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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR 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: 000-25399
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HEARME
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3217317
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
685 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------------- ----------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.00005 PAR VALUE
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $171,625,000 as of February 29, 2000 based upon the
closing sale price on the Nasdaq National Market reported for such date. Shares
of Common Stock held by each officer and director and by each person who owns 5%
of more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of outstanding shares of common stock, $0.00005 par value,
outstanding as of the close of business on March 16, 2000: 24,201,442
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference into
the following parts of this Form 10-K:
Proxy Statement for the Annual Meeting to be held on May 18, 2000--Part III.
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FORM 10-K REPORT
TABLE OF CONTENTS
PART I
Item 1. Business............................................ 3
Item 2. Properties.......................................... 22
Item 3. Legal Proceedings................................... 22
Item 4. Submission of Matter to a Vote of Security Holders.. 22
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters................................. 24
Item 6. Selected Financial Data............................. 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 25
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk......................................... 32
Item 8. Financial Statements and Supplementary Data......... 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 56
PART III
Item 10. Directors and Executive Officers of the Registrant.. 57
Item 11. Executive Compensation.............................. 57
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................... 57
Item 13. Certain Relationships and Related Transactions...... 57
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K......................................... 58
Signatures........................................................ 60
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PART I
THE DISCUSSION IN THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF SEVERAL
FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
ITEM 1. BUSINESS:
HearMe ("the Company") develops, operates and licenses technology that
is reshaping today's Internet applications into experiences through which people
can interact, connect and communicate using text, voice and video. Our
technology is enabling Web experiences through which people can gather to share
information, affinities, interests or ideas in "real-time"--in other words, the
communication, activity and related responses shared among users occurs almost
immediately and "live." These activities can involve people interacting
one-to-one or in large groups.
Our company develops and operates an Internet platform that allows
HearMe and its customers to build and deploy real-time Web experiences,
including those centered on voice. We license these technologies to other Web
businesses through a robust product line that offers a wide variety of
development and hosting options. These range from complex, large-scale
solutions, which we license to our corporate customers, to simple, free starter
products. In addition, we offer a variety of end-user products including Web
communications tools and two voice-enabled consumer sites or "communities."
HearMe believes that the immediate opportunity driving real-time
interaction online is live voice--interaction between people using a computer
microphone and speakers or a headset. Using live voice on the Internet, users
can use their own voices and other forms of sound to communicate, collaborate
and build community through a variety of activities based around sharing
information, communicating with business representatives and sales people,
conveying ideas, performing, meeting people and building relationships.
INDUSTRY BACKGROUND AND MARKET OPPORTUNITY
HearMe believes that the Internet is rapidly developing from a medium
for information and commerce to a tool for human interaction. In the early
stages of Internet development, activity on the Web was focused on
information--sites enabled Internet users to search and view Web sites
containing professionally created content on topics of general interest such as
current events, sports, weather and finance. Next came the emergence of the
Internet to a forum for online shopping or commerce, allowing Internet users to
buy all types of goods and services, from books and groceries, to clothes and
airline tickets--online. Finally, the Internet has emerged as a place in which
to share information, meet people and communicate.
HearMe sees some significant new developments in usage on the Internet
that are opening the doors for Web applications based on HearMe technology:
o Increasing popularity of instant messengers
(more than 60 million downloads of instant messenger software)(1)
(1)Based on publicly-released numbers from AOL ICQ and other
instant messenger providers
o Widespread use of e-mail as a communications medium (more than 10
billion e-mail messages sent each day)(2)
(2)IDC Research Statistics
Initial forms of Web-based communication such as user-created Web sites,
free e-mail, user-defined bulletin boards and e-mail have now evolved into rich,
real-time text chat, instant messengers or group meeting applications. As a
result, the Web is becoming a place through which people can now communicate,
collaborate and build community-live. Internet users are rapidly learning to use
the Internet as a place to share ideas and interests, gather information, meet
people, perform and communicate directly with merchants, educators and service
providers. And because of the unique nature of the Internet, communication and
collaboration can be much more interactive and engaging than ever before.
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LIVE VOICE BENEFITS FOR WEB
While older forms of real-time interactivity have been compelling, such
media have had inherent limitations. Until now, mostly text-based forms of Web
communication such as text chat and now instant messaging could be impersonal
and laborious. Voice technologies are "human" and more personal, thus conveying
emotion and feeling through the sound and inflections in the human voice.
Through PC microphones and speakers, people are communicating and collaborating
with co-workers, business representatives, family, friends and strangers, in a
way that is simple, comfortable, faster and more natural than the type-written
word.
LIVE VOICE APPLICATIONS AND BUSINESS BENEFITS
HearMe envisions three kinds of applications for live Web interaction
centered on voice:
o COMMUNICATIONS: Live voice can combine the qualities of the
telephone with the interactive qualities of the Internet. It can be
used for personal one-to-one communications because it is simple
and can be less expensive than traditional communications. HearMe
believes live voice and real-time interaction are particularly
compelling for Internet users because they can be integrated with
other media such as text, spreadsheets, Web site browsing and even
video along with voice.
o EMBEDDED WEB EXPERIENCES: Live voice can be embedded into Web
experiences where live online interaction becomes part of something
else people are doing on the Internet: which they are doing when
they visit a Web page. For example, on an e-commerce shopping site,
voice can be part of the shopping experience where a person can
talk to a customer service representative. By embedding live voice
into a web experience, it can become richer, more personal and more
compelling, enhancing the content and the experience.
o COMMUNITY WEB EXPERIENCES: In a community experience, people visit
a Web site to participate in various affinity groups. While online
they share interests or affinities, meet new people, or build
relationships based around topics. These may include such community
groups as women's groups, fan clubs and even support groups such as
Alcoholics Anonymous.
Evaluation of the use of live voice by early adopters signals important
trends beneficial to Web businesses. Web sites enabled with live voice are
experiencing large amounts of traffic and increased usage in terms of the amount
of time spent on a site (user minutes)--making live voice one of the "stickiest"
applications on the Internet (in other words, it keeps people there; encouraging
them to "stick" to a site). People using voice-enabled services from HearMe are
spending over 400 million minutes per month in total using voice-enabled
services. HearMe's own consumer Web properties are now ranking among the top
sites on the Internet in terms of total user minutes, according to Internet
measurement firm Media Metrix HearMe's voice-enabled services are now ranking
higher than many leading e-commerce, news and content sites. In addition,
consumers are continuing to adopt voice-enabled services at a rapid rate,
demonstrating the ability of voice to attract usage. HearMe's own voice-enabled
services have now attracted more than seven million registered members.
Consumers and Web businesses can both benefit from HearMe's innovative
live voice technologies. We believe that live voice has the potential to
enhance virtually any type of application including:
o E-commerce sales fulfillment
o Customer relationship management and technical service
o Consumer communities
o Distance learning
o Live auctions
o Business-to-business collaboration
o News and information feeds
o Entertainment and multiplayer games
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HEARME SOLUTION AND VALUE PROPOSITION
HearMe's mission is to enrich the online experience by enabling Web
sites and Web users with real-time communications capabilities that are centered
around live voice. The Company currently brings voice to the Internet in the
following ways:
TECHNOLOGY FOR LIVE VOICE ON THE INTERNET
The Company develops and operates technologies and an infrastructure to
support live voice interaction across the Internet. HearMe now offers a
third-generation platform that it has been building upon since 1995. Its core
technologies, many of which are already protected by patents, eliminate many of
the barriers associated with delivering real-time communication and interaction
on the Internet. Communication tools such as text chat applications and instant
messengers are already incorporating HearMe technology to enable real-time voice
interaction among multiple people. The technologies that HearMe develops are
already enhancing a wide range of Internet applications including e-commerce,
live customer support, business-to-business collaboration, distance learning,
entertainment and consumer communities. Our technology can be deployed across a
vast network, such as the Internet and can support thousands of users at the
same time, without additional investment or cost.
VOICE PRODUCTS LICENSING
Through our HearMe Technology Products and Licensing business unit, we
license our proprietary technology to Web businesses and provide services for
building business-to-consumer and business-to-business sites that may be either
self-managed by the third party or managed by us. We derive revenue by licensing
our base technology, development platform and operating services for a fee to a
growing customer base of online companies. The licensing business unit is
dedicated to delivering proven online technologies and services that enable the
creation of full-featured, real-time experiences on the Internet centered around
voice. Typically, we structure licenses based upon the number of peak
simultaneous users of the related software. We offer our customers broad
technological expertise in networks, operations, information systems,
integration technologies and the customer support capabilities necessary to
deploy live multi-participant applications rapidly and to manage large Internet
communities.
LIVE VOICE SERVICES FOR WEB USERS
HearMe also operates a variety of voice-based services targeted directly
at Internet users. Our end user products currently fall into two categories:
communications products and consumer communities (HearMe Live Communities).
We offer personal communications products that facilitate instantaneous
voice communication between people. In March 2000, HearMe released
VoiceCONTACT(TM) a simple voice communications tool that connects people to
real-time voice conversations by taking advantage of e-mail. HearMe also
operates voice-enabled consumer Web sites, HEARME.COM and MPLAYER.COM that serve
as gathering places where multiple users interact with each other in real-time.
People who visit community sites meet and interact with other people with
similar interests and backgrounds. People use our voice and other technologies
to talk, play games, perform and share information.
All of our end user products are currently offered at no charge. In
certain cases, we offer free services in exchange for the ability to serve
advertisements to our members. In other cases, we plan to sell upgrade products,
which offer additional functionality and features for which we will charge
premium fees.
HearMe believes that our combination of robust technologies,
comprehensive licensing products and compelling consumer products will keep the
Company at the forefront of real-time interaction on the Web.
HEARME STRATEGY
DRIVE MARKET DEMAND FOR LIVE VOICE AND BUILD MARKET SHARE AND BRAND NAME
RECOGNITION
HearMe provides the market with cutting-edge technologies and products
that are teaching Internet users that voice is THE way to interact online.
HearMe offers a variety of Internet services to end users and Web sites for free
as part of a strategy to drive consumer demand and speed the acceptance of live
voice. HearMe believes that as
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consumers become familiar with technologies that can improve their online
experience, they will begin to demand a new level of service from businesses
that are interested in gaining their loyalty. By offering a solution that
perpetuates the live voice experience easily, we hope to make voice a regular
part of Web usage--a standard for Web communication that consumers will demand
from every other Web site and service they visit.
VOICECREATOR(TM)
In November 1999, HearMe unveiled its suite of products based on a
"VoicePRESENCE(TM)" platform that enable voice communication on the Internet.
VoiceCREATOR the first product to be launched, is an easy-to-use product for
adding voice to any type of Web site. With VoiceCREATOR, people who have
developed a Web site--ranging from personal home page creators to Web
businesses--can easily add voice capabilities with no formal programming
experience and just a few lines of Web code (HTML).
VOICECONTACT(TM)
At the beginning of March 2000, HearMe launched VoiceCONTACT, a new
product that leverages e-mail to facilitate an instant live voice connection
between family, friends and business associates on the Internet, either
one-to-one or in groups. VoiceCONTACT allows users to invite other people to
join an instant or scheduled voice conversation by providing an easy-to-use
voice link to other people through e-mail. By taking advantage of e-mail, a
familiar communications tool and by eliminating many of the obstacles associated
with the process of downloading and installing software, VoiceCONTACT has the
potential to expose millions of new Internet users to the rich experience of
live voice communication.
As of the beginning of year 2000, users are spending over 400 million
minutes per month using voice-enabled services from HearMe. Consumers are
continuing to adopt voice-enabled services at a rapid rate, demonstrating the
ability of voice to attract usage. HearMe's own voice-enabled services have now
attracted more than seven million registered members.
Through innovative strategies and products for driving "viral" marketing
and word-of-mouth adoption, HearMe's sites have already made live voice
available to millions of registered users.
As businesses work to build stronger customer relationships, understand
consumer behavior and increase Web-based sales, adding compelling applications
like voice have the potential to drive site "stickiness" and traffic. Already,
more than 50,000 Web sites have registered and received HearMe software to bring
voice-enabled applications to their sites. With products like VoiceCREATOR and
VoiceCONTACT exposing consumers to free, easy-to-use voice-enabled experiences,
HearMe's goal is to drive the market for voice by changing consumer perception
and habit.
HEARME.COM AND MPLAYER.COM
Since 1996, HearMe has been operating voice-enabled services. The
Company's first service, Mplayer.com(TM), offered multiplayer game experiences
that were enhanced with live voice. Witnessing tremendous uptake in voice
interaction on MPLAYER.COM, the Company launched HEARME.COM(TM) in the beginning
of 1999, a real-time community dedicated specifically to voice interaction.
Through HearMe.com and MPLAYER.COM, HearMe is hosting a variety of new online
activities based around live voice including friends and family conferencing,
foreign language speaking practice, club meetings and online singing (karaoke).
LEVERAGE MARKET POSITION TO EXPAND LICENSING OPPORTUNITIES
By driving market adoption of live voice through both our end user and
products for Web sites, HearMe hopes to expand its technology licensing business
in the following ways:
o DRIVE DEMAND OF VOICE ON OTHER SITES: By offering end user
products and other free products, HearMe hopes to make voice a
regular part of the Web experience. As more and more consumers
become familiar with voice technologies, we believe that it
will become their preferred mode of communication and
interaction online. As this happens, we believe that consumers
will begin to demand voice-based interaction from the many Web
sites they visit regularly. As consumers begin to demand voice
experiences, we hope to open the market for our products.
Through our years of experience in this area, we have learned
that operating voice experiences requires significant
resources, time and expertise and
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that sites will turn to us to meet market demand because our
products offer flexibility and give them the ability to
bring voice services to market quickly.
o TARGET LARGE INSTALLED BASE. By offering free end user
products, we also plan to implement a business model based on
premium products that initially we offer for a small fee. With
our VoiceCONTACT communications product, we are using e-mail
and low cost marketing efforts to spread widespread adoption.
As consumers become more familiar with voice and real-time
interaction, we believe they will want newer products with
added functionality and services. HearMe plans to build this
added functionality into our premium products.
CREATE STRATEGIC PARTNERSHIPS TO DRIVE WIDESPREAD ACCEPTANCE OF OUR PRODUCTS
To drive usage of live voice and familiarize the market with the HearMe
products and brand, HearMe has formed partnerships with industry-leading Web
sites to bring our technology to a broad audience. HearMe has formed recent
partnerships with such companies as CBS Marketwatch.com, Talk City,
Homestead.com, FortuneCity.com and theglobe.com to integrate the HearMe
VoiceCREATOR product into their offering. Each of these partners hosts millions
of unique monthly visitors to their sites and, as a result of these
partnerships, live voice from HearMe is being offered to home page creators and
end users who want to add live voice to their Internet experiences. Through
technology distribution deals with companies like FaceTime Communications and
Prospero Technologies, HearMe is further expanding access to its VoiceCREATOR
products. FaceTime and Prospero have formed distribution agreements with HearMe
in order to offer HearMe's voice tools to their many Web site partners and
customers.
LEVERAGE END USER PRODUCTS AND FREE SERVICES TO ENHANCE EXISTING TECHNOLOGY
By operating voice and real-time interactivity services that are free
and targeted at end users, HearMe gains significant experience that it
incorporates into its technology development. We believe that our own operation
of end user products allows us to better understand how consumers use voice
technologies and use this knowledge to develop new feature sets and interfaces
for our products. In addition, by offering these products for free, we can build
a large user base. This allows us to test our technologies and their ability to
support millions of users. This in turn translates into significant benefits for
our technology customers. We can provide our customers with technologies that
are already tested in the marketplace. Over time, we will continue to use these
services to build upon our existing technologies and translate this knowledge
into benefits for our customers.
SUPPORT INDUSTRY-LEADING STANDARDS, PLATFORMS AND DEVELOPMENT TECHNOLOGIES
To make live voice technology widely accessible by Web businesses,
application developers and end users, HearMe supports an array of development
platforms, programming languages, operating systems and communications
protocols. HearMe's enabling technology is compatible with multiple operating
systems including Windows 95, 98, 2000 and NT, Mac, Solaris and Linux. Web site
and Web application developers can integrate HearMe's live voice technology
into HTML, Java, Shockwave and C++ programs. In addition, we have formed
strategic partnerships with leading technology partners to make it easier for
Web businesses to adopt our technology. In early 1999, we formed a partnership
with Macromedia to integrate our technology with their Director platform and
make our own development technologies readily accessible to Macromedia's large
audience of Web developers. We believe this dramatically increases the
accessibility of our licensing products. We utilize Active X and Netscape
Plug-ins to easily integrate our live voice technology into commonly available
Web browsers in a secure manner. Lastly, HearMe is pursuing efforts in the IP
Voice and Telephony space to ensure that our technology is compliant and
interoperable with widely accepted industry standards such as SIP and H.323.
BUILDING AND ACQUIRING COMPLEMENTARY TECHNOLOGIES
In 1999, HearMe acquired Resounding Technologies, Inc. bringing to the
Company complementary voice technologies. We intend to continue our efforts to
explore complementary technologies by pursuing opportunities that may accelerate
our development process where appropriate.
HearMe plans to continue to follow the evolution of emerging
technologies such as real-time video as the emergence and accessibility of
consumer broadband services open the doors for richer, more interactive
experiences. Through new product development, we are continually enhancing our
platform by improving our user interface and increasing the accessibility of our
products. Our goals are to lessen the amount of effort required by end users to
use
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our technologies. We strive to achieve this by limiting the amount of
software that users must download in order to use the services and by
eliminating many of the steps associated with installing and running new
software.
HearMe continues to build new technologies to enhance real-time and
voice-based Internet experiences. During 1999, we continued to explore new ways
to enhance real-time interactivity, introducing live video chat technology on
our HEARME.COM consumer community.
BUILD UPON INDUSTRY-LEADING TECHNOLOGY
HearMe has built industry-leading technology that is already hosting
some of the largest voice networks. We plan to continue our development efforts
to keep our products competitive as the market for live voice applications
evolves.
PRODUCTS AND PROPERTIES
HearMe offers a broad, flexible range of technology products to enable
Web businesses to take advantage of the live voice opportunity. By adding
real-time voice capabilities to their sites, Web businesses can add personal
experiences that attract visitors, drive increased usage and encourage repeat
traffic. HearMe customers benefit from HearMe's third generation technology with
proven ability to scale and support high-quality voice traffic and the Company's
understanding of the intricacies of building, hosting and managing a
voice-enabled site.
VOICE PRODUCTS FOR INTERNET BUSINESSES
HearMe's technology product line-up offers three product families with
different levels of functionality that can be easily integrated:
VoiceCREATOR(TM), VoiceNETWORK(TM) and VoiceSERVER(TM). The solutions that fall
into these three families allow organizations to add live voice capabilities to
any type of site, build or offer a live voice network and design applications
that leverage voice to enhance end users' online experience. The structure of
the product line gives Web businesses the flexibility to select and purchase the
HearMe technology for their given need--from easy and basic voice integration to
robust, full featured solutions with maximum levels of control and integration.
Customers with limited technical expertise can take advantage of very simple
voice solutions that are managed by HearMe. At the same time, customers that
want to develop and maintain complex voice applications on their own servers can
also use HearMe technology.
HEARME VOICECREATOR PRODUCTS
HearMe Voice CREATOR products allow organizations to add live voice to a
Web site. This solution incorporates the HearMe VoicePresence technology
platform and is an easy way to add live voice to any Web site. Requiring just a
few lines of HTML code, HearMe VoiceCREATOR enables conversations on a
HearMe-hosted server in a matter of minutes.
HEARME VOICENETWORK.
With the HearMe VoiceNETWORK, HearMe hosts and manages all voice
traffic, freeing the developer from the hassles of dealing with scaling, traffic
management and other back-end issues. For VoiceCREATOR Basic customers, access
to the HearMe VoiceNETWORK is free and automatic. For other customers, HearMe
offers access to the VoiceNETWORK based on monthly usage and licenses a network
integration kit.
HEARME VOICESERVER PRODUCTS
HearMe VoiceSERVER products allow organizations to build and host their
own live voice network and/or develop their own interactive voice-enabled
applications for such applications as e-commerce sales support, customer
service, distance learning, business-to-business collaboration and
entertainment. Products include:
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HEARME VOICESERVER--VoiceSERVER provides software for Web sites seeking
maximum control over their voice infrastructure and voice service
levels. The product enables easy deployment of current and future
voice-enabled applications and is ideal for organizations deploying
applications via their intranets.
HEARME VOICESERVER PRO-- The Pro solution builds upon the HearMe
VoiceSERVER and allows corporations to develop their own
massively-scalable, voice-enabled interactive applications.
PLATFORM FOR REAL-TIME INTERACTIVITY
POP.X(TM) (short for POPulation eXplosion), is our real-time technology
product built on the experiences and knowledge obtained from development of the
original architecture implemented for MPLAYER.COM. The POP.X product has an open
architecture, which means it can be installed and can run on any computer
platform. POP.X allows companies to build real-time community applications that
are easy for consumers to use without being concerned about also building the
numerous components necessary to support those applications. These components
typically consist of the ability to register new users, authenticate repeat
users, manage user-generated information and scale the service to support
thousands of users at the same time.
POP.X enables the rapid deployment of mass-consumer, real-time
interactivity applications on the Internet. The POP.X technology permits users
to quickly access real-time interactivity applications without the need for user
installation, thereby increasing customer acquisition and retention. When a user
first visits a Web site that uses POP.X, the user's browser downloads a
lightweight Webtop from the Web site's server. This lightweight Webtop receives
user input, displays graphics and plays sounds associated with live community
applications. The POP.X application, which resides on the Web site's server,
processes the bulk of the information required to enable the live community
application. In particular, the Web site's server guides media assets, such as
text, graphics and sound, to an individual user's PC when needed and
communicates data between multiple users' PCs in real-time.
Using the POP.X technology, developers can create and deploy live
community applications in a significantly shorter time frame and can instead
focus on creating such applications without being concerned about the inherent
operating restrictions of the Internet. POP.X enables communities to scale
rapidly without large technology or staffing expenditures, permits content to be
easily and rapidly changed and refreshed and provides for key data analysis
capabilities. POP.X allows a complete online service to be easily constructed
out of multiple small, component applications, without the developer having to
become an expert in the details of how to design a service that can reliably
scale to support thousands of users or how to develop a service that permits
these users to communicate with each other at the same time. For example, a
typical online service would consist of three core applications: a chat
application which implements a single chat room, a lobby manager which allows a
user to browse through a list of rooms and a pager application which allows
users to reach each other to determine where they are. With POP.X the
developer's focus would be on the creation of the three distinct user
experiences, without concerns about how they would work and inter-operate. In
addition, given that many Web publishers have significant existing online sites
and services, POP.X's open architecture supports existing industry standards for
application development and for the integration of POP.X with older computer
systems and programs, with well-defined and documented interfaces and APIs.
PRICING
HearMe pricing structures are based on a flexible model. For the
VoiceCREATOR basic product there is no charge for sites wanting to test the
voice experience. Site operators who want to customize their offering, embed
voice into applications, control their own voice traffic and scale to support
many users can license HearMe technology for a flat fee based on simultaneous
usage with annual maintenance fees. For all other business products, generally
a license fee is charged based upon simultaneous users, together with an annual
maintenance fee.
END USER SERVICES AND PROPERTIES
HearMe offers two types of products for Internet end users.
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VOICECONTACT(TM)
In March 2000, HearMe launched VoiceCONTACT, a new
product that leverages e-mail to facilitate an instant live voice connection
between family, friends and business associates on the Internet, either
one-to-one or in groups. VoiceCONTACT allows users to invite other people to
join an instant or scheduled voice conversation by providing an easy-to-use
voice link to other people through e-mail. By taking advantage of e-mail, a
familiar communications tool and by eliminating many of the obstacles associated
with the process of downloading and installing software, VoiceCONTACT has the
potential to expose millions of new Internet users to the rich experience of
live voice communication.
MPLAYER.COM AND HEARME.COM
HearMe has developed and operates two voice-enabled consumer web
properties for end users, MPLAYER.COM and HEARME.COM. Our services on these two
sites are free to our registered members. To join, users log on to the
MPLAYER.COM and HEARME.COM Web sites, complete a short registration form and
download the client software for MPLAYER.COM and HEARME.COM either from the Web
site or a retail CD-ROM.
In October 1996 we launched MPLAYER.COM a premier live entertainment
service on the Internet. The MPLAYER.COM service now consists of three
interactive communities that are built around common interests and offer some of
the most popular online multi-participant games.
In January 1999, we launched HEARME.COM, our second live community
service. HEARME.COM is currently comprised of a number of live communities,
making live audio and voice interaction available to people whose interests
extends beyond entertainment. We have extended the HEARME.COM service through
relationships with Web sites that want to offer live voice communities to their
members.
We generate the substantial majority of revenues from our consumer web
properties by selling advertisements. MPLAYER.COM offers over 100 games for
online play, more than any other Internet game and entertainment service. These
games cover a wide range of interests including action, strategy, simulation and
sports with top retail titles such as Rainbow 6, Quake I II & III, Total
Annihilation and Unreal. The retail games are licensed from leading game
publishers such as Activision, Eidos Interactive, Electronic Arts, Hasbro
Interactive, Id Software, MGM Interactive, Mindscape, THQ and The 3DO Company.
For certain titles, users must purchase the CD-ROM from the publisher to play on
MPLAYER.COM, while for other games a free shareware version of the game can be
downloaded from MPLAYER.COM. Unlike most other online game services, the
MPLAYER.COM technology offers multi-player games with quick response times
which, combined with MPLAYER.COM's easy-to-use software, has enabled MPLAYER.COM
to be one of the leading live entertainment services on the Internet. In
addition to its retail games, MPLAYER.COM offers over a dozen classic board and
card games, such as checkers, backgammon, hearts and spades, most of which can
be downloaded for free. These games in the aggregate generate approximately the
same amount of usage as retail games. Many of these games offer in-game text and
live voice chat, allowing players to speak with one another using their
microphones during game play.
Our consumer Web services also offer a rich set of community features
including voice and text chat, instant messaging, member profiles, ranking,
tournaments, member submitted editorial, a bulletin board service and hosting of
member game fan sites. MPLAYER.COM and HEARME.COM live voice allows members to
speak with one another in real-time and requires only a microphone to be
connected to their PC. HEARME.COM enables many popular community activities
including live concerts, live auctions, group conferencing, help desk
applications, distance learning, multi-player games and more.
