<PAGE>
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-39534
[INCHORUS.COM LOGO]
8,200,000 Shares
Common Stock
This prospectus may be used only in connection with the following resales
of common stock of inChorus.com:
- 1,142,857 shares may be offered and sold, from time to time, by AMRO
International, S.A., who will originally receive all or a portion of
these shares upon conversion of the 8% Convertible Debentures due
September 30, 2001 that we issued to AMRO on March 31, 2000;
- 100,000 shares may also be offered and sold, from time to time, by AMRO
International, S.A., who will originally receive these shares upon
exercise of warrants;
- 100,000 shares may be offered and sold, from time to time, by AMRO
International, S.A., who obtained these shares pursuant to penalties
incurred by us for the untimely filing of the registration statement of
which this prospectus forms a part;
- 3,362,295 shares may be offered and sold, from time to time, by Plumrose
Holdings, Ltd. and WEC Global Telecom Ltd., who will originally receive
such shares as we may issue and sell to them under our equity line
agreement with Plumrose Holdings, Ltd. and WEC Global Telecom Ltd. (we
have filed a registration statement that includes twice as many shares as
the 3,362,295 shares currently issuable to Plumrose and WEC under the
equity line agreement); and
- an additional 100,000 shares may be offered and sold, from time to time,
by Plumrose Holdings and WEC Global Telecom, Ltd., who will originally
receive these shares upon exercise of warrants.
We refer to AMRO International, Plumrose Holdings, Ltd. and WEC Global
Telecom Ltd. as "Selling Stockholders."
Pursuant to our equity line agreement with Plumrose Holdings, Ltd. and WEC
Global Telecom Ltd., beginning on the date the registration statement, of which
this prospectus forms a part, is declared effective by the SEC through April 24,
2001, subject to certain conditions, we may from time to time, in our sole
discretion, sell or "put" shares of our common stock to Plumrose Holdings, Ltd.
and WEC Global Telecom Ltd., who then may resell these shares pursuant to this
Prospectus. Plumrose Holdings, Ltd. and WEC Global Telecom Ltd. are
"underwriters" within the meaning of the Securities Act in connection with these
sales.
We will not receive any proceeds from the sale of shares by the Selling
Stockholders.
Our common stock is listed on the NASD O-T-C Market Bulletin Board under
the symbol "ICHC". In February 2000, we changed our name from "Softlink, Inc."
to "InChorus.com". On August 1, 2000, the last sale price of our common stock on
the O-T-C Market Bulletin Board was $0.375 per share.
______________________
See "Risk Factors" beginning on page 5 for a discussion of material issues to
consider before purchasing our common stock.
_______________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is August 11, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary 3
Risk Factors 5
Use of Proceeds 9
Price Range of Common Stock and Dividend Policy 9
Capitalization 11
Selected Consolidated Financial Data 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Business 21
Management 34
Related Party Transactions 42
Principal Stockholders 44
Description of Capital Stock 45
Shares Eligible for Future Sale 51
Plan of Distribution 52
Legal Matters 53
Experts 53
Where You Can Find Additional Information 53
Index to Financial Statements F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock. In this
prospectus, "InChorus.com", "we", "us" and "our" refer to InChorus.com and its
wholly-owned subsidiary, InChorus.com Incorporated.
"eMail inChorus" is a trademark of InChorus.com. All other trademarks,
service marks or tradenames referred to in this prospectus are the property of
their respective owners.
All share information has been adjusted to reflect our reorganization in
March 1998.
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information described more fully elsewhere in this
prospectus. You should read the entire prospectus carefully.
INCHORUS.COM
Our Business InChorus.com (formerly known as "Softlink, Inc.") provides
rich media email message creation solutions and software
that bring life to online communication with voice, sound,
animation and graphics. We develop and market software
products that use our proprietary technology to allow
businesses and consumers to communicate through text, voice,
sound, annotation and animation.
THE OFFERING
The Selling Stockholders may offer and sell shares of our common stock
under this prospectus.
AMRO International, S. A.
We issued 8% convertible debentures in the original principal amount of
$2,000,000 to AMRO in March 2000. The debentures are convertible, at the option
of the holder, into shares of our common stock at a price per share of $1.75,
subject to adjustment for stock splits, stock dividends and reverse stock
splits. Interest is payable quarterly.
Pursuant to the agreement with AMRO providing for the issuance of the
debentures, we have:
. filed a registration statement that includes up to 1,142,857 shares of
common stock available for issuance upon conversion of the debentures,
which shares AMRO may then offer and sell to the public through this
prospectus; and
. issued warrants to AMRO to purchase 100,000 shares of common stock at
an exercise price of $3.187 per share, which shares AMRO may then also
offer and sell to the public through this prospectus.
We have also issued to AMRO 100,000 shares of our common stock in lieu of
penalties of $40,000 incurred by our failure to file, on a timely basis, the
registration statement of which this prospectus forms a part.
Plumrose Holdings, Ltd. and WEC Global Telecom Ltd.
We entered into an equity line agreement with Plumrose Holdings, Ltd. and
WEC Global Telecom Ltd. effective April 24, 2000. This agreement entitles us to
sell, from time to time through April 24, 2001, up to $5,000,000 of our common
stock at a price per share equal to the average daily price on each separate
trading day during each draw down pricing period. The pricing period is 15 days
for the first draw down period and all other draw down periods except the
second, and 45 days for the second draw down period. We may sell as much as
$2,000,000 in common stock during the first draw down period, up to $3,000,000
in common stock during the second draw down period, and up to $500,000 in common
stock during subsequent draw down periods, subject to certain conditions, with
the total amount sold not to exceed $5,000,000. The maximum dollar amount of the
draw down during the first draw down period and all other draw down periods
except the second draw down period is limited to an amount equal to 20% of the
product of (i) the average stock price over the 15-day draw down period, (ii)
the average trading volume during that period and (iii) 15. The maximum dollar
amount of the second draw down is limited to an amount equal to 20% of the
product of (i) the average stock price over the 45-day draw down period, (ii)
the average trading volume during that period and (iii) 45. The minimum draw
down is $250,000.
Pursuant to the equity line agreement, we have:
. filed a registration statement that includes twice as many shares as the
3,362,295 shares of common stock currently issuable under the equity line
agreement (based upon our 15-day average daily price, as of May 11, 2000,
of approximately $1.17 per share), which shares of common stock Plumrose
Holdings. Ltd. and WEC Global Telecom Ltd. may then offer and sell to the
public through this prospectus; and
. issued to each of Plumrose Holdings, Ltd. and WEC Global Telecom Ltd.
warrants to purchase 50,000 shares of our common stock at an exercise
price of $1.50 per share, which shares Plumrose Holdings, Ltd. and WEC
Global Telecom Ltd. may also offer and sell to the public through this
prospectus.
