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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,1999
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: 000-25399
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MPATH INTERACTIVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3217317
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NO.)
665 CLYDE AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 429-3900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF THE REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
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. [X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.00005
par value, was 23,919,490 as of October 29, 1999.
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MPATH INTERACTIVE, INC.
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets - September 30,
1999 and December 31, 1998 ............................................ 3
Unaudited and Condensed Consolidated Statements of Operations - Three
Months and Nine Months Ended September 30, 1999 and 1998 ............ 4
Unaudited Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1999 and 1998 ...................................... 5
Notes to Condensed Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 8
Item 3. Qualitative and Quantitative Disclosure about Market Risk ......... 18
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 18
Item 2. Changes in Securities and Use of Proceeds ......................... 19
Item 3. Defaults Upon Senior Securities ................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ............... 20
Item 5. Other Information ................................................. 20
Item 6. Exhibits and Reports on Form 8-K .................................. 20
Signatures ................................................................. 20
2
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MPATH INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, December 31,
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 45,790 $ 1,114
Short-term investments ........................... 30,436 --
Accounts receivable, net of allowance for doubtful
accounts of $415 and $20 respectively .......... 3,220 2,226
Prepaid expenses and other current assets ........ 1,861 710
-------- -------
Total current assets ......................... 81,307 4,050
Restricted cash ..................................... -- 170
Property and equipment, net ......................... 3,357 1,878
Other assets ........................................ 427 79
-------- -------
Total assets ................................. $ 85,091 $ 6,177
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................. $ 514 $ 1,119
Accrued payroll and related expenses ............. 2,291 1,063
Accrued expenses ................................. 1,882 719
Current portion of capital lease obligations ..... 355 458
Deferred revenue ................................. 304 332
Notes payable .................................... 230 2,426
-------- -------
Total current liabilities .................... 5,576 6,117
Convertible note payable ............................ -- 1,864
Capital lease obligations and notes payable, net
of current portion .................................. 180 326
-------- -------
Total liabilities ............................ 5,756 8,307
-------- -------
Commitments and contingencies
Stockholders' equity (deficit):
Convertible preferred stock ...................... -- 1
Common stock warrants ............................ 2 2
Common stock ..................................... 1 --
Additional paid-in capital ....................... 160,587 63,155
Deferred stock based compensation ................ (9,986) (11,263)
Notes receivable from stockholders ............... (2,328) (1,020)
Accumulated deficit .............................. (68,941) (53,005)
-------- -------
Total stockholders' equity (deficit) ......... 79,335 (2,130)
-------- -------
Total liabilities and stockholders' equity ... $ 85,091 $ 6,177
======== =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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MPATH INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
Live Communities ....................... $ 2,098 $ 931 $ 4,683 $ 1,641
HearMe Technology Products ............. 2,034 1,287 4,809 3,524
-------- -------- -------- --------
Total net revenues ................. 4,132 2,218 9,492 5,165
Cost of net revenues:
Live Communities ....................... 840 463 2,492 1,614
Live Communities - warrant expense ..... -- -- 849 --
HearMe Technology Products ............. 255 210 779 592
-------- -------- -------- --------
Total cost of net revenues ......... 1,095 673 4,120 2,206
-------- -------- -------- --------
Gross profit ................... 3,037 1,545 5,372 2,959
-------- -------- -------- --------
Operating expenses:
Research and development ............... 1,901 779 5,167 2,325
Sales and marketing .................... 4,142 2,058 9,941 5,806
General and administrative ............. 1,552 785 4,605 2,372
Stock based compensation ............... 959 650 2,857 1,950
-------- -------- -------- --------
Total operating expenses ...... 8,554 4,272 22,570 12,453
-------- -------- -------- --------
Loss from operations ...... (5,517) (2,727) (17,198) (9,494)
Interest and other income (expense), net 757 (87) 1,262 44
-------- -------- -------- --------
Net loss .................. $ (4,760) $ (2,814) $(15,936) $ (9,450)
Other comprehensive income:
Unrealized gain on investments . 210 -- 301 --
-------- -------- -------- --------
Comprehensive loss ......... $ (4,550) $ (2,814) $(15,635) $ (9,450)
Net loss per common share:
Basic and diluted ...................... $ (.22) $ (1.14) $ (1.20) $ (4.35)
Pro forma .............................. $ (.22) $ (.22) $ (.84) $ (.75)
Weighted average shares outstanding:
Basic and diluted ...................... 21,571 2,465 13,268 2,172
Pro forma .............................. 21,571 12,882 19,085 12,588
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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MPATH INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
---- ----
<S> <C> <C>
Cash used in operating activities ................................ $(11,526) $(7,119)
Cash flows from investing activities:
Investment in short-term investments ......................... (30,436) --
Acquisition of property and equipment ........................ (2,488) (541)
-------- -------
Net cash used in investing activities ............. (32,924) (541)
-------- -------
Cash flows from financing activities:
Proceeds from notes payable .................................. -- 2,043
Payments of notes payable .................................... (4,453) (38)
Payments under capital lease obligations ..................... (350) (288)
Issuance of notes payable insurance premium .................. 434 --
Proceeds from exercise of common stock options
and warrants, net of repurchase ............................ 808 223
Proceeds from issuance of Series E preferred stock, net ..... 18,797 --
Proceeds from initial public offering, net of issuance costs . 73,890 --
-------- -------
Net cash provided by financing activities .......... 89,126 1,940
-------- -------
Net increase (decrease) in cash and cash equivalents 44,676 (5,720)
-------- -------
Cash and cash equivalents, beginning of period ................... 1,114 9,132
-------- -------
Cash and cash equivalents, end of period ......................... $ 45,790 $ 3,412
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
5
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MPATH INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the financial statements at September 30, 1999 and 1998 have been included.
The condensed consolidated financial statements include those of the Company and
its wholly-owned subsidiary. Intercompany balances and transactions have been
eliminated in consolidation.
Results for the three months and nine months ended September 30, 1999 are not
necessarily indicative of results for the entire fiscal year or future periods.