We believe MPLAYER.COM and HEARME.COM together offer one of the widest
ranges of opportunities to advertisers and Internet retailers available on the
Internet today. Advertisers may choose among several options to achieve both
branding and direct marketing objectives. Our live communities offer advertisers
rich 3D and audio advertisements, targeting based on consumer data and the
ability to obtain direct customer feedback and research on the impact of
particular advertising campaigns. In addition, Internet retailers can offer
their products directly to targeted consumers in a variety of vertical markets.
Our consumer community advertising products include:
o TV-style full-screen advertisements, which, according to an
industry analysis, are the best way to brand products and services
on the Internet.
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o the Pop-Up Box, which is a web page that is shown to all registered
members when they log-on. It drives high request rates for
advertisers on our live communities.
o the WebViewer, which is a web page that provides direct traffic to
the advertiser's Web site and allows our registered members to surf
within it without having to leave MPLAYER.COM or HEARME.COM.
o sponsorship of lobbies, channels, pagers and events, which provide
advertisers with persistent visibility and branding.
o member portraits, which are pictures of advertisers' logos and
icons that our registered members choose to represent themselves
online.
o e-mail newsletters, which our members can use to connect directly
to the advertiser's Web site.
o banner advertisements, which are traditional Web advertisements
that are approximately 1 inch wide by 5 inches long and have the
ability to connect viewers directly to the advertiser's Web site.
Due to the attractiveness of our demographics and our ability to provide
a variety of forms of advertising to our visitors, we have also made
arrangements with a network of sites including MPLAYER.COM and HEARME.COM, the
Mplayer Entertainment Network, for which we sell and serve advertising.
According to Media Metrix, the Mplayer Entertainment Network received more than
4.3 million unique visitors in the month of December 1999.
In addition to generating advertising revenue, HearMe earns revenue by
providing lists of its members who choose to subscribe to opt-in mail programs.
The Company also has an arrangement with ZENGINE, a subsidiary of MIAMI
COMPUTER SUPPLY INCORPORATED whereby Zengine supports the Company's e-commerce
business that is currently centered on the sale of computer games and peripheral
equipment and is marketed as the Mplayer Store.
TECHNOLOGY FOR REAL-TIME INTERACTION AND LIVE VOICE ON THE INTERNET
HearMe has developed proprietary technology for enabling live
person-to-person and large group interaction across the Internet. This
technology makes it possible to enable quality real-time experiences over large
networks where sending large amounts of graphics and multimedia-rich is limited
by bandwidth constraints and communication delays. In addition, HearMe
technology is flexible enough to be deployed for a wide variety of business and
consumer applications.
Since 1995, HearMe has invested over $20.3 million in technology
research and development to deliver compelling real-time experiences. Unlike
traditional forms of Internet content and communication such as web pages, email
and broadcast "streaming" media, real-time interactive content requires seamless
management of network latency, bandwidth, scale and the overall client
experience. Conventional communication, collaboration and community experiences
require relatively simple technology such as Web servers, Java and e-mail
servers. Real-time experiences and voice communications require highly
sophisticated technologies that manage the delivery of rich media such a text,
graphics and sound over the Internet to thousands of people at the same time and
minimize the time it takes to transmit and receive the data so that users who
participate in a real-time experience do not experience delays.
LATENCY MANAGEMENT TECHNOLOGY--HearMe technologies and network
infrastructure are designed to provide the highest quality experience possible
for a real-time Web communication or collaboration application. HearMe's own
latency management technology minimizes the time it takes to transmit and
receive data so that users who participate in real-time experiences do not
experience delays that hinder the quality of the experience. In addition, we
operate a large, distributed infrastructure, a network of large computers
located across the country that run real-time applications utilizing patented
"matchmaking" techniques. Live two-way and multi-point connections are made
through this network of servers distributed across the Internet.
BANDWIDTH MANAGEMENT TECHNOLGY--HearMe client and server technologies
have been designed to allow the delivery of real-time rich media content such as
voice, video and animation to multiple participants over typical consumer
Internet connections (speeds of 28.8 Kbps). Besides improving the overall
quality of the experience, our bandwidth optimizing techniques reduce network
traffic and transmission costs.
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SCALABLE TECHNOLOGY--HearMe's distributed network is designed to scale
for massive growth, balance communication load and gracefully handle network
outages and hardware failures. We currently manage some of the Internet's
largest interactive networks, managing thousands of simultaneous connections
delivering close to three billion usage minutes in 1999. In addition, our
servers are flexible enough to handle a wide variety of content formats from
text and graphics, to voice and video data. This flexibility provides HearMe the
ability to adapt quickly to changing standards and new data types as they become
available.
CLIENT EXPERIENCE TECHNOLOGY--HearMe has gained valuable experience from
developing and managing consumer services on top of its core technology. As a
result, HearMe technologies encompass real-world solutions such as automated
software installation and configuration, intelligent versioning management for
handling complex software distribution issues, background updating and network
connection management.
BUSINESS INTEGRATION TECHNOLOGY--Out software technology provides
interfaces for commercial software packages, such as databases, billing systems
and advertising tracking and rotation systems.
PATENT-PROTECTED TECHNOLOGY--HearMe has invested a significant effort
and resources to protect the innovation of its technical teams. Since its
inception in 1995, the company has aggressively pursued patent filing activities
to protect its technology for the Company and its customers. To date, HearMe
technology is currently protected by 11 issued patents with 15 additional
patents pending.
We believe that we have created a significant barrier to potential
competitors in the area of real-time interactive technology. This barrier is
comprised of multiple parts. The broad range of skills and technologies needed
to enable real-time interaction is difficult to assemble in a single company. We
have accumulated multiple years of development experience. We aggressively
protect our intellectual property and continue to heavily invest in new
technology development.
In an ongoing effort to develop and acquire core technology for enabling
real-time interaction, in September 1999 we acquired voice technology competitor
Resounding Technology, a privately held technology developer in Massachusetts
that develops and distributes the Roger Wilco(TM) voice communications software.
The acquisition gave us access to new voice technologies, client development
expertise as well as seasoned engineering talent.
Research and development expenditures were $7.9 million, $3.1 million
and $2.4 million for years ended December 31, 1999, 1998 and 1997 respectively.
MARKETING AND SALES
INTEGRATED BRAND AND PRODUCT MARKETING
TARGETED NATIONWIDE MARKETING CAMPAIGNS
In September 1999, HearMe announced that the Company had changed its
name from Mpath Interactive to HearMe in an effort to centralize its messaging
and brand. The goal was to simplify the message and build a strong story around
the Company's core competencies--mainly live voice. Since that time, HearMe has
been aggressively building upon its marketing efforts to establish the Company's
leadership position in live voice.
HearMe has recently increased staffing of its internal and external
marketing resources and major advertising and marketing campaigns with the main
objectives of:
o Building upon its leadership position in live voice
o Building the HearMe brand
o Driving market adoption and usage of HearMe technologies
o Communicating the inherent benefits of HearMe technologies and
services for Web businesses
o Communicating the live voice value proposition
HearMe participates in trade shows, conferences and seminars and
provides product information through Web sites. The Company places online
advertising pieces through electronic media and participates in public relations
activities and drives reach programs through targeted direct mail and sponsors
special reseller and developer
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programs, including its own conference, which this year was the SHOUT 2000
conference. These programs are primarily targeted at driving awareness of HearMe
technologies amongst Web businesses, creating brand recognition and stimulating
reseller and developer engagement with HearMe's products and services.
TECHNOLOGY PRODUCTS SALES STRATEGY
DIRECT AND INDIRECT DISTRIBUTION
To reach as many customer segments as possible and broaden the customer
penetration of our technologies for live voice and real-time interaction, HearMe
markets its products and services through both direct and indirect distribution
channels, domestically and internationally. In addition to addressing the needs
of Web businesses seeking a complete system for developing and deploying live
communities applications, HearMe has implemented a strategy to meet the needs of
customers with specific application requirements. As such, HearMe has
implemented developer marketing programs targeted at creating a variety of
highly customizable applications based on the HearMe POP.X and live voice
platforms. These applications include live voice chat, pagers, classic games,
event auditoriums and data analysis tools that are designed to complement a Web
publisher's existing content.
SALES FORCE
HearMe's direct sales force sells and markets our voice and
interactivity technologies by marketing directly to Web businesses and Web
technology providers in the following industries worldwide: electronic commerce,
business-to-business collaboration, Web conferencing, Web-based customer
support, distance learning and communities. In these industries, our customers
may range from actual Web site companies to Web technology providers or Web
development agencies that create and manage Web sites for major corporations.
The direct sales force consists of regional account managers and
technical sales engineers, supported by in-house technical marketing and
customer support organizations.
HearMe's reseller channel was established to create broader customer
penetration and drive application development. We have established relationships
with three classes of resellers including:
o Developer Partners focused on developing and selling HearMe live
voice and POP.X applications;
o Enterprise Partners delivering a full service solution to Web
content publishers including creative development, infrastructure
and operations; and
o OEM Partners creating online products that incorporate live voice
and other POP.X components into their own products and services.
Reseller programs are targeted at penetration of target sectors.
CUSTOMERS
In 1999, CSK Sega accounted for 14% of total revenues. In 1998, CSK
Sega, Sony and Electronic Arts accounted for 23%, 12% and 10% of total revenues
respectively. In 1997, CSK Sega and Sony accounted for 35% and 11% of total
revenues, respectively.
CONSUMER WEB COMMUNITIES (LIVE COMMUNITIES)
The marketing strategy for MPLAYER.COM and HEARME.COM emphasizes two key
objectives. The first is to provide consumers with online communities in which
they can socialize, create their own experiences, engage in activities and
events and play multi-player games. The second is to provide online advertisers
with opportunities to reach this attractive, targeted audience with innovative
advertising products. We also market additional value-added services and
products to MPLAYER.COM users.
We market advertising opportunities on our live communities to the
advertising industry through Web advertisements, trade shows, direct mail,
advertising in the trade press and general public relations. We intend to expand
our sales force in 1999 and to open new sales offices in locations that can
target attractive market segments.
We market MPLAYER.COM to consumers through Web advertising and publicity
in consumer publications and Web sites. The Web advertisements are primarily
placed on entertainment and community Web sites, which attract a similar
psychographic and demographic audience as MPLAYER.COM. Our survey data indicates
that over 90% of the
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participants in our sports and gamers communities are male and the people within
those communities are typically between the ages of 13 and 50; however,
approximately 40% of the participants in our classics and casino community are
women and the people within that community are typically between the ages of 25
and 50. The public relations activity is focused on consumer publications such
as Internet magazines, game magazines, news magazines, entertainment magazines
and newspapers. We are following a similar strategy for HEARME.COM. Currently,
over 40% of the participants on our HEARME.COM service are women and the people
within the service are typically between the ages of 13 and 55. In addition, the
significant majority of retail games offered on MPLAYER.COM contain a "button"
on the CD-ROM version of the game linking to MPLAYER.COM.
Our marketing and sales organization is also responsible for acquiring
and developing original content for our live communities. We establish and
maintain relationships with the world's leading computer game developers,
enlisting their content for distribution on the MPLAYER.COM service while
creating our own content for distribution within our live communities. In
addition, we attract and retain our members on both the MPLAYER.COM and
HEARME.COM services by encouraging member-created content, hosting contests and
events and building information-oriented Web pages.
Once a consumer becomes a registered member of our live communities, we
begin to market value-added services and products to the consumer, including
premium services, pay-per-play games and online purchasing of software and
hardware products. These products are marketed to the consumer directly through
Web and e-mail newsletter advertising and are sold online.
OPERATIONS AND INFRASTRUCTURE
The network for our Live VoiceNetwork and our real-time communities is
managed from our headquarters in Mountain View, California. This network
supports our end user products, our consumer communities and technology
customers that do not want to host the voice traffic themselves. The central
services are co-located with Exodus Communications, a provider of Internet
system and network management solutions. Our central services utilize three Sun
enterprise-class servers consisting of a Master Control Program machine, a
member database machine and a data warehouse machine. In addition, the central
services utilize more than 3 dozen servers for functions such as matchmakers,
webservers and information logging and matchmaking.
We also deploy numerous network servers across multiple locations at
Exodus, PSINet and Frontier co-location sites. Our agreements with Exodus
Communications, PSINet and Frontier are not material as alternative sources
exist for these services. The voice network and community servers are located as
close as feasible to network interchange points to facilitate improved
connectivity and lower latency. In general, the network topology for our
services is designed to provide easy scalability and reduce network downtime.
Our distributed architecture for our network servers enables our services to
continue operations even in cases of severe Internet outages as long as some
connectivity to our central service facility remains functional. The
architecture also ensures optimal performance for users during voice chatting
and game play. We intend to expand our infrastructure as necessary to meet the
demand for our products and services.
The Operations department is comprised of four groups: the Information
Systems Group, the System Administration Group, the Network Operations Center
Group and the Customer Support Group. The Information Systems Group is
responsible managing our corporate desktop systems while our System
Administration Group is responsible for web services, network infrastructure,
consumer communities administration and HearMe technology products
administration. The Network Operations Center group is responsible for real-time
response and intervention into issues with our consumer communities,
VoiceNETWORK and customer services and is staffed twenty-four hours per day,
seven days a week. The Customer Support group is responsible for both customer
account issues for our consumer communities and other customers.
COMPETITION
HearMe experiences intense competition in both its technology and live
communities businesses. As the market for these businesses continues to grow, we
expect to be competing with more and more companies expending greater resources
to enter our markets and challenge us for customers.
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HEARME TECHNOLOGY PRODUCTS AND VOICE SERVICES
The market for real-time interaction and live voice technologies and
services for the Internet is relatively new, constantly evolving and intensely
competitive and we expect that competition will only intensify in the future. As
part of our business, we sell and license products and services for live voice
and real-time interaction applications. Competitive factors in this market
include the following:
o quality and reliability of software and network services;
o the ability to meet and anticipate customer needs;
o ease of installation and use;
o technology distribution and adoption by businesses and consumers;
o scalability and cost per user; and
o compatibility with the user's existing network components and
software systems.
HearMe's technologies for real-time interaction and specifically live
voice have two primary groups of competitors. HearMe competes with Voice-over-IP
companies providing real-time one-to-one communications such as Net2Phone,
DeltaThree, DialPad and MediaRing. HearMe also competes with vendors providing
real-time many-to-many, or live group communications solutions such as
Lipstream, MediaRing and FireTalk. In addition, our technology development
toolkits for real-time interaction often compete with in-house developers.
To expand our customer base and further enhance the real-time
interactive experience, we must continue to innovate and improve the performance
of our technologies. Many of our existing and potential competitors have longer
operating histories, greater name recognition and significantly greater
financial, technical and marketing resources than we do. We are committed to
continued market penetration of our brand, products and services and we may
implement pricing, licensing, service or marketing changes as a strategic
response to changes in the competitive environment in an effort to extend our
current brand and technology franchise. If we make price concessions or if our
pricing and distribution strategies emerge from our competitors, our business,
financial condition and results of operations may be adversely affected.
HEARME CONSUMER COMMUNITIES (LIVE COMMUNITIES)
The market for Internet users and advertisers is new and rapidly
evolving. Competition is intense and is expected to increase significantly in
the future. In addition, barriers to entry are relatively insubstantial. We
believe that the principal competitive factors for companies seeking to create
live communities on the Internet include the following:
o critical mass and functionality;
o brand recognition;
o member affinity and loyalty;
o broad demographic focus; and
o open access for visitors.
Other companies creating Web-based live communities on the Internet are
Excite, Yahoo!, Havas (Won.net and Battle.net), Uproar.com, Talk City, Microsoft
(MSN Gaming Zone), SegaSoft (Heat.net), Pogo.com, Gamespy.com,and Sony (Sony
Station). We will also likely face competition in the future from Web
directories, search engines, shareware archives, online communities, Internet
telephony, content sites, commercial online service providers, sites maintained
by Internet service providers and other entities that attempt to or establish
communities on the Internet either by developing their own community or
acquiring one of our competitors.
Our future competition could include traditional media companies, a
number of which, including CBS, Disney and NBC, have recently invested in and
acquired Internet companies. Our competitors and potential competitors may
develop superior communities or communities that achieve greater market
acceptance than our community. We also compete for visitors with many Internet
content providers and Internet service providers, including Web directories,
search engines, shareware archives, content sites, commercial online services
and sites
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maintained by Internet service providers, as well as thousands of Internet sites
operated by individuals and government and educational institutions. These
competitors include free information, search and content sites or services, such
as America Online, CNET, CNN/Time Warner, GO, AltaVista, Lycos, Microsoft and
Netscape.
We also compete with the foregoing companies, as well as traditional
forms of media such as newspapers, magazines, radio and television, for
advertisers and advertising revenues. We believe that the principal competitive
factors in attracting advertisers include the amount of traffic on our Web site,
brand recognition, customer service, the demographics of our members and
viewers, our ability to offer targeted audiences and the overall
cost-effectiveness of the advertising medium we offer. We believe that the
number of Internet companies relying on Web-based advertising revenue will
increase substantially in the future. Accordingly, we will likely face increased
competition, resulting in increased pricing pressures on our advertising rates
which could in turn have a material adverse effect on our business, results of
operations and financial condition.
An increasing proportion of our Live Community revenues come from our
Mplayer Advertising Network, a collection of affiliated website partnerships
where we sell and deliver advertising for their sites in exchange for a portion
of the revenue generated. Some of these contracts are limited in duration (3 to
6 months), require us to guarantee certain fixed revenue minimums and can be
cancelled on very short notice. In addition, our ability to sell advertising
effectively is often dictated by the size or quality of the audience that we can
offer our advertisers (also referred to as "Reach"). Since our advertising
network's reach is based on the combined total reach of our affiliate partners,
a loss of a single or even multiple partners could have a material effect on our
reach statistics, sellable inventory and ultimately our revenues. Competition by
other ad networks is intense and expected to increase as the market grows. We
currently face direct competition from a number of companies including
Snowball.com, UGO.com, Doubleclick and 24/7 Media.
Many of our existing and potential competitors, including Web
directories and search engines, advertising networks and large traditional media
companies, have longer operating histories in the Web market, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we have. Our competitors may be able to
undertake more extensive marketing campaigns for their brands and services,
adopt more aggressive advertising pricing policies and make more attractive
offers to potential employees, distribution partners, commerce companies,
advertisers and third-party content providers. Advertisers may perceive Internet
content providers, advertising networks and Internet service providers,
including Web directories, search engines, shareware archives, sites that offer
professional editorial content, commercial online services and sites maintained
by Internet service providers as more desirable Web sites for placement of
advertisements.
In addition, substantially all of our current advertising customers and
strategic partners also have established collaborative relationships with
certain of our competitors or potential competitors and other high-traffic Web
sites. Accordingly, we cannot be certain that we will be able to grow our
membership base, traffic levels and advertiser customer base at historical
levels or retain our current members, traffic levels or advertiser customers.
Advertisers may find other Web sites more attractive if Web traffic grows at a
faster rate on the Web sites of competitors and our strategic partners may
decline to renew their agreements with us. We may not be able to compete
successfully against our current or future competitors and competition could
have a material adverse effect on our business, results of operations and
financial condition.
PROPRIETARY RIGHTS
Our success depends in part on our ability to protect our proprietary
software and other intellectual property. To protect our proprietary rights, we
rely generally on patent, copyright, trademark and trade secret laws,
confidentiality agreements with employees and third parties and license
agreements with consultants, vendors and customers, although we have not signed
such agreements in every case. Despite efforts to protect our proprietary
rights, unauthorized third parties could copy or otherwise obtain and use our
products or technology, or develop similar technology. Other parties may breach
confidentiality agreements and other protective contracts we have entered into.
As a result we may not become aware of, or have adequate remedies in the event
of, such a breach.
We currently have eleven issued patents in the U.S. with expiration
dates ranging from 2014 to 2017 and 15 patents pending. One of the patents
pending is a provisional patent. We cannot be certain that any pending or future
patent applications will be granted, that any existing or future patent will not
be challenged, invalidated or circumvented, or that the rights granted under any
patent that has issued or may issue will provide competitive
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advantages to us. Many of our current and potential competitors dedicate
substantially greater resources than we do to protection and enforcement of
intellectual property rights, especially patents. If a blocking patent has
issued or issues in the future, we would need to either obtain a license or
design around the patent. We cannot be certain that we would be able to obtain
such a license on acceptable terms, if at all, or to design around the patent.
We pursue the registration of certain of our trademarks and service marks in the
U.S. and in certain other countries, although we have not secured registration
of all our marks. As of March 17, 2000, we had five registered U.S. and six
foreign trademarks or service marks and had applications pending for an
additional fifteen U.S. and eleven foreign trademarks or service marks.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving and no assurance can be given as to the future
viability or value of any of our proprietary rights or of similar rights of
other companies within this market. We cannot be certain that the steps taken by
us will prevent misappropriation or infringement of our proprietary information.
Any such infringement or misappropriation, should it occur, could have a
material adverse effect on our business, results of operations and financial
condition. In addition, we are currently involved in litigation and additional
litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Such litigation might result in substantial
costs and diversion of resources and management attention and could have a
material adverse effect on our business, results of operations and financial
condition. Furthermore, it is possible that our business activities may infringe
upon the proprietary rights of others, or that other parties may assert
infringement claims against us.
From time to time, we have been and expect to continue to be, subject to
claims in the ordinary course of our business including claims of alleged
infringement of the trademarks, service marks and other intellectual property
rights of third parties by us and the content generated by our members. Although
such claims have not resulted in any significant litigation or had a material
adverse effect on our business to date, such claims and any resultant
litigation, should it occur, might subject us to significant liability for
damages. In addition, even if such claims are not meritorious, they could be
time consuming and expensive to defend. Finally, as a result of such claims, our
proprietary rights could be invalidated. Any of the foregoing could result in
the diversion of management time and attention, any of which might have a
material adverse effect on our business, results of operations and financial
condition.
We also rely on certain technology and content that we license from
third parties, including software that is integrated with our internally
developed software and used in our products and Web site, to perform key
functions. Although we are generally indemnified against claims that such
third-party technology or content infringes the proprietary rights of others,
such indemnification is not always available for all types of intellectual
property rights and in some cases the scope of such indemnification is limited.
Even if we receive broad indemnification, third-party indemnitors are not always
well capitalized and may not be able to indemnify us in the event of
infringement, resulting in substantial exposure to us.
Infringement or invalidity claims arising from the incorporation of
third-party technology or content and claims for indemnification from our
customers resulting from such claims, may be asserted or prosecuted against us.
As a result of such claims, even if not meritorious, we could incur expenditures
of significant financial and managerial resources in addition to potential
product redevelopment costs and delays, all of which could materially and
adversely affect our business, financial condition and results of operations.
In addition, the expiration of any of our patents, patent rights, trade
secrets, trademarks, service marks, trade names or copyrights could materially
and adversely affect our business, financial condition and results of
operations.
REGULATION OF OUR BUSINESS
We are not currently subject to direct regulation by any governmental
agency, other than laws and regulations generally applicable to businesses,
although certain U.S. export controls and import controls of other countries,
including controls on the use of encryption technologies, may apply to our
products. Due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted in the U.S. and
abroad with particular applicability to the Internet. It is possible that
governments will enact legislation that may be applicable to us in areas such as
content, network security, encryption and the use of key escrow, data and
privacy protection, protection of minors, electronic authentication or "digital"
signatures, illegal and harmful content, access charges and retransmission
activities. Such legislation could dampen the growth in Internet usage
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generally and decrease the acceptance of the Internet as a commercial medium.
Moreover, the applicability to the Internet of existing laws and regulations
governing issues such as property ownership, content, taxation, defamation and
personal privacy is uncertain. These laws and regulations often require
subjective interpretation, and we cannot be certain that our attempts to comply
will be deemed sufficient by the courts or appropriate regulatory agencies. The
majority of laws that currently regulate the Internet were adopted before the
widespread use and commercialization of the Internet and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies. Any export or import restrictions, new legislation or regulation
or governmental enforcement of existing regulations may limit the growth of the
Internet, increase our cost of doing business or increase our legal exposure.
Any of these factors could have a material adverse effect on our business,
financial condition and results of operations.
We face potential liability for claims based on the nature and content
of the materials that we distribute over the Internet, including claims for
defamation, negligence or copyright, patent or trademark infringement. Claims
like these have been brought and sometimes successfully litigated, against
Internet companies. Our general liability insurance may not cover claims of this
type or may not be adequate to indemnify us for any liability that may be
imposed. Any liability not covered by insurance or in excess of insurance
coverage could have a material adverse effect on our business, financial
condition and results of operations.
Laws and regulations directly applicable to Internet content
distribution, including laws and regulations about user privacy, liability for
third-party activities, obscenity/pornography, defamation, intellectual property
and jurisdiction, may hinder the demand for our products and services or
increase our legal exposure. New legislation, regulatory interpretations and
court decisions may abruptly change our legal exposure, and we may fail to adapt
our Web site or network infrastructure in time or reduce customer access to
affected systems until such systems have been modified. We may also experience
material delays in introducing new services, products and enhancements, and our
customers may forego the use of our services, and use those of a competitor. The
manner in which new legislation and regulations will be interpreted and enforced
cannot be fully determined, and may subject us to potential liability, which in
turn could have an adverse effect on our business, financial condition and
results of operations. See "Proprietary Rights."
Due to the global nature of the Web, it is possible that, the
governments of other states and foreign countries might attempt to regulate our
transmissions or prosecute us for violations of their laws even though
transmissions by us over the Internet originate primarily in the State of
California. In addition, international agreements may regulate our interactions
with citizens of foreign countries. Violations of local laws may be alleged or
charged by state or foreign governments and we may unintentionally violate local
laws and local laws may be modified, or new laws enacted, in the future. Any of
the foregoing developments could have a material adverse effect on our business,
results of operations and financial condition.
EMPLOYEES
As of December 31, 1999 the Company employed 195 people on a full-time
basis. The Company's future success is substantially dependent on the
performance of its senior management and key technical personnel and its
continuing ability to attract and retain highly qualified technical and
managerial personnel.
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 increase demand for our products and services and
our ability to develop and extend the HEARME, HEARME.COM AND MPLAYER.COM brands.
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
18
<PAGE>
adversely affected. As of December 31, 1999, we had an accumulated deficit of
$78.1 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.
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
HearMe Technology 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 eighteen 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 HEARME, HEARME.COM and MPLAYER.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.
