated with the build-up in sales and marketing staff and activities, as well as expenses relating to the implementation of internal Year 2000 compliant systems. STOCK COMPENSATION. In prior periods, stock options have been granted with exercise prices that were less than the estimated fair value of our common stock. Compensation cost associated with such options was determined as the difference between the fair value of the stock and the exercise price. Stock compensation costs increased to $417,000 for the three months ended December 31, 1999, from $32,000 for the three months ended December 31, 1998, as the compensation cost is being charged to expense over the option vesting period. INCOME TAX EXPENSE. Prior to our IPO, we had been included in Brooktrout's consolidated income tax filings and the losses associated with the Company have been used to reduce the group's taxes payable. Brooktrout has not Page 10 of 25 Total Pages and does not intend to reimburse us for the value of the net losses used to reduce Brooktrout's consolidated taxes. Accordingly, we have not recorded any benefit related to these prior losses. We have not recognized any benefit in the current quarter for the losses generated for the three months ended December 31, 1999 as we believe that it is more likely than not that such benefits will not be recoverable. We will continually evaluate the recoverability of net loss carryforwards. NET LOSS. Net loss for the three months ended December 31, 1999 was $3,193,000 compared to net loss of $1,623,000 for the three months ended December 31, 1998, an increase of $1,570,000. This increase is due primarily to the increases in operating expenses and stock compensation charges, as described above, that more than offset the increase in gross profit from increased revenue resulting from the shipment of our product during the three months ended December 31, 1999. Page 11 of 25 Total Pages LIQUIDITY AND CAPITAL RESOURCES From inception through the IPO, our operations had been funded through contributions of capital and loans from Brooktrout. Subsequent to the IPO, our operations have been funded through the proceeds from the IPO. We believe that the remaining net proceeds will be sufficient to meet our anticipated cash needs for working capital and capital expenditures at least until September 30, 2000. Thereafter, if cash generated from operations is insufficient to satisfy our liquidity requirements, we might need to raise additional funds through public or private financing, strategic relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms that we believe are attractive, or at all. If we fail to raise capital when needed, it could harm our business, operating results and financial condition. If we raise additional funds through the issuance of equity securities, the percentage ownership of our stockholders would be reduced. Cash decreased by $6,593,000 to $14,634,000 at December 31, 1999 from $21,227,000 at September 30, 1999. The decrease in cash is due primarily to a $1,206,000 increase in accounts receivable, a $1,140,000 increase in inventory, a $931,000 decrease in accounts payable, and a net loss of $3,193,000. The increase in accounts receivable was due to substantially higher revenue billings during the first quarter of fiscal 2000, while the increase in inventory is due to the increased inventory on consignment to others and the expectation of increased shipment volumes during subsequent quarters. The decrease in accounts payable is due to the effort in establishing more standard payment terms as a newly independent company. For the three months ended December 31, 1999 and 1998, we purchased approximately $469,000 and $15,000 respectively, of fixed assets. We currently have no material commitments for additional capital expenditures. Subsequent to December 31, 1999, we have used significant amounts of cash in operations resulting in a cash balance of approximately $612,000 as of September 30, 2000. We are taking actions to reduce cash outflows by, among other things, reducing headcount and curtailing certain marketing activities. Subsequent to September 30, 2000, the Company's majority stockholder, Brooktrout, Inc., agreed to provide the Company with a revolving line of credit which will provide the Company with up to $2.5 million. Advances under this line of credit are at Brooktrout's sole discretion and as of November 10, 2000, the Company has drawn down approximately $600,000. We have engaged Broadview International, LLC, a global merger and acquisition advisor, to assist us with the review of strategic alternatives, including a possible sale of the Company. If we are unable to complete a strategic transaction, secure additional sources of financing, or achieve positive cash flow from our operations, we may be required to significantly curtail our operations or cease doing business as a going concern. In addition, as discussed in Note K to the condensed financial statements, shareholder class action complaints have been filed in the United States District Court for the District of Massachusetts against Interspeed and certain former officers and directors of the Company. While we are currently reviewing the allegations in those lawsuits, the defense or possible settlement of these lawsuits could involve significant expenses. We do not believe that inflation has had a significant effect on our operations to date. RECENT ACCOUNTING PRONOUNCEMENTS In June of 1998, the Financial Accounting