As soon as practicable after the effective date of this registration statement,
we plan to draw down the maximum initial amount permitted under the equity line.
Based on our 15-day average daily price, as of May 11, 2000, of $1.17 per share
and our 15-day average daily trading volume of 72,920 shares, we would be
entitled to draw down approximately $255,950. We expect to effect subsequent
drawdowns of the applicable maximum amount available under the equity line every
45 trading days thereafter until April 24, 2001, the termination date of the
equity line.
Common stock offered 8,200,000 shares of common stock,
$.001 par value.
Common stock to be outstanding after this 21,430,042 shares, excluding an
Offering aggregate of 8,586,540 shares
reserved for issuance upon the
exercise of outstanding stock
options and warrants (other than
the warrants held by the selling
stockholders) and the conversion of
our Series A Preferred Stock.
Use of proceeds We will not receive any of the
proceeds from the offering of
shares by the Selling Stockholders
under this prospectus. Any proceeds
we receive pursuant to the equity
line agreement with Plumrose
Holdings Ltd. and WEC Global
Telecom Ltd., and from the exercise
of the warrants held by the Selling
Stockholders will be used for
marketing, establishment of our
consulting and service business and
for working capital and general
corporate purposes.
O-T-C Market Bulletin Board symbol: "ICHC"
3
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SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------
2000 1999
------------ ----------
<S> <C> <C>
Consolidated Statements of Operations Data:
Net sales, including license fee income $ 680,200 $ 731,100
Cost of sales 491,100 39,200
Loss from operations (4,867,600) (1,128,100)
Net loss (6,148,600) (1,015,900)
Basic and diluted loss per share $(0.88) $(0.14)
Basic and diluted weighted-average common shares outstanding 8,195,300 7,132,600
March 31,
2000
------------
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 1,995,900
Working capital 1,477,200
Total assets 3,288,600
Total stockholders' deficiency (88,900)
</TABLE>
4
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RISK FACTORS
An investment in the shares of our common stock offered by this prospectus
involves a high degree of risk. You should consider carefully the following
risk factors as well as the other information set forth in this prospectus
before you decide to buy our common stock.
Risks Related to Our Operations
We have a history of losses, and we expect losses for the foreseeable future.
Since our inception in November 1995, we have incurred substantial losses.
Our net loss equaled approximately $1,015,900 for the year ended March 31, 1999,
and approximately $6,148,600 for the year ended March 31, 2000. As of March 31,
2000, we had an accumulated deficit of approximately $8,887,900.
We anticipate that our expenses relating to developing, marketing and
supporting our current and future products and services will increase
substantially in the future. Accordingly, for the foreseeable future we expect
to experience additional losses as these increased expenses exceed our total
revenues. These additional losses will increase our accumulated deficit.
The report of BDO Seidman, LLP on our consolidated financial statements for
the year ended March 31, 2000 contains an explanatory paragraph indicating that
our accumulated deficit and net losses raise substantial doubt about our ability
to continue as a going concern. This going concern qualification may adversely
affect our perception by prospective customers and suppliers, as well as by the
financial community.
Our revenues currently depend on one product family.
To date, we have generated nearly all of our revenues from our eMail VOICELink
and eMail inChorus family of products. We expect that our current eMail
VOICELink and eMail inChorus family of software products and software products
in the future will continue to account for a substantial majority of our
revenues for the foreseeable future. Therefore, our future financial
performance is dependent, in significant part, upon the successful development,
introduction and customer acceptance of new and enhanced versions of eMail
VOICELink and eMail inChorus and of related new products and services that we
may develop. We cannot assure you that we will be successful in upgrading eMail
VOICELink and eMail inChorus or that we will successfully develop new products
and services, or that any new product or service will achieve market acceptance.
For more information on the sources of our revenues, please see the section of
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
5
<PAGE>
Our revenues are also dependent on licensing revenue from one major licensing
customer.
For the years ended March 31, 2000 and 1999, approximately $153,100 and
$640,000, respectively, or 22.5% and 87.5%, respectively, of our net sales were
derived from licensing revenue from one customer, NIC Ltd. In addition, we had
net accounts receivable from NIC Ltd. of $479,900 and $421,900 at March 31, 2000
and March 31, 1999, respectively. As of March 31, 2000, we increased the
allowance for doubtful accounts to $672,200, fully reserving the unpaid balance
of the NIC receivable. The loss of this customer, or the inability to collect in
full the receivable from this customer could have a material and adverse effect
on our business, results of operations or financial condition. Although we are
seeking to increase our sales of software products, we expect that a substantial
majority of our revenues for the foreseeable future will be derived from the
licensing of our software products.
We have recently experienced greater than estimated retail software returns.
In the quarter ended March 31, 2000, we experienced greater than estimated
returns of our software from retailers. These returns exceeded the amount of
revenues from retail software sales during the same quarter. We are currently
investigating the reasons for these returns, and believe that they may be due in
part to the traditionally higher return rate in the first calendar quarter in
the shrinkwrap software industry as distributors and retailers balance their
inventory.
We are changing our business model from one focused on licensing to one focused
on sales of software. This new model is unproven.
Our core business model has focused on licensing software designed to enable
our customers to enhance their email communications with voice and multimedia
features. To date, substantially all of our revenue has been derived from
licensing of our software. We are attempting to increase sales of our software
to complement our licensing revenue; however, we believe that it is too early to
determine whether this business model will be successful in the future.
We have broadened our business by offering turnkey multimedia email services.
These services would transfer to us the responsibility for constructing and
disseminating multimedia messages on behalf of our customers. We would be
competing against production and advertising companies in this market, and we
may not compete effectively with these current or future service providers based
on price, performance or other features. We expect to devote significant
engineering, marketing, sales and customer support resources to enhance the
competitiveness and cost-effectiveness of these services. These actions may
divert resources from our other products and services and may thus harm our core
eMail VOICELink and eMail inChorus business.
Multimedia email is a new and evolving business, competes with other methods of
online communication, and may not receive widespread acceptance.
Multimedia email is in its very early stages of development. Like many new
businesses, it is characterized by rapidly evolving technologies, quickly
changing marketing and sales strategies, multiple and aggressive market
participants, fluctuating demand and uncertain market acceptance for products
and services. Businesses and consumers have the option of using other methods
of online communication, including video and audio streaming. These methods may
receive greater acceptance than our multimedia email model. Multimedia email is
also heavily dependent on the success of the Internet, which itself is a
relatively new medium with an unpredictable future.