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
19
<PAGE>
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. We also cannot be certain as to the broad acceptance of Voice
over the Internet. 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 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 and customers of acquired
organizations. Other risks associated with acquisitions include those relating
to the correct assessment of the relative percentages of in-process research and
development expense which can be immediately written off as compared to the
amount which must be amortized over the appropriate life of the asset, the
failure to successfully develop and integrate acquired in-process technology
resulting in the impairment of amounts capitalized as intangible assets,
unanticipated
20
<PAGE>
expenses related to technology integration and the maintenance of uniform
standards, controls, procedures and policies. The Company may not be successful
in addressing these risks or any other problems encountered with such
acquisitions.
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, technology partners and commerce
partners to use our Company's Websites and hosting services. If system failures
were sustained or repeated, our advertising and hosting 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, communications 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 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
21
<PAGE>
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 2. PROPERTIES:
The Company leases its corporate offices, consisting of approximately
57,600 square feet of office building space located in Mountain View,
California. In addition, the Company leases sales office space in several
locations in the United States including New York, Maryland and Massachusetts.
The Company's facilities are sufficient for current operations and
suitable additional space is available to accommodate expansion needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS:
The Company has filed a patent infringement 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". On January 26, 2000 the Company moved to amend its patent
infringement suit against Lipstream Networks, Inc. and Lipstream Networks, Inc.,
dba Delaware Lipstream Networks, Inc. to include the Company's United States
Patent No. 6,018,766 entitled "Server-Group Messaging System for Interactive
Applications". The action by the Company alleges that Lipstream infringes this
patent through the sale and licensing of its products. The Company is seeking a
court order to permanently enjoin Lipstream from further sale or licensing of
infringing products and is also seeking to recover damages, attorneys fees and
costs.
In addition, from time to time we have been and expect to continue to
be, subject to legal proceedings and claims by third parties in the ordinary
course of business, including claims of alleged infringement of third-party
trademarks and other intellectual property rights against us or our licensees.
Third party 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1999.
EXECUTIVE OFFICERS OF HEARME:
Our executive officers and their positions and ages at March 15, 2000
are shown in the table below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- ------- -------------------------------------------------------------------
<S> <C> <C>
Paul Matteucci..................................... 44 Chairman, Chief Executive Officer and Director
Jeremy Verba....................................... 36 President and Chief Operating Officer
Linda Palmor....................................... 44 Chief Financial Officer
Brian Apgar........................................ 45 Chief Entrepreneur, Founder and Director
Steven Roskowski................................... 34 Chief Technical Officer
Robert Csongor..................................... 37 Executive, Vice President and General Manager
James Schmidt...................................... 47 Executive Vice President, Engineering
Lynn Heublein...................................... 37 Vice President
</TABLE>
22
<PAGE>
PAUL MATTEUCCI, Chief Executive Officer, joined the Company and became a
Director in May 1995. From December 1994 to May 1995, Mr. Matteucci was a
Resident Entrepreneur at Institutional Venture Partners. From July 1986 to
December 1994, Mr. Matteucci held various positions at Adaptec, Inc., including
Vice President and General Manager. Prior to joining Adaptec, Inc., Mr.
Matteucci held positions with Texas Instruments. Mr. Matteucci received an
M.B.A. from Stanford University and an M.A. from Johns Hopkins School of
Advanced International Studies. Mr. Matteucci received his undergraduate degree
from the University of Pacific in Stockton, California.
JEREMY VERBA, President and Chief Operating Officer, joined the Company
in April of 1999. From April 1999 to December 1999 Mr. Verba served as executive
vice president overseeing the Company's Consumer Web communities business. Prior
to joining the Company, Mr. Verba served as president of E! Online for over two
years from 1996 to 1999. Mr. Verba founded E! Online during his position with
CNET as vice president of entertainment ventures, a position he held from
January 1996 to November 1996. From 1995 to 1996, Mr. Verba served as the
director of new services for TCI Technology Ventures. Before that, he served as
director of programming and distribution for Reiss Media Entertainment
Corporation, parent company of Request Television and held positions with
Toronto-based Campeau Corporation and First Boston Corporation (now CSFB). Mr.
Verba received a Masters of Business Administration from Harvard and a Bachelor
of Science from the Massachusetts Institute of Technology.
LYNN HEUBLEIN, Vice President, joined the Company in November 1996 upon
the Company's acquisition of Catapult Entertainment, Inc., which is now a
wholly-owned subsidiary of the Company. Miss Heublein served as the Company's
Chief Operating Officer until December 1999. Catapult filed a voluntary petition
under Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Northern District of California, San Jose Division, on
October 10, 1996 and MPCAT Acquisition Corporation, a wholly-owned subsidiary of
the Company, merged with and into Catapult upon the conclusion of the bankruptcy
proceedings. Ms. Heublein was a co-founder of Catapult and from April 1994 to
November 1996, she was Executive Vice President, Business Development at
Catapult. From October 1993 to April 1994, she served as Vice President of
Marketing for THQ, Inc. Ms. Heublein has also served the Company in the capacity
of Acting Chief Financial Officer and General Manager, the Company Foundation.
Ms. Heublein holds a B.S. in Engineering from the University of Washington and
an M.B.A. from Stanford University.
LINDA R. PALMOR, Chief Financial Officer, joined the Company in February
1999. From February 1996 to February 1999, Ms. Palmor worked for Terayon
Communication Systems, a developer and marketer of cable modem systems, where
she served as Vice President, Finance and Corporate Controller. From 1995 to
1996, Ms. Palmor served as the Corporate Controller of Electronic Arts, Inc., a
multimedia software company. From 1991 to 1995, Ms. Palmor held a number of
financial positions with The Walt Disney Company, a media conglomerate. Ms.
Palmor is a certified public accountant and she received a B.Sc. degree in
Biochemistry from Manchester University in the United Kingdom.
BRIAN APGAR, Chief Entrepreneur, Founder and Director, co-founded the
Company in January 1995, where he has also served as President, Vice President,
Development, General Manager and Chief Operating Officer. From October 1993 to
January 1995, Mr. Apgar served as a Resident Entrepreneur and in other
consulting capacities for several venture capital firms, including Merrill
Pickard Anderson & Eyre, Sigma Partners and Institutional Venture Partners. Mr.
Apgar holds a B.A. in Physics from Princeton University.
STEVE ROSKOWSKI, Chief Technical Officer, joined the Company in November
1996 upon the Company's acquisition of Catapult Entertainment, Inc., which is
now a wholly-owned subsidiary of the Company. Catapult filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code with the United
States Bankruptcy Court for the Northern District of California, San Jose
Division, on October 10, 1996 and MPCAT Acquisition Corporation, a wholly-owned
subsidiary of the Company, merged with and into Catapult upon the conclusion of
the bankruptcy proceedings. From March 1994 to December 1996, Mr. Roskowski was
Vice President, Engineering and a co-founder of Catapult. Mr. Roskowski has also
served the Company as Vice President, Operations and Vice President, Technology.
From October 1992 to March 1994, Mr. Roskowski was a manager of hardware for
General Magic. Prior to that, he was a Project Manager at Apple Computer. Mr.
Roskowski holds a B.S. in Engineering from the California Institute of
Technology.
ROBERT CSONGOR, Executive Vice President and General Manager, joined the
Company in August 1996 where he initially served as Director of Product
Marketing and also as Vice President, Business Development and
23
<PAGE>
Marketing. From January 1995 to August 1996, he served as Director of Marketing
at NVIDIA Corporation. From August 1986 to January 1995, Mr. Csongor served in
various capacities at Adaptec, Inc., including as Director of Marketing. Mr.
Csongor holds a B.S. in Electrical Engineering from Villanova University.
JAMES SCHMIDT, Executive Vice President, Engineering, joined the Company
in December 1998. From December 1986 to December 1998, Mr. Schmidt worked for
Adaptec Inc., where he served in a number of positions, including Vice President
and Chief Information Officer, Vice President, Process Development and
Infrastructure and Vice President, Engineering. Mr. Schmidt received both a B.S.
degree in Electrical Engineering and an M.S. degree in Electrical Engineering
from Wichita State University.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS:
HearMe common stock is traded on the Nasdaq National Market System under
the symbol "HEAR". The following table sets forth the range of high and low
closing sales prices for each period indicated. Prior to second quarter 1999
there was no public market for our common stock.
1999 1999
HIGH LOW
----------- -----------
First Quarter.................................... -- --
Second Quarter................................... $ 50.625 $ 17.000
Third Quarter.................................... $ 24.125 $ 9.625
Fourth Quarter................................... $ 37.500 $ 10.000
On March 16, 2000 the last reported sales price of our common stock on
the Nasdaq National Market was $27.00 per share. We had approximately 280
shareholders of record as of the record date of March 16, 2000. The Company has
not declared or paid any cash dividends on its common stock or preferred stock
and anticipates that all future earnings, if any, will be retained for
development of our business. The payment of dividends will be at the discretion
of our Board of Directors and will depend upon factors such as future earnings,
capital requirements, the financial condition of HearMe and general business
conditions.
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
-----------------
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<PAGE>
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 the funding of product
development and expansion of 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.
ITEM 6. SELECTED FINANCIAL DATA:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- --------------- --------------- -------------- --------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net revenues $ 15,522 $ 8,027 $ 2,727 $ 124 $ --
Gross profit (loss) 9,931 5,016 299 (1) --
Total operating expenses 36,877 16,854 13,859 25,334 2,453
Net loss (25,081) (11,951) (13,654) (25,045) (2,355)
Net loss per share--basic and diluted $ (1.60) $ (5.39) $ (7.81) $ (33.80) $(23.55)
Pro forma net loss per share--basic and diluted . $ (1.29) $ (.95) -- -- --
Shares used in per share calculation--basic and
diluted 15,673 2,217 1,749 741 100
Shares used in pro forma per share
calculation--basic and diluted 19,503 12,643 -- -- --
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 2,568 $ 1,114 $ 9,132 $ 5,511 $ 3,548
Short term investments........................ 66,756 -- -- -- --
Working capital (deficit)..................... 70,626 (2,067) 7,580 4,006 3,169
Total assets.................................. 104,556 6,177 12,356 8,142 4,333
Long term notes payable....................... -- 1,864 1,864 2,756 --
Stockholders' equity (deficit)................ 93,768 (2,130) 7,141 2,762 3,580
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION:
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Form 10-K 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", under Part I,
and those appearing elsewhere in this Form 10-K. 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.
25
<PAGE>
OVERVIEW
The Company develops, licenses and operates technologies that enable us
and other Internet sites to create and manage voice-enabled real time
interactive experiences. 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 the 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 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
and from opt-in e-mail programs. 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 that 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 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 $26.4 million in net revenues through
December 31, 1999. For the period from inception to December 31, 1999 we have
incurred a cumulative net loss of $78.1 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 and $3.0 million from a
write-off of goodwill and in-process research and development expenses
associated with our acquisition of RTI.
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
26
<PAGE>
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 our
current business, our prospects and us can be based. In addition, our revenue
model is evolving and relies substantially upon the licensing of our technology
and the sale of advertising on our MPLAYER.COM and HEARME.COM services. 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
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
NET REVENUES. The Company's total net revenues increased by 94% from
$8.0 million for the year ended December 31, 1998 to $15.5 million for the year
ended December 31, 1999. 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. Approximately 135
customers advertised on the Company's network of internet properties during 1999
as compared to approximately 66 in 1998. No one advertising customer accounted
for 10% or more of net revenues during those periods. Live Communities net
revenues grew by $5.4 million or 179% from $3.0 in fiscal 1998 to $8.4 in fiscal
1999. Net revenues from HearMe Technology Products as of December 31, 1999
accounted for 46% of total Company net revenues compared to 62% of net revenues
in fiscal 1998. However, in absolute dollars HTP net revenues grew by $2.1
million from $5.0 in fiscal 1998 to $7.1 in fiscal 1999. The increase was due to
increased technology licensing fees earned from both new and existing customers
during the periods.
COST OF NET REVENUES. Live Communities cost of net revenues primarily
consists 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 cost of net revenues were $5.6 million for the year ended December 31,
1999, or 36% of net revenues, as compared to $3.0 million or 38% of net revenues
for the year ended December 31, 1998. 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.
The absolute increase in cost of net revenues was due to the significant
increase in Live Communities subscriber usage and the resulting increase in
server and network costs between 1998 and 1999. The increase in Technology
Products cost of net revenues was attributable to server costs associated with
hosting services provided to certain HearMe Technology Products customers. Also
included in costs for 1999 was an $849,000 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 year ended December 31, 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses were $7.9
million, or 51% of net revenues for the year ended December 31, 1999 compared to
$3.1 million or 39% of net revenues for the year ended December 31, 1998.
Research and development expenses consist primarily of employee compensation
relating to developing and enhancing the features and functionality of HearMe's
technology and consumer websites. 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, the Voice Presence platform and enhancements to the Company's Live
Communities websites and to additional consulting fees and software expenditures
associated with these projects. The Company believes that significant
investments in product development are required to remain competitive.
Consequently, the Company expects to incur increased product development
expenditures in absolute dollars in future periods. As a percentage of net
revenues, the Company anticipates that research and development expenses will
range from 40% to 50% during 2000, however, anticipated spending levels may vary
as a results of acquisitions and future business combinations.
SALES AND MARKETING. Sales and marketing expenses were $15.5 million for
the year ended December 31, 1999 or 100% of net revenues compared to $7.8
million or 98% of net revenues for the year ended December 31, 1998. Sales and
marketing expenses consist primarily of advertising and other marketing-related
expenses, compensation
27
<PAGE>
and employee-related expenses, sales commission and travel costs. Sales and
marketing expenses increased as a percentage of net revenues from 1998 to 1999
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. As a percentage of net revenues, the Company currently anticipates that
annual sales and marketing expenses will range from 100% to 120% during 2000 due
to announced marketing plans.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$6.6 million, or 42% of net revenues for the year ended December 31, 1999,
compared to $3.3 million or 41% of net revenues for the year ended December 31,
1998. 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. The
Company believes that the absolute dollar level of general and administrative
expenses will increase in future periods, as a result of an increase in
personnel and increased fees for professional services. As a percentage of net
revenues, the Company currently anticipates that general and administrative
expenses will approximate 30% during 2000, however, anticipated spending levels
may vary as a result of acquisitions and future business combinations
IN PROCESS RESEARCH AND DEVELOPMENT. As part of the Resounding
acquisition, the Company recorded in process research and development projects
for the development of a next generation version of RTI's Roger Wilco product, a
software developers' kit as well as other specialized technologies totaling
$850,000. The value was determined by estimating the expected cash flows from
the projects once commercially viable, applying a percentage of completion to
the calculated value as defined below and then discounting the net cash flows
back to their present value.
AMORTIZATION OF INTANGIBLES. As part of the Resounding acquisition, the
Company recorded amortization of intangible assets consisting primarily of
goodwill in the amount of $2.2 million. The related assets are being amortized
over a 2-year period beginning October 1999.
STOCK BASED COMPENSATION. Stock based compensation expenses were $3.8
million, or 25% of net revenues for year ended December 31, 1999. For the year
ended December 31, 1998, stock based compensation expenses were $2.6 million or
32% of net revenues. 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 issued prior to our Initial
Public Offering that 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.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Net revenues increased 194% from approximately $2.7
million for the year ended December 31, 1997 to approximately $8.0 million for
the year ended December 31, 1998. Net revenues from Live Communities increased
from $686,000 to $3.0 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 from $2.0 million for the year ended
December 31, 1997 to approximately $5.0 million for the year ended December 31,
1998. Approximately $1.0 million of this increase was primarily attributable to
the successful development and release of our POP.X technology and approximately
$2.0 million was due to an increase in the number of from HearMe Technology
Products customers and the related increase in license revenues. Since $1.5
million of from HearMe Technology Products revenue was recognized in late 1998,
the accounts receivable balance associated with from HearMe Technology Products
revenue increased at a faster rate than related revenue.
COST OF NET REVENUES. Cost of net revenues increased 24% from
approximately $2.4 million, or 89% of net revenues, for the year ended December
31, 1997 to approximately $3.0 million, or 37% of net revenues, for the year
ended December 31, 1998. Cost of net revenues declined as a percentage of net
revenues primarily due to the substantial increase in net revenues between 1997
and 1998. Cost of net revenues for Live Communities increased from approximately
$1.8 million for the year ended December 31, 1997 to approximately $2.2 million
for the year
28
<PAGE>
ended December 31, 1998. This increase was primarily due to server and network
costs associated with the growth of the Live Communities business unit. Cost of
net revenues from HearMe Technology Products increased from approximately
$620,000 for the year ended December 31, 1997 to approximately $790,000 for the
year ended December 31, 1998. The increase was attributable to connectivity and
server costs associated with services provided to from HearMe Technology
Products customers.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
29% from approximately $2.4 million, or 89% of net revenues, for the year ended
December 31, 1997 to approximately $3.1 million, or 39% of net revenues, for the
year ended December 31, 1998. Research and development expenses declined as a
percentage of net revenues primarily because of the substantial increase in net
revenues between 1997 and 1998. The increase in research and development
expenses was primarily due to an increase of salary expense in 1998 as
additional engineers were hired to support the from HearMe Technology Products
development of the POP.X technology and to additional equipment and software
expenditures associated with the increased headcount.
SALES AND MARKETING. Sales and marketing expenses increased 14% from
approximately $6.9 million, or 253% of net revenues, for the year ended December
31, 1997, to approximately $7.8 million, or 98% of net revenues, for the year
ended December 31, 1998. Sales and marketing expenses decreased as a percentage
of net revenues primarily because of the substantial increase in net revenues
between 1997 and 1998. The increase in sales and marketing expenses was
primarily due to an increase in additional salary expense related to expanding
our sales force in order to grow advertising revenues in our Live Communities
business unit.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased
15% from approximately $2.8 million, or 104% of net revenues, for the year ended
December 31, 1997 to approximately $3.3 million, or 41% of net revenues, for the
year ended December 31, 1998. General and administrative costs decreased as a
percentage of net revenues primarily because of the substantial increase in net
revenues between 1997 and 1998. These increases were primarily due to salary
increases in the operations support area of approximately $300,000 and patent
filings and legal expenses associated with general corporate matters of
approximately $100,000.
STOCK BASED COMPENSATION. Stock based compensation costs increased from
approximately $1.7 million or 61% of net revenues in the year ended December 31,
1997 to approximately $2.6 million or 32% of net revenues in the year ended
December 31, 1998. The increase relates 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 1998 expense from grants in previous years which
continued to vest in 1998.
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 short-term investment of cash.
29
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited consolidated statements of
operations data for the eight quarters ended December 31, 1999 as well as the
percentage of our revenues represented by each item. This data has been derived
from unaudited interim consolidated financial statements prepared on the same
basis as our audited consolidated financial statements contained in this report
and, in our opinion, include all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of
such information when read in conjunction with our consolidated financial
statements and notes to our consolidated statements appearing elsewhere in this
report.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1999 1999 1999 1999 1998 1998 1998 1998
-------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT AS A PERCENTAGE OF NET REVENUES)
STATEMENT OF OPERATIONS:
Net revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Live Communities................. $3,739 $ 2,098 $ 1,465 $ 1,120 $ 1,381 $ 931 $ 393 $ 317
Foundation....................... 2,291 2,034 1,767 1,008 1,481 1,287 1,103 1,134
-------- --------- --------- --------- --------- --------- --------- ---------
Total revenues................ 6,030 4,132 3,232 2,128 2,862 2,218 1,496 1,451
Cost of net revenues:
Live Communities................. 1,132 840 842 1,659 607 463 567 584
Foundation....................... 339 255 293 231 198 210 190 192
-------- --------- --------- --------- --------- --------- --------- ---------
Total cost of revenues........ 1,471 1,095 1,135 1,890 805 673 757 776
-------- --------- --------- --------- --------- --------- --------- ---------
Gross profit (loss).............. 4,559 3,037 2,097 238 2,057 1,545 739 675
Operating expenses:
Research and development......... 2,770 1,901 1,723 1,543 807 779 767 779
Sales and marketing.............. 5,564 4,142 3,468 2,331 2,041 2,058 1,896 1,852
General and administrative....... 1,989 1,552 1,615 1,438 902 785 820 767
In-process research and development 850
Amortization of goodwill and
intangible Assets................ 2,175
Stock based compensation......... 959 959 962 936 651 650 650 650
-------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses...... 14,307 8,554 7,768 6,248 4,401 4,272 4,133 4,048
-------- --------- --------- --------- --------- --------- --------- ---------
Loss from operations.................. (9,748) (5,517) (5,671) (6,010) (2,344) (2,727) (3,394) (3,373)
Interest and other income (expense),
net................................... 603 757 471 34 (155) (87) 146 (15)
-------- --------- --------- --------- --------- --------- --------- ---------
Loss before provision for income taxes (9,145) (4,760) (5,200) (5,976) (2,499) (2,814) (3,248) (3,388)
Provision for income taxes............ -- -- -- -- (2) -- -- --
-------- --------- --------- --------- --------- --------- --------- ---------
Net loss.............................. $(9,145) $(4,760) $(5,200) $(5,976) $(2,501) $(2,814) $ (3,248) $(3,388)
======== ========= ========= ========= ========= ========= ========= ========
AS A PERCENTAGE OF NET REVENUES:
Net revenues:
Live Communities................. 62.0 % 50.8% 45.3% 52.6% 48.3% 42.0% 26.3% 21.8%
Foundation....................... 38.0 49.2 54.7 47.4 51.7 58.0 73.7 78.2
-------- --------- --------- --------- --------- --------- --------- ---------
Total revenues................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Live Communities................. 18.8 20.3 26.1 78.0 21.2 20.8 37.9 40.2
Foundation....................... 5.6 6.2 9.1 10.8 6.9 9.6 12.7 13.3
-------- --------- --------- --------- --------- --------- --------- ---------
Total cost of revenues........ 24.4 26.5 35.1 88.8 28.1 30.4 50.6 53.5
-------- --------- --------- --------- --------- --------- --------- ---------
Gross profit (loss)........... 75.6 73.5 64.9 11.2 71.9 69.6 49.4 46.5
Operating expenses:
Research and development......... 45.9 46.0 53.3 72.5 28.2 35.1 51.3 53.7
Sales and marketing.............. 92.3 100.2 107.3 109.5 71.3 92.8 126.7 127.6
General and administrative....... 33.0 37.6 50.0 67.6 31.5 35.4 54.8 52.9
In-process research and development 14.1 -- -- -- -- -- -- --
Amortization of goodwill and
intangible Assets................ 36.1 -- -- -- -- -- -- --
Stock based compensation......... 15.9 23.2 29.8 44.0 22.7 29.3 43.4 44.7
-------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses...... 237.3 207.0 240.3 293.6 153.7 192.6 276.2 278.9
-------- --------- --------- --------- --------- --------- --------- ---------
Loss from operations.................. (161.7) (133.5) (175.5) (282.4) (81.8) (123.0) (226.8) (232.4)
Interest and other income (expense),
net................................... 10.0 18.3 14.6 1.6 (5.5) (3.9) 9.7 (1.0)
-------- --------- --------- --------- --------- --------- --------- ---------
Loss before provision for income taxes (151.7) (115.2) (160.9) (280.8) (87.4) (126.9) (217.1) (233.4)
Provision for income taxes............ -- -- -- -- -- -- -- --
-------- --------- --------- --------- --------- --------- --------- ---------
Net loss.............................. (151.7)% (115.2)% (160.9)% (280.8)% (87.4)% (126.9)% (217.1)% (233.4)%
======== ========= ========= ========= ========= ========= ========= =========
</TABLE>
30
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
HearMe invests excess cash in debt instruments that are highly liquid,
of high-quality investment grade and predominantly have maturities of less then
one year with the intent to make such funds readily available for operating
purposes. At December 31, 1999, the Company had cash and cash equivalents and
investments in marketable debt securities totaling $69.3 million compared to
$1.1 million at December 31, 1998. For the year ended December 31, 1999, cash
used in operating activities was $17.7 million compared to cash used in
operating activities of $9.3 million and $11.1 million for the years ended
December 31, 1998 and 1997, respectively.
For the year ended December 31, 1999 and 1998 net cash 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. For the year ended December 31, 1997, cash
used in operating activities was primarily a result of funding ongoing
operations.
Net cash used in investing activities was $4.1 million for the year
ended December 31, 1999 compared to $.7 million and $1.0 million for the years
ended December 31, 1998 and 1997 respectively. Net cash used in investing
activities in each period was primarily related purchases of property and
equipment. Capital expenditures have generally been comprised of purchases of
computer hardware and software as well as leasehold improvements related to
leased facilities and are expected to increase in future periods.
Net cash provided by financing activities for the year ended December
31, 1999 was $90.0 million as compared to net cash provided by financing
activities for the year ended December 31, 1998 of $2.0 million and $15.7
million for year ended December 31, 1997. The major sources of financing
activities during the year ended December 31, 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. The fourth round, completed between July 1997 and August 1997,
raised a total of approximately $16.8 million, through the sale of Series D
Preferred Stock. Of the $16.8 million raised with Series D Preferred Stock,
approximately $14.9 million was cash and $1.8 million was through conversion of
a promissory note and Series C Preferred Stock
In 1995, we entered into a capital lease agreement with an investor
group and drew down all available funds of approximately $1.5 million. We
entered into a Loan and Security Agreement with a financial institution 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 were scheduled to 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.
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.
On September 27, 1999, the Company entered into an Agreement and Plan of
Merger (the Merger Agreement) with Resounding Technology, Inc. (RTI), a Delaware
corporation. The Merger Agreement provided for the merger of a newly formed
wholly owned subsidiary of HearMe with and into RTI. The merger is being
accounted for under the purchase method of accounting. The merger was
consummated on October 20, 1999. Further details are included in Note 3
"Resounding Acquisition" incorporated in the Notes to the Consolidated Financial
Statements.
31
<PAGE>
YEAR 2000 COMPLIANCE
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
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.
The Company's worldwide Y2K strategic plan (Y2K Plan) was described in
the Company's 1999 prospectus dated April 29, 1999. This plan was substantially
completed prior to the end of the third quarter of fiscal 1999. Through December
31, 1999, the Company's total incremental external spending over the life of its
Y2K plan was approximately $116,000. Our expenses have related to the operating
costs associated with time spent by employees in the evaluation process and Year
2000 compliance matters generally.
The Company's business operations are heavily dependent on third party
corporate service vendors, materials suppliers, outsourced operations partners,
distributors and others. Through March of 2000, the Company's key third party
suppliers and service providers have not reported any significant Y2K compliance
problems and the Company's financial results have not been negatively impacted
by Y2K failures of third parties. However, because the Company's continued Y2K
compliance in calendar 2000 is in part dependent on the continued Y2K compliance
of third parties, there can be no assurance that the Company's efforts alone
have resolved all Y2K issues or that key third parties will not experience Y2K
compliance failures as calendar year 2000 progresses.