These financial statements should be read in conjunction with the consolidated
financial statements and the accompanying notes included in the Company's
Registration Statement on Form S-1 (No. 333-72437), including the related
prospectus dated April 29, 1999 as filed with the SEC.
Certain prior year amounts have been reclassified for consistency with current
year financial statement presentation.
The Company has adopted the accounting treatment prescribed by SFAS No. 130,
"Comprehensive Income." Unless otherwise noted, the components of the Company's
"Other comprehensive income" and "Comprehensive loss" have no tax effect as the
Company makes no provision for U.S. income taxes applicable to unrealized gains
on investments.
On September 28, 1999 the Company announced that it would commence doing
business under the name HearMe and changed the NASDAQ ticker symbol to HEAR.
NET LOSS PER SHARE
Historical basic and diluted net loss per share are calculated using the
weighted average shares of common stock outstanding, reduced for shares subject
to repurchase by the Company. Preferred stock, stock options, warrants and
unvested common stock are excluded from the calculation of diluted net loss per
share since their effect would be antidilutive.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A, Series B, Series C, Series D and Series E
preferred stock into shares of the Company's common stock effective upon the
closing of the Company's initial public offering as if such conversion occurred
on January 1, 1998 for Series A, B, C and D and on January 19, 1999 for Series
E. Pro forma common equivalent shares, comprised of unvested common stock, and
incremental common shares issuable upon the exercise of stock options and
warrants, are not included in pro forma diluted net loss per share because they
would be anti-dilutive.
6
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MPATH INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
ACCOUNTING FOR DERIVATIVES
In June 1998, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
133 is effective for fiscal years beginning after June 15, 1999. In July 1999,
FASB issued SFAS No. 137 (SFAS 137), "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of SFAS No. 133." SFAS 137
deferred the effective date of SFAS 133 until the first fiscal quarter beginning
after June 15, 2000. The Company does not believe the adoption of SFAS 133 and
SFAS 137 will have a material effect on the Company's consolidated results of
operations or financial condition.
2. SEGMENT INFORMATION
Operating losses for the Company's two segments, the Live Communities segment
and the HearMe Technology Products segment, formerly known as the Mpath
Foundation segment, were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Live Communities .................. ($3,680) ($1,955) ($10,987) ($7,179)
HearMe Technology Products ........ (879) (122) (3,354) (365)
------- ------- -------- -------
Total Operating Loss .............. ($4,559) ($2,077) ($14,341) ($7,544)
Amounts do not reconcile to total operating loss since they exclude stock-based
compensation.
3. SUBSEQUENT EVENT - ACQUISITION OF RESOUNDING TECHNOLOGY, INC.
On October 20, 1999, the Company, completed its acquisition of Resounding
Technology, Inc., a Delaware corporation. This acquisition was accomplished by
the statutory merger (THE "MERGER") of ITR Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of Mpath, with and into Resounding.
The Merger was accomplished pursuant to an Agreement and Plan of Merger dated as
of September 27, 1999, among Mpath, Resounding, and ITR Acquisition Corp., and a
related Certificate of Merger, following approval by the stockholders of
Resounding and satisfaction of other closing conditions. The acquisition, which
is being accounted for as a purchase transaction, was paid through the issuance
of 1,585,488 shares of Mpath common stock, the assumption of 153,048 stock
options, and payment in cash to certain of Resounding's stockholders in the
amount of $175,000. The portion of the consideration in the form of Mpath stock
was distributed using an exchange ratio of .331 for each share or option of
Resounding. Of the 1,585,488 shares of common stock, 317,098 shares are held by
an escrow agent to serve as security for the indemnity provided by certain
shareholders of Resounding. The Company will account for this acquisition in the
fourth quarter of fiscal 1999 using the purchase method of accounting. The
Company will evaluate the allocation of the purchase price to the net assets
acquired, which may include in-process technology that will be written-off in
the period acquired, and goodwill and other intangibles that will be amortized
over their benefit periods.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Form 10-Q contain forward-looking statements
that involve risks and uncertainties. Words such as "anticipates," "believes",
"plans," "expects," "future," "intends", and similar expressions identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks and uncertainties that could cause
actual results to differ materially from those expressed or forecasted. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Certain Business Risks" and those appearing
elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. We assume no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting forward-looking statements.
OVERVIEW
Mpath develops, licenses and operates technologies that enable us and other
Internet sites to create and manage Live Communities. We were incorporated and
commenced operations in January 1995. From inception through September 1996, our
activities primarily consisted of recruiting employees and raising capital,
performing product and technology development, engaging in marketing activities
and negotiating strategic relationships. In November 1995, we entered into an
agreement with PSINet, Inc. for the deployment of a low-latency network, which
provided a platform for launching and operating the MPLAYER.COM service. Testing
of the MPLAYER.COM service began in February 1996 and the service was launched
commercially in October 1996. In April 1996, we licensed our Live Community
software and network services to SegaSoft Networks, Inc., which occurred
concurrently with an equity investment by affiliates of SegaSoft's parent, CSK
Corporation. In January 1999, we launched HEARME.COM, our second Live Community
service. During the period from January 1995 to March 31, 1999, we raised gross
proceeds of approximately $54.9 million from the sale of equity securities to
venture capital investors and strategic partners. The proceeds from these
financings were primarily used to finance our research and development and the
sales and marketing of our products and services. In May and June 1999, we
raised gross proceeds of approximately $80.7 million from the sales of common
stock through its initial public offering. A portion of the proceeds from this
offering is being used to finance research and development and sales and
marketing activities.
In September 1999, we announced that we would commence doing business under
the name HearMe.