Standards Board released Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, establishes new standards of accounting and reporting for derivative instruments and hedging activities and will be effective for the Company in fiscal 2001. Management is currently evaluating the effect of adopting SFAS No. 133 on the condensed financial statements. In December 1999, the Securities and Exchange Commission (the "SEC") released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements and will be effective for the Company in the fourth quarter of fiscal 2001. Management is currently evaluating the effect of adopting SAB No. 101. Page 12 of 25 Total Pages YEAR 2000 READINESS DISCLOSURE The Year 2000 issue relates to potential problems arising from the way in which computer software processes functions that are date dependent. These problems arise from hardware and software unable to distinguish dates in the "2000s" from dates in the "1900s" and from other sources such as the use of special codes and conventions in software that use a date field. These problems could result in a system failure with miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices or engage in other normal business activities. The Year 2000 issue may pose additional problems due to the fact the Year 2000 is a leap year and some computers and programs may fail to recognize the extra day. GENERAL READINESS ASSESSMENT. As a wholly owned subsidiary of Brooktrout prior to our IPO, we relied on Brooktrout's Year 2000 Plan except with respect to our products and suppliers where we instituted our independent compliance program. We no longer rely on any Brooktrout systems. We completed a formal systems selection process and retained a systems consultant to assist us in determining our systems requirements and purchasing Year 2000 compliant business systems to satisfy our present and future needs. However, no assurance can be given that we or third parties with whom we have a business relationship will successfully address our or their Year 2000 issues. To date, we have not experienced any problems with Year 2000 issues with either third party or our internal systems. Our Year 2000 readiness program is supervised by our Year 2000 compliance committee which is headed by Rajeev Agarwal, and we review our Year 2000 program on a periodic basis. Our overall non-Brooktrout related Year 2000 readiness program has consisted of the following steps: - purchasing internal systems that are Year 2000 compliant; - developing a complete inventory of our products' hardware and software and assessing whether each specific piece of equipment or software is Year 2000 compliant; - contacting most of our major equipment vendors to ensure that the equipment or software purchased has been tested and verified as Year 2000 compliant; and - developing contingency plans to address potential Year 2000 problems that are not directly in our control. The following lists the specific areas in our Year 2000 program that have been completed: - ensuring our products' hardware and software are Year 2000 compliant; - contacting most of our major equipment providers and receiving disclosure statements that all of the equipment or software purchased from these vendors is Year 2000 compliant; - implementing contingency plans ensuring that we have alternative suppliers for our products' components; and - purchasing and installing Year 2000 compliant systems. ASSESSMENT OF INTERNAL INFRASTRUCTURE. With respect to our internal systems, during the first quarter of fiscal 2000, we relied on Brooktrout's Year 2000 Plan which consists of three phases--assessment, testing and implementation. We currently have our own internal systems in place. All of the internal systems we purchased were Year 2000 compliant. ASSESSMENT OF INTERSPEED'S SOFTWARE AND PRODUCTS. We have gathered, tested and produced information about our products impacted by the Year 2000 transition. We believe that all of our products are Year 2000 compliant. SUPPLIERS. All organizations dealing with the Year 2000 must address the effect this issue will have on their significant business relationships with key third parties. Our significant business relationships that may be Page 13 of 25 Total Pages adversely impacted by the Year 2000 issue include certain contractual relationships with key suppliers of components for our products and service providers for our internal systems. We continue to work with third parties to understand their ability to continue to provide services and products. If any significant Year 2000 problems are identified with third parties, contingency plans will be developed. COSTS TO ADDRESS YEAR 2000 ISSUES. Prior to the IPO, the primary costs in achieving Year 2000 compliance had been incorporated into the fees Brooktrout had charged us for managing our system requirements. During the three months ended December 31, 1999, we purchased and implemented certain internal Year 2000 compliant systems. Costs of purchasing these systems and consultant fees to assist with the installation of these systems were approximately $230,000 and $290,000, respectively. We expect any future costs directly attributable to Year 2000 issues not to be material or to have an adverse effect on our business and financial results. CONTINGENCY PLAN. While the implementation of internal Year 2000 compliant systems was essentially completed by December 31, 1999, we are keeping careful manual records in the event such systems fail. In addition, with