6
<PAGE>
We are growing rapidly, and effectively managing our growth may be difficult.
We are currently experiencing a period of significant expansion in our
products, services and infrastructure. In order to execute our business plan, we
must continue to grow significantly by expanding our product line and hiring new
employees. This growth will strain our management, resources and systems. Our
ability to compete effectively and manage future growth, if any, will require us
to implement and improve our operational, financial and management information
systems on a timely basis and to attract, hire, train and retain additional
personnel. If we cannot effectively manage our growth, our business could be
harmed.
The loss of the services of one or more of our key personnel or our failure to
hire, integrate or retain other qualified personnel could disrupt our business.
We depend upon the continued services and performance of our executive
officers and other key employees, particularly William Yuan, our President and
Chief Executive Officer, Johnson Lee, our Chairman, and Edmund Leung, our Chief
Technical Officer. We currently maintain key person life insurance on Messrs.
Yuan, Lee and Leung; however, the loss of the services of any of them could
materially and adversely affect our business. Competition for qualified
personnel in technology is intense and we may not be able to retain or hire
necessary personnel.
We would lose revenues and incur significant costs if our systems or material
third-party systems are not year 2000 compliant.
To date, we have not incurred any material costs in identifying or
evaluating year 2000 compliance issues, nor have we experienced any significant
failures due to the year 2000 date changes. However, we may fail to discover
year 2000 compliance problems in our systems that will require substantial
revisions or replacements. There can be no assurance that third-party software,
hardware or services incorporated into our material systems will not need to be
revised or replaced, which could be time-consuming and expensive. Our inability
to fix or replace third-party software, hardware or services on a timely basis
could result in lost revenues, increased operating costs and other business
interruptions, any of which could have a material and adverse effect on our
business, results of operations and financial condition. Moreover, the failure
to adequately address year 2000 compliance issues in our software, hardware or
systems
7
<PAGE>
could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, which could be costly and time-consuming to
defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be or continue to be year 2000 compliant. The failure
by these entities to be year 2000 compliant could result in a systemic failure
beyond our control, including, for example, a prolonged Internet,
telecommunications or electrical failure, which could also prevent us from
delivering our services to our users, decrease the use of the Internet or
prevent users from accessing our services, any of which would have a material
and adverse effect on our business, results of operations and financial
condition.
We are heavily reliant on third parties for order fulfillment and any delays or
other problems in fulfillment could adversely affect our business.
We are heavily reliant on the ability of Pakpro and Russ Thill, our
fulfillment houses, to package and ship orders of our products. Growth in the
volume of orders for our products may strain the capacity of our fulfillment
houses, and delays or other problems with order fulfillment could have a
material and adverse effect on our business.
There are dilutive effects of the equity line agreement.
The sale of stock pursuant to the equity line agreement with Plumrose
Holdings, Ltd. and WEC Global Telecom Ltd. will have a dilutive impact on our
stockholders. As a result, our net income or loss per share could be materially
affected in future periods and the market price of our common stock could be
materially and adversely affected. The shares of common stock to be issued under
the equity line agreement will be issued at a discount to the then-prevailing
market price of the common stock. These discounted sales could have an immediate
adverse effect on the market price of the common stock. We have also issued to
AMRO International, S.A., Plumrose Holdings, Ltd. and WEC Global Telecom Ltd.
warrants to purchase an aggregate of 200,000 shares of our common stock at
exercise prices from $1.50 to $3.187 per share. The issuance of shares of common
stock under the equity line agreement or upon exercise of these warrants, and
the subsequent resale of the common stock would have a further dilutive effect
on our common stock and could adversely affect its market price.
The offer and sale of shares of common stock under the private equity line
arrangement might violate federal securities laws.
In a transaction like our sale of common stock to Plumrose Holdings, Ltd.
and WEC Global Telecom Ltd. pursuant to the equity line agreement, the issuer of
such securities generally may register the resale of securities prior to their
issuance if the issuer has completed a valid exempt sale of the securities to
the investor, and the investor is at market risk at the time of filing of the
registration statement. Because Plumrose Holdings, Ltd. and WEC Global Telecom
Ltd. might not be deemed to have been at market risk prior to filing of the
registration statement, the transaction might not qualify for an exemption from
the registration requirements of the Securities Act of 1933. If this transaction
is deemed to have violated the Securities Act of 1933, Plumrose Holdings, Ltd.
and WEC Global Telecom Ltd. would have the right, for a period of up to one year
from the date of its purchase of common stock, to recover the cash it paid or,
if it had already sold the stock, sue for damages resulting from its purchase.
These damages could equal up to the full $5,000,000 plus interest that Plumrose
Holdings, Ltd. and WEC Global Telecom Ltd. might purchase under the equity line.
If this occurs, our business, results of operations and financial condition
would be harmed. In particular, such an occurrence would have a material adverse
effect on our liquidity position and our ability to meet short-term obligations
and we might not be able to secure alternative financing on favorable terms or
at all.
Some of the information in this prospectus contains forward-looking statements.
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may", "will", "expect",
"anticipate", "believe", "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they:
- discuss our expectations about our future performance;
- contain projections of our future operating results or of our future
financial condition; or
- state other "forward-looking" information.
We believe it is important to communicate our expectations to our stockholders.
There may be events in the future, however, that we are not able to predict
accurately or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of any of the events described in these risk factors and elsewhere in this
prospectus could have a material and adverse effect on our business, results of
operations and financial condition and that upon the occurrence of any of these
events, the trading price of our common stock could decline and you could lose
all or part of your investment.
8
<PAGE>
USE OF PROCEEDS
We will not receive any of the proceeds from the offering of shares by the
Selling Stockholders under this prospectus. Any proceeds we receive pursuant to
the equity line agreement with Plumrose Holdings, Ltd. and WEC Global Telecom
Ltd., and from the exercise of the warrants held by the Selling Stockholders
will be used for marketing, establishment of our consulting and service business
and for working capital and general corporate purposes.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been traded on the NASD O-T-C Market Bulletin
Board under the trading symbol "SFLK" since October 21, 1998. Prior to that
date, our common stock was not actively traded in the public market. The
following table sets forth, for the periods indicated, the high and low bid
prices for our common stock as reported by various Bulletin Board market makers.