We generate our revenues from two business units, Live Communities and
HearMe Technology Products (formerly known as Mpath Foundation.) With respect to
Live Communities, we derive the substantial majority of revenues from
advertising fees. While the MPLAYER.COM and the HEARME.COM services are free to
all registered members, until September 1999, some users also paid subscription
fees to us in exchange for access to premium services such as special events,
rankings and ratings, contests, magazine subscriptions, special features and
exclusive games. We also had a subscription plan that allowed the members to
purchase a year's subscription up front at a discounted rate. As of September
1999, we terminated the subscription fee program and extended our services free
to all of our members. Additionally, we have begun to derive revenues from
e-commerce activities, including fees from special event promotions and
merchandise sales. Advertising revenue is recognized ratably over the term of
each particular advertising agreement. E-commerce revenue is recognized when
notification of shipment has taken place and the revenue has been earned.
Subscription revenue through September 1999 was recognized ratably over the
related subscription period. Any unearned but paid member subscription fees
remaining at September 30, 1999 were reimbursed to the members in October 1999.
With respect to HearMe Technology Products, we derive revenues from licensing
fees for our technology, including our POP.X product which enables others to
create live communities, and related services. We also derive incremental HearMe
Technology Products revenues from service, maintenance and upgrade fees. Service
revenues are recognized over the period in which services are provided.
Development revenue is
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recognized at the time services are completed or as development milestones are
achieved. License revenue is recognized in the period earned. Deferred revenue
consists primarily of monthly service revenue billed and paid in advance.
Since we launched our first Live Community service in October 1996 and began
negotiating certain license agreements through the HearMe Technology Products
business unit, we have generated $20.4 million in net revenues through September
30, 1999. For the period from inception to September 30, 1999 we have incurred a
cumulative net loss of $68.9 million, of which $14.5 million came from a
one-time write-off of goodwill and in-process research and development expenses
associated with our acquisition of Catapult.
Cost of net revenues for Live Communities consists primarily of the cost of
operating the network infrastructure and royalties paid to third-party content
providers. Cost of net revenues for HearMe Technology Products consists
primarily of network operating expenses in conjunction with providing services
to certain HearMe Technology Products customers.
The Company's operating expenses consist of sales and marketing expenses,
research and development expenses and general and administrative expenses. Sales
and marketing expenses consist principally of salaries paid to employees in
sales and marketing activities, advertising, promotional materials and programs,
public relations costs and travel. Research and development expenses consist
principally of salaries and compensation paid to employees and consultants
engaged in research and development activities and product testing. General and
administrative expenses consist principally of salaries and compensation paid to
employees and consultants in the administrative departments including finance,
human resources and legal and costs relating to facilities, infrastructure and
related depreciation, in-house and outside legal and accounting fees and related
costs, and travel. All operating costs are expensed as incurred.
We have a limited operating history upon which an evaluation of us, our
current business, and our prospects can be based. In addition, our revenue model
is evolving and relies substantially upon the sale of advertising on OUR
MPLAYER.COM AND HEARME.COM services and the licensing OF OUR POP.X technology.
Our business must be considered in light of the risks, expenses and problems
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as the Internet.
Our results of operations and financial condition may be subject to volatility
in future periods.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1998
REVENUES. Net revenues increased 86% from approximately $2.2 million for the
three months ended September 30, 1998 to approximately $4.1 million for the
three months ended September 30, 1999. Net revenues from Live Communities
increased 125% from $931,000 to $2.1 million. This increase was primarily driven
by growth in advertising revenues associated with an expanding number of
advertisers and the growth of traffic and usage time in our Live Communities.
Net revenues from HearMe Technology Products increased 58% from approximately
$1.3 million for the three months ended September 30, 1998 to approximately $2.0
million for the three months ended September 30, 1999. The increase was due to
increased technology licensing fees earned from both new and existing customers
during the period.
COST OF REVENUES. Cost of net revenues increased 63% from approximately
$673,000, or 30% of net revenues, for the three months ended September 30, 1998
to approximately $1.1 million, or 27% of net revenues, for the three months
ended September 30, 1999. Cost of net revenues decreased as a percentage of net
revenues primarily due to advertising revenues growing faster than the related
server and network costs within the Live Communities segment for the three
months ended September 30, 1999. The absolute increase in cost of revenues was
due to the significant increase in Live Communities subscriber usage and
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the resulting increase in server and network costs between 1998 and 1999. Cost
of net revenues for Live Communities increased from approximately $463,000 for
the three months ended September 30, 1998 to approximately $840,000 for the
three months ended September 30, 1999. Cost of net revenues for HearMe
Technology Products increased from approximately $210,000 for the three months
ended September 30, 1998 to approximately $255,000 for the three months ended
September 30, 1999. The increase was attributable to server costs associated
with hosting services provided to certain HearMe Technology Products customers.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 144%
from approximately $779,000, or 35% of net revenues, for the three months ended
September 30, 1998 to approximately $1.9 million, or 46% of net revenues, for
the three months ended September 30, 1999. The increase in research and
development expenses was primarily due to an increase in salary expense in 1999
as additional engineers were hired to support the development of the POP.X
technology and enhancements to the Company's Live Communities websites and to
additional consulting fees and software expenditures associated with these
projects.
SALES AND MARKETING. Sales and marketing expenses increased 101% from
approximately $2.1 million, or 93% of net revenues, for the three months ended
September 30, 1998, to approximately $4.1 million, or 100% of net revenues, for
the three months ended September 30, 1999. Sales and marketing expenses
increased as a percentage of net revenues primarily due to the initiation of
outbound advertising and marketing campaigns to promote the Company's brands.
The absolute increase in sales and marketing expenses was due to an increase in
headcount in the Live Communities marketing team, increases in advertising sales
headcount and related travel expenses and an increase in headcount of the HearMe
Technology Products marketing and sales force.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased 98%
from approximately $785,000, or 35% of net revenues, for the three months ended
September 30, 1998 to approximately $1.6 million, or 38% of net revenues, for
the three months ended September 30, 1999. General and administrative costs
increased primarily due to higher salary expenses resulting from additional
headcount in the finance, administrative and operations area required to support
our expanded infrastructure and additional costs relating to the costs of
maintaining the Company as a public entity.