respect to our suppliers, we have successfully identified at least one alternative supplier for each of our products' components. CONSEQUENCES OF YEAR 2000 PROBLEMS. We continue to evaluate potential disruptions or complications that might result from Year 2000 related problems. Presently, however, we believe that the most likely worst case scenario related to the Year 2000 issue is associated with third party vendors. A significant Year 2000 related disruption of the services provided to us by third party vendors could prevent us from timely delivering our products to customers, which in turn could materially and adversely affect our results of operations, liquidity and financial condition. We are not presently aware of any vendor related Year 2000 issue that is likely to result in such a disruption. We anticipate that litigation may be brought against vendors of all component products of systems that are unable to properly manage data related to the Year 2000. We have not received any threats of such litigation. Although we believe our products are Year 2000 compliant, no assurance can be given that such litigation may not be threatened or brought in the future. Our failure or failure of our key suppliers and/or customers to be Year 2000 compliant may also result in litigation being brought against us in addition to making it more difficult and/or costly for us to manufacture and sell our products. Any such claims, with or without merit, or our failure or the failure of our suppliers or customers to be Year 2000 compliant could result in a material adverse affect on our business, financial condition and results of operations, including increased warranty costs, customer satisfaction issues and potential lawsuits. Although there continues to be inherent uncertainty in the Year 2000 issue, to date we have not experienced any impact. However, we continue to monitor and identify the nature and extent of any material risk to us as a result of any Year 2000 disruptions. This section contains certain statements that are forward-looking statements. Our Year 2000 compliance, and the effects of the Year 2000 on us may be materially different than currently projected. This may be due to, among other things, the failure of key third parties with whom we have a significant business relationship to achieve Year 2000 compliance or address Year 2000 issues. Page 14 of 25 Total Pages RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER INFORMATION IN THIS REPORT. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE HARMED BY ANY OF THE FOLLOWING RISKS. IF CLASS ACTION LAWSUITS RECENTLY FILED AGAINST US ARE DETERMINED OR SETTLED IN A MANNER ADVERSE TO US, IT MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION Shareholder class action suits have been filed against Interspeed, which if determined or settled in a manner adverse to Interspeed could adversely affect our financial condition. The shareholder class action suits, all of which are pending in the United States District Court for the District of Massachusetts, each arise out of the same alleged conduct and pertain to the disclosures made by the Company in a press release dated October 6, 2000. Each of the actions alleges that the defendants, which include Interspeed, its former President and Chief Financial Officer, as well as two of its former Vice Presidents, violated Section 10(b) of the Securities Exchange Act of 1934, or the 1934 Act, in connection with the Company's historical recognition of its revenues. In addition, each complaint alleges that the individual defendants are controlling persons of the Company under Section 20(a) of the 1934 Act, and as such caused the Company to engage in conduct which purportedly violated Section 10(b) of 1934 Act. The plaintiffs seek damages in an undisclosed amount. We are currently reviewing the allegations in those lawsuits. The defense of these lawsuits could involve significant litigation-related expenses. In the event that any of the claims set forth in the class action complaints are determined or settled in a manner adverse to Interspeed, then such determination or settlements could adversely affect our financial position or results of operations in the period in which the litigation is resolved. IF WE ARE UNABLE TO COMPLETE A STRATEGIC TRANSACTION, IT MAY HAVE A MATERIAL ADVERSE AFFECT ON OUR FINANCIAL CONDITION AND OUR ABILITY TO CONTINUE DOING BUSINESS AS A GOING CONCERN. We have engaged Broadview LLC to assist us with the review of strategic alternatives, including a possible sale of the Company. We are actively considering all of our strategic alternatives, including a sale or merger of the Company, sales of certain of the Company's assets, or a potential restructuring, recapitalization or bankruptcy reorganization of the Company. At this time, however, we cannot predict the success of any of these alternatives. If we are unable to complete one of the above mentioned strategic transactions or secure additional sources of financing, we may have to significantly curtail our operations or cease doing business as a going concern. WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES We have accumulated losses of approximately $19 million since inception in October 1996 through December 31, 1999 and expect to incur net losses in the future. Losses were approximately $10.5 million for the year ended September 30, 1999 and approximately $3.2 million of the first quarter of fiscal 2000. We anticipate continuing