Through March of 2000, the Company experienced no significant
malfunctions in its information technology (IT) systems as the result of the
date change. None of these failures had a material impact on the Company's
financial performance. The Company believes it could experience additional minor
malfunctions of its IT systems and Non-IT business systems not previously
detected but that these additional malfunctions will not have a material impact
on the Company's results of operations or financial condition. As discussed
above, the Company's continued Y2K compliance in calendar 2000 is in part
dependent on the continued Y2K compliance of third parties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company is exposed to the impact of interest rate changes and
changes in the market values of its investments. To date all of the Company's
contracts have been denominated in U.S. dollars and have not been subject to
currency risks.
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company has not
used derivative financial instruments in its investment portfolio. The Company
invests its excess cash in debt instruments of the U. S. Government and its
agencies and in high-quality corporate issuers and, by policy, limits the amount
of credit exposure to any one issuer. The Company protects and preserves its
invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning
instruments carries a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in the interest
rates, while floating rate securities may produce less income then expected if
interest rates fall. Due in part to these factors, the Company's future
investment income may fall short of expectations due to changes in interest
rates or the Company may suffer losses in principal if forced to sell securities
which have declined in market value due to changes in interest rates.
32
<PAGE>
<TABLE>
<CAPTION>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----------------------------------------------------------------------- --------
<S> <C>
Report of Independent Accountants...................................... 34
Consolidated Balance Sheets at December 31, 1999 and 1998.............. 35
Consolidated Statement of Operations for each of the three years in the
period ended December 31, 1999.......................................... 36
Consolidated Statement of Shareholders' Equity for each of the three
years in the period ended December 31, 1999............................. 37
Consolidated Statement of Cash Flows for each of the three years in the
period ended December 31, 1999......................................... 38
Notes to Consolidated Statements....................................... 39
</TABLE>
All other schedules are omitted because they are not applicable or
the required information is shown in the Consolidated Financial
Statements or Notes thereto;
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of HearMe
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholder's equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of HearMe (the Company) at December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. These financial statements and financial statement schedules
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, CA
January 21, 2000
34
<PAGE>
HEARME
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
--------------------------
1999 1998
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 2,568 $ 1,114
Short-term investments........................ 66,756 --
Accounts receivable, net of allowance for
doubtful accounts of $415 and $20,
respectively.................................. 5,767 1,933
Interest and other receivables................. 946 293
Prepaid expenses and other current assets...... 1,697 710
------------ -----------
Total current assets......................... 77,734 4,050
Restricted cash................................... 170 170
Property and equipment, net....................... 4,500 1,878
Intangible assets................................. 4,153 --
Goodwil1.......................................... 17,708 --
Other assets...................................... 291 79
------------ -----------
Total assets................................. $ 104,556 $ 6,177
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................... $ 557 $ 1,119
Accrued payroll and related expenses........... 2,829 1,029
Accrued expenses............................... 2,637 719
Current portion of capital lease obligations... 322 458
Deferred revenue............................... 396 332
Notes payable.................................. 255 2,426
Deferred Rent.................................. 112 34
------------ -----------
Total current liabilities................. 7,108 6,117
Convertible note payable.......................... -- 1,864
Deferred tax liability............................ 1,661 --
Capital lease obligations and notes payable, net
of current portion.............................. 19 326
------------ -----------
Total liabilities......................... 8,788 8,307
------------ -----------
Commitments and contingencies (Note 5)
Redeemable common stock........................... 2,000 --
Stockholders' equity (deficit):
Convertible preferred stock:
Par value: $0.00005..........................
Authorized: 2,500,000 and 16,294,986,
respectively................................
Issued and outstanding: 0 and 10,416,615,
respectively................................. -- 1
Common stock warrants........................... 2 2
Common stock:
Par value: $0.00005...........................
Authorized: 150,000,000 and 25,000,000,
respectively.................................
Issued and outstanding: 24,108,133 and 3,834,815,
respectively.................................. 1 --
Additional paid-in capital....................... 182,589 63,155
Unrealized gain.................................. 614 --
Deferred stock based compensation................ (9,027) (11,263)
Notes receivable from stockholders............... (2,325) (1,020)
Accumulated deficit.............................. (78,086) (53,005)
------------ -----------
Total stockholders' equity (deficit)........ 93,768 (2,130)
------------ -----------
Total liabilities and stockholders' equity.. $104,556 $ 6,177
============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
35
<PAGE>
<TABLE>
<CAPTION>
HEARME
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues:
Live Communities................................................................... $ 8,422 $ 3,022 $ 686
HearMe Technology Products......................................................... 7,100 5,005 2,041
------------ ------------ ------------
Total net revenues............................................................... 15,522 8,027 2,727
Cost of net revenues:
Live Communities................................................................... 4,473 2,221 1,808
HearMe Technology Products......................................................... 1,118 790 620
------------ ------------ ------------
Total cost of net revenues....................................................... 5,591 3,011 2,428
------------ ------------ ------------
Gross profit.......................................................................... 9,931 5,016 299
------------ ------------ ------------
Operating expenses:
Research and development........................................................... 7,937 3,132 2,436
Sales and marketing................................................................ 15,505 7,847 6,906
General and administrative......................................................... 6,594 3,274 2,841
In-process research and development................................................ 850 -- --
Amortization of goodwill and intangible assets..................................... 2,175 -- --
Stock based compensation........................................................... 3,816 2,601 1,676
------------ ------------ ------------
Total operating expenses......................................................... 36,877 16,854 13,859
------------ ------------ ------------
Loss from operations.......................................................... (26,946) (11,838) (13,560)
------------ ------------ ------------
Interest and other income............................................................. 2,426 390 283
Interest and other expense ........................................................... (552) (501) (376)
------------ ------------ ------------
Interest and other income (expense), net......................................... 1,874 (111) (93)
Loss before provision for income taxes................................................ (25,072) (11,949) (13,653)
------------ ------------ ------------
Provision for income taxes............................................................ (9) (2) (1)
------------ ------------ ------------
Net loss.............................................................................. $ (25,081) $ (11,951) $ (13,654)
============ ============ ============
Net loss per common share:
Basic and diluted.................................................................. $ (1.60) $ (5.39) $ (7.81)
============ ============ ============
Pro forma.......................................................................... $ (1.29) $ (.95)
============ ============
Weighted average shares outstanding:
Basic and diluted.................................................................. 15,673 2,217 1,749
============ ============ ============
Pro forma.......................................................................... 19,503 12,643
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
36
<PAGE>
<TABLE>
<CAPTION>
HEARME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ------------------- PAID-IN
SHARES AMOUNT WARRANTS SHARES AMOUNT CAPITAL
---------- --------- --------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996..................... 7,315 $ 1 $ -- 2,531 -- $ 33,064
Issuance of Series C convertible preferred....... 49 -- -- -- -- 500
Exchange of Series C convertible preferred stock
for Series D convertible stock.................. 44 -- -- -- -- --
Issuance of Series D convertible preferred stock,
net of offering cost of $98 and converted
amortized debt discount of $360................. 3,018 -- -- -- -- 15,841
Issuance of common stock warrants in conjunction
with Series D convertible preferred stock....... -- -- 2 -- -- --
Exercise of stock options........................ -- -- -- 53 -- 14
Deferred stock based compensation................ -- -- -- -- -- 5,607
Amortization of deferred stock based
compensation.................................... -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
---------- --------- --------- -------- --------- -----------
Balance at December 31, 1997..................... 10,426 1 2 2,584 -- 55,026
Adjustment to Series C relating to Catapult
escrow closing................................... (9) -- -- -- -- (96)
Warrants issued to purchase of Series D preferred
stock for services rendered..................... -- -- -- -- -- 64
Exercise of common stock options for notes
receivable and cash............................. -- -- -- 852 -- 937
Repurchase of stock options...................... -- -- -- (2) -- (2)
Exercise of stock options........................ -- -- -- 400 -- 113
Deferred stock based compensation................ -- -- -- -- -- 7,113
Amortization of deferred stock based
compensation.................................... -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
---------- --------- --------- -------- --------- -----------
Balances at December 31, 1998.................... 10,417 1 2 3,834 -- 63,155
Issuance of Series E convertible preferred....... 3,035 -- -- -- -- 18,797
Warrants issued to purchase 120,000 shares of
common stock for services rendered.............. -- -- -- -- -- 849
Exercise of common stock options for notes
receivable...................................... -- -- -- 208 -- 1,204
Repayment of common stock notes.................. -- -- -- -- -- --
Repurchase of stock options...................... -- -- -- (12) -- (12)
Exercise of stock options for cash............... -- -- -- 349 -- 491
Issuance of common stock in public offering, net
of offering costs............................... -- -- -- 3,900 -- 64,101
Conversion of preferred to common stock upon
initial public offering......................... (13,452) (1) -- 13,452 1 --
Issue of common stock for overallotment, net of
offering........................................ -- -- -- 585 -- 9,793
Stock issued through Employee Stock Purchase
Plan............................................ -- -- -- 71 -- 675
Shares issued upon acquisition of RTI............ -- -- -- 1,586 -- 21,031
Exercise of common stock and warrants............ -- -- -- 135 -- 700
Deferred stock based compensation................ -- -- -- -- -- 1,580
Unrealized holding gains......................... -- -- -- -- -- --
Amortization of deferred stock based
compensation.................................... -- -- -- -- -- --
Expense related to acceleration of options....... -- -- -- -- -- 225
Net loss......................................... -- -- -- -- -- --
---------- --------- --------- -------- --------- -----------
Balances at December 31, 1999.................... -- $ -- $ 2 24,108 $ 1 $ 182,589
========== ========= ========= ======== ========= ===========
NOTES TOTAL
DEFERRED RECEIVABLE STOCKHOLDERS'
STOCK BASED UNREALIZED FROM ACCUMULATED EQUITY
COMPENSATION GAINS STOCKHOLDERS DEFICIT (DEFICIT)
-------------- ----------- ------------- ------------- --------------
Balance at December 31, 1996..................... $ (2,820) -- $ (83) $ (27,400) $ 2,762
Issuance of Series C convertible preferred....... -- -- -- -- 500
Exchange of Series C convertible preferred stock
for Series D convertible stock.................. -- -- -- -- --
Issuance of Series D convertible preferred stock,
net of offering cost of $98 and converted
amortized debt discount of $360................. -- -- -- -- 15,841
Issuance of common stock warrants in conjunction
with Series D convertible preferred stock....... -- -- -- -- 2
Exercise of stock options........................ -- -- -- -- 14
Deferred stock based compensation................ (5,607) -- -- -- --
Amortization of deferred stock based
compensation.................................... 1,676 -- -- -- 1,676
Net loss......................................... -- -- -- (13,654) (13,654)
-------------- ----------- ------------- ------------- --------------
Balance at December 31, 1997..................... (6,751) -- (83) (41,054) 7,141
Adjustment to Series C relating to Catapult
escrow closing................................... -- -- -- -- (96)
Warrants issued to purchase of Series D preferred
stock for services rendered..................... -- -- -- -- 64
Exercise of common stock options for notes
receivable and cash............................. -- -- (937) -- --
Repurchase of stock options...................... -- -- -- -- (2)
Exercise of stock options........................ -- -- -- -- 113
Deferred stock based compensation................ (7,113) -- -- -- --
Amortization of deferred stock based
compensation.................................... 2,601 -- -- -- 2,601
Net loss......................................... -- -- -- (11,951) (11,951)
-------------- ----------- ------------- ------------- --------------
Balances at December 31, 1998.................... (11,263) -- (1,020) (53,005) (2,130)
Issuance of Series E convertible preferred....... -- -- -- -- 18,797
Warrants issued to purchase 120,000 shares of
common stock for services rendered.............. -- -- -- -- 849
Exercise of common stock options for notes
receivable...................................... -- -- (1,307) -- (103)
Repayment of common stock notes.................. -- -- 2 -- 2
Repurchase of stock options...................... -- -- -- -- (12)
Exercise of stock options for cash............... -- -- -- -- 491
Issuance of common stock in public offering, net
of offering costs............................... -- -- -- -- 64,101
Conversion of preferred to common stock upon
initial public offering......................... -- -- -- -- --
Issue of common stock for overallotment, net of
offering........................................ -- -- -- -- 9,793
Stock issued through Employee Stock Purchase
Plan............................................ -- -- -- -- 675
Shares issued upon acquisition of RTI............ -- -- -- -- 21,031
Exercise of common stock and warrants............ -- -- -- -- 700
Deferred stock based compensation................ (1,580) -- -- --
Unrealized holding gains......................... -- 614 -- -- 614
Amortization of deferred stock based
compensation.................................... 3,816 -- -- -- 3,816
Expense related to acceleration of options....... -- -- -- -- 225
Net loss......................................... -- -- -- (25,081) (25,081)
-------------- ----------- ------------- ------------- --------------
Balances at December 31, 1999.................... $ (9,027) $ 614 $ (2,325) $(78,086) $ 93,768
============== =========== ============= ============= ==============
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
HEARME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...........................................................................$ (25,081) $ (11,951) $ (13,654)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization..................................................... 1,454 976 852
Stock based employee compensation................................................. 3,816 2,601 1,676
Warrant expense................................................................... 849 -- --
Write-off of purchased in-process research and development cost from RTI.......... 850 -- --
Write-off of intangible assets acquired in connection with the RTI acquisition.... 2,175 -- --
Non-cash interest on debt......................................................... 60 32 30
Unrealized gain on investment..................................................... 614 -- --
Adjustment to net loss for sale of investment..................................... -- (166) --
Amortization of notes payable discount............................................ -- -- 47
Changes in assets and liabilities:
Accounts receivable............................................................ (3,834) (1,314) (556)
Interest and other receivables................................................. (653) (261) (32)
Prepaid expenses and other current assets...................................... (1,019) (314) 74
Other assets................................................................... (212) (9) (1)
Accounts payable............................................................... (562) 690 (41)
Accrued payroll and related expenses........................................... 1,800 242 227
Accrued expenses............................................................... 1,600 67 3
Deferred revenue............................................................... 389 54 268
Deferred rent.................................................................. 78 12 23
----------- ----------- -----------
Cash used in operating activities...................................................... (17,676) (9,341) (11,084)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of investment.............................................................. -- (625) --
Proceeds from sale of investment.................................................... -- 791 --
Purchase of certificate of deposit (restricted cash)................................ -- (5) --
Acquisition of property and equipment............................................... (4,076) (880) (1,035)
----------- ----------- -----------
Net cash used in investing activities..................................... (4,076) (719) (1,035)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable......................................................... -- 2,500 --
Payments of notes payable........................................................... (4,469) (74) --
Proceeds from capital lease transactions............................................ -- -- 678
Proceeds from refunds of capital lease deposits..................................... -- -- 20
Payments under capital lease obligations............................................ (443) (399) (360)
Issuance of notes payable for insurance premium..................................... 434 -- --
Proceeds from exercise of common stock options and warrants, net of repurchase...... 1,181 111 15
Proceeds from issuance of common stock through ESPP................................. 675 -- --
Proceeds from issuance of preferred stock, net...................................... 18,797 (96) 13,787
Proceeds from issuance of bridge loans.............................................. -- -- 1,600
Acquisition of RTI.................................................................. (106) -- --
Proceeds from initial public offering, net of issuance costs........................ 73,893 -- --
----------- ----------- -----------
Net cash provided by financing activities................................. 89,962 2,042 15,740
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents...................... 68,210 (8,018) 3,621
----------- ----------- -----------
----------- ----------- -----------
Cash and cash equivalents, beginning of period......................................... 1,114 9,132 5,511
----------- ----------- -----------
----------- ----------- -----------
Cash and cash equivalents, end of period..............................................$ 69,324 $ 1,114 $ 9,132
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Mpath Interactive, Inc. ("the Company"), was incorporated in Delaware
and commenced operations in January 1995. The Company provides technology and
services to third parties seeking to create voice enabled real time internet
communities and designs, develops, operates and markets a people-to-people
entertainment and game community on the Internet.
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. The
Company changed its legal name to HearMe in January 2000.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The following tables detail HearMe's cash and investments and their
contractual maturities. The Company considers all highly liquid investments with
original maturities of three months or less, to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates market. The Company
considers all short-term investments as available-for-sale.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
(IN THOUSANDS)
----------------------------------------------------------------------------
GROSS GROSS UNREALIZED ESTIMATED FAIR
AMORTIZED COST UNREALIZED GAINS LOSSES VALUE
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Cash in bank...................................... $ 3,506 $ -- $ -- $ 3,506
Mutual funds...................................... 12,093 -- -- 12,093
Corporate debt securities......................... 53,725 617 (4) 54,338
------------------ ----------------- ------------------ -----------------
69,324 617 (4) 69,937
================== ================= ================== =================
Included in cash and cash equivalents............. 28,361 1 -- 28,362
Included in short-term investments................ 40,963 616 (4) 41,575
------------------ ----------------- ------------------ -----------------
69,324 617 (4) 69,937
================== ================= ================== =================
Due within one year............................... $ 69,324 $ 617 $ (4) $ 69,937
================== ================= ================== =================
</TABLE>
RESTRICTED CASH:
At December 31, 1999 and 1998, cash balances of approximately $170,000
were restricted from withdrawal and held by a bank in the form of certificates
of deposit. These certificates of deposit serve as collateral to a letter of
credit issued to the Company's landlord as a security deposit and as a deposit
against the Company's credit card.
CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents,
short-term investments and accounts receivable. The Company deposits its cash
and cash equivalents with four major banks. The Company has not experienced any
losses on its deposits of cash and cash equivalents. Management believes that
these banks are financially sound and, accordingly, minimal credit risk exists.
39
<PAGE>
With respect to accounts receivable, the Company's customer base is
dispersed across many different geographic areas and ranges from individual
consumers to a variety of commercial entities. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company periodically reviews the need for reserves for potential credit
losses and such losses have been within management's expectations. Typically,
the Company grants terms of 30 to 60 days for both their Live Communities and
Technology Products customers.
During the year ended December 31, 1999, sales to one customer accounted
for approximately 14% of total revenue. During the year ended December 31, 1998
three customers accounted for 10%, 12% and 23% of total revenues. As of December
31, 1999 three customers accounted for approximately 11%, 12% and 15% of total
accounts receivable. Two customers accounted for approximately 19% and 27% of
total accounts receivable as of December 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of notes payable and capital lease obligations
approximate fair value.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, generally three to five years. When property and
equipment are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
included in income. For the year ended December 31, 1999 approximately
$1,068,000 of the property and equipment was construction-in-process pertaining
to the build-out of the Company's new leased office facilities. Depreciation
starts upon completion of the work, scheduled for late January of 2000.
LONG-LIVED ASSETS:
The Company accounts for long-lived assets under Statement of Financial
Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
the Company to review for impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets, whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be
recoverable. When such an event occurs, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the undiscounted expected future cash flows is less than the carrying amount
of the asset, an impairment loss is recognized.
REVENUE RECOGNITION:
LIVE COMMUNITIES
Live Communities revenues are substantially derived from advertising
revenues. Advertising revenues are recognized ratably over the period in which
the advertisement is displayed provided that no significant obligations remain
and collection of the resulting receivable is probable. Advertising rates are
dependent on the services provided and the placement of the advertisements. To
date, the duration of the Company's advertising commitments has generally
averaged from two to three months.
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 the Company 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. Revenues derived from monthly subscription services were
recognized over the period in which the services were provided. The Company
recorded deferred revenue for any amounts received in advance of the completion
of the subscription period. Any unearned but paid member subscription fees
remaining at September 30, 1999 were reimbursed to the members in October and
November 1999. E-commerce revenue is recognized when notification of shipment
has taken place and the revenue is earned. List rental revenue is recognized in
the period that the list rental partner notifies the Company of list usage.
40
<PAGE>
HEARME TECHNOLOGY PRODUCTS
The Company derives revenues from licensing fees for our technology,
including our Pop.X product, which enables other to create real-time interactive
experiences and related services. The Company also derives incremental HearMe
Technology Products revenues from service, maintenance and upgrade fees.
The Company has adopted the provisions of Statement of Position 97-2, or
SOP 97-2, "Software Revenue Recognition," as amended by Statement of Position
98-9, "Software Revenue Recognition With Respect to Certain Transactions." The
Company recognizes product revenue upon shipment if a signed contract exists,
the fee is fixed and determinable, collection of resulting receivables is
probable and product returns are reasonably estimable. For contracts with
multiple obligations (e.g., maintenance, unspecified upgrades), the Company
allocates revenue to each component of the contract based on objective evidence
of its fair value, which is specific to the Company, or for products not being
sold separately, the price established by management. The Company recognizes
revenue allocated to maintenance fees for ongoing customer support and
unspecified upgrades ratably over the period of the maintenance contract or
upgrade period.
The Company records deferred revenue for any amounts received in advance
of the completion of the maintenance contract period and for any amounts
received prior to their being earned under the percentage of completion method.
RESEARCH AND DEVELOPMENT COSTS:
Research and development expenditures are charged to operations as
incurred.
ADVERTISING COSTS:
Costs related to advertising and promotion of products is charged to
sales and marketing expense as incurred. Advertising cost charged to expenses
for the years ended December 31, 1999, 1998 and 1997 were approximately
$2,378,000, $1,201,000 and $572,000 respectively.
EARNINGS PER SHARE:
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings per Share", establishes standards for computing and presenting
earnings per share. Basic earnings per share is calculated using the average
shares of common stock outstanding, reduced for shares subject to repurchase by
the Company, while diluted earnings per share reflects the potential dilution
that could occur because of preferred stock and if stock options and warrants
were exercised. Preferred stock, stock options and warrants are excluded from
the calculation if their effect would be antidilutive.
PRO FORMA NET LOSS PER SHARE:
Pro forma net loss per share for the year ended December 31, 1999 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. The
resulting pro forma adjustment results in an increase in the weighted average
shares used to compute basic and diluted net loss per share of 12,872,927 shares
for the year ended December 31, 1999 and 10,416,615 shares for the year ended
December 31, 1998. 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.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation", defines a fair value based method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities a choice of recognizing related compensation expense by
adopting the fair value method or measuring compensation using the intrinsic
value approach under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees". The Company has chosen to continue
to use the measurement prescribed by APB Opinion No. 25 for employee stock
options and to make supplemental
41
<PAGE>
disclosures to show the effects of using the fair value-based measurement
criteria. The Company accounts for options granted to non-employees under SFAS
No. 123.
INCOME TAXES:
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
CERTAIN RISKS AND UNCERTAINTIES:
The Company is subject to all of the risks inherent in an early stage
business in the technology and entertainment industries. The risks include but
are not limited to limited operating history, limited management resources,
reliance on advertising for revenues where acceptance of advertising on the
Internet is uncertain, reliance on relationships with content providers,
dependence on the Internet and related security risks and the changing nature of
the Internet industry.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME:
The Company has adopted the accounting treatment prescribed by Financial
Accounting Statement No. 130, "Comprehensive Income." The adoption of this
statement had no impact on the Company's financial statements for the periods
presented.
SEGMENT INFORMATION:
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131). SFAS No. 131 supersedes FAS 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information (see Note 13)
RECENT ACCOUNTING PRONOUNCEMENTS:
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP 98-1). SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use. Costs
incurred prior to the initial application of SOP 98-1 should not be adjusted to
the amounts that would have been capitalized had this SOP been in effect when
those costs were incurred. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. Accordingly, the Company adopted
SOP 98-1 in its financial statements for the year ending December 31, 1999. The
impact on the financial statements of the adoption of this standard is not
significant.
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
42
<PAGE>
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 currently hold derivative instruments
nor engage in hedging activities and 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.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified for consistency with
current year financial statement presentation.
3. ACQUISITIONS:
CATAPULT ACQUISITION:
In May 1996, the Company commenced negotiations on, and in July 1996,
the Company finalized a binding letter of intent to acquire all of the assets
and assume the liabilities of Catapult Entertainment, Inc. ("Catapult"). This
acquisition was completed as part of a Chapter 11 Plan of Reorganization under
the United States Bankruptcy Code in November 1996. The total acquisition cost
was approximately $11,831,000 and consisted of (i) cash payments of $2,444,000,
including $549,000 paid to Catapult's unsecured creditors; (ii) 877,560 shares
of Series C preferred stock valued at $10.28 per share (see Note 7); and (iii)
legal and accounting costs of $367,000. Net liabilities in excess of assets
assumed by the Company amounted to $2,644,000. Approximately 105,000 shares of
Series C Preferred Stock were placed in escrow in the event that the Company was
required to pay allowable unsecured claims in excess of $549,000. As of May
1998, the final payment of $121,000 had been requested by Catapult creditors for
which the Company was entitled to receive reimbursement from Series C preferred
stock in escrow. The Series C preferred stock held in escrow was reduced by
9,306 shares and the remaining 95,665 shares were released to the stockholders
of Catapult.
The acquisition was accounted for as a purchase. Accordingly, the
results of operations of Catapult have been included in the consolidated
statements of operations from the date of acquisition.
The purchase price, including liabilities assumed, in excess of the fair
value of assets acquired was allocated to in-process research and development
($1,600,000), which was immediately expensed and goodwill ($12,876,000).
The goodwill was originally assigned a two year life based on the time
it would take for competitors to develop competing technology. During the
remainder of 1996, however, significant changes in the industry caused the
Company to move from a "pay for play" business model to an advertising supported
model. These events included the anticipated change in business model by
competitors and an industry shift toward free, Internet-based gaming, away from
the proprietary, telephonic, subscription-based technology employed by Catapult.
As a result, the Company no longer intended to further develop or use the
Catapult technology. Accordingly, the Company wrote off the goodwill as it was
clearly impaired in 1996 and had zero market value.
In June 1998, the Company exercised warrants, received in connection
with the Catapult Acquisition and immediately sold the acquired shares,
realizing a gain of approximately $167,000. The gain was included in other
income during the year ended December 31, 1998.
RESOUNDING ACQUISITION:
On October 20, 1999, the Company completed its acquisition of Resounding
Technology, Inc ("RTI"), a Delaware corporation. This acquisition was
accomplished by the statutory merger (the "Merger") of RTI Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of the Company, with and into
Resounding. The Merger was accomplished pursuant to an Agreement and Plan of
Merger dated as of September 27, 1999, among the Company, Resounding and RTI
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 the Company 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 the Company stock was distributed using an exchange
43
<PAGE>
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
accounted for this acquisition in the fourth quarter of fiscal 1999.