STOCK BASED COMPENSATION. Stock based compensation costs increased from
approximately $650,000, or 29% of net revenues, in the three months ended
September 30, 1998 to approximately $959,000, or 23% of net revenues, in the
three months ended September 30, 1999. The increase related to an increase in
the number of options granted as we continued to hire additional employees
resulting in a larger cumulative amount of options granted. The increase
attributable to these new issuances was added to the expense from grants in
previous years which continued to vest in 1999.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
(expense), net includes interest income earned on the short-term investment of
cash and interest expense primarily related to capital lease and debt
obligations.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1998
REVENUES. Net revenues increased 84% from approximately $5.2 million for the
nine months ended September 30, 1998 to approximately $9.5 million for the nine
months ended September 30, 1999. Net revenues from Live Communities increased
185% from $1.6 million to $4.7 million. This increase was primarily driven by
growth in advertising revenues associated with an expanding number of
advertisers and the growth of traffic and usage time in our Live Communities.
Net revenues from HearMe Technology Products increased 36% from approximately
$3.5 million for the nine months ended September 30, 1998 to approximately $4.8
million for the nine months ended September 30, 1999. The increase was due to
increased technology licensing fees earned from both new and existing customers
during the period.
COST OF REVENUES. Cost of net revenues increased 87% from approximately $2.2
million for the nine months ended September 30, 1998 to approximately $4.1
million, for the nine months ended September 30,
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1999 and, as a percentage of revenues, remained flat at 43% of revenue from 1998
to 1999. The increase in costs of net revenues was mainly due to the significant
increase in Live Communities subscriber usage and the resulting increase in
server and network costs between 1998 and 1999. Cost of net revenues for Live
Communities increased from approximately $1.6 million for the nine months ended
September 30, 1998 to approximately $2.5 million for the nine months ended
September 30, 1999 excluding $849,000 of expense incurred in connection with a
warrant for 120,000 shares granted to an internet service provider in 1995, the
terms of which were finalized during the nine months ended September 30, 1999.
Cost of net revenues for HearMe Technology Products increased from approximately
$592,000 for the nine months ended September 30, 1998 to approximately $779,000
for the nine months ended September 30, 1999. The increase was attributable to
server costs associated with hosting services provided to certain HearMe
Technology Products customers.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 122%
from approximately $2.3 million, or 45% of net revenues, for the nine months
ended September 30, 1998 to approximately $5.2 million, or 54% of net revenues,
for the nine months ended September 30, 1999. The increase in research and
development expenses in absolute terms and as a percentage of net revenues, was
primarily due to an increase in salary expense in 1999 as additional engineers
were hired to support the HearMe Technology Products development of the POP.X
technology and to additional consulting fees and software expenditures
associated with this development.
SALES AND MARKETING. Sales and marketing expenses increased 71% from
approximately $5.8 million, or 112% of net revenues, for the nine months ended
September 30, 1998, to approximately $9.9 million, or 105% of net revenues, for
the nine months ended September 30, 1999. Sales and marketing expenses decreased
as a percentage of net revenues primarily because of the substantial increase in
net revenues between 1998 and 1999. The increase in sales and marketing expenses
was primarily due to an increase in marketing and outbound advertising expense
incurred in order to grow advertising revenues in our Live Communities business
unit, increased Live Communities marketing headcount and an increase in
headcount of the HearMe Technology Products and Live Communities sales forces.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased 94%
from approximately $2.4 million, or 46% of net revenues, for the nine months
ended September 30, 1998 to approximately $4.6 million, or 49% of net revenues,
for the nine months ended September 30, 1999. General and administrative costs
increased primarily due to higher salary expenses related to additional
headcount in the finance, administrative and operations support area hired to
support our expanding infrastructure. Higher reserves taken against receivables
during the nine months ended September 30, 1999 also contributed to the increase
over the prior year period.
STOCK BASED COMPENSATION. Stock based compensation costs increased from
approximately $2.0 million or 38% of net revenues in the nine months ended
September 30, 1998 to approximately $2.9 million or 30% of net revenues in the
nine months ended September 30, 1999. The increase related to an increase in the
number of options granted as we continued to hire additional employees resulting
in a larger cumulative amount of options granted. The increase attributable to
these new issuances was added to the expense from grants in previous years which
continued to vest in 1999.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
(expense), net includes interest expense primarily related to lease and debt
obligations and interest income earned on the short-term investment of cash.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had approximately $76.2 million of cash and cash
equivalents and short-term investments.
Net cash used in operating activities for the nine months ended September
30, 1999 was $11.5 million compared to $7.2 million in the nine months ended
September 30, 1998. For both periods, net cash
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used in operating activities was primarily a result of funding ongoing expansion
of our research and development and sales and marketing efforts and the
resulting larger infrastructure and support functions.
Net cash used in investing activities was $32.9 million for the nine months
ended September 30, 1999 compared to $0.5 million for the nine months ended
September 30, 1998. Net cash used in investing activities in each period was
primarily related to purchase of short-term investments and to purchases of
property and equipment.
Net cash provided by financing activities in the nine months ended September
30, 1999 was $89.1 million as compared to net cash provided by financing
activities in the nine months ended September 30, 1998 of $2.0 million. The
major sources of financing activities during the nine months ended September 30,
1999 was our initial public offering, through which we raised net proceeds of
approximately $73.9 million and which was completed in May and June 1999 and our
sale of Series E preferred stock in January 1999 through which we raised net
proceeds of approximately $18.8 million.
In 1995, we entered into a capital lease agreement with Lighthouse Capital
and we drew down all available funds of approximately $1.5 million. We entered
into a Loan and Security Agreement with Greyrock Business Credit, a Division of
NationsCredit Commercial Corporation in July 1998. The agreement consisted of a
term loan for $1.5 million, an accounts receivable revolving line of credit for
$1.5 million and a capital equipment loan of $1.0 million. Amounts borrowed
under these agreements are collateralized by substantially all our assets, bear
interest at the prime rate plus two percent and mature on June 30, 1999. By
December 1998, we had drawn down $1.5 million against the term loan agreement
and approximately $1.0 million against the capital equipment agreement. In
January 1999, we fully repaid the term loan with a portion of the net proceeds
from the sale of our Series E Preferred Stock in January 1999. In May 1999 we
fully repaid the equipment loan from the proceeds of the IPO. There are no
outstanding loans to Greyrock Business Credit.