to incur significant sales and marketing, research and development and general and administrative expenses. We cannot be certain we will realize sufficient revenues to achieve profitability. BECAUSE OF OUR LIMITED OPERATING HISTORY IT IS DIFFICULT FOR US TO PREDICT FUTURE RESULTS OF OPERATIONS We commenced operations in March 1997 and our first product became generally available in February 1999. Due to our limited operating history, it is difficult for us to predict future results of operations. You should consider our business and prospects in light of the risks typically encountered by companies in their early stages of development, particularly those in rapidly evolving markets such as the data communications equipment market. We cannot be certain that we will successfully address these risks. Page 15 of 25 Total Pages OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND CAUSE OUR STOCK PRICE TO BE VOLATILE WHICH COULD CAUSE THE VALUE OF YOUR INVESTMENT IN OUR COMPANY TO DECLINE Our quarterly or annual operating results are likely to fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. If our operating results do not meet the expectations of securities analysts, the trading price of our common stock could significantly decline which may cause the value of your investment in our company to decline. In addition, the value of your investment could be impacted by investor perception of the Internet and emerging data communications sectors generally, independent of the operating performance of our company or other similar companies. Some of the factors that could affect our quarterly or annual operating results or impact the market price of our common stock include: - our ability to develop, manufacture, market and support our products and product enhancements; - the timing and amount of, or cancellation or rescheduling of, orders for our products, particularly large orders from key customers; - our ability to retain key management, sales and marketing and engineering personnel; - announcements, new product introductions and price reductions in products offered by our competitors; - our ability to obtain sufficient supplies of sole or limited source components for our products; - a decrease in the average selling prices of our products; - changes in costs of components which we include in our products; and - the mix of products that we sell and the mix of distribution channels through which they are sold. Due to these and other factors, quarterly or annual revenues, expenses and results of operations could vary significantly in the future, and period-to-period comparisons should not be relied upon as indications of future performance. THE LOSS OF ANY SIGNIFICANT CUSTOMER COULD CAUSE OUR REVENUE TO DECLINE The loss of any of our significant customers could cause our revenue to decline and thus have a material adverse effect on our business, financial condition and results of operations. Our products became generally available in February 1999 and to date we have only sold products to a limited number of customers. Unless and until we diversify and expand our customer base, our future success will significantly depend upon a limited number of customers. FAILURE TO ADEQUATELY DEVELOP OUR SALES CHANNELS COULD CAUSE OUR REVENUE TO DECLINE We sell our products directly through our sales force and indirectly through original equipment manufacturers, value added resellers and system integrators. Our failure to adequately develop these sales channels may cause our revenue to decline and, thus, have a material adverse effect on our business, financial condition and results of operations. We are currently continuing to develop these sales channels and expect to expend significant resources in this area. As of February 7, 2000, we had a total of 21 employees responsible for direct sales, marketing and sales engineering in the United States and international markets. To the extent we are able to enter into agreements with additional original equipment manufacturers, value added resellers or systems integrators, the amount and timing of resources which they devote to the sale of our products may not be within our control, and they may not perform their obligations as expected. Page 16 of 25 Total Pages IF WE ARE UNABLE TO DEVELOP AND OPERATE AN EFFECTIVE CUSTOMER SUPPORT ORGANIZATION, SALES OF OUR PRODUCTS MAY BE REDUCED Purchasers of data communications equipment assign significant weight in their purchasing decisions to a vendor's capabilities and reputation in supporting its products. We will be required to expend significant resources and management attention on developing and operating a customer support organization. If our level of customer support does not satisfy customer expectations, our reputation and future sales could be adversely affected. Accordingly, we have emphasized customer support in our business strategy and marketing. Because our products were recently introduced for sale, we have limited experience in operating a customer support program. IF OUR TARGET CUSTOMERS DO NOT ACCEPT DSL TECHNOLOGY, WE MAY BE UNABLE TO SUSTAIN OR GROW OUR BUSINESS Our future success is substantially dependent upon whether digital subscriber line, or DSL, technology gains widespread market acceptance by data communications service providers and the small to medium sized business users to whom they market their services. In the event that our customers or potential customers adopt technologies other than digital subscriber