The purchase price of approximately $23,485,000 includes $22,601,000 of
stock, issued at fair value (fair value being determined as the average price of
the HearMe stock for a period three days before and after the announcement of
the merger) less a discount of $1,479,000 due to the restricted nature of the
stock, $1,908,000 in RTI stock option costs (being determined under the Black
Scholes formula), $175,000 in cash and $280,000 in estimated expenses of the
transaction. The purchase price was allocated as follows: $260,000 to the
estimated fair value of RTI net tangible assets purchased (as of September 27,
1999), $2,600,000 to purchased existing technology, ($1,840,000) to establish
deferred tax liabilities associated with certain intangibles acquired, $850,000
to purchased in-process research and development, $700,000 to
workforce-in-place, $1,300,000 to non-compete agreements and $19,615,000 to
goodwill. The allocation of the purchase price to intangibles was based upon an
independent, third party appraisal and management's estimate.
The intangible assets and goodwill acquired have estimated useful lives
and estimated 1999 amortization, as follows:
<TABLE>
<CAPTION>
ESTIMATED 1999
AMOUNT USEFUL LIFE AMORTIZATION
--------------- --------------- ---------------
<S> <C> <C> <C>
Purchased existing technology.................................................. $ 2,600,000 2 years $ 253,000
Workforce-in-place............................................................. 700,000 2 years 68,000
Executive covenants............................................................ 1,300,000 2 years 126,000
Goodwill....................................................................... 19,615,000 2 years 1,907,000
</TABLE>
The value assigned to purchase-in-process research and development
("IPR&D") was determined by identifying research projects in areas for which
technological feasibility had not been established. These include projects for
the development of a next generation version of RTI's Roger Wilco product, a
software developers' kit as well as other specialized technologies totaling
$2,600,000. The value was determined by estimating the expected cash flows from
the projects once commercially viable, applying a percentage of completion to
the calculated value as defined below and then discounting the net cash flows
back to their present value.
NET CASH FLOWS. The net cash flows from the identified projects are
based on our estimates of revenues, cost savings from those projects, estimated
charges for use of assets by the projects and income taxes from those projects.
These estimates are based on the assumptions mentioned below.
The estimated revenues are based on management projections of each
in-process project. Estimated total revenues from the IPR&D product areas are
expected to peak in the second quarter of 2001 and decline to zero by the third
quarter of 2002 as other new products are expected to become available. These
projections are based on our estimates of market size and growth, expected
trends in technology and the nature and expected timing of new project
introductions by our competitors and us.
Projected gross profits from RTI's technology products are in line with
comparable industry margins. The estimated charges for use of assets are
consistent with RTI's historical cost structure, which is in line with industry
averages at approximately 5% of revenues.
DISCOUNT RATE. Discounting the net cash flows back to their present
value is based on the industry weighted average cost of capital ("WACC"). The
industry WACC is approximately 31%. The discount rate used in discounting the
net cash flows from IPR&D is 35%, a 400 basis point increase from the industry
WACC. This discount rate is higher than the industry WACC due to inherent
uncertainties surrounding the successful development of the IPR&D, market
acceptance of the technology, the useful life of such technology and the
uncertainty of technological advances which could potentially impact the
estimates described above.
PERCENTAGE OF COMPLETION. The percentage of completion for each project
was determined using costs incurred to date on each project as compared to the
remaining research and development to be completed to bring each project
technological feasibility. The percentage of completion varied by individual
project ranging from 25% to 80%.
If the projects discussed above are not successfully developed, the
sales and profitability of the combined company may be adversely affected in
future periods.
44
<PAGE>
Pro forma condensed results of operations for the combined company as if
the transaction had consummated at the beginning of the earliest period
presented and carried forward into 1999 are as follows:
HEARME
PROFORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenues................................................................. $ 15,522 $ 8,027
Cost of revenues......................................................... 5,591 3,011
------------- -------------
Gross profit............................................................. 9,931 5,016
------------- -------------
Loss from operations..................................................... (39,542) (13,867)
Net loss............................................................ $ (37,677) $ (13,980)
============= =============
Net loss per common share:
Basic................................................................. $ (2.63) $ (6.27)
============= =============
Diluted............................................................... $ (2.63) $ (6.27)
============= =============
Weighted average shares outstanding:
Basic................................................................. 14,335 2,231
============= =============
Diluted............................................................... 14,335 2,231
============= =============
</TABLE>
There were no transactions between the Company and RTI during the
periods presented
4. PROPERTY AND EQUIPMENT:
Property and equipment, with useful lives ranging from 3-5 years,
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Software................................................................ $ 371 $ 212
Computer equipment...................................................... 4,574 2,078
Furniture and fixtures.................................................. 291 86
Leasehold improvements.................................................. 257 109
Construction in progress................................................ 1,068 --
Equipment under capital lease:
Software and computer equipment...................................... 1,602 1,602
------------- -------------
8,163 4,087
Less accumulated depreciation and amortization.......................... (3,663) (2,209)
------------- -------------
$ 4,500 $ 1,878
============= =============
</TABLE>
The accumulated amortization on assets under capital lease was
approximately $1,327,000 and $900,000 at December 31, 1999 and 1998,
respectively.
5. COMMITMENTS AND CONTINGENCIES:
CONTINGENCIES:
The Company has received notice of certain claims for potential patent
infringement. The Company believes that these claims are without merit and
intends to defend them vigorously. However, litigation is subject to inherent
uncertainties and thus, there can be no assurance that these claims will be
resolved favorably to the Company or that they will not have a material adverse
affect on the Company's financial statements.
LEASE COMMITMENTS:
The company leases its office facilities under terms of operating lease
agreements expiring through 2005. During 1999, the company entered into a lease
agreement for an additional location to expand into. The lease
45
<PAGE>
commenced on July 1999 and expires in February 2005. Future minimum lease
payments under capital and operating leases at December 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------- -------------
<S> <C> <C>
2000.................................................................... $ 432 $ 1,134
2001.................................................................... 10 1,142
2002.................................................................... 3 755
2003.................................................................... -- 738
2004.................................................................... -- 734
2005.................................................................... -- 118
------------- -------------
Total minimum lease payments......................................... 445 $ 4,621
=============
Less amount representing interest....................................... (104)
-------------
341
Less current portion.................................................... (322)
-------------
$ 19
=============
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $623,000, $498,000 and $500,000 respectively.
6. NOTES PAYABLE:
In conjunction with its acquisition of Catapult (Note 3), the Company
assumed certain indebtedness of Catapult. Included in the indebtedness assumed
were convertible, non-interest bearing promissory notes payable totaling
$1,300,000 which were due in full in November 2001. Associated with these notes
was unamortized debt discount, which was calculated using an interest rate of
8.25%. Warrants to purchase the Company's common stock were issued in
conjunction with the convertible promissory notes at the time of the Catapult
acquisition. In July 1997, these notes were converted into 981,481 shares of
Series D preferred stock and warrants to purchase 490,741 shares of the
Company's common stock. These warrants have an exercise price of $5.40 per share
and have exercisability and expiration terms defined in Note 7--Warrants. The
unamortized debt discount was recorded as a reduction to additional paid-in
capital in connection with the conversion of the notes into the Series D
preferred stock.
The Company also assumed a convertible note payable from Catapult
bearing interest at prime (7.75% at December 31, 1998) which is due with
interest in November 2001. At December 31, 1998 and 1997, the Company had
$1,864,000 outstanding under this note payable. The entire amount of unpaid
principal and accrued interest may be converted, at the option of the note
holder, into shares of the Company's common stock, upon (i) a sale of all or
substantially all of the Company, through a merger, acquisition or other
transaction, or (ii) upon an initial public offering of the Company's common
stock. The number of shares of common stock this note can be converted into is
calculated by dividing the amount of unpaid principal and interest by either (i)
the IPO price per share, or (ii) the acquisition price per share. On June 11,
1999, the Company elected to pay off the note balance together with accrued
interest therein, for a total of $2,265,000.
In May 1997, the Company received convertible bridge loans totaling
$1,600,000 from certain of its stockholders. The bridge loans carried interest
at 6.23% per annum. In July 1997, the bridge loans and accrued interest of
approximately $14,000 were converted into 647,405 shares of Series D preferred
stock and warrants to purchase 323,702 shares of the Company's common stock.
These warrants have an exercise price of $5.40 per share and have exercisability
and expiration terms defined in Note 7--Warrants. In April 1999, these warrants
were cancelled in connection with the Initial Public Offering.
In July 1998, the Company entered into a revolving line of credit
agreement for up to $1,500,000 or 80% of the Company's accounts receivable, a
capital equipment purchase line agreement for up to $1,000,000 and a term loan
agreement up to $1,500,000, all bearing interest rates of prime plus 2.0% (9.75%
at December 31, 1998). Amounts borrowed under these agreements are
collateralized by substantially all assets of the Company. In conjunction with
this agreement, the Company issued a warrant to purchase 23,000 shares of the
Company's Series D preferred stock at an exercise price of $5.40 per share. As
the fair value of these warrants was determined to be immaterial at the date of
issuance, no additional debt issuance costs were recorded.
46
<PAGE>
As of December 31, 1998, the Company has borrowed approximately
$1,500,000 and $1,000,000 against the term loan agreement and the capital
equipment purchase line agreement, respectively. Amounts drawn against the term
loan and capital equipment purchase line were repaid in January 1999. As of
December 31, 1998, the Company has not drawn down any of the available funds on
the revolving line of credit. In May 1999, the Company fully repaid the capital
equipment loan from proceeds of the Initial Public Offering. There are no
outstanding loans and the various lines of credit have been canceled. In
December 1999, the related warrants were exercised in a net transaction for
18,357 shares with total proceeds of approximately $99,000.
Total notes payable outstanding are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Assumed note from Catapult.............................................. $ -- $ 1,864
Capital equipment purchase line......................................... -- 985
Term loan............................................................... -- 1,441
Directors' and officers' insurance note................................. 255 --
------------ ------------
255 4,290
Less current portion.................................................... (255) (2,426)
------------ ------------
Total long term notes payable........................................... $ -- $ 1,864
============ ============
</TABLE>
7. STOCKHOLDERS' EQUITY (DEFICIT):
CONVERTIBLE PREFERRED STOCK:
In January 1999, the Company increased the authorized number of shares
of preferred stock to 16,294,986 and issued 3,035,306 shares of Series E
convertible preferred stock, with a par value of $.00005 per share, at a price
of $6.60 per share. An additional 77,422 shares of Series E preferred stock were
reserved for issuance upon exercise of warrants granted to the investment
bankers at an exercise price of $6.60 per share. The fair value of these
warrants of $104,000 was recorded as a reduction of additional paid-in capital.
In April 1999, these warrants were exercised for total proceeds of approximately
$511,000. Each share of Series E preferred stock converted at the time of the
Initial Public Offering on a one-for-one basis.
The Company currently has authorized a total of 5,000,000 shares of
convertible preferred stock. The Company had previously authorized prior to the
Initial Public Offering 16,294,986 shares. With the completion of the Initial
Public Offering these authorized shares were cancelled as the issued and
outstanding shares converted into common stock.
The following is outstanding:
<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING
DECEMBER 31,
-----------------------------------
DESIGNATED 1999 1998
----------------- ---------------- ----------------
<S> <C> <C>
Series A........................................................... 2,800,000 -- 2,800,000
Series B........................................................... 2,234,320 -- 2,190,842
Series C........................................................... 2,323,969 -- 2,314,663
Series C-1......................................................... 2,323,969 -- --
Series D........................................................... 3,500,000 -- 3,111,110
Series E........................................................... 3,112,728 -- --
Undesignated....................................................... 5,000,000 -- --
----------------
Total convertible preferred stock.................................. -- 10,416,615
================
</TABLE>
The rights, preferences and privileges of the preferred stockholders are
as follows:
DIVIDENDS:
The holders of Series A, Series B, Series C, Series C-1, Series D and
Series E preferred stock are entitled to receive dividends, out of any assets
legally available prior and in preference to any declaration or payment of any
dividend on the common stock at the rate of $.05, $.205, $1.03, $1.03, $0.54 and
$0.66 per share per annum, respectively, when and if declared by the Board of
Directors. Such dividends are not cumulative. After payment of the dividend
preference, outstanding shares of Series A, Series B, Series C, Series C-1 and
Series D preferred stock
47
<PAGE>
shall participate with shares of common stock as to any additional declaration
or payment of any dividend. As of December 31, 1999, no dividends have been
declared or paid.
LIQUIDATION:
Upon liquidation, dissolution, or winding up of the Company, the holders
of preferred stock are entitled to receive on an equal basis in conjunction with
holders of preferred Series D and in preference to holders of common and holders
of Series A,B,C and C-1 an amount equal to $6.60 for each share of Series E and
$5.40 for each share of Series D then held plus any declared but unpaid
dividends. Holders of Series A,B,C and C-1 preferred stock shall then receive
distributions based on their liquidation rates.
After completion of the distribution to the preferred stockholders the
remaining assets will be distributed to the holders of Series A Preferred Stock
and common stock on a common equivalent of $2.50 per share. Thereafter, the
holders of common stock will be entitled to receive all remaining assets.
The holders of each share of Series E preferred stock shall have the
right to that number of votes equal to the number of shares of common held on as
converted basis.
CONVERSION:
Each share of Series A, Series B, Series C, Series C-1, Series D and
Series E preferred stock was converted to one share of common stock upon the
closing of the public offering.
REDEMPTION:
The preferred stock is not redeemable.
VOTING RIGHTS:
The holder of each share of Series A, Series B, Series C, Series C-1 and
Series D preferred stock is entitled to one vote for each share of common stock
into which such share of the preferred stock is convertible.
COMMON STOCK:
In May 1999, the Company completed its initial public offering and
issued 3,900,000 shares of its common stock to the public at a price of $18.00
per share. The Company received net proceeds of approximately $64.1 million in
cash. As of the closing date of the offering, all of the preferred stock
outstanding was converted into an aggregate of 13,529,343 shares of common
stock. In June 1999, the Company issued an additional 585,000 shares of its
common stock at a price of $18.00 per share for net proceeds of approximately
$9.8 million, relating to the underwriters' thirty-day option to purchase these
shares in connection with the initial public offering.
Previously the Company had issued 2,397,000 shares of its common stock
to the founders and key employees of the Company under restricted stock purchase
agreements in exchange for notes receivable bearing interest at 5.2% to 6.8% per
annum. In the period ending December 31, 1999, the Company issued 207,500
options for shares of its common stock to three key employees of the Company.
All of the options were exercised immediately in exchange for cash and notes
receivable bearing interest rate ranging from 4.64% to 4.99% per annum. In the
same period ending December 31,1999, three of the notes receivable to key
employees totaling $7,684 were paid in full. In the period ending December 31,
1998, the Company issued 852,378 options for shares of its common stock to seven
key employees of the Company. All of the options were exercised immediately in
exchange for cash and notes receivable bearing interest rates ranging from 5.93%
to 6.02% per annum.
Under the terms of the agreements, the Company has the option to
repurchase all or any portion of the purchased shares in which the founders and
key employees have not acquired a vested interest, should the individuals cease
to be employed, at the holder's original purchase price. The Company's right to
repurchase such shares generally lapses 25% on the first anniversary date of the
purchase of the common stock and thereafter ratably over three years. At
December 31, 1999, 13,479 shares of the founders common stock and 480,020 shares
of the options exercised were subject to the Company's right of repurchase.
48
<PAGE>
REDEEMABLE COMMON STOCK:
Common Stock Put Rights were granted to Resounding's employees to enable
them to sell their pro-rata portion of 200,000 shares of the Company's common
stock at a price of $10.00 per share. Such Put Rights expire in October 2001.
WARRANTS:
In conjunction with a capital lease agreement, the Company granted
warrants to purchase up to 43,477 shares of its Series B preferred stock at an
exercise price of $2.07 per share and expire September 30, 2002. The warrants
are exercisable based on the amount of the lease line used. As the fair value of
these warrants was determined to be immaterial at the date of issuance, no
charge to rent expense was recorded. In November 1999, these warrants were
exercised in a net transaction resulting in 39,374 shares of common stock issued
at a value of approximately $81,000.
In conjunction with the issuance of the Series D preferred stock, issued
during July and August 1997, the Company issued warrants to the Series D
investors to purchase 1,555,555 shares of common stock at a price of $5.40 per
share (subject to adjustments under certain circumstances). This grant of
1,555,555 includes the 490,741 convertible promissory note grant and the 323,702
bridge loan conversion grant (see Note 6). No charge was recorded for the fair
value of these warrants at the date of grant (of $529,000) as the warrants were
costs of financing recorded against additional paid-in capital. These warrants
were cancelled in connection with the Initial Public Offering.
The Company entered into an agreement with a national Internet Service
Provider (service provider) in 1995 to provide the equipment necessary for the
Company's services. In connection with this agreement, the Company tentatively
agreed to issue warrants to purchase 120,000 shares of common stock, although
the warrant was not issued until an agreement as to its terms was finalized on
February 12, 1999. The warrants entitle the holder to purchase 12,000 shares of
common stock at $0.21 per share and 108,000 shares at $1.03 per share. These
warrants are immediately exercisable and expire in February 2004. The fair value
of these warrants, as determined using the Black-Scholes model, was calculated
to be approximately $849,000 and expensed as cost of revenues in the first
quarter of 1999.
The Company issued a warrant to purchase up to 52,250 shares of common
stock at a price of $60 per share (subject to adjustments under certain
circumstances) in connection with the issuance of notes payable by Catapult
prior to its acquisition by the Company (See Note 6). The warrant is
exercisable, in whole or in part, at any time on or after November 18, 1996,
based on certain conditions as defined and expires on December 31, 2000. The
Company has reserved 52,250 shares of common stock for the exercise of this
warrant. As the fair value of these warrants was determined to be immaterial at
the date of issuance, no charge was recorded.
On February 11, 1999, the Company entered into a Letter of Understanding
with Yahoo! Inc., which outlines an arrangement to license to Yahoo! certain
technology. As part of this arrangement, the Company issued Yahoo! a warrant to
purchase 192,000 shares of common stock at an exercise price of $10.29 per
share, which Yahoo! can exercise upon certain milestones. The final valuation of
this warrant will not be established until all of the milestones have been met.
As of December 31, 1999 none of the milestones have been met.
The following table summarizes the outstanding warrants at December 31,
1999:
<TABLE>
<CAPTION>
NUMBER OF
DATE OF GRANT ISSUED TO TYPE WARRANTS EXERCISE PRICE EXPIRES
---------------------- ------------------------------- -------------- ---------------- ---------------- ----------------------
<S> <C> <C> <C> <C> <C>
November 1996 Promissory note-holder Common 52,250 $60.00 November 2000
(see above) Internet service provider Common 120,000 (see above) (see above)
February 1999 Yahoo! Inc. Common 192,000 $10.29 February 11, 2001
</TABLE>
1995 STOCK OPTION/STOCK ISSUANCE PLAN:
During 1995, the Company adopted the 1995 Stock Option/Stock Issuance
Plan (the Plan). The Plan is divided into an Option Grant Program under which
employees may be granted options to purchase common stock and a Stock Issuance
Program under which employees may be issued shares of common stock directly,
either through the immediate purchase of such shares or for services rendered to
the Company. Options are granted at an exercise price determined by the board of
directors and are fully exercisable on date of grant, subject to repurchase
49
<PAGE>
(at the original price) by the Company. The repurchase right lapses for 25% of
the shares upon completion of one year of service and the balance in successive
equal monthly installments over three years. Options expire ten years after
issuance. As of December 31, 1999 shares authorized under the plan were
3,453,000.
As part of the Catapult acquisition, the Company exchanged options to
purchase 122,403 shares of stock under the Plan for Catapult options outstanding
prior to the acquisition. These options, which were fully vested upon
consummation of the acquisition, are exercisable following termination of
employment for a period up to four years after the Company's acquisition of
Catapult or nine months after an initial public offering of the Company. A total
of 3,657 shares (with exercise prices between $2.01 and $6.29) were canceled
because they had not been exercised by January 29, 2000, nine months after the
IPO date. Shares issuable upon exercise of 15,453 of the options were held as
part of the escrow described under Note 3. The Catapult options held in escrow
were reduced by 1,325 options and the remaining 14,128 options were released
from escrow in 1998. The exercise price of the options was based on the exchange
ratio in the acquisition and range from $1.01 to $6.29 per share.
1999 STOCK INCENTIVE PLAN:
In February 1999, the Company's Board of Directors approved the 1999
Stock Incentive Plan. A total of 2,500,000 shares of common stock have been
reserved for issuance under this plan, which is subject to annual increases.
This plan provides for the grant of incentive stock options to employees and
nonstatutory stock options and restricted stock to employees, directors and
consultants. The terms of the option and restricted stock grants will be
determined by the Board of Directors on the date of issuance.
1999 DIRECTORS' STOCK OPTION PLAN:
In February 1999, the Company's Board of Directors approved the 1999
Directors' Stock Option Plan (the "Directors' Plan"). A total of 300,000 shares
of common stock have been reserved for issuance under the Directors' Plan. The
Directors' Plan provides for an initial grant of an option to purchase 30,000
shares of common stock to each person who becomes a non-employee director after
the effective date of the Directors' Plan. These options vest and become
exercisable 25% annually upon the first, second, third and fourth anniversaries
of the date of grant. The Directors' Plan also calls for annual grants upon each
annual meeting of options to purchase 7,500 common shares, which option becomes
exercisable and vested in full upon the fourth anniversary of the date of grant.
Options must be granted at the fair market value on the date of grant and have a
term of the lesser of ten years or the term of the optionees' service as a
director.
1999 EMPLOYEE STOCK PURCHASE PLAN:
In February 1999, the Company's Board of Directors approved the 1999
Employee Stock Purchase Plan (the "Purchase Plan"). A total of 750,000 shares of
common stock have been reserved for issuance under the Purchase Plan, which is
subject to annual increases. The Purchase Plan allows for eligible employees to
purchase a limited number of shares of the Company's common stock at 85% of the
fair market value during certain plan-defined dates.
OTHER STOCK OPTION GRANTS:
In the year ended December 31, 1999 the Company made grants of
non-statutory options to purchase 689,500 shares of stock. The terms of these
grants are the same as those made under the 1995 Stock Option Plan.
50
<PAGE>
Activity under the Company's stock option plans, including options
granted in connection with the above Catapult and Resounding acquisition, is as
follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED
AVAILABLE FOR NUMBER OF AGGREGATE AVERAGE
GRANT SHARES EXERCISE PRICE PRICE EXERCISE PRICE
--------------- --------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996........... 705,597 963,653 $ 0.05-$6.29 821,000 $ 0.85
Options additionally reserved...... 600,000
Options granted.................... (837,750) 837,750 $ 1.03 863,000 $ 1.03
Options canceled................... 144,525 (144,525) $ 0.21-$1.03 (93,000) $ 0.65
Options exercised.................. (53,400) $ 0.05-$1.03 (15,000) $ 0.28
--------------- --------------- -----------------
Balances, December 31, 1997........... 612,372 1,603,478 $ 0.05-$6.29 1,576,000 $ 0.98
Options additionally reserved...... 1,150,000
Options granted.................... (1,586,750) 1,586,750 $ 1.03-$2.50 1,992,000 $ 1.26
Options repurchased................ 1,500 $ 1.03 $ 1.03
Options canceled................... 152,166 (152,166) $ 0.05-$6.29 (134,000) $ (0.88)
Options exercised.................. (1,252,165) $ 0.05-$1.13 (1,050,000) $ (0.84)
--------------- --------------- -----------------
Balances, December 31, 1998........... 329,288 1,785,897 $ 0.05-$6.29 2,384,000 $ 1.33
Options additionally reserved...... 3,489,500
Options granted (1)................ (3,297,299) 3,297,299 $ 0.72-$29.50 45,270,000 $ 13.73
Options repurchased................ 11,526 $ 0.21-$2.50 $ 6.35
Options canceled................... 318,274 (318,274) $ 0.21-$20.88 (2,203,000) $ 6.92
Options exercised.................. (556,628) $ 0.05-$16.69 (1,697,000) $ 3.05
--------------- --------------- -----------------
Balances, December 31, 1999........... 851,289 4,208,294 $ 43,754,000
=============== =============== =================
</TABLE>
Note (1) - In connection with the acquisition of Resounding Technology,
152,308 options to purchase shares were issued below fair market value and are
included in the number above. The weighted average exercise price for these
options is $.72 with a weighted average fair market value of $13.25.
At December 31, 1999, 1998 and 1997, options for 1,218,275 shares,
589,599 shares and 12,501 shares remain subject to the Company's right of
repurchase, respectively.
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS CURRENTLY VESTED
-----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE NUMBER VESTED EXERCISE PRICE
- ------------------------ ----------------- ------------------ ------------------ ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.00-$2.95 1,453,924 8.1 years $ 1.16 1,356,986 $ 1.19
$ 2.96-$5.90 170,000 9.1 years $ 5.38 170,000 $ 6.29
$ 5.91-$8.85 43,463 .9 years $ 6.29 43,463 $ 6.29
$ 8.86-$11.80 508,999 9.2 years $ 9.35 508,999 $ 9.35
$ 11.81-$14.75 666,750 9.5 years $ 13.25 13,688 $ 12.80
$ 14.76-$17.70 404,658 9.5 years $ 16.90 22,109 $ 16.75
$ 17.71-$20.65 655,000 9.4 years $ 19.76 99,157 $ 19.52
$ 20.66-$23.60 115,500 9.5 years $ 20.88 2,447 $ 20.88
$ 23.61-29.50 190,000 9.3 years $ 26.84 $ 0.00
----------------- ----------------------
$ 0.00-$29.50 4,208,294 8.9 years $ 10.40 2,216,849 $ 4.55
================= ======================
</TABLE>
Options to purchase approximately 2,216,849, 1,785,897 and 580,541
shares were vested at December 31, 1999, 1998 and 1997, respectively. The
weighted average exercise price per share for options vested at December 31,
1999 was $4.55. Through December 31, 1999 the Company recorded compensation
expense related to certain stock options issued with exercise prices below the
fair market value of the related common stock. The company recorded compensation
expense in the approximate amount of $3,816,000, $2,601,000 and $1,676,000 in
1999, 1998 and 1997, respectively. Approximately $9,027,000 remains to be
amortized over the remaining vesting periods of the options.
51
<PAGE>
PRO FORMA STOCK-BASED COMPENSATION:
The Company accounts for employee stock options under APB Opinion No.