Upon the acquisition of Catapult in 1996, we assumed a convertible note
payable from Catapult bearing interest at prime and which is due together with
interest in November 2001. At December 31, 1998, we had $1,864,000 outstanding
under this note payable. On June 11, 1999, we elected to pay off the loan
balance together with the accrued interest thereon, for a total of $2,265,000.
We currently anticipate that the net proceeds of $73.9 million from the
public offering which we completed in May 1999 and from the issuance of the
underwriters' overallotment in June 1999, together with our existing lines of
credit and available funds will be sufficient to meet our anticipated needs for
working capital and capital expenditures for at least the next 12 months. We may
need to raise additional funds in the future in order to fund more aggressive
brand promotions and more rapid expansion, to develop newer or enhanced products
or services, to fund acquisitions, to respond to competitive pressures, or to
acquire complementary businesses, technologies or services. There can be no
assurance that additional financing will be available on terms favorable to us,
or at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and
software used by many companies and governmental agencies may need to be
upgraded to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
STATE OF READINESS. We have made an assessment of the Year 2000 readiness of
our information technology ("IT") systems, including the hardware and software
that enable us to provide and deliver our products and services. We have
completed our Year 2000 compliance plan and contracted for the services of two
Year 2000 compliance consultants. Our assessment plan consists of:
12
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quality assurance testing of our internally developed proprietary
software incorporated in our products;
contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to
the delivery of our products and services;
contacting vendors of material non-IT systems;
assessment of repair or replacement requirements;
repair or replacement;
implementation; and
creation of contingency plans in the event of Year 2000 failures.
In accordance with our Year 2000 compliance plan we identified measures to be
taken to avoid Year 2000 disruptions to our business operations. We also
conducted an assessment of our systems and third party products that must be
verified for Year 2000 compliance. Our Year 2000 compliance plan scheduled the
following activities:
First quarter 1999--Began engineering and operational work required to
make our products Year 2000 compliant.
Second quarter 1999--Completed component evaluation for Year 2000
compliance.
Third quarter 1999--Completed development of Year 2000 compliant systems.
Third quarter 1999--Tested our systems in a constrained environment for
Year 2000 compliance.
Fourth quarter 1999--Resolve remaining Year 2000 compliance issues.
We have been informed by our hardware and software component vendors that the
products we use are currently Year 2000 compliant. We will require our other
material hardware and software component vendors to provide assurance of their
Year 2000 compliance. We will complete this process during 1999. We are
currently assessing our non-IT systems and will seek assurance of Year 2000
compliance from providers of material non-IT systems. Until such testing is
complete and such vendors and providers are contacted, we will not be able to
completely evaluate whether our IT systems or non-IT systems will need to be
revised or replaced.
We have located and printed Year 2000 readiness disclosure statements for our
software and hardware vendors. In accordance with our Year 2000 compliance plan
and under the guidance of our Year 2000 consultants we will contact our
hardware, software and service vendors concerning Year 2000 compliance. We will
contact by letter, email or fax the vendors that have not provided Year 2000
readiness disclosure statements. This communication to the vendors will request
a written response confirming that the vendor's products and services are Year
2000 compliant. At present we believe there are upgrade products for all the
significant third party hardware products, software products and services we
rely upon to operate our business. If the vendors are, in fact, not Year 2000
compliant, we may experience some short term difficulty procuring software
applications, computer hardware and telecommunication services to replace
non-compliant products and services.
COSTS. To date, we have incurred approximately $105,000 in connection with
identifying or evaluating Year 2000 compliance issues. Our expenses have related
to the operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. We anticipate our costs will
continue to include employee expenses and will increase for purchases of Year
2000 compliant upgrades to our existing hardware and software platforms. We
estimate that these costs will
13
<PAGE>
total between approximately $150,000 and $200,000 and approximately $100,000 for
two Year 2000 compliance consultants; however, if these costs are substantially
higher than anticipated, it could have a material adverse effect on our
business, results of operations and financial condition. The cost of Year 2000
compliance will be accounted for as an operating expense and funded from working
capital.
RISKS. We are not currently aware of any Year 2000 compliance problems
relating to our technology or our IT or non-IT systems that would have a
material adverse effect on our business, results of operations or financial
condition, without taking into account our efforts to avoid or fix potential
problems. We may discover Year 2000 compliance problems in our technology that
will require substantial revisions. In addition, third-party software, hardware
or services incorporated into our material IT and non-IT systems may need to be
revised or replaced, all of which could be time consuming and expensive. If we
fail to fix our technology or to fix or replace third-party software, hardware
or services on a timely basis, the result could be lost revenues, increased
operating costs, the loss of customers and other business interruptions, any of
which could have a material adverse effect on our business, results of
operations and financial condition. Moreover, the failure to adequately address
Year 2000 compliance issues in our technology, and our IT and non-IT systems
could result in claims of mismanagement, misrepresentation or breach of contract
and related litigation, which could be costly and time-consuming to defend. In
addition, there can no assurance that governmental agencies, utility companies,
Internet access companies, third-party service providers and others outside our
control will be Year 2000 compliant. The failure by these types of entities to
be Year 2000 compliant could result in a systemic failure beyond our control,
such as a prolonged Internet, telecommunications or electrical failure, which
could also prevent us from delivering our products and services to our
customers, decrease the use of the Internet or prevent users from accessing the
Web sites of our strategic partners, which could have a material adverse effect
on our business, results of operations and financial condition.