line, or DSL, we may be unable to sustain or grow our business. Our business strategy and current products are focused on DSL technology. Various alternative technologies, including T-1, cable and broadband wireless, are currently available to deliver high speed data communications, and each of the alternatives has comparative advantages and disadvantages. Data communications service providers continually evaluate alternative high speed data access technologies and may at any time adopt technologies other than DSL. IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, OUR REVENUES MAY DECLINE We have recently introduced our products to the market. Market acceptance of our products is critical to our future success. Factors that may affect the market acceptance of our products include: - market acceptance of DSL technology; - the features, performance, price and total cost of ownership of our products; - the availability of competing products and technologies; - the success and development of our direct sales force and distribution channels; - the quality of our customer service and support of our products; and - the breadth and depth of our product offerings. Failure of our existing or future products to achieve and maintain meaningful levels of market acceptance would materially adversely affect our business, financial condition and results of operations. BECAUSE WE CURRENTLY DEPEND ON A SINGLE FAMILY OF PRODUCTS, ANY DECLINE IN DEMAND FOR THOSE PRODUCTS MAY HARM OUR OPERATING RESULTS We expect to derive substantially all of our revenues from our DSL access routers, or DSLARs, product family and related modules for the foreseeable future. The market may not continue to demand our current products, and we may not be successful in marketing any new or enhanced products. Any reduction in the demand for our current products or our failure to successfully develop or market and introduce new or enhanced products could materially adversely affect our business, financial condition and results of operations. UNLESS WE ARE ABLE TO KEEP PACE WITH THE EVOLUTION OF THE DATA COMMUNICATIONS EQUIPMENT MARKET WE WILL NOT BE ABLE TO GROW OR SUSTAIN OUR BUSINESS The data communications equipment market is characterized by: - rapid technological advances; Page 17 of 25 Total Pages - evolving industry standards; - changes in end-user requirements; - frequent new product introductions; and - evolving offerings by data communications service providers. We believe our future success will depend, in part, on our ability to anticipate or adapt to such changes and to offer, on a timely basis, products that meet customer demands. We intend to continue to invest significantly in product and technology development. The development of new or enhanced products is a complex and uncertain process requiring the anticipation of technological and market trends. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent our development, introduction or marketing of new products and enhancements and result in unexpected expenses. The introduction of new or enhanced products also requires that we manage the transition from older products in order to minimize disruption in customer ordering patterns and ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. Our inability to develop on a timely basis new products or enhancements to existing products, or the failure of such new products or enhancements to achieve market acceptance, could have a material adverse effect our business, financial condition and results of operations. IF WE LOSE KEY PERSONNEL, WE MAY BE UNABLE TO SUCCESSFULLY OPERATE OUR BUSINESS Our prospects depend to a significant degree upon the continued contributions of our principal management, engineering and sales personnel, many of whom perform important management functions and would be difficult to replace. We do not have employment contracts with our key personnel. Because of recent business reversals, retention of our employees may be more difficult. The loss of the services of any key personnel could materially adversely affect our business, financial condition and results of operations. IF WE ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL, WE MAY BE UNABLE TO SATISFY CUSTOMER DEMANDS WHICH MAY CAUSE OUR REVENUES TO DECLINE We have at times experienced, and continue to experience, difficulty in recruiting qualified personnel. Recruiting qualified personnel is an intensely competitive and time consuming process. We may not be able to attract and retain the necessary personnel to accomplish our business objectives, and we may experience constraints that will adversely affect our ability to satisfy customer demand in a timely fashion or to support our customers and operations. Because of recent business reversals, retention of our employees may be more difficult. In addition, companies in the data communications industry whose employees accept positions with competitors frequently claim that such competitors have engaged in unfair hiring practices. We could incur substantial costs in defending ourselves against any such litigation, regardless of the merits or outcome of such litigation. FAILURE TO MANAGE OUR GROWTH EFFECTIVELY MAY PREVENT US FROM MAXIMIZING OUR EARNINGS We have expanded and plan to continue to expand our operations, including our sales and marketing activities, our accounting, billing and human resource departments and the establishment of additional sales offices. This expansion may place significant strains