The quotations do not reflect adjustments for retail mark-ups, mark-downs, or
commissions and may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
Period Low Bid High Bid
------ ------- --------
<S> <C> <C>
Fiscal 2001
Second Quarter (July 1, 2000 to July 31, 2000) $0.335 $0.625
First Quarter (April 1, 2000 to June 30, 2000) $0.500 $2.906
Fiscal 2000
Fourth Quarter (January 1, 2000 to February 29, 2000) $1.562 $4.812
Third Quarter (October 1, 1999 to December 31, 1999) $0.500 $2.750
Second Quarter (July 1, 1999 to September 30, 1999) $1.437 $3.250
First Quarter (April 1, 1999 to June 30, 1999) $1.875 $4.750
Fiscal 1999
Fourth Quarter (January 1, 1999 to March 31, 1999) $1.062 $8.125
Third Quarter (October 21, 1998 to December 31, 1998) $0.875 $5.500
</TABLE>
On July 31, 2000, the high and low bid prices of our common stock on
the Bulletin Board were $0.40 and $0.370 per share, respectively and there were
approximately 165 holders of record of the common stock.
The market price of our common stock has been, and is likely to continue to
be, highly volatile as the stock market in general, and the market for
technology companies in particular, has been highly volatile. Investors may not
be able to resell their shares of our common stock following periods of
volatility because of the market's adverse reaction to volatility. The trading
prices of many technology companies' stocks have reached historical highs within
the last 52 weeks and have reflected valuations substantially above historical
levels. During the same period, these companies' stocks have also been highly
volatile and have recorded lows well below historical highs. We cannot assure
you that our stock will trade at the same levels of other technology stocks or
that technology stocks in general will sustain their current market prices.
Factors that could cause such volatility may include, among other things:
9
<PAGE>
- actual or anticipated fluctuations in our quarterly operating results;
- announcements of technological innovations;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet industry;
- changes in the market valuations of other technology companies; and
- general market conditions.
To date, we have never declared or paid any cash dividends on our
common stock. We currently intend to retain any future earnings for funding
growth and therefore, do not expect to pay any dividends in the foreseeable
future. We are obligated to pay dividends on our outstanding Series A
Preferred Stock at the rate of seven percent per annum. We may pay these
dividends in either cash or shares of our common stock. We currently intend to
retain earnings, if any, to fund the development and growth of our business and
do not anticipate paying cash dividends on the common stock in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of our
Board of Directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs and
plans for expansion.
10
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 2000, our
capitalization on an actual basis, and as adjusted to reflect the conversion of
our convertible notes payable and Series A Preferred Stock, as well as the
issuance of common stock offered by this prospectus. This information should be
read in conjunction with our Consolidated Financial Statements and the related
Notes appearing elsewhere in this prospectus.
The "as adjusted" column assumes 1) the conversion of the convertible notes
payable, at $1.75 per share, with the remaining discount expensed at conversion;
2) the conversion of the Series A Preferred Stock at $0.301 per share (the
conversion price at August 3, 2000) and payment of dividends on the Series A
Preferred Stock in shares of common stock at the same conversion price; 3) the
issuance of 100,000 shares of common stock in lieu of $40,000 of penalties at a
price of $.40 per share; 4) the issuance of $5,000,000 of shares of common stock
under the equity line agreement covered by this Offering at a price of $0.3125
per share (the closing sale price of the common stock on August 3, 2000); and 5)
the exercise of warrants covered by this Offering for 200,000 shares of common
stock at exercise prices for the warrants ranging from $1.50 to $3.187 per
share.
<TABLE>
<CAPTION>
As
Actual Adjusted(1)
------------- -------------
<S> <C> <C>
Short-term debt $ - $ -
Convertible notes payable 1,878,800 -
------------- -------------
Stockholders' Equity (Deficiency)
Convertible preferred stock, $.001 par value; 1,000,000 shares 1,264,400 -
authorized; 159 shares issued and outstanding actual, no
shares issued and outstanding as adjusted
Common stock, $0.001 par value; 59,000,000 shares
authorized; 10,261,714 shares issued and outstanding 10,300 32,400
actual, 21,430,042 shares issued and outstanding as
adjusted
Additional paid-in capital 7,542,100 16,331,100
Accumulated deficit (8,887,900) (9,087,100)
------------- -------------
(71,100) 7,276,400
Less: Notes receivable (17,800) (17,800)
------------- -------------
Total Stockholders' Equity (Deficiency) (88,900) 7,258,600
------------- -------------
Total Capitalization $ 1,789,900 $ 7,258,600
============= =============
</TABLE>
-------------
(1) Assumes common stock valued at $5,000,000 will be issued under the equity
line agreement. Actual common stock valued at $255,950 can be issued as of
May 11, 2000 based on the agreement.
11
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SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below are summary consolidated statements of operations data for the
years ended March 31, 2000, 1999 and 1998, respectively, and summary balance
sheet data as of March 31, 2000. You should read this information in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and
related Notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Years Ended March 31,
2000 1999 1998
------ ----- -----
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
Net Sales, including license fee income $ 680,200 $ 731,100 $ 23,500
Cost of Sales 491,100 39,200 12,900
----------- ---------- ----------
Gross Profit 189,100 691,900 10,600
----------- ---------- ----------
Operating Expenses:
Research and development 907,500 286,300 30,200
Sales and marketing 1,625,800 688,600 123,800
General and administrative 2,523,400 845,100 476,700
----------- --------- ---------
Total Operating Expenses 5,056,700 1,820,000 630,700
----------- --------- ---------
Loss From Operations (4,867,600) (1,128,100) (620,100)
----------- --------- ---------
Other Income (Expense):
Interest income 72,500 115,500 100
Interest expense (1,311,100) (2,500) -
Other (6,700) - -
----------- --------- ---------
Total Other Income (Expense) (1,245,300) 113,000 100
----------- --------- ---------
Loss Before Provision for Income Taxes (6,112,900) (1,015,100) (620,000)
Provision for Income Taxes 35,700 800 800
----------- --------- ---------
Net Loss (6,148,600) (1,015,900) (620,800)
Preferred Stock Dividends (120,200) - -
Deemed Dividend on Beneficial Conversion of Preferred Stock (972,600) - -
----------- --------- ---------
Net Loss Applicable to Common Shareholders $(7,241,400) (1,015,900) $ (620,800)
----------- --------- ---------
Basic and diluted loss per share $ (0.88) $ (0.14) $(0.26)
----------- --------- ---------
Basic and diluted weighted-average common shares outstanding 8,195,300 7,132,600 2,377,200
March 31, 2000
--------------
Consolidated Balance Sheet Data:
Cash and Cash Equivalents $1,995,900
Working Capital $1,477,200
Total Assets $3,288,600
Total Stockholders' Deficiency $ (88,900)
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We provide rich media email message creation solutions and software that
bring life to online communication with voice, sound, animation and graphics. We
develop and market software products that use our proprietary technology to
allow businesses and consumers to communicate through text, voice, sound,
annotation and animation.