CONTINGENCY PLAN. As discussed above, we are engaged in an ongoing Year 2000
assessment and the development of contingency plans. The results of our Year
2000 simulation testing and the responses received from third-party vendors and
service providers will be taken into account in determining the nature and
extent of any contingency plans. We have identified our worst-case scenario as
the interruption of our business resulting from Year 2000 failure of the
electric company or our ISPs to provide services. We have not yet completed our
worst-case scenario contingency plan. Without a worst-case scenario contingency
plan we may not have enough time to complete remedial measures and implement
contingency planning for the worst-case scenario. We completed our contingency
plan in accordance with our compliance plan and under the guidance of our
consultants in July 1999.
CERTAIN BUSINESS RISKS
We have a limited operating history making it difficult or impossible for us
to predict future results of operations. As a result, you should not expect
future revenue growth to be comparable to our recent revenue growth. We believe
that comparing different periods of our operating results is not meaningful, as
you should not rely on the results for any period as an indication of our future
performance. We did not begin generating advertising or licensing revenues until
October 1996. Some of the risks and difficulties that we face as an early stage
company in a new and rapidly evolving market include our ability to maintain and
to increase levels of traffic on our Live Communities, our ability to develop
and extend the MPLAYER.COM, HEARME.COM AND POP.X brands and our ability to
increase demand for our products and services.
We have had substantial losses since our inception and our operating losses
may increase in the future. Accordingly, we cannot assure you that we will ever
become or remain profitable. If our revenues fail to grow at anticipated rates,
our operating expenses increase without a commensurate increase in our revenues
or we fail to adjust operating expense levels accordingly, our business, results
of operations and financial condition will be adversely affected. As of
September 30, 1999, we had an accumulated deficit of $68.9 million. Although we
have experienced growth in net revenues, members, customers and Internet reach
in recent periods, we cannot be certain that our growth rates will continue at
their current levels or increase in the future.
14
<PAGE>
We have not yet become profitable on a quarterly or annual basis, and we
anticipate that we will continue to incur net losses for the foreseeable future.
The extent of these losses will be contingent, in part, on the amount of growth
in our revenues from advertising, licensing and commerce. We expect our
operating expenses to increase significantly, especially in the areas of
engineering, sales and marketing and brand promotion, and, as a result, we will
need to generate increased quarterly revenues to become profitable.
Our HearMe Technology Products revenues have accounted for a significant
portion of our revenues to date. Historically, we have received most of our
HearMeTechnology Products revenues from a limited number of sales and license
agreements. Therefore, any downturn in the business of these customers or
potential customers could have a material adverse effect on our revenues and
quarterly results of operations. We believe that a customer's decision to
license our technology is relatively discretionary and, for large-scale users,
often involves a significant long-term commitment of resources. We currently
have fifteen HearMe Technology Products customers.
Our HearMe Technology Products customers often take a long time to evaluate
our products and services, and many people are involved in the sales process.
The long sales and implementation cycles for our products and services and the
timing of these sales may cause license and service revenues and operating
results to vary significantly from period to period. We spend a lot of time
educating and providing information to our prospective customers regarding the
use and benefits of our products and services. Even after deciding to license
our products, our customers tend to deploy our products slowly and deliberately
depending on the expertise of the customer, the size of deployment, the
complexity of the customer's system architecture, the quantity of hardware
involved, and the degree of hardware and software configuration necessary to
deploy our products.
We derive a significant portion of our revenues from the sale of
advertising. If customers cancel or defer existing advertising or commerce
contracts or if we fail to obtain new contracts in any quarter, our business,
results of operations and financial condition for that quarter and future
periods will be adversely affected. A significant number of these advertising
sales are made under short-term contracts that average two to three months in
length. Consequently, many of our advertising customers can cease advertising on
our Web site quickly and without penalty. As a result, our quarterly revenues
and operating results depend heavily on advertising revenues from contracts
entered into within the quarter and on our ability to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall.
Furthermore, our advertising revenues are based in part on the amount of
traffic on MPLAYER.COM and HEARME.COM. Accordingly, if the amount of traffic on
our Live Communities falls below our expectations or those of existing or
potential advertisers, we may lose advertising customers. In addition,
substantially all of our advertising contracts require us to guarantee a minimum
number of impressions. In the event that we fail to deliver the minimum number
of impressions, we could be required to provide credit for additional
impressions and we may have to reduce advertising rates in order to maintain
existing advertisers and attract new advertisers.
Our quarterly operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of our control.
These fluctuations make it difficult to predict our financial performance and
may adversely affect the trading price of our common stock. These factors
include demand for and market acceptance of our products and services and
Web-based advertising, budgeting cycles of advertisers, amount and timing of
capital expenditures by our customers and other costs relating to the expansion
of our operations and future acquisitions, engineering or development fees that
we may pay for new Web site development and publishing tools and general
economic conditions.
As a strategic response to changes in the competitive environment, we may
from time to time make certain pricing, service or marketing decisions or
business combinations that could have a material adverse effect on our business,
results of operations and financial condition. In order to accelerate the
promotion of the MPLAYER.COM and HEARME.COM brands, we intend to significantly
increase our marketing budget. Such an increase in marketing expenditures may
adversely affect our results of operations for a number of quarterly periods.
15
<PAGE>
Due to our relatively short operating history, we have limited meaningful
historical financial data upon which to base our planned operating expenses.
Accordingly, our expense levels are based in part on our expectations as to
future revenues from advertising, software licensing fees, commerce
revenue-sharing arrangements and our anticipated growth in memberships and to a
large extent are fixed. We cannot be certain that we will be able to accurately
predict our revenues, particularly in light of the intense competition for the
sale of Web-based advertisements, revenue-sharing opportunities and new members,
our limited operating history and the uncertainty as to the broad acceptance of
the Web as an advertising and commerce medium. If we fail to accurately predict
revenues in relation to fixed-expense levels, our business, results of
operations and financial condition could be adversely affected.
Although we view our strategic relationships with media, Internet
and technology companies as a key factor in our overall business strategy, we
cannot be certain that we will be successful in developing new strategic
relationships or that our strategic partners will view such relationships as
significant to their own business or that they will continue their commitment to
us in the future. Our business, results of operations and financial condition,
and our stock price may be materially adversely affected if any strategic
partner discontinues its relationship with us for any reason. Additionally, any
party to a strategic agreement with us may fail to perform its contractual
obligations and we cannot be certain that we could enforce any such agreement.