on our ability to manage our growth, including our ability to monitor operations, bill customers, control costs and maintain effective quality controls. Until the end of December 1999, we relied upon Brooktrout, our parent company, to provide us with administrative and support services, including accounting, human resources and computer systems. Since then, we have implemented systems that provide the functions and services that were previously provided by Brooktrout. If we fail to manage our growth effectively, it could have a material adverse effect on our business, financial condition and results of operations. Page 18 of 25 Total Pages INTENSE COMPETITION IN THE MARKET FOR HIGH SPEED DATA ACCESS EQUIPMENT PREVENT US FROM ACHIEVING OR SUSTAINING PROFITABILITY The market for data communications equipment is highly competitive, particularly in the emerging DSL equipment market. If we are unable to compete effectively in the market for high speed data access equipment, our results of operations could be materially adversely affected. We compete directly with Ascend Communications, Inc., which was acquired by Lucent Technologies Inc.; Copper Mountain Networks, Inc.; Diamond Lane, which was acquired by Nokia, Inc.; Paradyne Networks, Inc.; and Tut Systems, Inc. Many of our current and potential competitors have significantly greater selling and marketing, technical, manufacturing, financial, and other resources. Moreover, our competitors may foresee the course of market developments more accurately than we do and could in the future develop new technologies that compete with our products. The strength and capabilities of our competitors may be increased as a result of the trend toward consolidation in the data communications market. Capitalizing on and maintaining our technological advantage will require a continued high level of investment in research and development, marketing and customer service and support. Due to the rapidly evolving markets in which we compete, additional competitors with significant market presence and financial resources may enter those markets, thereby further intensifying competition. We may not have sufficient resources to continue to make the investments or achieve the technological advances necessary to compete successfully with existing competitors or new competitors. IF WE ARE UNABLE TO DEVELOP INTERNATIONAL MARKETS FOR OUR PRODUCTS, WE MAY BE UNABLE TO GROW AS PLANNED Our strategy emphasizes the development of international markets for our products. We may be unsuccessful in marketing, selling and distributing our products in foreign markets. Conducting business outside of the United States is subject to risks, including: - longer accounts receivable collection cycles; - possible foreign currency exchange and conversion issues; - difficulties in managing operations across disparate geographic areas; - difficulties associated with enforcing agreements and collecting receivables through foreign legal systems; - changes in a specific country's or region's political or economic conditions; - trade protection measures; - import or export licensing requirements; - potential adverse tax consequences; - unexpected changes in regulatory requirements; and - reduced or limited protection of our intellectual property rights in some countries. We cannot be certain that one or more of such factors will not have a material adverse effect on our future international operations, and consequently, our business, financial condition and results of operations. Page 19 of 25 Total Pages OUR DEPENDENCE ON SOLE AND SINGLE SOURCE SUPPLIERS AND INDEPENDENT MANUFACTURERS EXPOSES US TO SUPPLY INTERRUPTIONS THAT COULD RESULT IN PRODUCT DELIVERY DELAYS Although we generally use standard parts and components for our products, some key components are purchased from sole or single source vendors for which alternative sources are not currently available. Our inability to obtain sufficient quantities of these components may result in future delays or reductions in product shipments which could materially adversely affect our business, financial condition and results of operations. We currently purchase proprietary components from Conexant and Motorola for which there are no direct substitutes. These components could be replaced with alternatives from other suppliers, but that would involve redesign of our products. Such redesign would involve considerable time and expense. We currently enter into purchase orders with our suppliers for materials based on forecasts, but have no guaranteed supply arrangements with these suppliers. In addition, we currently use a small number of independent manufacturers to manufacture printed circuit boards, chassis and subassemblies to our design. Our reliance on independent manufacturers involves a number of risks, including the potential for inadequate capacity, unavailability of, or interruptions in access to, process technologies, and reduced control over delivery schedules, manufacturing yields and costs. If our manufacturers are unable or unwilling to continue manufacturing our components in required volumes, we will have to transfer manufacturing to acceptable alternative manufacturers whom we have identified, which could result in significant interruption of supply. Moreover, the manufacture of these components is extremely complex, and our reliance on the suppliers of these components exposes us to potential production difficulties and quality variations, which could