We were incorporated in November 1995 as Softlink, Inc., a California
corporation ("Softlink California") and shipped our first product, eMail
VOICELink, in August 1997. For the period from inception through December 1997,
our revenue was minimal and our operating activities related primarily to the
development of our infrastructure and our first products.
In March 1998, Softlink California entered into a reorganization with Draco
Technologies, Inc., a Nevada corporation. Under the reorganization, the
stockholders of Softlink California received approximately 0.6745344 shares of
common stock of Draco Technologies, Inc. in exchange for each of their shares of
Softlink California, and Softlink California became a wholly-owned subsidiary of
Draco. Draco then changed its name to Softlink, Inc. In February 2000, we
changed our name to "InChorus.com".
We began the marketing and promotion of our products when we introduced our
second product, PowerLink, a precursor of eMail inChorus, in November 1997.
Beginning in 1998, we also focused on recruiting personnel and raising capital.
To date, our revenues have been derived primarily from the licensing of our
products. We are attempting to increase sales of our software to complement our
licensing revenue; however, we believe that it is too early to determine whether
this business model will be successful in the future.
We have broadened our business in 2000 by offering turnkey multimedia email
services. These services transfer to us the responsibility for constructing and
disseminating multimedia messages on behalf of our customers. We will be
competing against production and advertising companies in this market, and we
may not compete effectively with these current or future service providers based
on price, performance or other features. We expect to devote significant
engineering, marketing, sales and customer support resources to enhance the
competitiveness and cost-effectiveness of these services; however, to date we
have not devoted substantial resources to this effort. Once commenced, these
actions may divert resources from our other products and services and may thus
harm our core eMail VOICELink and eMail inChorus business.
Due to the fact that we were founded in November 1995 and commercially
released version 1.0 of our first product, eMail VOICELink, in August 1997, we
have a limited operating history, and we face all of the risks and uncertainties
encountered by early stage companies such as the need to establish our
credibility with customers, advertising and other service providers,
13
<PAGE>
and prospective strategic partners. There can be no assurance that we will be
able to overcome some of these obstacles; if we do not, we may be unable to
achieve our business goals and raise sufficient capital to expand our business.
Results Of Operations
The following table sets forth the percentage relationship to net sales of
principal items contained in our Consolidated Statements of Operations for the
fiscal years ended March 31, 2000, 1999 and 1998, respectively. It should be
noted that percentages discussed throughout this analysis are stated on a
rounded basis. Our revenues, gross margins and other operating results may vary
significantly from quarter to quarter. The fluctuations may be due to a number
of factors, many of which are beyond our control, including actions of our
competitors, market acceptance of our products, changes in pricing and margins,
and unanticipated costs. Given our limited operating history, we believe that an
analysis of our cost and expense categories as a percentage of net sales is not
meaningful.
<TABLE>
<CAPTION>
Years Ended March 31,
2000 1999 1998
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
Net sales, including license fee income 100% 100% 100%
Cost of sales 72 5 55
---- ---- -----
Gross profit 28 95 45
Operating expenses 744 249 2,684
---- ---- -----
Loss from operations (716) (154) (2,639)
Other income (expense) (183) 15 1
---- ---- -----
Loss before provision for income taxes (899) (139) (2,638)
Provision for income taxes 5 0 4
---- ---- ------
Net loss (904%) (139%) (2,642%)
------ ---- ------
</TABLE>
Years Ended March 31, 2000 and 1999
Net sales for the year ended March 31, 2000 were $680,200, compared to net
sales of $731,100 for the year ended March 31, 1999. The decrease reflects the
shift in our business model to expanded sales efforts for our eMail VOICELink
and eMail inChorus products from the licensing of these products. The sales of
VOICELink and inChorus are subject to product returns from distributors. In the
fourth quarter ended March 31, 2000, we experienced greater than estimated
returns of our software from distributors and retailers. These returns equaled
$455,000, which we believe reflected the traditionally higher return rate in the
first calendar quarter in the shrinkwrap software industry as distributors and
retailers balance their inventories.
In the year ended March 31, 2000, $153,100, or 22.5%, of our revenues
consisted of licensing revenues as compared to licensing revenues of $640,000,
or 87.5%, of revenues for the year ended March 31, 2000.
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<PAGE>
Cost of sales increased to $491,100 for the year ended March 31, 2000
from $39,200 for the comparable period in 1999, due to the increase of
inventory reserves, the elimination of obsolete products and increased
production of our products.
Operating expenses increased to $5,056,000 for the year ended March 31,
2000, compared to $1,820,000 for the year ended March 31, 1999. The increase was
comprised of growth in all components of our operating expenses such as research
and development, sales and marketing and general and administrative expenses.
Research and development expenditures increased significantly to $907,500 for
the year ended March 31, 2000 compared to $286,300 for the year ended March 31,
1999, due primarily to costs associated with the development of new versions of
our existing products and the design and development of new products and
services. Sales and marketing expenses increased to $1,625,800 in the year ended
March 31, 2000 compared to $688,600 for the comparable period in 1999, due to
expanded marketing efforts for our eMail VOICELink and eMail inChorus software
introduced in the middle of fiscal 1998. These efforts included hiring
additional sales personnel and participation in trade shows. General and
administrative expenses increased to $2,523,400 for the year ended March 31,
2000 compared to $845,100 for the year ended March 31, 1999, due primarily to
the expansion of our infrastructure through the hiring of additional personnel
and management and the lease of additional facilities.
Our interest income decreased to $72,500 for the year ended March 31, 2000
compared to $115,500 for the year ended March 31, 1999. The decrease was due to
slightly decreased average balances of cash and cash equivalents in fiscal 2000.
We also incurred $1,311,100 of interest expense (including noncash interest of
$1,298,400) related to the $2,000,000 bridge loan that we received from AMRO
International, S.A. in March 2000. The noncash interest related to a beneficial
conversion price of the bridge loan note.
As a result of these factors, we incurred a net loss of $6,148,600 for the
year ended March 31, 2000 compared to a net loss of $1,015,900 for the year
ended March 31, 1999. Net loss available to common shareholders for the year
ended March 31, 2000 equaled $7,241,400 due to a deemed dividend of $972,600
related to a beneficial conversion price in connection with the convertible
preferred stock offering, and $120,200 in dividends on outstanding shares of
preferred stock.