25. Had the Company determined compensation expense under SFAS No. 123, the
effect on the Company's net earnings would have been insignificant for the
years-ended 1997 and 1998. For the year-end December 31, 1999, 1998 and 1997,
the results would have been as follows (in thousands, except per shares
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Net income (loss):
As reported.................. $ (25,081) $ (11,951) $ (13,654)
Pro forma.................... $ (28,195) -- --
Net income (loss) per share - basic
As reported.................. $ (1.60) $ (7.81) $ (5.39)
Pro forma.................... $ (1.80) -- --
Net income (loss) per share - diluted
As reported.................. $ (1.60) $ (7.81) $ (5.39)
Pro forma.................... $ (1.80) -- --
</TABLE>
These pro forma results are not necessarily indicative of results which
may be expected in the future as additional grants are made each year and
options vest over several years. Prior to the company's initial public offering,
the fair value of each option grant was determined on the date of grant using
the minimum value method. Subsequent to the offering, the fair value was
determined using the Black-Scholes model. The weighted average fair value of the
options granted or modified for the years ended December 31, 1999, 1998 and 1997
was $13.73, $0.22 and $0.40 respectively.
The following weighted average assumptions were used in the above
calculations:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Risk free interest rate............................. 5.47% 5.13% 6.05%
Expected life....................................... 3 years 4 years 4 years
Volatility.......................................... 60.0% -- --
Dividend yield...................................... -- -- --
</TABLE>
8. NET LOSS PER SHARE:
In accordance with the requirements of SFAS No. 128, a reconciliation of
the numerator and denominator of basic and diluted loss per share is provided as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- ---------------------
<S> <C> <C> <C>
Numerator--Basic and Diluted:
Net loss..................................... $ (25,081,000) $ (11,951,000) $ (13,654,000)
Denominator--Basic and Diluted:
Weighted average common shares outstanding... 15,673,000 2,217,000 1,749,000
Basic and Diluted loss per share................ $ (1.60) $ (5.39) $ (7.81)
</TABLE>
52
<PAGE>
Options and warrants to purchase common and preferred shares, unvested
common shares subject to repurchase by the Company and preferred securities are
not included in the diluted loss per share calculations as their effect is
antidilutive for all periods presented. These dilutive securities at December
31, 1999 included weighted average common stock equivalents relating to
preferred stock and options and warrants to purchase common and preferred shares
(as calculated using the treasury method), as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Preferred stock.................................. -- 10,416,615 8,662,706
Unvested common shares........................... 1,218,275 185,354 794,594
Options.......................................... 2,565,113 1,993,582 1,118,773
Warrants......................................... 233,523 543,436 216,088
</TABLE>
9. EMPLOYEE BENEFIT PLAN:
The Company created a 401(k) Plan (the Plan) to provide tax deferred
salary deductions for all eligible employees. Participants may make voluntary
contributions to the Plan up to 20% of their compensation, not to exceed the
annual 402(g) limitation for any plan year. The Company's matching contribution
is discretionary as determined by the Board of Directors. During 1999, 1998 and
1997, the Company did not contribute to the Plan.
10. INCOME TAXES:
At December 31, 1999 and 1998, the Company had federal and state net
operating loss carryforwards of approximately $68,729,000 and $45,232,000,
respectively, available to offset future regular and alternative minimum taxable
income. The Company's net operating loss carryforwards expire on various dates
after the year 2000, if not utilized. At December 31, 1999, the Company had
research credit carryforwards of approximately $866,000 and $517,000 for federal
and state income tax purposes, respectively. The federal credit, if not
utilized, will expire on various dates after the year 2000. Due to changes in
the Company's ownership in 1995 and 1997, future utilization of a portion of the
net operating loss carryforwards will be subject to certain limitations of
annual utilization as deferred by the Tax Reform Act of 1986.
The components of the net deferred tax assets comprised (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net operating loss carryforwards................... $ 26,258 $ 17,588
Tax credit carryforwards........................... 1,464 988
Accruals and reserves.............................. 850 528
PP&E............................................... 4,645 5,097
Deferred tax liability from RTI acquisition........ (1,661) --
---------------- ----------------
31,556 24,201
Less valuation allowance........................... (31,556) (24,201)
---------------- ----------------
Net deferred tax liability......................... $ -- $ --
================ ================
</TABLE>
Due to uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its net deferred tax assets. The valuation allowance recorded for the
period ended December 31, 1999 increased by $9,016,005. Deferred tax assets and
the related valuation allowance include approximately $399,000 related to
certain U.S. operating loss carryforwards resulting from the exercise of
employee stock options, the tax benefit of which, when recognized, will be
accounted for as a credit to additional paid-in capital rather than a reduction
of the income tax provision.
53
<PAGE>
The difference between the statutory rate of approximately 34% and the
Company's effective tax rate is due primarily to the valuation allowance
established to offset the deferred tax assets. The provision for income taxes is
different than the amount computed using the applicable statutory federal income
tax rate with the difference for the year summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- ----------------
<S> <C> <C> <C>
Provision computed at federal statutory rate............... (34)% (34)% (34)%
State taxes................................................ (6) (6) (6)
Tax credit carryforwards................................... (2) (2) (2)
Change in valuation allowance.............................. 35 36 36
Fed permanent differences.................................. 10 1 1
Other...................................................... (3) 5 5
----------------- ---------------- ----------------
Provision for income taxes................................. 0% 0% 0%
================= ================ ================
</TABLE>
11. RELATED PARTY TRANSACTIONS:
One of the Company's major customers is also an investor and has a seat
on the Board of Directors. The Company had revenue transactions in the normal
course of business with this customer totaling $2,110,800, $1,901,000 and
$515,000 in the years ending December 31, 1999, 1998 and 1997, respectively. As
of December 31, 1999, the Company has an accounts receivable balance of
approximately $987,000 outstanding from this customer.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Cash paid for interest................................................. $ 213000 $ 222,000 $ 115,000
Exercise of common stock options for notes receivable.................. 1,204,000 937,000 --
Conversion of Series C preferred stock to Series D preferred stock..... -- -- 500,000
Exchange of notes payable for Series D preferred stock................. -- -- 1,300,000
Conversion of bridge loans and accumulated interest into Series D
preferred stock....................................................... -- -- 1,614,000
Non-cash payment for common stock warrants............................. -- -- 1,000
Buyout of Catapult leases with deposit funds........................... -- -- 74,000
Non cash financing cost in conjunction with financing arrangement for
Warrant of 23,000 shares of Series D preferred stock.................. -- 64,000 --
Warrant expenses related to 120,000 shares of common stock for
services.............................................................. 849,000 -- --
Compensation accrued for options granted............................... 215,000 215,000 1,606,000
Compensation recorded for options exercised............................ 2,380,000 2,380,000 63,000
</TABLE>
13. SEGMENTS:
As discussed in Note 2, the Company has two reportable segments: Live
Communities and Technology Products. Live Communities provides a live
entertainment and game community on the Internet. Technology Products leverages
the technology expertise developed in creating Live Communities by providing
licensed technology, developmental and supporting services to companies seeking
to create online communities.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income tax and
including nonrecurring gains and losses.
54
<PAGE>
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business has different strategies. The following table provides financial
information by segment (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF TOTAL DOLLAR OF TOTAL DOLLAR OF TOTAL
DOLLAR VALUE REVENUE VALUE REVENUE VALUE REVENUE
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Live Communities................. $ 8,422 54% $ 3,022 38% $ 686 25%
Technology Products.............. 7,100 46% 5,005 62% 2,041 75%
------------- ------------- ------------- ------------- ------------- -------------
Total...........................$ 15,522 100% $ 8,027 100% $ 2,727 100%
============= ============= ============= ============= ============= =============
Cost of net revenues:
Live Communities..................$ 4,473 29% $ 2,221 28% $ 1,808 66%
Technology Products............... 1,118 7% 790 10% 620 23%
------------- ------------- ------------- ------------- -------------
Total...........................$ 5,591 $ 3,011 $ 2,428
============= ============= ============= =============
Gross profit (loss):
Live Communities..................$ 3,949 25% $ 801 10% $ (1,122) (41)%
Technology Products............... 5,982 39% 4,215 52% 1,421 52%
------------- ------------- ------------- ------------- -------------
Total...........................$ 9,931 $ 5,016 $ 299
============= ============= ============= =============
Operating expenses:
Live Communities..................$ 19,006 $ 9,740 $ 8,106
Technology Products............... 11,030 4,513 4,077
------------- -------------
Total...........................$ 30,036 $ 14,253 $ 12,183
============= ============= =============
Operating loss:
Live Communities..................$ (15,057) $ (8,939) $ (9,228)
Technology Products............... (5,048) (298) (2,656)
------------- ------------- -------------
Total...........................$ (20,105) $ (9,237) $ (11,884)
============= ============= =============
</TABLE>
The Company does not track assets at all or operating expenses in any
more detail than presented above for the chief operating decision maker to make
operating decisions. Accordingly such information has not been presented.
In 1999, 1998 and 1997, the operating expenses and operating loss do not
agree to the amounts on the statements of operations as the stock compensation
was not classified within either operating segment. Additionally for 1999,
amortization of goodwill and intangible assets and in process research and
development were not classified in either operating segment.
14. SUBSEQUENT EVENTS:
On March 13, 2000, the Company announced that it signed a definitive
agreement to acquire AudioTalk Networks, a privately-held leading provider of
Internet voice and IP telephony technologies to Web businesses. Terms of the
agreement provide for the exchange of AudioTalk's outstanding shares for a
combination of mostly stock and some cash estimated at approximately $125
million based upon the market value of the Company's stock for the ten trading
days ending four trading days prior to the close of the transaction. The
transaction will be accounted for as a purchase and is expected to close during
the second quarter of 2000. Management believes that approximately $115 million
of the acquisition cost represents intangible assets, consisting of goodwill,
existing technology, contracts in process and costs relating to AudioTalk's
workforce. These assets are expected to be completely amortized within three
years of the close of the transaction.
55
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998 and 1997: (in thousands)
<TABLE>
<CAPTION>
ADDITIONS
-----------------
BALANCE AT THE CHARGED TO BALANCE AT
ALLOWANCE FOR BEGINNING OF COSTS AND CHARGED TO THE END OF
DOUBTFUL ACCOUNTS THE YEAR EXPENSES OTHER ACCOUNTS DEDUCTIONS THE YEAR
- ------------------- ----------------- ----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
1999 20 398 -- 3 415
1998 8 12 -- -- 20
1997 -- 8 -- -- 8
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
56
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the Company's
executive officers is incorporated herein by reference from the information
contained in Item 1 of Part I of this Report under the caption " Executive
Officers of the Registrant." The information required by this Item with respect
to the Company's directors is incorporated herein by reference from the
information provided under the heading "Proposal No. 1 - Election of Directors"
of the Company's Proxy Statement for its 2000 Annual Meeting. The information
required by Item 405 of Regulation S-K is incorporated herein by reference from
the information provided under the heading "Section 16(a) Beneficial Ownership
Reporting Compliance" of the Company's Proxy Statement for its 2000 Annual
Meeting.
Gregory O'Brien resigned as a Director of the Company on February 10,
2000. Mr. O'Brien had served as a Director of the Company since January 1999.
Mr. O'Brien has been Chief Administrative Officer at CSK Global Business Offices
since May 1998 and has held various other positions at CSK or its affiliates
since September 1990. CSK is a computer software and services company. Mr.
O'Brien has a B.B.A. and an M.B.A. from Pace University.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference from the information provided under the heading "Executive
Compensation and Other Matters" of the Company's Proxy Statement for its 2000
Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference from the information provided under the heading "Information Regarding
Beneficial Ownership of Principal Stockholders and Management" of the Company's
Proxy Statement for its 2000 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference from the information provided under the heading
"Certain Relationships" of the Company's Proxy Statement for its 2000 Annual
Meeting.
57
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements: (see index on page 33 of this
report)
--Independent Auditors' Report
--Consolidated Balance Sheets
--Consolidated Statements of Operations
--Consolidated Statements of Stockholders' Equity
--Consolidated Statements of Cash Flows
--Notes to the Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule The following financial
statement schedule of the Registrant for fiscal years 1999, 1998 and 1997
(inception) through December 31, 1997, is filed as a part of this report and
should be read in conjunction with the Consolidated Financial Statements of the
Registrant.
Schedule II - Valuation and qualifying accounts
All other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the financial
statements or the notes thereto.
(3) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of September 27, 1999 among the Company, ITR Acquisition Corp. and Resounding
Technology, Inc. (1)
3.2 Form of Amended and Restated Certificate of Incorporation. (2)
3.4 Amended and Restated Bylaws. (2)
4.1 Specimen Stock Certificate. (2)
4.2 Fourth Amended and Restated Investors' Rights Agreement dated January 15, 1999.(2)
4.3 Form of Common Stock Purchase Warrant, issued in connection with the Series D Preferred Stock financing.(2)
4.4 Warrant to Purchase Shares of Capital Stock dated November 18, 1996, issued by Mpath in favor of Intel Corporation.(2)
4.5 Common Stock Purchase Warrant dated February 12, 1999, issued by the Company in favor of PSINet, Inc.(2)
4.6 Common Stock Purchase Warrant dated February 12, 1999, issued by the Company in favor of PSINet, Inc.(2)
4.7 Common Stock Purchase Warrant dated February 11, 1999, issued by the Company in favor of Yahoo! Inc. +(2)
4.8 Preferred Stock Purchase Warrant dated September 29, 1995, issued by the Company in favor of Lighthouse Capital
Partners, LP.(2)
4.9 Warrant to Purchase Stock dated July 29, 1998, issued by the Company in favor of Greyrock Business Credit.(2)
4.10 Series E Preferred Stock Purchase Warrant dated January 15, 1999, issued by the Company in favor of NationsBanc
Montgomery Securities LLC.(2)
4.11 Convertible Senior Subordinated Promissory Note dated November 18, 1996, issued by the Company to Viacom International,
Inc.(2)
4.12 Secured Promissory Notes dated July 29, 1998 and December 24, 1998 issued by the Company to Greyrock Business Credit.(2)
10.1 Form of Indemnification Agreement between the Company and each of its officers and directors.(2)
10.2 1995 Stock Option/Stock Issuance Plan. (2)
10.3 1999 Stock Incentive Plan.
10.4 1999 Employee Stock Purchase Plan.
10.5 1999 Directors' Stock Option Plan.(2)
10.9 Application Development Agreement dated November 9, 1998 between the Company and Intel Corporation. + (2)
10.10 Technology License Agreement dated April 15, 1996 between the Company and SegaSoft Networks, Inc. + (2)
58
<PAGE>
10.11 Amendment #1 to Technology License Agreement dated November 27, 1996 between the Company and SegaSoft Networks, Inc. +
(2)
10.12 Amendment #2 to TechnologyLicense Agreement dated March 28, 1998 between the Company and SegaSoft Networks, Inc. + (2)
10.13 Amendment #3 to Technology License Agreement dated October 27, 1998 between the Company and SegaSoft Networks, Inc. +(2)
10.15 Loan and Security Agreement dated July 29, 1998 between the Company and Greyrock Business Credit, including the
Related Schedule to Loan and Security Agreement dated July 29, 1998, related Amendment to Loan Documents dated July 31,
1998, the related Patent and Trademark Security Agreement dated July 29, 1998, the related Supplement One to Patent and
Trademark Security Agreement dated December 1, 1998 and the related Security Agreement in Copyrighted Works dated July
29, 1998.(2)
10.16 Industrial Lease dated December 1996 between the Company and The Prudential Insurance Company of America and the related
nondisturbance and Attornment Agreement dated February 25, 1998.(2)
10.17 Industrial Lease dated July 30, 1999 between the Company and Martin CBP Associates., LP.(3)
23.1 Consent of Independent Accountants.
24.1 Power of Attorney. See Page 60
27.1 Financial Data Schedule.
</TABLE>
- ---------
+ Confidential treatment requested as to certain portions of this Exhibit.
(1) Incorporated by reference to the corresponding Exhibit previously
filed as an Exhibit to the Company's Form 8-K dated October 20, 1999,
as filed with the Commission on November 16, 1999.
(2) Incorporated by reference to the corresponding Exhibit previously
filed as an Exhibit to the Company's Registration Statement on Form
S-1 (File No. 333- 72437) filed with the Commission on February 16,
1999, as amended.
(3) To be filed by amendment.
(b) Reports on Form 8-K.
On October 22, 1999, the Company filed a report on Form 8-K, pursuant
to Items 2 and 7 of such Form, regarding (a) its acquisition of Resounding
Technology, Inc.; (b) its doing business under the name HearMe; and (c) its
filing of a patent infringement lawsuit against Lipstream Networks, Inc.
On November 5, 1999, the Company filed a report on Form 8-K, pursuant to
Items 2 and 7 of such Form, regarding its acquisition of Resounding Technology,
Inc.
On November 7, 1999, the Company filed an amended report on Form 8-K,
pursuant to Item and 7 of such Form, relating to its acquisition of Resounding
Technology, Inc.
On December 22, 1999, the Company filed an amended report on Form 8-K,
pursuant to Items 2 and 7 of such Form, which included the supplementary
consolidated financial statements of with respect to the acquisition of
Resounding Technology, Inc.
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEARME
By: /s/ LINDA PALMOR
-------------------------------
Linda Palmor
CHIEF FINANCIAL OFFICER
Date: March 29, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Paul Matteucci and Linda Palmor, jointly
and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ PAUL MATTEUCCI Director and Chief Executive Officer March 29, 2000
- ------------------------------------------- (Principal Executive Officer)
PAUL MATTEUCCI
/s/ LINDA PALMOR Chief Financial Officer March 29, 2000
- ------------------------------------------- (Principal Financial and Accounting Officer)
LINDA PALMOR
/s/ BRIAN A. APGAR Director March 29, 2000
- -------------------------------------------
BRIAN A. APGAR
/s/ JAMES W. BREYER Director March 29, 2000
- -------------------------------------------
JAMES W. BREYER
/s/ DAVID A. BROWN Director March 29, 2000
- -------------------------------------------
DAVID A. BROWN
/s/ DOUGLAS G. CARLSTON Director March 29, 2000
- -------------------------------------------
DOUGLAS G. CARLSTON
/s/ WILLIAM MCCALL Director March 29, 2000
- -------------------------------------------
WILLIAM MCCALL
/s/ RUTHANN QUINDLEN Director March 29, 2000
- -------------------------------------------
RUTHANN QUINDLEN
</TABLE>
60
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- ------------------------------ ----------------------------------------------
10.3 1999 Stock Incentive Plan
10.4 1999 Employee Stock Purchase Plan
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
61
<PAGE>
EXHIBIT 10.3
HEARME
1999 STOCK INCENTIVE PLAN
ARTICLE 1. INTRODUCTION.
1.1 PURPOSES OF THE PLAN. The purpose of this Stock Incentive Plan is to promote
the long-term success of the Company and the creation of shareowner value by (a)
encouraging the attraction and retention of the best available personnel for
positions of substantial responsibility, (b) linking Company personnel directly
to shareowner interests through increased stock ownership, and (c) encouraging
Company personnel to focus on critical long-range objectives. The Plan seeks to
achieve these purposes by providing awards in the form of Stock Options (which
may constitute Incentive Stock Options or Nonstatutory Options) and Restricted
Stock.
1.2 TERM OF THE PLAN. The Plan shall become effective upon the earlier to occur
of its adoption by the Board of Directors or its approval by the shareholders of
the Company as described in Section 10.2 of the Plan. It shall continue in
effect for a term of ten years unless sooner terminated under Article 9 of the
Plan.
ARTICLE 2. SHARES AVAILABLE FOR GRANTS.
2.1 MAXIMUM AGGREGATE SHARES SUBJECT TO THE PLAN. Subject to the provisions of
Section 8.1 of the Plan, the maximum aggregate number of shares that may be
issued pursuant to the Plan is 2,500,000 Shares of Common Stock, plus an
automatic annual increase in such maximum number on the first day of each of the
Company's fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the
lesser of (A) 750,000 Shares , (B) 3% of the Shares outstanding on the last day
of the immediately preceding fiscal year, or (C) such lesser number of Shares as
is determined by the Board. The Shares may be authorized, but unissued, or
reacquired Common Stock.
2.2 SHARES FORFEITED OR SUBJECT TO UNEXERCISED OPTIONS. If an Option should
expire or become unexercisable for any reason without having been exercised in
full, the unpurchased Shares that were subject thereto shall, unless the Plan
shall have been terminated, become available for future grant under the Plan.
Shares of Common Stock that are retained by the Company upon exercise of an
Option or issuance of Restricted Stock in order to satisfy the exercise or
purchase price or any withholding taxes due with respect thereto shall be
treated as not issued and shall continue to be available under the Plan. If
Restricted Shares are forfeited before any dividends have been paid with respect
to such Restricted Shares, then such Restricted Shares shall again become
available for awards under the Plan other than Incentive Stock Options.
Notwithstanding any other provision of the Plan, shares issued under the Plan
and later repurchased by the Company pursuant to any repurchase right that the
Company may have shall not become available for future grant under the Plan.
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ARTICLE 3. ADMINISTRATION OF THE PLAN.
3.1 COMPOSITION OF ADMINISTRATOR. The Plan shall be administered by (a) the
Board, or (b) a Committee (or a subcommittee of the Committee) designated by the
Board, which Committee shall be constituted in such a manner as to satisfy
Applicable Laws. The Board may authorize one or more Officers to act as the
Administrator to grant Options or Restricted Stock with respect to Employees who
are not Officers and may limit such authority as the Board determines from time
to time.
3.2 MULTIPLE ADMINISTRATIVE BODIES. If permitted under Applicable Laws, the Plan
may (but need not) be administered by different bodies with respect to Reporting
Persons, Named Executives and other persons eligible to receive grants under the
Plan. With respect to grants of Options to Reporting Persons and Named
Executives, the Plan shall generally be administered by the Board or a Committee
as applicable so as to permit grants of Options to Reporting Persons under the
Plan to comply with Rule 16b-3 and to qualify grants of Options to Named
Executives as performance-based compensation under Section 162(m) of the Code
and otherwise so as to satisfy the Applicable Laws.
3.3 POWERS OF THE ADMINISTRATOR. Subject to Applicable Laws and the provisions
of the Plan (including any other powers given to the Administrator hereunder),
and except as otherwise provided by the Board, the Administrator shall have the
authority, in its discretion:
(a) to determine the Fair Market Value of the Common Stock, in accordance
with the definition set forth in Article 11 of the Plan;
(b) to select the Employees, Directors and Consultants to whom Options
and/or Restricted Stock may from time to time be granted hereunder;
(c) to determine whether and to what extent Options and/or Restricted Stock
are granted hereunder;
(d) to determine the number of shares of Common Stock to be covered by an
Option or Restricted Stock grant hereunder;
(e) to approve forms of agreement for use under the Plan;
(f) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any grant hereunder (including, but not limited to, the
Share price for any Option and any restriction or limitation, or any vesting
acceleration or waiver of forfeiture restrictions regarding any grant and/or the
shares of Common Stock relating thereto, based in each case on such factors as
the Administrator shall determine, in its sole discretion);
(g) to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Common Stock covered by such
Option shall have declined since the date the Option was granted; and
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(h) to construe and interpret the terms of the Plan and Options granted
pursuant to the Plan.
3.4 EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations and
interpretations of the Administrator shall be conclusive and binding on all
persons.
ARTICLE 4. ELIGIBILITY.
4.1 GENERAL RULE. Employees, Directors and Consultants are eligible to
receive grants of Options or Restricted Stock under the Plan. An Employee,
Director or Consultant who has been granted an Option or Restricted Stock may,
if he or she is otherwise eligible, be granted an additional Option or Options
or additional Restricted Stock.
4.2 INCENTIVE STOCK OPTIONS. Only Employees of the Company or a Subsidiary shall
be eligible to receive grants of Incentive Stock Options. Employees of an
Affiliate, Directors who are not Employees of the Company or a Subsidiary and
Consultants shall not be eligible to receive Incentive Stock Options.
4.3 LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as provided in
Section 8.1 of this Plan, the maximum number of Shares which may be subject to
Options granted to any one Employee under this Plan for any fiscal year of the
Company shall be 2,500,000 Shares.
4.4 NO EMPLOYMENT RIGHTS. Neither the Plan nor any grant pursuant to the Plan
shall confer upon any recipient of an Option or Restricted Stock grant any right
with respect to continuation of his or her service as an Employee, Director or
Consultant, or in any way interfere with the right of the Company, or a Parent,
Subsidiary or Affiliate, as the case may be, to terminate his or her service as
an Employee, Director or Consultant at any time, with or without cause.
ARTICLE 5. STOCK OPTIONS.
5.1 SEPARATE PROGRAMS. The Administrator may establish one or more separate
programs under the plan for purpose of issuing particular forms of Options to
one or more classes of Participants on such terms and conditions as determined
by the Administrator from time to time.
5.2 TYPE OF OPTION. As determined by the Administrator at the time of grant of
an Option and as designated in the written Option Agreement, Options granted
under the Plan may be either Incentive Stock Options or Nonstatutory Stock
Options. Notwithstanding such designations, the following rules shall apply to
Options designated as Incentive Stock Options:
(a) To the extent that the aggregate Fair Market Value of Shares with
respect to which Incentive Stock Options are exercisable for the first time by
an Optionee during any calendar year (under all plans of the Company or any
Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5.2(a), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares shall be determined as of the time the
Option with respect to such Shares is granted.
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(b) In the event any Option designated an Incentive Stock Option fails to
meet the requirements set forth herein for an Incentive Stock Option or as
required to qualify as an incentive stock option within the meaning of Code
Section 422, such Option shall not be void but instead shall be deemed a
Nonstatutory Stock Option.
5.3 TERMS AND CONDITIONS OF OPTIONS.
(a) TERM OF OPTIONS. The term of each Option shall be the term stated in
the Option Agreement; PROVIDED, HOWEVER, that the term shall be no more than ten
(10) years from the date of grant thereof, and in the case of an Incentive Stock
Option granted to an Optionee who, at the time the Incentive Stock Option is
granted, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the term of
the Incentive Stock Option shall be no more than five (5) years from the date of
grant thereof.
(b) DATE OF OPTION GRANT. The date of grant of an Option shall for all
purposes be the date on which the Administrator makes the determination to grant
such Option, or such other date as is determined by the Administrator; provided,
however, that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the commencement of the Optionee's
employment. Notice of the grant determination shall be given to each Employee,
Director or Consultant to whom an Option is granted within a reasonable time
after the date of the grant.