negatively impact cost and timely delivery of our products. We currently enter into purchase orders with independent manufacturers of materials based on forecasts, but have no guaranteed arrangements with these manufacturers. Any significant interruption in the supply, or degradation in the quality, of any component would have a material adverse effect on our business, financial condition and results of operations. OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY PREVENT US FROM RETAINING OUR COMPETITIVE ADVANTAGE Our success and our ability to compete are dependent, in part, upon our proprietary technology. Taken as a whole, we believe our intellectual property rights are significant and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a competitive advantage and decreased revenues. In addition, the laws of many foreign countries do not protect our intellectual property to the same extent as the laws of the United States. Also, it may be possible for unauthorized third parties to copy or reverse engineer aspects of our products, develop similar technology independently or otherwise obtain and use information that we regard as proprietary. Furthermore, policing the unauthorized use of our products is difficult. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or patents that we may obtain, or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our future operating results. INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND RESTRICT OUR BUSINESS The data communications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants in our market increases and the functionality of our products is enhanced and overlaps with the products of other companies, we may become subject to claims of infringement or misappropriation of the intellectual property rights of others. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, if determined adversely to us, could have a material adverse effect on our business, financial condition or results of operations. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays or require us to enter into royalty or licensing agreements, any of which could have a material adverse effect upon our operating results. Legal action claiming patent infringement may be commenced against us. We cannot assure you that we would prevail in such litigation given the complex technical issues and inherent uncertainties in patent litigation. In the event a claim against us was successful, and we could not obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign to avoid infringement, this could have a material adverse effect on our business, financial condition and results of operations. Page 20 of 25 Total Pages CHANGES TO REGULATIONS AFFECTING THE TELECOMMUNICATIONS INDUSTRY COULD REDUCE DEMAND FOR OUR PRODUCTS Any changes to the legal requirements relating to the telecommunications industry, including the adoption of new regulations by federal or state regulatory authorities under current laws or any legal challenges to existing laws or regulations relating to the telecommunications industry, could have a material adverse effect upon the market for our products. Moreover, our distributors or customers may require, or we may otherwise deem it necessary or advisable, that we modify our products to address actual or anticipated changes in the regulatory environment. Our inability to modify our products or address any regulatory changes could have a material adverse effect on our business, financial condition or results of operations. CONTROL BY BROOKTROUT MAY LIMIT STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF MATTERS REQUIRING STOCKHOLDER APPROVAL At December 31, 1999, Brooktrout owned approximately 57% of the outstanding shares of common stock. Accordingly, Brooktrout will be able to control or significantly influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquiror from attempting to obtain control of us, which in turn could have a material adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the market prices for their shares of common stock. SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE OUR STOCK PRICE TO FALL The market price of our common stock could fall as a result of future sales of a large number of shares of our common stock in the public market. As of February 7, 2000, we had approximately 10,774,462 shares of common stock outstanding, of which approximately 3,957,400 shares are freely transferable without restriction or registration under the Securities Act of 1933, unless such shares are held by our affiliates. The remaining 6,817,062 shares of common stock held by existing stockholders and 223,882 shares subject to outstanding options vested as of February 7, 2000, of which 156,685 shares will be restricted securities and may only be sold in the public market if registered or if they qualify for an exemption from registration under the Securities Act and 67,197 shares are freely transferable without restriction or registration under the Securities Act of 1933. All of our officers and directors and Brooktrout have agreed with U.S. Bancorp Piper Jaffray not to sell or otherwise dispose of any of their shares for 180 days after the IPO. Beginning 180 days after the IPO, under specified circumstances and subject to customary conditions, Brooktrout will have rights, with respect to 6,075,000 shares of common stock, to require us to register its shares of common stock under the Securities Act, and Brooktrout will have rights to participate in any future