15
<PAGE>
Income Taxes
At March 31, 2000 and March 31, 1999, we had deferred tax assets of
$3,212,800 and $651,600, respectively, principally arising from net operating
loss carryforwards available to offset future taxable income. As management
cannot determine that it is more likely than not that we will realize the
benefit of these assets, a 100% valuation allowance has been established.
Liquidity and Capital Resources
Our working capital requirements have been financed over the past two years
through private placements of common and preferred stock and, to a lesser
extent, from borrowings from principal stockholders. In the years ended March
31, 2000 and 1999, financing activities, principally private placements,
generated $5,191,700 and $1,363,000, respectively, of cash. In the years ended
March 31, 2000 and 1999, financing activities generated $3,175,000 and
$1,995,900 of cash, respectively. As of March 31, 2000, we had approximately
$1,995,900 in cash and cash equivalents, an increase from $849,400 of cash and
cash equivalents at December 31, 1999 and $307,500 of cash and cash equivalents
at March 31, 1999. Our accounts receivable equaled $701,400 at March 31, 2000
(net of an allowance of $672,200 for doubtful accounts), as compared to $430,600
at March 31, 1999, due primarily to increased sales of our products but offset
by our determination to fully reserve the unpaid balance of amounts due under
the license agreement with NIC, Ltd.
In fiscal 2000, our operating activities utilized $3,283,400 in cash, as
compared to the $1,005,600 of cash utlized in operating activities in fiscal
1999. The increase was due to the expansion of our operations as a component of
our business growth. Investing activities utilized $219,900 of cash for the year
ended March 31, 2000, compared to $101,800 for the prior year.
In August 1999, we completed a private placement in which we issued 300
shares of preferred stock and warrants to purchase an aggregate of 390,000
shares of common stock. The warrants, which have exercise prices ranging from
$2.25 to approximately $2.44 per share, expire
16
<PAGE>
in August 2004. We received net proceeds, after placement agent commissions and
expenses, of $2,788,700 from this private placement.
In March 2000, we entered into a loan agreement with AMRO International,
S.A. for a $2,000,000 bridge loan. The loan is evidenced by convertible
debentures bearing interest at the rate of eight percent per annum, which are
convertible into shares of our common stock at $1.75 per share. If not
converted, the debentures are due and payable on September 30, 2001. In
connection with this loan, we issued to AMRO International, S.A. warrants to
purchase 100,000 shares of our common stock at an exercise price of $3.187 per
share. Furthermore, in August 2000, we issued 100,000 shares of our common stock
to AMRO in lieu of $40,000 in penalties incurred by us for the untimely filing
of the registration statement of which this prospectus forms a part.
Effective April 24, 2000, we entered into an equity line agreement with
Plumrose Holdings, Ltd. and WEC Global Telecom Ltd. This agreement allows us to
sell, from time to time, through April 24, 2001, up to $5,000,000 of our common
stock. We also issued warrants to purchase 50,000 shares of our common stock,
with an exercise price of $1.50 per share, to each of Plumrose Holdings, Ltd.
and WEC Global Telecom Ltd. in connection with this transaction.
Our independent certified public accountants have issued a report on our
audited financial statements with an explanatory paragraph regarding our ability
to continue as a going concern. Our continuation as a going concern is
dependent upon our ability to obtain additional financing or refinancing as may
be required, and ultimately upon our ability to attain profitability.
In the future, we may acquire or make investments in complementary
businesses, products, services or technologies on an opportunistic basis when we
believe they will assist us in carrying out our business strategy. We do not
have any present understanding, nor are we having any discussions relating to
any such acquisition or investment. Any such acquisition or investment could
harm our operating results or cause our stock price to decline because:
- the amount of time and level of resources required to successfully
integrate our business operations could be substantial;
- challenges in assimilating personnel, organizational structure, and
technology could cause significant delays in executing other key areas of our
business plan;
- the key personnel of the acquired company may decide not to work for us,
which could result in the loss of key technical or business knowledge to us; and
- we may have to incur debt or issue equity securities to pay for any
future acquisitions, the issuance of which could be dilutive to our existing
stockholders.
We need working capital to execute our business plan. We believe that our
current cash and cash equivalents plus existing financing commitments and
anticipated cash generated from operations will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures through the
remainder of 2000. If cash generated from operations is insufficient to satisfy
our liquidity requirements after that date, we may seek to sell additional
equity or debt securities or to obtain a credit facility. The sale of additional
equity or convertible debt securities could result in additional dilution to our
stockholders. The incurrence of indebtedness would result in an increase in our
fixed obligations and could result in operating covenants that would restrict
our operations. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all. If financing is not available
when required or is not available on acceptable terms, we may be unable to
develop or enhance our products or services. In addition, we may be unable to
take advantage of business opportunities or respond to competitive pressures.
Any of these events could have a material and adverse effect on our business,
results of operations and financial condition.
Impact of the Year 2000
In our previous filings, we have discussed the nature and progress of our
plans to deal with potential Year 2000 problems. These problems arise from the
fact that many currently installed computer systems and software products are
coded to accept or
17
<PAGE>
recognize only two digit entries in the date code field. These systems may
recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, computer systems and/or software used by many companies and governmental
agencies needed to be upgraded to comply with Year 2000 requirements or risk
system failure or miscalculations causing disruptions of normal business
activities. Prior to December 31, 1999, we completed our assessment of all
material information technology and non-information technology systems at our
headquarters, as well as our review of year 2000 compliance by our key vendors,
distributors and suppliers. To date, we have experienced no material technical
problems related to the year 2000. We will continue to monitor our material
information technology and non-information technology systems and that of our
suppliers and vendors throughout the year 2000 to ensure that any latent year
2000 matters that may arise are addressed promptly.
18
<PAGE>
Effects Of Inflation
Due to relatively low levels of inflation in 1999 and 2000, inflation
has not had a significant effect on our results of operations.
Recent Accounting Pronouncements
On October 27, 1997, the American Institute of Certified Public
Accountants issued Statement of Position No. 97-2, "Software Revenue
Recognition", which provides guidance on when revenue should be recognized and
in what amounts for licensing, selling, leasing, or otherwise marketing computer
software. If the software arrangement does not require significant production,
modification, or customization of software, revenue should be recognized when
all of the following criteria are met:
19
<PAGE>
- persuasive evidence of an arrangement exists;
- delivery has occurred;
- the vendor's fee is fixed or determinable; and
- collectibility is probable.
The adoption of SOP No. 97-2 did not have a material impact on our
consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Software for Internal Use", which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The adoption of SOP No. 98-
1 did not have a material impact on our consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. Historically,
we have not used derivatives and therefore this new pronouncement is not
applicable.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998, or January 12,
2000. Due to the repricing of options, FIN 44 may have a material effect on our
financial position or results of operations.