We do not generally establish minimum performance requirements for our strategic
partners but instead rely on their voluntary efforts. In addition, most of these
agreements may be terminated by either party with little notice. Therefore, we
cannot be certain that these relationships will be successful.
We have derived a significant portion of our revenues to date from
the sale of advertisements and intend to continue to do so in the future. If the
Web does not continue its development as an effective advertising medium, this
could have a material adverse effect on our business, financial condition and
results of operations. Intense competition in the sale of advertising on the Web
has resulted in a wide variety of pricing models, rate quotes and advertising
services, making it difficult to project future levels of advertising revenues
and rates. It is also difficult to predict which pricing models, if any, will
achieve broad acceptance among advertisers. Our strategy is to continue to
emphasize advertising as a method of generating revenues. Our current business
model is therefore highly dependent on the amount of traffic on our Web site.
This type of business model, however, is relatively unproven. The Internet as an
advertising medium has not been available for a sufficient period of time to
gauge our effectiveness as compared with traditional advertising media. Many of
our advertisers have only limited experience with the Web as an advertising
medium, have not yet devoted a significant portion of their advertising budgets
to Web-based advertising and may not find such advertising to be effective for
promoting their products and services relative to traditional print and
broadcast media. To date, advertising on the Web represented a nominal portion
of overall advertising revenues in the United States. Our ability to generate
significant advertising revenues will also depend on, among other things, our
ability to provide advertisers with a large base of users possessing demographic
characteristics attractive to advertisers as well as our ability to develop or
acquire effective advertising delivery and measurement systems.
The process of managing advertising within large, high-traffic Web
sites such as ours is an increasingly important and complex task. Any extended
failure of, or material difficulties encountered in connection with, our
advertising management system may expose us to "make good" obligations with our
advertisers, which, by decreasing saleable advertising inventory would reduce
revenues and have a material adverse effect on our business, results of
operations and financial condition. We license our advertising sales and
management system from DoubleClick Inc.. Any replacement of this system could
disrupt our ability to manage our advertising operations for a period of time.
In addition, to the extent that we encounter system failures or material
difficulties in the operation of this system, we could be unable to deliver
banner advertisements and sponsorships through our Web site.
As part of our business strategy, we review acquisition prospects that would
complement our existing business or enhance our technological capabilities such
as our recently completed acquisition of Resounding Technology. Future
acquisitions by us could result in potentially dilutive issuances of equity
securities, large and immediate write-offs, the incurrence of debt and
contingent liabilities or amortization expenses related to goodwill and other
intangible assets, any of which could materially and adversely affect
16
<PAGE>
our results of operations. Furthermore, acquisitions entail numerous risks and
uncertainties, including difficulties in the assimilation of operations,
personnel, technologies, products and the information systems of the acquired
companies, diversion of management's attention from other business concerns,
risks of entering geographic and business markets in which we have no or limited
prior experience, and potential loss of key employees of acquired organizations.
Our future success depends in large part upon our ability to aggregate and
deliver compelling content over the Internet. If we fail to aggregate and
deliver compelling third-party content to our users, Web traffic to our site
might decrease and, as a result, advertising revenue might decrease. This could
have a material adverse effect on our business, results of operations and
financial condition. Although we create some of our own content such as poker
and chess, we also rely on third-party content providers, such as game
developers, for entertaining content. Our ability to aggregate and deliver
compelling content provided by third parties may be adversely impacted by a
number of factors, including the following: third-parties may increase the price
of the content they provide, many of our third-party content providers compete
with us for members and advertising and may decide not to provide us with
content, our contracts with third-party content providers are usually short-term
and may be canceled if we do not fulfill our obligations, and our competitors
and many of our third-party content providers provide content that is similar or
the same as our content and may do so at a lower cost.
The performance of our server and networking hardware and software
infrastructure is critical to our business and reputation and our ability to
attract Web users, advertisers, new members and commerce partners to our Live
Communities. If system failures were sustained or repeated, our advertising
revenues, our reputation and the attractiveness of our brand name could be
impaired. Because we have incorporated third-party software into our systems and
we depend upon Internet service providers to provide consumers with access to
our products and services, we are limited in our ability to prevent system
failures. We have sustained system failures for significant periods of time and
may experience similar failures in the future. Users have also occasionally
experienced difficulties due to system failures unrelated to our systems. These
system failures caused an interruption in our Live Community services resulting
in less traffic.
Despite the implementation of security measures, our networks may be
vulnerable to unauthorized and illegal access, computer viruses and other
disruptive problems. Eliminating computer viruses and alleviating other security
problems may require interruptions, delays or cessation of service to users
accessing our Web sites, which could have a material adverse effect on our
business, results of operations and financial condition. A party who is able to
circumvent security measures could misappropriate proprietary information or
cause interruptions in our Internet operations. Internet service providers and
online service providers have in the past experienced, and may in the future
experience, interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or others.
We may be required to expend significant capital or other resources to protect
against the threat of security breaches or to alleviate problems caused by
breaches. Although we intend to continue to implement industry-standard security
measures, we cannot be certain that measures implemented by us will not be
circumvented in the future.
Our future success depends upon our ability to enhance our current products
and services and to develop and introduce new products and services that will
achieve market acceptance. If we do not adequately respond to the need to
develop and introduce new products or services, then our business, operating
results and financial condition will be adversely affected. The market for our
products is characterized by: rapid technological advances, evolving standards
in the Internet and software markets, changes in customer requirements, and
frequent new product and service introductions and enhancements. We cannot be
certain that we will be successful at integrating new technology into the Live
Communities and our HearMe Technology Products on a timely basis. In addition,
the integration of new technology may degrade the responsiveness and speed of
the Live Communities and our HearMe Technology Products and we cannot be certain
that, once integrated, the new technology will function as expected. Major
product enhancements and new products and services often require long
development and testing periods to achieve market acceptance. In addition, our
software products are complex and, despite vigorous testing and quality control
procedures, may contain undetected errors or "bugs" when first introduced or
updated. Any
17
<PAGE>
inability to timely deliver quality products and services could have a material
adverse effect on our business, results of operations and financial condition.