(c) CONDITIONS OF AN OPTION. Subject to the terms of the Plan, the
Administrator shall determine the provisions, terms and conditions of each
Option including, but not limited to, the option vesting schedule (including any
performance criteria which must be satisfied in connection with vesting of the
Option), and the consideration to be paid for Shares upon exercise of the
Option.
(d) NONTRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, made subject to any creditor's process,
whether voluntarily, involuntarily or by operation of law, or disposed of in any
manner other than by will or by the laws of descent or distribution, except as
otherwise determined by the Administrator in its discretion with respect to a
Nonstatutory Stock Option and provided in the applicable Option Agreement
specifying (i) the manner in which such Nonstatutory Option is transferable and
(ii) that any such transfer shall be subject to the Applicable Laws. The
designation of a beneficiary by an Optionee will not constitute a transfer. An
Option may be exercised, during the lifetime of the Optionee, only by the
Optionee or a transferee permitted by this Section 5.3(d).
5.4 OPTION EXERCISE PRICE; CONSIDERATION.
(a) EXERCISE PRICE. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be such price as is determined by
the Administrator and set forth in the applicable Option Agreement, but shall be
subject to the following:
(i) In the case of an Incentive Stock Option that is granted to an
Employee who, at the time of the grant of such Incentive Stock Option, owns
stock representing more than
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10% of the total combined voting power of all classes of stock of the Company or
any Parent or Subsidiary (an "10% Owner"), the per Share exercise price shall be
no less than 110% of the Fair Market Value per Share on the date of grant.
(ii) In the case of an Incentive Stock Option that is granted to an
Employee other than a 10% Owner, the per Share exercise price shall be no less
than 100% of the Fair Market Value per Share on the date of grant.
(iii) In the case of a Nonstatutory Stock Option that is granted to a
10% Owner prior to the date, if any, on which the Common Stock becomes a Listed
Security, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of the grant.
(iv) In the case of a Nonstatutory Stock Option that is granted to a
Named Executive, the per Share exercise price shall generally be no less than
100% of the Fair Market Value per Share on the date of grant.
(b) CONSIDERATION. Subject to Applicable Laws, the consideration to be paid
for the Shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administrator (and, in the case of an
Incentive Stock Option, shall be determined at the time of grant) in its
discretion. In addition to any other types of consideration the Administrator
may determine, the Administrator is authorized to accept as consideration for
Shares issued under the Plan the following:
(i) cash;
(ii) check;
(iii) delivery of the Optionee's promissory note with such recourse,
interest, security and redemption provisions as the Administrator determines as
appropriate;
(iv) other Shares that (A) in the case of Shares acquired upon
exercise of an Option, have been owned by the Optionee for more than six months
on the date of surrender or such other period as may be required to avoid a
charge to the Company's earnings, and (B) have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
such Option shall be exercised;
(v) authorization by the Optionee for the Company to retain from
the total number of Shares as to which the Option is exercised that number of
Shares having a Fair Market Value on the date of exercise equal to the exercise
price for the total number of Shares as to which the Option is exercised; or
(vi) any combination of the foregoing methods of payment.
5.5 EXERCISE OF OPTION.
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(a) VESTING. Any Option granted hereunder shall be exercisable at
such times and under such conditions as determined by the Administrator,
including performance criteria with respect to the Company and/or the Optionee,
and as shall be permissible under the terms of the Plan and set forth in the
Option Agreement; provided however that, if required by the Applicable Laws, any
Option granted prior to the date, if any, upon which the Common Stock becomes a
Listed Security shall become exercisable at a rate of at least 20% per year over
five years from the date the Option is granted. In the event that any of the
Shares issued upon exercise of an Option (which exercise occurs prior to the
date, if any, upon which the Common Stock becomes a Listed Security) should be
subject to a right of repurchase in the Company's favor, such repurchase right
shall, if required by the Applicable Laws, lapse at the rate of at least 20% per
year over five years from the date the Option is granted. Notwithstanding the
above, in the case of an Option granted to an officer (including but not limited
to Officers), Director or Consultant, the Option may become exercisable, or a
repurchase right, if any, in favor of the Company shall lapse, at any time or
during any period established by the Administrator. The Administrator shall have
the discretion to determine whether and to what extent the vesting of Options
shall be tolled during any unpaid leave of absence; provided however that in the
absence of such determination, vesting of Options shall be tolled during any
such leave.
(b) PROCEDURE FOR EXERCISE. An Option may not be exercised for a
fraction of a Share. An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Administrator,
consist of any consideration and method of payment allowable under Section
5.4(b) of the Plan. Exercise of an Option in any manner shall result in a
decrease in the number of Shares that thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercise, including any Shares withheld to satisfy tax
withholding obligations.
(c) RIGHTS AS A SHAREHOLDER. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Shares subject to an Option, notwithstanding the exercise of
the Option. The Company shall issue (or cause to be issued) such stock
certificate promptly upon exercise of the Option. No adjustment will be made for
a dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in Section 10 of the Plan.
(d) TERMINATION OF CONTINUOUS SERVICE. In the event of termination of an
Optionee's Continuous Service, such Optionee's right to exercise the Option
shall cease and the Option shall forthwith become void and cease to have effect,
except as set forth specifically in the Option Agreement. In the event of an
Optionee's death, the Optionee's beneficiary or the administrator of his or her
estate shall have such right to exercise the Option as set forth in the Option
Agreement.
ARTICLE 6. RESTRICTED STOCK.
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6.1 RESTRICTED STOCK GRANTS. Shares of Common Stock may be granted under the
Plan subject to a Restricted Stock Agreement which complies with the terms
specified in this Article 6.
6.2 PAYMENT FOR RESTRICTED STOCK. No cash consideration shall be required of the
recipient of a Restricted Stock grant under this Article 6.
6.3 VESTING PROVISIONS. Restricted Stock granted under the Plan may, in the
discretion of the Administrator, be fully and immediately vested upon issuance
or may vest in one or more installments over the recipient's period of service
or upon attainment of specified performance objectives; provided however that,
if required by the Applicable Laws, any Restricted Stock granted prior to the
date, if any, upon which the Common Stock becomes a Listed Security, shall vest
at a rate of at least 20% per year over five years from the date the Restricted
Stock is granted. Notwithstanding the above, in the case of Restricted Stock
granted to an officer (including but not limited to Officers), Director or
Consultant, the Restricted Stock shall vest at any time or during any period
established by the Administrator.
(a) The elements of the vesting provisions applicable to any unvested
Shares of Common Stock issued under a Restricted Stock grant shall be specified
in the Restricted Stock Agreement, including but not limited to, any service
period required to be completed by the recipient or any performance objectives
to be obtained, the number of installments in which the shares are to vest, the
interval or intervals (if any) which are to lapse between installments, and the
effect which death, Disability or other event designated by the Administrator is
to have upon the vesting schedule.
(b) Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Restricted Stock grant recipient may have the right to receive with respect to
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares and (ii) such
escrow arrangements as the Plan Administrator shall deem appropriate.
6.4 VOTING AND DIVIDEND RIGHTS. The recipient of a Restricted Stock grant shall
have full stockholder rights with respect to any shares of Common Stock issued
to the recipient pursuant to the Restricted Stock grant, subject to the limits
on transferability set forth in the Restricted Stock Agreement, whether or not
the Participant's interest in those shares is vested. Accordingly, the
Participant shall have the right to vote such shares and to receive any regular
cash dividends paid on such shares.
6.5 TRANSFERABILITY OF RESTRICTED STOCK. Until such time as all conditions and
restrictions with respect to Restricted Stock issued under the Plan have lapsed,
Restricted Stock issued under the Plan shall not be sold, pledged, assigned,
hypothecated, transferred, made subject to any creditor's process, whether
voluntarily, involuntarily or by operation of law, or disposed of in any manner
other than by will or by the laws of descent or distribution. Notwithstanding
the
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foregoing, if permitted in the Restricted Stock Agreement a Participant may
transfer or assign Restricted Shares to (i) a trustee of a trust that is
revocable by such Participant alone, both at the time of the transfer or
assignment and at all times thereafter prior to such Participant's death, or
(ii) the trustee of any other trust to the extent approved in advance by the
Administrator in writing. A transfer or assignment of Restricted Shares from
such trustee to any person other than such Participant shall be permitted only
to the extent approved in advance by the Committee in writing, and Restricted
Shares held by such trustee shall be subject to all of the conditions and
restrictions set forth in the Plan and in the applicable Restricted Stock
Agreement, as if such trustee were a party to such Agreement.
6.6 FORFEITURE OF RESTRICTED STOCK. Should the recipient of a Restricted Stock
grant cease to remain in Continuous Service while holding one or more unvested
shares of Common Stock issued under a Restricted Stock grant or should the
performance objectives not be attained with respect to one or more such unvested
shares of Common Stock, then those shares shall be immediately forfeited and
shall be surrendered to the Company for cancellation, and the recipient shall
have no further stockholder rights with respect to such forfeited shares.
6.7 WAIVER OF RESTRICTIONS. The Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the
non-completion of the vesting schedule applicable to such shares. Such waiver
shall result in the immediate vesting of the Participant's interest in the
shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Continuous Service or the attainment or non-attainment of the applicable
performance objectives.
ARTICLE 7. TAX WITHHOLDING.
7.1 TAX WITHHOLDING. To the extent required by the Applicable Laws, transactions
under the Plan shall be subject to tax withholding by the Company, and the
Administrator may condition the delivery of any Shares under the Plan on
satisfaction of applicable withholding tax obligations. The Administrator, in
its discretion and subject to such requirements as the Administrator may impose
prior to the occurrence of such withholding, may permit or require tax
withholding obligations under the Plan to be satisfied by one or some
combination of the following methods:
(a) by cash or check payment,
(b) out of the Participant's current compensation,
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(c) if permitted by the Administrator, in its discretion, by surrendering
to the Company Shares that (i) in the case of Shares previously acquired from
the Company, have been owned by the Participant for more than six months on the
date of surrender, and (ii) have a Fair Market Value determined as of the
applicable Tax Date (as defined in Section 7.3 below) on the date of surrender
equal to the amount required to be withheld, or
(d) by electing to have the Company withhold, from the Shares to be issued
upon exercise of the Option or the Shares to be issued in connection with the
Restricted Stock grant, that number of Shares having a Fair Market Value
determined as of the applicable Tax Date equal to the amount required to be
withheld. This Section 7.1(d) shall apply only after the date, if any, upon
which the Common Stock becomes a Listed Security.
7.2 STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. In the event an
Administrator allows a Participant to satisfy his or her tax withholding
obligations as provided for in Section 7.1(c) or (d) above, such satisfaction
must comply with the requirements of this Section 7.2 and the Applicable Laws.
Any surrender by a Reporting Person of previously owned Shares to satisfy tax
withholding obligations arising upon exercise of an Option or Stock Purchase
Right must comply with the applicable provisions of Rule 16b-3.
(a) All elections by a Participant to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(i) the election must be made on or prior to the applicable Tax Date
(as defined in Section 7.3 below);
(ii) once made, the election shall be irrevocable as to the particular
Shares of the Option or Stock Purchase Right as to which the election is made;
and
(iii) all elections shall be subject to the consent or disapproval of
the Administrator.
(b) In the event the election to have Shares withheld is made by a
Participant and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Participant shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Participant shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
7.3 TAX DATE. For purposes of this Article 7, the "Tax Date" shall be the date
that the Participant is determined to have received income subject to
withholding tax under the Applicable Laws. The Fair Market Value of the Shares
to be withheld shall be determined as of the Tax Date.
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ARTICLE 8. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; DISTRIBUTIONS;
LIQUIDATION; CORPORATE TRANSACTIONS.
8.1 ADJUSTMENTS TO NUMBER OR PRICE OF SHARES UPON CHANGE IN CAPITALIZATION.
Subject to any required action by the shareholders of the Company, the number of
shares of Common Stock covered by each outstanding Option or Restricted Stock
award, the number of shares of Common Stock that have been authorized for
issuance under the Plan but as to which Options or Restricted Stock awards have
not yet been granted or which have been returned to the Plan upon cancellation
or expiration of an Option or forfeiture of Restricted Stock, the maximum number
of shares of Common Stock for which Options may be granted to any employee under
Section 4.3 of the Plan, the number of shares of Common Stock set forth in
Article 2 of the Plan, and the price per share of Common Stock covered by each
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock (including any such change in the number of shares of Common
Stock effected in connection with a change in domicile of the Company), or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Administrator, whose determination in that respect shall be
final, binding and conclusive. Except as expressly provided herein, no issuance
by the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Common Stock
subject to an Option.
8.2 ADJUSTMENTS TO PRICE OF SHARES FOR CERTAIN DISTRIBUTIONS. In the event
of any distribution to the Company's shareholders of securities of any other
entity or assets (other than dividends payable in cash or stock of the Company)
without receipt of consideration by the Company, the Administrator may, in its
discretion, appropriate adjust the price per Share of Common Stock covered by
each outstanding Option to reflect the effect of such distribution.
8.3 VOLUNTARY DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, unless otherwise provided by the
Administrator, each Option will terminate immediately prior to the consummation
of such proposed action, and all conditions and restrictions with respect to
Restricted Stock shall lapse immediately prior to the consummation of such
proposed action. The Administrator may, in the exercise of its sole discretion
in such instances, declare that any Option shall terminate as of a date fixed by
the Administrator and give each Optionee the right to exercise his or her Option
as to all or any portion of the Shares subject to the Option, including Shares
as to which the Option would not otherwise be exercisable.
8.4 CORPORATE TRANSACTIONS.
(a) CORPORATE TRANSACTION NOT CONSTITUTING A CHANGE OF CONTROL. In
the event of a Corporate Transaction that does not constitute a Change of
Control, each outstanding Option shall be assumed or an equivalent Option shall
be substituted by the successor corporation or a Parent or Subsidiary of such
successor corporation (such entity, the "Successor Corporation")
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and all conditions and restrictions with respect to Restricted Stock shall
continue with such Successor Corporation substituted in the place of the Company
with respect to such conditions and restrictions. Notwithstanding the foregoing,
in the event such Successor Corporation does not agree to assume all outstanding
Options or to substitute equivalent options or to accept assignment of the
conditions and restrictions with respect to Restricted Stock, such Options shall
terminate upon the consummation of such Corporate Transaction and all conditions
or restrictions with respect to Restricted Stock shall lapse upon the
consummation of such Corporate Transaction.
(b) CHANGE OF CONTROL. In the event of a Change of Control, the
Administrator shall, as to outstanding Options, either (i) provide that such
Options shall be assumed by the Successor Corporation or that the Successor
Corporation shall substitute with respect to such Options equivalent options;
(ii) provide upon notice to Optionees that all Options, to the extent then
exercisable or to be exercisable as a result of the Change of Control, must be
exercised on or before a specified date (which date shall be at least five (5)
days from the date of the notice), after which the Options shall terminate; or
(iii) terminate each Option in its entirety in exchange for a payment of cash,
securities and/or other property equal to the excess of the Fair Market Value of
the Shares with respect to which the Option is vested and exercisable
immediately prior to the consummation of the transaction over the aggregate
exercise price thereof. In the event of a Change of Control, all conditions and
restrictions with respect to Restricted Shares shall lapse, except to the extent
such conditions and restrictions are assigned to the successor corporation (or
its Parent) in connection with the Change of Control.
(c) DETERMINATION OF ASSUMPTION OR SUBSTITUTION. For purposes of
this Section 8.4, an Option shall be considered assumed or substituted, without
limitation, if, at the time of issuance of the stock or other consideration upon
a Corporate Transaction or a Change of Control, as the case may be, each
Optionee would be entitled to receive upon exercise of an Option the same number
and kind of shares of stock or the same amount of property, cash or securities
as the Optionee would have been entitled to receive upon the occurrence of such
transaction if the Optionee had been, immediately prior to such transaction, the
holder of the number of Shares of Common Stock covered by the Option at such
time (after giving effect to any adjustments in the number of Shares covered by
the Option as provided for in Section 8.1 above) and provided all other terms of
the Option as assumed or substituted are substantially similar to the terms of
the Option; provided however that if the consideration received in the
transaction is not solely common stock of the Successor Corporation, the
Administrator may, with the consent of the Successor Corporation, provide for
the consideration to be received upon exercise of the Option to be solely common
stock of the Successor Corporation equal to the Fair Market Value of the per
Share consideration received by holders of Common Stock in the transaction.
ARTICLE 9. AMENDMENT AND TERMINATION OF THE PLAN.
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9.1 AUTHORITY TO AMEND OR TERMINATE THE PLAN. The Board may at any time
amend, alter, suspend or terminate the Plan. To the extent necessary and
desirable to comply with Applicable Laws, the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
9.2 EFFECT OF AMENDMENT OR TERMINATION. Except as provided in Article 8,
no amendment, alteration, suspension or termination of the Plan shall materially
and adversely affect Options already granted and such Options shall remain in
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Participant and the Company, which
agreement must be in writing and signed by the Optionee and the Company. Except
as provided in Article 8, no amendment, alteration, suspension or termination of
the Plan shall materially and adversely affect the rights of a recipient of
Restricted Stock under the Plan, unless mutually agreed otherwise between the
Participant and the Company, which agreement must be in writing and signed by
the Optionee and the Company.
ARTICLE 10. MISCELLANEOUS.
10.1 CONDITIONS UPON ISSUANCE OF SHARES. Notwithstanding any other
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver Shares under the Plan unless such issuance or
delivery would comply with the Applicable Laws, with such compliance determined
by the Company in consultation with its legal counsel.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
10.2. RESERVATION OF SHARES. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
10.3. SHAREHOLDER APPROVAL. If required by Applicable Laws, continuance of the
Plan shall be subject to approval by the shareholders of the Company within
twelve (12) months before or after the date the Plan is adopted. Such
shareholder approval shall be obtained in the manner and to the degree required
under Applicable Laws.
10.4 INFORMATION AND DOCUMENTS TO OPTIONEES AND PURCHASERS. Prior to the date,
if any, upon which the Common Stock becomes a Listed Security and if required by
the Applicable Laws, the Company shall provide financial statements at least
annually to each Optionee, to each Restricted Stock recipient and to each
individual who acquired Shares pursuant to the Plan, during the period such
Optionee, recipient or purchaser has one or more Options outstanding, and in the
case of an individual who acquired Shares pursuant to the Plan, during the
period such individual owns such Shares. The Company shall not be required to
provide such information if
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the issuance of Options under the Plan is limited to key employees whose duties
in connection with the Company assure their access to equivalent information.
ARTICLE 11. DEFINITIONS.
As used herein, the following definitions shall apply:
"ADMINISTRATOR" means the Board or any of its Committees appointed pursuant to
Section 5 of the Plan.
"AFFILIATE" means a corporation, partnership, joint venture or other business
entity other than a Subsidiary (as defined below) in which the Company owns a
significant interest, directly or indirectly, as determined in the discretion of
the Committee.
"APPLICABLE LAWS" means the legal requirements relating to the administration of
stock option plans, if any, under applicable corporate and securities laws, the
Code and the rules of any applicable stock exchange or national market system.
"BOARD" means the Board of Directors of the Company.
"CHANGE OF CONTROL" means a sale of all or substantially all of the Company's
assets or any merger, consolidation or other capital reorganization of the
Company with or into another corporation, other than one in which the holders of
more than fifty percent (50%) of the shares of capital stock of the Company
outstanding immediately prior to such transaction continue to hold (either by
the voting securities remaining outstanding or by being converted into voting
securities of the surviving entity) more than fifty percent (50%) of the total
voting power represented by the voting securities of the Company, or such
surviving entity, outstanding immediately after such merger or consolidation.
"CODE" means the Internal Revenue Code of 1986, as amended. Reference to any
specific section of the Code shall include such section, any valid regulation
promulgated thereunder, and any comparable provision of any future legislation
amending, supplementing or superseding such section.
"COMMITTEE" means the Committee appointed by the Board of Directors in
accordance with Section 5 of the Plan, if one is appointed. Once appointed, a
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee, all to the extent
permitted by the Applicable Laws.
"COMMON STOCK" means the Common Stock of the Company.
"COMPANY" means HearMe, a Delaware corporation.
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"CONSULTANT" means any person, including an advisor, who is engaged by the
Company or any Parent, Subsidiary or Affiliate to render consulting or advisory
services as an independent contractor and is compensated for such services.
"CONTINUOUS SERVICE" means the absence of any interruption or termination of the
provision of services to the Company or a Parent, Subsidiary or Affiliate as an
Employee, Director or Consultant. Continuous Service as an Employee, Director or
Consultant shall not be considered interrupted in the case of: (A) any leave of
absence approved by the Administrator, provided that such leave is for a period
of not more than 90 days, unless reemployment upon expiration of such leave is
guaranteed by contract or statute, or unless provided otherwise pursuant to
Company policy adopted from time to time; (B) transfers between locations of the
Company or between the Company, a Parent, Subsidiary or Affiliate, or any
successor, in any capacity of Employee, Director or Consultant, or (C) any
change in status as long as the individual remains in the service of the
Company, a Parent, Subsidiary or Affiliate in any capacity of Employee, Director
or Consultant (except as otherwise provided in an Option Agreement). An approved
leave of absence shall include sick leave, military leave, or any other
authorized personal leave.
"CORPORATE TRANSACTION" means a merger, consolidation, reorganization or other
capital reorganization of the Company with or into another corporation. A
Corporate Transaction may or may not constitute a Change of Control, as defined
above.
"DIRECTOR" means a member of the Board.
"EMPLOYEE" means any person (including any Named Executive, Officer or Director)
employed by the Company or any Parent, Subsidiary or Affiliate of the Company.
The payment by the Company of a director's fee to a Director shall not be
sufficient to constitute "employment" of such Director by the Company.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined
as follows:
(a) If the Common Stock is listed on any established stock exchange or a
national market system including without limitation the National Market of the
National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq")
System, its Fair Market Value shall be the closing sales price for such stock
(or the closing bid, if no sales were reported), as quoted on such system or
exchange, or the exchange with the greatest volume of trading in Common Stock
for the last market trading day prior to the time of determination, as reported
in THE WALL STREET JOURNAL or such other source as the Administrator deems
reliable; or
(b) If the Common Stock is quoted on the Nasdaq System (but not on the
National Market thereof) or regularly quoted by a recognized securities dealer
but selling prices are not reported, its Fair Market Value shall be the mean
between the high bid and low asked prices for the Common Stock for the last
market trading day prior to the time of determination, as reported in THE WALL
STREET JOURNAL or such other source as the Administrator deems reliable; or
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(c) In the absence of an established market for the Common Stock, the Fair
Market Value thereof shall be determined in good faith by the Administrator in a
manner consistent with Applicable Laws.
"INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive
stock option within the meaning of Section 422 of the Code, as designated in the
applicable written Option Agreement.
"LISTED SECURITY" means any security of the Company that is listed or approved
for listing on a national securities exchange or designated or approved for
designation as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.
"NAMED EXECUTIVE" means any individual who, on the last day of the Company's
fiscal year, is the chief executive officer of the Company (or is acting in such
capacity) or among the four highest compensated officers of the Company (other
than the chief executive officer). Such officer status shall be determined
pursuant to the executive compensation disclosure rules under the Exchange Act.
"NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an
Incentive Stock Option, as designated in the applicable written Option
Agreement.
"OFFICER" means a person who is an officer of the Company within the meaning of
Section 16 of the Exchange Act and the rules and regulations promulgated
thereunder.
"OPTION" means an option to purchase Shares granted pursuant to the Plan, the
terms of which shall be set forth in the Option Agreement.
"OPTION AGREEMENT" means a written agreement between an Optionee and the Company
reflecting the terms of an Option granted under the Plan and any amendments
thereto, and includes any documents attached to such Option Agreement,
including, but not limited to, a notice of stock option grant and a form of
exercise notice.
"OPTIONEE" means an Employee, Director or Consultant who receives an Option.
"PARENT" means a "parent corporation," whether now or hereafter existing, as
defined in Section 424(e) of the Code.
"PARTICIPANT" means an Employee, Director or Consultant who receives a grant of
an Option or of Restricted Stock under the Plan.
"PLAN" means this 1999 Stock Incentive Plan.
"REPORTING PERSON" means an Officer, Director or greater than 10% shareholder of
the Company within the meaning of Rule 16a-2 under the Exchange Act, who is
required to file reports pursuant to Rule 16a-3 under the Exchange Act.
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"RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act as the same may
be amended from time to time, or any successor thereto.
"SHARE" means a share of the Common Stock, as adjusted in accordance with
Section 10 of the Plan.
"SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter
existing, as defined in Section 424(f) of the Code.
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EXHIBIT 10.4
HEARME
1999 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the HearMe 1999 Employee Stock
Purchase Plan.
1. PURPOSE. The purpose of the Plan is to provide employees of the Company
and its Designated Subsidiaries with an opportunity to purchase Common Stock of
the Company. It is the intention of the Company to have the Plan qualify as an
"Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of
the Plan shall, accordingly, be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
2. DEFINITIONS.
(a) "BOARD" means the Board of Directors of the Company.
(b) "CODE" means the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" means the Common Stock of the Company.
(d) "COMPANY" means HearMe, a Delaware corporation.
(e) "COMPENSATION" means all regular straight time gross earnings and
commissions, and shall not include payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of (i) sick leave; (ii)
military leave; (iii) any other leave of absence approved by the Company,
provided that such leave is for a period of not more than 90 days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute or unless provided otherwise pursuant to Company policy adopted from
time to time.
(g) "CONTRIBUTIONS" means all amounts credited to the account of a
participant pursuant to the Plan.
(h) "CORPORATE TRANSACTION" means a sale of all or substantially all
of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(i) "DESIGNATED SUBSIDIARY" means any Subsidiary which has been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
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(j) "EMPLOYEE" means any person, including an Officer, who is
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or a Designated Subsidiary.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" means, as of any date, the
value of Common Stock determined by the Board in its discretion based on the
closing sales price of the Common Stock for such date (or, in the event that the
Common Stock is not traded on such date, on the immediately preceding Trading
Day), as reported by the National Association of Securities Dealers Automated
Quotation (Nasdaq) National Market or, if such price is not reported, the mean
of the bid and asked prices per share of the Common Stock as reported by Nasdaq
or, in the event the Common Stock is listed on a stock exchange, the Fair Market
Value per share shall be the closing sales price on such exchange on such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding Trading Day), as reported in THE WALL STREET JOURNAL. For
purposes of the Offering Date of the first Offering Period under the Plan, the
Fair Market Value shall be the initial price to the public as set forth in the
final prospectus included within the registration statement in Form S-1 filed
with the Securities and Exchange Commission pursuant to Rule 424 under the
Securities Act of 1933, as amended, for the initial public offering of the
Company's Common Stock (the "Registration Statement").