20
<PAGE>
BUSINESS
Overview
inChorus provides rich media email message creation solutions and software
that bring life to online communication with voice, sound, animation and
graphics. We develop and market software products that use our proprietary
technology to allow businesses and consumers to communicate through text, voice,
sound, annotation and animation.
Our two key products are eMail VOICELink and eMail inChorus. eMail
VOICELink adds voice messages to email communications over the Internet,
allowing users to add personality, clarity and impact to their email messages.
eMail inChorus is a multimedia email product that integrates text, voice, sound,
annotation and animation with email. Users of both eMail VOICELink and eMail
inChorus can send their messages through industry standard email packages such
as Netscape Mail, Microsoft Outlook, America Online and Eudora, and can utilize
our products with MSN and other major Internet service providers.
International Data Corporation predicts that the number of email addresses
on the Internet will double yearly from an installed base of 52 million in 1995,
and will continue doubling until 2000. Industry sources also indicate that email
accounts for 70% of all Internet connect time. Businesses are currently using
email in their e-commerce strategies to replace or supplement banners and other
online advertising strategies. To date, however, most email products only allow
the transmission of text or text with file attachments due to the large amount
of capacity, or bandwidth, required for more complex messages.
Our proprietary multimedia composer and compression technology allows
multimedia email messages to be transmitted over the Internet with the minimum
consumption of bandwidth. Use of this technology permits businesses to expand
their e-commerce marketing capabilities with multimedia email by offering
product demonstrations or complex graph and tables to customers. In addition,
we believe that companies could realize cost savings by using multimedia email
in lieu of printed brochures, flyers and coupons. We do not currently own any
patented technology registered with the United States Patent and Trademark
Office.
Our products provide online communication solutions for consumers and
business users across a variety of industries. We have established strategic
relationships with several manufacturers of multimedia computer components ,
such as Sony Electronics, Inc., to promote our software products by including
them in computer hardware products sold by Sony and have entered an agreement
with Earthlink/Sprint combining its Internet access services with our products
in return for a payment from new Earthlink subscribers. We also have an
agreement with one of the largest Japanese distributors, NIC, Ltd., to sell our
products in Japan through distributors and original equipment manufacturer
partners.
21
<PAGE>
Industry Background and Market Opportunities
Email
-----
Global communication using the Internet has expanded exponentially in the
past few years. In addition to providing a medium for basic communication, email
can be used for e-commerce. The increased use of email generally has opened up
significant opportunities for the large number of businesses that are working on
e-commerce strategies. While these companies have relied on banner advertising
and other online advertising strategies to reach potential customers over the
Internet, they are now turning to email as another e-commerce marketing tool.
Various e-commerce functions can be accomplished with email. First of all,
it can be used as a promotional tool to get information out to a targeted list
of customers. This can be done in mass mailing, i.e., bulk email, or on an
individualized basis for businesses that emphasize person-to-person selling.
Second, it can be used as a customer service tool for products that must be
installed by the user, or products that need more than text instruction to
explain clearly. Third, it can be used to obtain customer registrations.
Finally, it can be used as a form of intra-company communications on an
Intranet, which might also include extranet communications through an external
network, an extranet, with vendors and subcontractors.
In each of these functional areas, email reduces costs and improves the
communication with the receiver. For example, using a bulk email approach to a
targeted list of online users is a very inexpensive way to reach customers
directly. Moreover, email has been found by some commercial marketers to be
more effective than banner ads in driving online sales. ZDNet, an industry
media analyst, has reported that Tower Records increased its response rate from
4.4% to 14.9% after introducing personalized email, while The Gap doubled its
online sales after launching an email campaign. Thus, we believe the eventual
use of email as a functional replacement for what is currently used in these
areas by companies is reasonably likely.
Multimedia Opportunities
------------------------
One of the problems with email to date as a tool to market products is that
most email products only allow text or text with file attachments. Two
important means of reaching customers, the use of sound and the use of pictures,
have been missing, partly due to the bandwidth problem and the need to compress
data files. In today's multimedia environment, the lack of these features has
held email back as a marketing tool. However, due to technical advances,
companies are now able use innovative multimedia email business solutions.
Multimedia email is substantially different than text email, or even voice
email when used as an e-commerce tool. Many products require being viewed or
benefit when the customer can see a picture, as well as hear a promotional
pitch. Voice in some ways is superior to text since it easier to listen than it
is read. Voice can add a level of persuasiveness not available with text alone.
Also, if one is sitting in front of a computer screen, it is possible to avoid
reading, but not easy to avoid listening. When voice is combined with pictures
or graphics a far more powerful tool is created.
22
<PAGE>
In order to utilize multimedia email, both the sender and recipient of the
message must have a multimedia computer. Most new computers and much of the
installed base in the United States are multimedia computers.
In e-commerce, the primary beneficiaries of multimedia email will be
companies online that need graphics and sound in their selling pitch and in
their communications with others. This would include companies offering
consumer products that must be seen before they are bought because the
particular design and look of the product is important in the buying decision;
leisure and other products that are selling excitement and adventure; products
that are primarily sold by a broker or salesperson to an individual consumer;
and products that are more complicated and may require explanations using graphs
and tables. The other important benefits are cost saving and improve time to
market for companies to market their product and services.
All of these applications, however, require an enormous increase in the
current capacity, or bandwidth, of communications networks. Behind this
phenomenal rise in consumption of bandwidth is the simple fact that there are
more people connected to networks, sending more bits of information more often.
The Internet has become not only a primary means for interpersonal
communication, but a commercial tool as well. Businesses are now looking at the
Internet and the Web as a connectivity tool to implement remote access, wire
their suppliers and customers to their networks, and potentially integrate their
voice and data traffic over a single network. We believe that a flood of demand
is being created for the products and services that will enable this
connectivity to occur as seamlessly as possible - either through increased
bandwidth or by using the existing capacity to maximum advantage.
Because we are in the business of multimedia email solutions, our success
is directly tied to the widespread acceptance and continued use of the Internet.
However, the Internet may not be accepted as a viable commercial medium for a
number of reasons, including the following:
- inadequate Internet infrastructure;
- security concerns;
- possible governmental regulation and taxation;
- inconsistent quality of service; and
- unavailability of cost-effective, high-speed service.
If use of the Internet does not grow as expected, our business, results of
operations and financial condition would be materially and adversely affected.