registrations of securities by us. Page 21 of 25 Total Pages BECAUSE WE HAVE NO SPECIFIC PLAN FOR ANY SIGNIFICANT PORTION OF THE NET PROCEEDS OF OUR IPO, OUR MANAGEMENT WILL HAVE THE DISCRETION TO ALLOCATE THE NET PROCEEDS OF OUR IPO TO USES THE STOCKHOLDERS MAY NOT DEEM DESIRABLE Although we expect to use the net proceeds of our IPO for general corporate purposes such as working capital, product development and sales and marketing, we currently have no other specific plan for any significant portion of the net proceeds of our IPO. As a consequence, our management will have the discretion to allocate the net proceeds of our IPO to uses the stockholders may not deem desirable. We may not be able to invest these net proceeds to yield a significant return. Substantially all of the net proceeds of our IPO will be invested in short-term, interest-bearing, investment grade securities or guaranteed obligations of the U.S. government for an indefinite period of time. WE DO NOT INTEND TO PAY DIVIDENDS To date, we have never declared or paid any cash dividends on shares of our common stock. We currently intend to retain our earnings for future growth and development of our business and, therefore, do not anticipate declaring or paying any dividends in the foreseeable future. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the potential change in a financial instrument's value caused by fluctuations in interest and currency exchange rates and equity and commodity prices. Our operating activities expose us to many risks that are continually monitored, evaluated, and managed. Proper management of these risks helps reduce the likelihood of earnings volatility. At December 31, 1999, we were not a party to any derivative arrangement and we do not engage in trading, market-making or other speculative activities in the derivatives markets. We do not engage in regular hedging activities to minimize the impact of foreign currency fluctuations. At December 31, 1999, we had no short-term or long-term debt obligations. Page 22 of 25 Total Pages PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The Company completed its IPO in September 1999. The IPO was made pursuant to a registration statement on Form S-1, originally filed with the Securities and Exchange Commission on June 18, 1999, as amended (Commission File No. 333-81071), which was declared effective on September 23, 1999. The IPO commenced on September 24, 1999 and terminated shortly thereafter after the sale into the public market of all of the registered shares of common stock. The shares of common stock sold in the IPO were offered for sale by a syndicate of underwriters represented by U.S. Bancorp Piper Jaffray, Warburg Dillon Read LLC, Tucker Anthony Cleary Gull and DLJdirect Inc. The Company registered an aggregate of 3,500,000 shares of common stock (including 1,500,000 sold by Brooktrout as a selling shareholder) in the IPO at a per share price of $12.00, for an aggregate offering price of $42,000,000. As of the date of the filing of this report, 3,925,000 registered shares (including 425,000 shares previously owned by Brooktrout that were sold upon the exercise of the underwriters' overallotment option) have been sold at an aggregate offering price of $47,100,000. Of the 3,925,000 shares sold in the IPO, 2,000,000 shares were registered for the Company's account. The Company incurred the following expenses in connection with the IPO: Underwriting discounts and commissions.......................................... $1.68 million Other expenses.................................................................. 1.53 million ------------------------------------------------------------------------------------------------- Total expenses $3.21 million

After deducting the expenses set forth above, the Company received $20,790,000 in net proceeds for the IPO. From the period commencing on September 23, 1999 through December 31, 1999, the Company has used approximately $6.6 million of the net proceeds, of which approximately $6.1 million was used to fund operating activities including the net loss for the first fiscal quarter of 2000, and approximately $500,000 which was used to purchase equipment. Page 23 of 25 Total Pages ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 The Amended and Restated Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on December 29, 1999 ("10-K"). 3.2 The Amended and Restated By-Laws of the Company are incorporated herein by reference to Exhibit 3.2 to the 10-K. 27.1 Restated Financial Data Schedule (b) Reports on Form 8-K during the quarter ended December 31, 1999. The registrant filed the following Current Reports on Form 8-K during the quarter ended December 31, 1999: 1. On October 7, 1999, the Company filed a Current Report on Form 8-K, disclosing its estimated revenue for the quarter ended September 30, 1999. 2. On November 30, 1999, the Company filed a Current Report on Form 8-K, disclosing its results of operations for the fourth quarter and fiscal year ended September 30, 1999. Page 24 of 25 Total Pages SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERSPEED, INC. Dated: November 29, 2000 By: /s/ RAJEEV AGARWAL -------------------------- Rajeev Agarwal President and Chief Executive Officer (principal executive officer) Dated: November 29, 2000 By: /s/ STEVEN E. SARTOR -------------------------- Steven E. Sartor Vice President, Finance and Controller (chief accounting officer) Page 25 of 25 Total Pages

INTERSPEED INC 10-Q/A