(m) "OFFERING DATE" means the first Trading Day of each Offering
Period of the Plan.
(n) "OFFERING PERIOD" means a period of approximately twenty-four (24)
months and not exceeding twenty-seven (27) months. The duration and timing of
the Offering Periods may be changed pursuant to Section 4 of the Plan.
(o) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "PLAN" means this HearMe 1999 Employee Stock Purchase Plan.
(q) "PURCHASE DATE" means the last Trading Day of each Purchase
Period.
(r) "PURCHASE PERIOD" means a period of approximately six (6) months
within an Offering Period, except for the first Purchase Period as set forth in
Section 4(b). The duration and timing of the Purchase Periods may be changed
pursuant to Section 4 of the Plan.
(s) "PURCHASE PRICE" means with respect to a Purchase Period an amount
equal to 85% of the Fair Market Value (as defined in Section 2(l) above) of a
Share of Common Stock on the Offering Date or on the Purchase Date, whichever is
lower; provided, however, that in the event (i) there is any increase in the
number of Shares available for issuance under the Plan as a result of a
shareholder-approved amendment to the Plan, and (ii) all or a portion of such
additional Shares are to be issued with respect to one or more Offering Periods
that are underway at the time of such increase ("ADDITIONAL SHARES"), and (iii)
the Fair Market Value of a Share of
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Common Stock on the date of such increase is higher than the Fair Market Value
on the Offering Date for any such Offering Period, then in such instance the
Purchase Price with respect to such Additional Shares shall be 85% of the Fair
Market Value of a Share of Common Stock on the date of such increase or the Fair
Market Value of a Share of Common Stock on the Purchase Date, whichever is
lower.
(t) "SHARE" means a share of Common Stock, as adjusted in accordance
with Section 20 of the Plan.
(u) "SUBSIDIARY" means a corporation, domestic or foreign, of which
not less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or a Subsidiary.
(v) "TRADING DAY" means a day on which national stock exchanges and
the Nasdaq System are open for trading.
3. ELIGIBILITY.
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code; provided, however, that eligible
Employees may not participate in more than one Offering Period at a time if
such participation would, in the aggregate, result in an employee's
participation rate that exceeds the limitations set forth in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase stock possessing five percent (5%) or more of the total combined voting
power or value of all classes of stock of the Company or of any Subsidiary, or
(ii) to the extent that his or her rights to purchase stock under all employee
stock purchase plans (described in Section 423 of the Code) of the Company and
its Subsidiaries accrues at a rate which exceeds twenty-five thousand dollars
($25,000) of the Fair Market Value (as defined in Section 2(l) above) of such
stock (determined at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
4. OFFERING PERIODS AND PURCHASE PERIODS.
(a) OFFERING PERIODS. The Plan shall be implemented by a series of
Offering Periods generally of twenty-four (24) months duration and not exceeding
twenty-seven (27) months duration, with new Offering Periods commencing on May 1
and November 1 of each year, or at such other time or times as may be determined
by the Board of Directors. Offering Periods shall commence on a continuing and
overlapping basis until terminated in accordance with Section 21 hereof.
Notwithstanding the foregoing, the first Offering Period under the Plan shall
commence with the first Trading Day on or after the date on which the Securities
and Exchange Commission declares the Company's Registration Statement effective
(the "IPO
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DATE") and ending on the last Trading Day on or before April 30, 2001.
The Board of Directors of the Company shall have the power to change the
duration and/or the frequency of Offering Periods with respect to future
offerings without shareholder approval if such change is announced at least five
(5) days prior to the scheduled beginning of the first Offering Period to be
affected.
(b) PURCHASE PERIODS. Each Offering Period shall generally consist of
four (4) Purchase Periods of approximately six (6) months duration, the first
commencing on the Offering Date and ending on the October 31 or April 30 next
following, and each other Purchase Period in such Offering Period commencing on
the day after the last day of the preceding Purchase Period and ending on the
October 31 or April 30 next following; provided, however, that the first
Purchase Period shall commence on the IPO Date and shall end on October 31,
1999. The Board of Directors of the Company shall have the power to change the
duration and/or frequency of Purchase Periods with respect to future purchases
without shareholder approval if such change is announced at least five (5) days
prior to the otherwise scheduled beginning of the first Purchase Period to be
affected.
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's payroll office prior to the applicable Offering
Date, unless a later time for filing the subscription agreement is set by the
Board for all eligible Employees with respect to a given Offering Period.
(b) The subscription agreement shall set forth the Employee's
participation election, either in the form of a designation of the percentage of
the Employee's Compensation the Employee elects to have deducted from his or her
pay on each pay day during the Offering Period and credited to his or her
account under the Plan to be used to purchase shares on the Purchase Date for
each of the relevant Purchase Periods, which percentage shall be not less than
one percent (1%) and not more than twenty percent (20%), or such greater
percentage as the Board may establish from time to time before an Offering Date,
or, if permitted by the Board, in the form of a designation of the number of
whole shares the Employee elects to purchase at the end of each Purchase Period
with respect to the Offering Period, up to such maximum number of shares as the
Board may establish from time to time before an Offering Date.
(c) A participant's subscription shall be effective for each
successive Offering Period in which he or she is eligible to participate, unless
the participant withdraws in accordance with Section 11(a).
(d) In addition to the limits on an Employee's participation in
the Plan set forth herein, the Board may establish limits on the number of
shares an Employee may elect to purchase with respect to any Offering Period if
such limit is announced at least fifteen (15) days prior to the scheduled
beginning of the first Offering Period to be affected.
6. GRANT OF OPTION. On the Offering Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each
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Purchase Date a number of Shares of the Company's Common Stock determined by
dividing such Employee's Contributions accumulated prior to such Purchase Date
and retained in the participant's account as of the Purchase Date by the
applicable Purchase Price, provided, however, that the maximum number of Shares
an Employee may purchase during each Purchase Period shall be 2,000 Shares
(subject to adjustment pursuant to Section 20 below), and provided further that
such purchase shall be subject to the limitations set forth in Sections 3(b) and
9(b).
7. METHOD OF PAYMENT OF CONTRIBUTIONS.
(a) PAYROLL DEDUCTIONS.
(i) If an Employee's participation election is in the form of an
election to contribute a percentage of his or her Compensation through payroll
deductions, or if an Employee otherwise elects to make contributions to the Plan
through payroll deductions of a specified percentage of his or her Compensation
as permitted by the Board with respect to an Employee's participation election
in the form of an election to purchase a designated number of shares at the end
of each Purchase Period, such payroll deductions shall commence on the first
payroll following the Offering Date and shall end on the last payroll paid in
the Offering Period to which such subscription agreement and payroll deduction
authorization is applicable, unless sooner terminated by the participant as
provided in Section 11. All payroll deductions made by a participant shall be
credited to his or her account under the Plan.
(ii) A participant may discontinue his or her participation in the
Plan as provided in Section 11, or to the extent permitted by the Board in its
discretion, may increase or decrease the rate of his or her payroll deductions
during the Offering Period by completing and filing with the Company a new
subscription agreement authorizing a change in payroll deduction rate. The
change in rate shall be effective as of the beginning of the next calendar month
commencing ten (10) or more business days after the date the new subscription is
filed.
(iii) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased by the Company to zero percent (0%) at any
time during a Purchase Period. Payroll deductions shall re-commence at the rate
provided in such participant's subscription agreement at the beginning of the
first Purchase Period which is scheduled to end in the folowing calendar year,
unless terminated by the participant as provided in Section 11.
(b) CASH OR STOCK CONTRIBUTIONS. To the extent permitted by the
Board, a participant may make contributions to the Plan for purchase of shares
in cash or by tendering Company stock or by election to receive shares
representing the difference between the Purchase Price and the Fair Market Value
of the shares, less applicable withholding. Any such cash or stock contribution,
or any election to receive net shares, must be received by the Company in
accordance with procedures and at such times as established by the Board, and a
participant's failure to make such contributions or such an election within the
time required, to the extent the aggregate Purchase Price of the number of
shares the participant has an option to purchase on the Purchase Date exceeds
payroll deduction contributions made by the participant as of the Purchase Date,
shall be deemed a withdrawal from the Offering Period with respect to shares
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subject to the option not purchased on the applicable Purchase Date and with
respect to all other Purchase Periods in such Offering Period.
8. WITHHOLDING TAX OBLIGATIONS. At the time the option is exercised, in
whole or in part, or at the time some or all of the Company's Common Stock
issued under the Plan is disposed of, the participant must make adequate
provision for payment to the Company of the Company's federal, state or other
tax withholding obligations, if any, which arise upon the exercise of the option
or the disposition of the Common Stock. At any time, the Company may, but shall
not be obligated to, withhold from the participant's compensation the amount
necessary for the Company to meet applicable withholding obligations, including
any withholding required to make available to the Company any tax deductions or
benefits attributable to the sale or early disposition of Common Stock by the
participant.
9. EXERCISE OF OPTION.
(a) Unless a participant withdraws from the Plan as provided in
Section 11, his or her option for the purchase of Shares will be exercised
automatically on each Purchase Date of an Offering Period, and the maximum
number of full Shares subject to the option will be purchased at the applicable
Purchase Price with the accumulated Contributions in his or her account. The
Shares purchased upon exercise of an option hereunder shall be deemed to be
transferred to the participant on the Purchase Date. During his or her lifetime,
a participant's option to purchase Shares hereunder is exercisable only by him
or her.
(b) If the Board determines that, on a given Purchase Date, the number
of Shares with respect to which options are to be exercised may exceed (i) the
number of Shares of Common Stock that were available on the Offering Date of the
applicable Offering Period (after deduction of all Shares for which options have
been exercised or are then outstanding), or (ii) the number of shares available
for sale under the Plan on such Purchase Date (after deduction of all Shares for
which options have been exercised or are then outstanding), the Board may, in
its sole discretion, provide that the Shares of Common Stock available for
purchase on such Offering Date or Purchase Date, as applicable, shall be
allocated pro rata, in as uniform a manner as shall be practicable and as it
shall determine in its sole discretion to be equitable among all participants
exercising options to purchase Common Stock on such Purchase Date and (x)
continue all Offering Periods then in effect or (y) pursuant to Section 21
below, terminate any or all Offering Periods then in effect. The Board may
direct that the Shares available on the Offering Date of any applicable Offering
Period pursuant to the preceding sentence be allocated pro rata, notwithstanding
any authorization of additional Shares for issuance under the Plan by the
Company's shareholders subsequent to such Offering Date.
(c) Any cash remaining to the credit of a participant's account under
the Plan after a purchase by him or her of Shares at the termination of each
Purchase Period which is insufficient to purchase a full Share shall be carried
over to the next Purchase Period if the Employee continues to participate in the
Plan, or if the Employee does not continue to participate, shall be returned to
the participant. Any other amounts left over in a participant's account after a
Purchase Date shall be returned to the participant.
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10. DELIVERY. As promptly as practicable after each Purchase Date of each
Offering Period, the Company shall arrange the delivery to each participant, as
appropriate, of a certificate representing the Shares purchased upon exercise of
his or her option.
11. VOLUNTARY WITHDRAWAL.
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
each Purchase Date by giving written notice to the Company. All of the
participant's Contributions credited to his or her account will be paid to him
or her promptly after receipt of his or her notice of withdrawal and his or her
option for the current Offering Period will be automatically terminated, and no
further Contributions for the purchase of Shares will be made during and with
respect to such Offering Period.
(b) A participant's voluntary withdrawal from an offering will not
have any effect upon his or her eligibility to participate in a succeeding
Offering Period or in any similar plan which may hereafter be adopted by the
Company.
12. AUTOMATIC WITHDRAWAL.
(a) REDUCTION OF HOURS. In the event an Employee fails to remain in
Continuous Status as an Employee of the Company for at least twenty (20) hours
per week during the Offering Period in which the employee is a participant, he
or she will be deemed to have elected to withdraw from the Plan and the
Contributions credited to his or her account will be returned to him or her and
his or her option terminated.
(b) TERMINATION OF EMPLOYMENT. Upon termination of the participant's
Continuous Status as an Employee prior to the Purchase Date of an Offering
Period (other than on account of death), he or she will be automatically
withdrawn from the Plan effective as of the date of such termination of his or
her Continuous Status as an Employee, the Contributions credited to his or her
account will be returned to him or her, and his or her option will be
automatically terminated.
(c) DEATH OF PARTICIPANT. Upon the death of a participant prior to the
Purchase Date of an Offering Period, he or she will be automatically withdrawn
from the Plan, the Contributions credited to his or her account will be returned
to the person or persons entitled thereto under Section 15, and his or her
option will be automatically terminated.
(d) REDUCTION IN FAIR MARKET VALUE. To the extent permitted by any
applicable laws, regulations or stock exchange rules, if the Fair Market Value
of the Shares on a Purchase Date of an Offering Period (other than the final
Purchase Date of such Offering Period) is less than the Fair Market Value of the
Shares on the Offering Date for such Offering Period, then every participant
shall automatically (i) be withdrawn from such Offering Period at the close of
such Purchase Date and after the acquisition of Shares for such Purchase Period,
and (ii) be enrolled in the Offering Period commencing on the first business day
subsequent to such Purchase Date. If the Fair Market Value of the Shares on
April 30, 1999 is less than the Fair
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Market Value of the Shares on the IPO Date, each participant shall automatically
be withdrawn as of April 30, 1999 from the Offering Period beginning on the IPO
Date and re-enrolled in the Offering Period beginning on May 1, 1999 unless such
participant notifies the Administrator prior to April 30, 1999 that he or she
does not wish to be withdrawn and re-enrolled. All payroll deductions
accumulated in a participant's account as of such withdrawal date shall be
returned to the participant.
13. INTEREST. No interest shall accrue on the Contributions of a
participant in the Plan.
14. STOCK.
(a) The maximum number of Shares which shall be made available for
sale under the Plan shall be 750,000 Shares, plus an annual increase on the
first day of each of the Company's fiscal years beginning in 2000, 2001, 2002,
2003 and 2004, equal to the lesser of (A) 100,000 Shares, (B) 1% of the Shares
outstanding on the last day of the immediately preceding fiscal year, or (C)
such lesser number of Shares as is determined by the Board, subject to
adjustment upon changes in capitalization of the Company as provided in Section
20.
(b) The participant shall have no interest or voting right in Shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
15. ADMINISTRATION. The Board, or a committee named by the Board, shall
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan. Every finding, decision and determination made by the Board or its
committee shall, to the full extent permitted by law, be final and binding upon
all parties.
16. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who
is to receive any Shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of a
Purchase Period but prior to delivery to him or her of such Shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Purchase Date of an Offering Period. If
a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective. Such
designation of beneficiary may be changed by the participant (with the consent
of his or her spouse, if any) at any time by written notice effective upon
receipt by the Company of such notice.
(b) In the event of the death of a participant and in the absence of a
beneficiary validly designated in accordance with Section 16(a) who is living at
the time of such participant's
-8-
<PAGE>
death, the Company shall deliver such Shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its discretion, may deliver such Shares and/or cash to the spouse or to any
one or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as the
Company may designate.
17. TRANSFERABILITY. Neither Contributions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way by the participant (other than by will, the laws of
descent and distribution, or as provided in Section 16). Any such attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with Section 11.
18. USE OF FUNDS. All Contributions received or held by the Company under
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
19. REPORTS. Individual accounts will be maintained for each participant in
the Plan. Statements of account will be given to participating Employees at
least annually, which statements will set forth the amounts of Contributions,
the per Share Purchase Price, the number of Shares purchased and the remaining
cash balance, if any.
20. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
(a) ADJUSTMENT. Subject to any required action by the
shareholders of the Company, the number of Shares covered by each option under
the Plan which has not yet been exercised and the number of Shares which have
been authorized for issuance under the Plan but have not yet been placed under
option (collectively, the "RESERVES"), as well as the maximum number of shares
of Common Stock which may be purchased by a participant in a Purchase Period,
the number of shares of Common Stock set forth in Section 14(a) above, and the
price per Share of Common Stock covered by each option under the Plan which has
not yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common Stock
(including any such change in the number of shares of Common Stock effected in
connection with a change in domicile of the Company), or any other increase or
decrease in the number of Shares effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an option.
(b) CORPORATE TRANSACTIONS. In the event of a dissolution or
liquidation of the Company, any Purchase Period and Offering Period then in
progress will terminate
-9-
<PAGE>
immediately prior to the consummation of such action, unless otherwise provided
by the Board. In the event of a Corporate Transaction, each option outstanding
under the Plan shall be assumed or an equivalent option shall be substituted by
the successor corporation or a Parent or Subsidiary of such successor
corporation. In the event that the successor corporation refuses to assume or
substitute for outstanding options, each Purchase Period and Offering Period
then in progress shall be shortened and a new Purchase Date shall be set (the
"NEW PURCHASE DATE"), as of which date any Purchase Period and Offering Period
then in progress will terminate. The New Purchase Date shall be on or before the
date of consummation of the transaction and the Board shall notify each
participant in writing, at least ten (10) days prior to the New Purchase Date,
that the Purchase Date for his or her option has been changed to the New
Purchase Date and that his or her option will be exercised automatically on the
New Purchase Date, unless prior to such date he or she has withdrawn from the
Offering Period as provided in Section 10. For purposes of this Section 20(b),
an option granted under the Plan shall be deemed to be assumed, without
limitation, if, at the time of issuance of the stock or other consideration upon
a Corporate Transaction, each holder of an option under the Plan would be
entitled to receive upon exercise of the option the same number and kind of
shares of stock or the same amount of property, cash or securities as such
holder would have been entitled to receive upon the occurrence of the
transaction if the holder had been, immediately prior to the transaction, the
holder of the number of Shares of Common Stock covered by the option at such
time (after giving effect to any adjustments in the number of Shares covered by
the option as provided for in this Section 20(b); provided however that if the
consideration received in the transaction is not solely common stock of the
successor corporation or its parent (as defined in Section 424(e) of the Code),
the Board may, with the consent of the successor corporation, provide for the
consideration to be received upon exercise of the option to be solely common
stock of the successor corporation or its parent equal in Fair Market Value to
the per Share consideration received by holders of Common Stock in the
transaction.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per Share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of Shares of its outstanding Common Stock, and
in the event of the Company's being consolidated with or merged into any other
corporation.
21. AMENDMENT AND TERMINATION.
(a) The Board may at any time and for any reason terminate or amend
the Plan. Except as provided in Section 20, no such termination of the Plan may
affect options previously granted, provided that the Plan or an Offering Period
may be terminated by the Board on a Purchase Date or by the Board's setting a
new Purchase Date with respect to an Offering Period and Purchase Period then in
progress if the Board determines that termination of the Plan and/or the
Offering Period is in the best interests of the Company and the shareholders or
if continuation of the Plan and/or the Offering Period would cause the Company
to incur adverse accounting charges as a result of a change after the effective
date of the Plan in the generally accepted accounting rules applicable to the
Plan. Except as provided in Section 20 and this Section 21, no amendment to the
Plan shall make any change in any option previously granted
-10-
<PAGE>
which adversely affects the rights of any participant. In addition, to the
extent necessary to comply with Section 423 of the Code (or any successor rule
or provision or any other applicable law or regulation), the Company shall
obtain shareholder approval in such a manner and to such a degree as so
required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods and Purchase
Periods, limit the frequency and/or number of changes in the amount withheld
from a participant's Compensation during an Offering Period, establish the
exchange ratio applicable to amounts withheld in a currency other than U.S.
dollars, permit payroll withholding in excess of the amount designated by a
participant in order to adjust for delays or mistakes in the Company's
processing of properly completed withholding elections, establish reasonable
waiting and adjustment periods and/or accounting and crediting procedures to
ensure that amounts applied toward the purchase of Common Stock for each
participant properly correspond with amounts withheld from the participant's
Compensation, establish such other limitations or procedures as the Board (or
its committee) determines in its sole discretion advisable which are consistent
with the Plan.
22. NOTICES. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
23. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, applicable state securities laws and the requirements of
any stock exchange upon which the Shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
24. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective upon the
IPO Date. It shall continue in effect for a term of
twenty (20) years unless sooner terminated under Section 21.
25. ADDITIONAL RESTRICTIONS OF RULE 16B-3. The terms and conditions of
options granted hereunder to, and the purchase of Shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the Shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3
-11-
<PAGE>
to qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
-12-
<PAGE>
HEARME
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the HearMe
1999 Employee Stock Purchase Plan (the "Plan") commencing with the Offering
Period ______________, ____ to _______________, ____, and subscribe to purchase
shares of the Company's Common Stock in accordance with this Subscription
Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my Compensation,
as those terms are defined in the Plan, applied to this purchase. I understand
that this amount must not be less than 1% and not more than 20% of my
Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on each
Purchase Date of an Offering Period unless I otherwise withdraw from the
Offering Period prior to a Purchase Date by giving written notice to the Company
for such purpose.
4. I understand that I may decrease or increase the rate of my
Contributions on one occasion only with respect to an increase and one occasion
only with respect to a decrease during any Offering Period by completing and
filing a new Subscription Agreement with such increase or decrease taking effect
as of the beginning of the calendar month following the date of filing of the
new Subscription Agreement, if filed at least ten (10) business days prior to
the beginning of such month. I also understand that I may change the rate of
deductions for future Offering Periods by filing a new Subscription Agreement,
and any such change will be effective as of the beginning of the next Offering
Period commencing after the new Subscription Agreement is filed.
5. I understand that I may discontinue my participation in an Offering
Period at any time prior to the Purchase Date as provided in Section 11 of the
Plan, and that if I do so I will not be permitted to renew participation in such
Offering Period.
<PAGE>
I UNDERSTAND THAT UNLESS I DISCONTINUE MY PARTICIPATION IN AN OFFERING
PERIOD AS PROVIDED IN SECTION 11 OF THE PLAN OR CHANGE THE RATE OF DEDUCTIONS BY
FILING A NEW SUBSCRIPTION AGREEMENT, MY ELECTION WILL CONTINUE TO BE EFFECTIVE
FOR EACH SUCCESSIVE OFFERING PERIOD COMMENCING AFTER THE TERMINATION OF AN
OFFERING PERIOD IN WHICH I HAVE PARTICIPATED.
6. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "HearMe 1999 Employee Stock Purchase Plan." I
understand that my participation in the Plan is in all respects subject to the
terms of the Plan.
7. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only):
------------------------------------
------------------------------------
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) _____________________________________
(First) (Middle) (Last)
- -------------------- -------------------------------------
(Relationship) (Address)
-------------------------------------
SUMMARY OF TAX TREATMENT ON SALE OF SHARES
THE FOLLOWING INFORMATION REGARDING THE FEDERAL TAX TREATMENT ON SALE OF
SHARES ACQUIRED UNDER THE PLAN IS ONLY A SUMMARY AND IS SUBJECT TO CHANGE, AND
IS NOT INTENDED TO REPRESENT OR PROVIDE TAX ADVICE TO THE PARTICIPANT, HIS OR
HER SPOUSE OR BENEFICIARIES. YOU SHOULD CONSULT A TAX ADVISOR CONCERNING THE TAX
IMPLICATIONS OF THE PURCHASE AND SALE OF STOCK UNDER THE PLAN.
If any shares received pursuant to the Plan are sold or otherwise disposed
of within two (2) years after the Offering Date or within one (1) year after the
Purchase Date, the excess of the fair market value of the shares on the Purchase
Date over the price paid for the shares on such Purchase Date will be treated
for federal income tax purposes as ordinary compensation income at the time of
such disposition, regardless of the amount received on sale or other disposition
of the shares, even if such amount is less than their fair market value at the
Purchase Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss.
-2-
<PAGE>
If any shares received pursuant to the Plan are sold or otherwise disposed
of at any time after expiration of the 2-year and 1-year holding periods, the
lesser of 15% of the fair market value of the shares on the Offering Date or the
excess of the fair market value of the shares at the time of such sale or
disposition over the price paid for the shares on the Purchase Date will be
treated for federal income tax purposes as ordinary compensation income. The
remainder of the gain or loss, if any, recognized on such disposition will be
treated as capital gain or loss.
9. I hereby agree to notify the Company in writing within 30 days after the
date of any disposition of shares within two (2) years after the Offering Date
or within one (1) year after the Purchase Date, and I will make adequate
provision for federal, state or other tax withholding obligations, if any, which
arise upon the disposition of the Common Stock. The Company may, but will not be
obligated to, withhold from my compensation the amount necessary to meet any
applicable withholding obligation including any withholding necessary to make
available to the Company any tax deductions or benefits attributable to the sale
or early disposition of Common Stock by me.
10. I hereby agree to be bound by the terms of the Plan. The effectiveness
of this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
SIGNATURE:
--------------------------------
SOCIAL SECURITY #:
------------------------
DATE:
-------------------------------------
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
- ------------------------------------------
(Signature)
- ------------------------------------------
(Print name)
-3-
<PAGE>
HEARME
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, __________________________, hereby elect to withdraw my participation in
the HearMe 1999 Employee Stock Purchase Plan (the "PLAN") for the Offering
Period _________. This withdrawal covers all Contributions credited to my
account and is effective on the date designated below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated:___________________
---------------------------------
Signature of Employee
---------------------------------
Social Security Number
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-78503) and (No. 333-89605) of HearMe of our
report dated January 21, 2000 relating to the financial statements for the year
ended December 31, 1999, which appears in the Annual Report of HearMe on Form
10-K. We also consent to the incorporation by reference of our report dated
January 21, 2000 relating to the financial statement schedules, which appears in
this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,568
<SECURITIES> 66,756
<RECEIVABLES> 6,182
<ALLOWANCES> 415
<INVENTORY> 0
<CURRENT-ASSETS> 77,734
<PP&E> 4,500
<DEPRECIATION> 0
<TOTAL-ASSETS> 104,556
<CURRENT-LIABILITIES> 7,108
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 93,768
<TOTAL-LIABILITY-AND-EQUITY> 104,556
<SALES> 15,522
<TOTAL-REVENUES> 15,522
<CGS> 5,591
<TOTAL-COSTS> 5,591
<OTHER-EXPENSES> 36,877
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,874
<INCOME-PRETAX> (25,081)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,081)
<EPS-BASIC> (1.6)
<EPS-DILUTED> (1.6)
</TABLE>