We currently sell the vast majority of our HearMe Technology Products and
services through our internal sales staff. If demand for our products and
services increases, however, we will need to enter into reseller arrangements
with Web development firms, enterprise applications resellers and OEM partners
to distribute our products and technologies. If we do not adequately develop and
maintain a network of resellers and OEMs, our business, results of operations
and financial condition could be adversely impacted. Resellers and OEMs
frequently have exclusive sales territories pursuant to individually negotiated
contracts, which may limit our ability to build and expand our network of
resellers and OEMs. In addition, some resellers and OEMs may offer products of
one or more of our competitors, and they may emphasize our competitors' products
at the expense of our products.
Also inherent in our business are additional risks, which include, but
are not limited to: competition in the market for Internet users and for Live
Community technology and services; our ability to successfully manage our
growth, our ability to hire and retain personnel, our ability to protect our
proprietary software and intellectual property, and patent, product liability
and OTHER LITIGATION. IN ADDITION, POTENTIAL new government regulations could
have an adverse effect on our ability to target product offerings and attract
advertisers and would have a material adverse effect on our business, results of
operations and financial condition.
ITEM 3.QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
The risk associated with fluctuating interest expense is limited, however, to
the exposure related to those debt instruments and credit facilities which are
tied to market rates. We do not plan to use derivative financial instruments in
our investment portfolio. We plan to ensure the safety and preservation of our
invested principal funds by limiting default risks, market risk and reinvestment
risk. We plan to mitigate default risk by investing in high-credit quality
securities.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the matter concerning Steve Perlman, a founder of Catapult, the
Company resolved this matter on September 24, 1999 through a Non-Exclusive
Patent License Agreement signed by the Company, Catapult, Mr. Perlman, WebTV and
Microsoft. The U.S. Supreme Court petition for certiorari will be abandoned by
Microsoft, WebTV, Mr. Perlman, the Company and Catapult as a result of the
Non-Exclusive Patent License Agreement.
The Company has filed a patent infringment suit against Lipstream Networks,
Inc. and Lipstream Networks, Inc., dba Delaware Lipstream Networks, Inc. in the
United States District Court, Northern District of California, San Jose
Division. On October 13, 1998, the Company was issued United States Patent No.
5,822,523, entitled "Server-Group Messaging System for Interactive
Applications". The action alleges that Lipstream infringes this patent through
the sale and licensing of its products. The Company is seeking a court order to
enjoin Lipstream from further sale or licensing of infringing products and is
also seeking to recover damages, attorneys fees and costs.
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of business, including
claims of alleged infringement of third-party
18
<PAGE>
trademarks and other intellectual property rights by us and our licensees.
Claims like these, even if not meritorious, could result in the expenditure of
significant financial and managerial resources and could materially and
adversely affect our business, financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities.
None
(d) Use of Proceeds from Sales of Registered Securities.
On May 4, 1999, the Company completed an initial public offering of its
Common Stock, $0.00005 par value. The managing underwriters in the offering were
BancBoston Robertson Stephens, Thomas Weisel Partners LLC, Warburg Dillon Read
LLC and Wit Capital Corporation (the "Underwriters"). The shares of Common Stock
sold in the offering were registered under the Securities Act of 1933, as
amended, on a Registration Statement on Form S-1 (the "Registration Statement")
(Reg. No. 333-72437) that was declared effective by the SEC on April 28, 1999.
The offering commenced on April 29, 1999, on which date, 3,900,000 shares of
Common Stock registered under the Registration Statement were sold at a price of
$18.00 per share. The Underwriters also exercised an overallotment option of
585,000 shares which closed on June 2, 1999. All 585,000 overallotment shares
were sold at a price of $18.00 per share. The aggregate price of the offering
amount registered and sold was $80,730,000. In connection with the offering, the
Company paid an aggregate of $5,651,100 in underwriting discounts and
commissions to the Underwriters. In addition, the following table sets forth the
other material expenses incurred in connection with the offering.
AMOUNT PAID
-----------
Securities and Exchange Commission registration fee ........... $ 50,000
NASD filing fee ............................................... 5,500
NASDAQ National Market listing fee ............................ 95,000
Printing and engraving expenses ............................... 245,000
Legal fees and expenses ....................................... 361,500
Accounting fees and expenses .................................. 189,700
Blue Sky qualification fees and expenses ...................... 3,000
Transfer Agent and Registrar fees ............................. 5,500
Miscellaneous fees and expenses ............................... 233,800
----------
Total ......................................................... $1,189,000
----------
After deducting the underwriting discounts and commissions and the
offering expenses described above, the Company received net proceeds from the
offering of approximately $73,900,000. The Company has used the net proceeds
from its initial public offering of Common Stock to invest in interest bearing
investment grade instruments and to fund the general operations of the Company.
In addition, the Company currently expects to use the net proceeds primarily for
working capital and general corporate purposes, including approximately $5.0
million for funding product development and approximately $5.0 million for
expanding its sales and marketing organization. In addition, the Company may use
a portion of the net proceeds for further development of its product lines
through acquisitions of products, technologies and businesses. None of the
Company's net proceeds of the offering were paid directly or indirectly to any
director, officer, general partner of the Company or their associates, persons
owning 10% or more of any class of equity securities of the Company, or an
affiliate of the Company.
19
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On October 22, 1999 the Company filed a report on Form 8-K dated
September 28, 1999 with respect to Item 5 thereunder.
On November 5, 1999 the Company filed a report on Form 8-K dated
October 20, 1999 with respect to Item 5 thereunder.
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.
MPATH INTERACTIVE, INC.
By: /s/ LINDA R. PALMOR Date: November 9, 1999
------------------------------------
Linda R. Palmor
Chief Financial Officer
(Principal Accounting and Financial Officer)
20
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<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