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<PAGE>
The inChorus.com Solution
inChorus.com provides multimedia email solutions that bring life to online
communication through multimedia. Our founders, Johnson Lee and Edmund Leung,
formed inChorus.com in 1995 in recognition of the growing need for complex
communications on the Internet, the diminishing capacity of text-only email to
meet this need and the need to provide this solution within the existing
bandwidth. Our multimedia email solution is based upon our multimedia composer
and proprietary compression technology, which permits users to shorten the time
and bandwidth required to send and receive complex multimedia email without the
loss of quality or resolution. We shipped our first product, eMail VOICELink,
in August 1997, and introduced PowerLink, a previous generation of eMail
inChorus, in November 1997.
Our business is being positioned to capitalize on the growing marketplace
opportunities attributable to several overlapping factors such as the increase
in the number of email addresses on the Internet, the increase in frequency of
email use in e-commerce solutions, and the rapidly growing installed base of
multimedia computers.
Due to the fact that we were founded in November 1995 and commercially
released version 1.0 of our first product, eMail VOICELink, in August 1997, we
have a limited operating history, and we face all of the risks and uncertainties
encountered by early stage companies such as the need to establish our
credibility with customers, advertising and other service providers, and
prospective strategic partners. There can be no assurance that we will be able
to overcome some of these obstacles; if we do not, we may be unable to achieve
our business goals and raise sufficient capital to expand our business.
Strategy
Our strategy is to be the leading provider of multimedia communications
solutions, based on our proprietary multimedia composer and compression
technology, for communication over the Internet. Key elements of our strategy
include:
Extend Technology Leadership By Producing Superior Products. Since
inception, we have focused our research and development efforts on developing
our multimedia composer and core compression technology that addresses the issue
of inadequate capacity on the Internet for the transmission of complex
communications. Our products integrate a number of advanced technologies,
including our proprietary data compression technology, that provide a 50:1
compression rate without loss of quality or resolution. We believe that we are
currently a leader in multimedia communications technology, and we intend to
extend this leadership position by continuing to devote additional resources to
research and development efforts.
Create Brand Recognition. We are focused on building brand awareness and
acceptance as well as on developing strategic marketing and distribution
relationships. We have a comprehensive marketing strategy with several key
components:
- image and awareness building;
24
<PAGE>
- direct marketing to prospective and existing customers using demographic
profiling;
- a strong Web presence and broad scale marketing programs in conjunction
with key partners.
Our corporate marketing strategy also includes trade shows, television
commercials and public relations activities. Our business and products have
received news coverage from ABC, CBS and NBC as well as their affiliated
stations nationwide through brief interview segments. We also have received
coverage to date from many radio stations.
Expand Market Leadership Position Through Strategic Licensing
Relationships. We are attempting to establish a leading position in the
emerging market for multimedia communications solutions. To accelerate the
adoption of VOICELink and inChorus as the standard multimedia communications
solutions and to facilitate global acceptance of our products, we have
established and are continuing to establish strategic licensing relationships
with leading personal and laptop computer manufacturers and distributors. Our
strategic licensing partners include Sony Electronics, Inc., NEC, and
Earthlink/Sprint. In general, these relationships provide for the inclusion of
our software in hardware products sold by our partners. In the case of
Earthlink, our agreement provides for the combining of Internet access services
offered by Earthlink/Sprint with our software in return for a payment form new
Earthlink subscribers. We believe that brand recognition is essential to our
business success, and encourage all of our partners and resellers to use the
Softlink brand name in conjunction with their applications. We intend to
further develop our existing strategic licensing relationships and enter into
new partnerships in both licensing and sales to expand our market presence and
brand recognition.
Broaden Distribution Channels. To date, we have sold our products
primarily through original equipment manufacturer partners and distributors as
well as through direct sales. We intend to expand our direct sales force as
well as to leverage and grow our existing network of original equipment
manufacturer partners and distributors.
Increase International Presence. While to date our international sales
have been limited, we plan to increase our international sales presence. We
have entered into an agreement with NIC, Ltd., one of the largest Japanese
distributors, to sell our products in Japan, and are also working with our
Chinese partners to stimulate sales in that country. We have also commenced
sales into the Middle East and European markets.
Products And Technology
Products
--------
We currently offer two primary communications products. These are called
eMail inChorus and eMail VOICELink. eMail inChorus, introduced in August 1997,
develops and transmits full-featured multimedia presentations via email on the
Internet and corporate Intranets. An email message generated with eMail
inChorus integrates text, voice, sound, annotation and animation. Users can
import, manipulate and edit text, pictures, photos and graphics, capture
25
<PAGE>
screen shots displayed on a monitor, annotate directly from a document, cut and
paste documents and use original art works within a single email message as
though the message were being presented on a white board to an audience. We also
include graphical templates and clip art to reduce the time required for message
creation.
eMail inChorus uses our proprietary compression technology to shorten the
time and bandwidth required to send and receive multimedia email. For example, a
one minute multimedia message sent through eMail inChorus requires only 200
kilobytes of capacity, as compared to the 6 megabytes required to send the same
message through competitive channels such as QuickTime. eMail inChorus is
compatible with the most popular email programs including Netscape Mail,
Microsoft Outlook and Eudora, and works with America Online, MSN and other major
Internet service providers. An eMail inChorus message is sent as an attached
file with a free player, giving the recipient the opportunity to play the
message. To send a response, however, the recipient must also have the eMail
inChorus software.
Our eMail inChorus software is currently configured for use with all
Windows and Macintosh applications.
Our second product, eMail VOICELink, was introduced in November 1997.
eMail VOICELink allows users to add voice capability to their email messages to
provide personality, clarity and impact without the cost of long distance. Like
eMail inChorus, eMail VOICELink features our proprietary compression technology,
permitting a one-minute eMail VOICELink message to require just 100 kbpm as
compared to 5,200 kbpm utilized by a standard one minute audio file.
Except for our Macintosh version, as Macintosh computers already contain a
built-in microphone, we package eMail VOICELink with a high quality microphone,
player software, the message recipient must also have eMail VOICELink to send a
reply, and over 200 pre-designed graphical templates and clip art images. eMail
VOICELink is compatible with both Windows and Macintosh applications, and works
with email packages such as Netscape Mail, Microsoft Outlook, Lotus Notes and
Eudora. eMail VOICELink messages may be sent through most major Internet
service providers, including America Online and MSN.
In February 2000, we introduced a version of eMail inChorus with database
connectivity and mass mailing capabilities, called eMail inChorus Pro, for
corporate users.
In addition to refining our existing software products and expanding their
applicability, we are considering the development of complementary
communications services. These services would provide turnkey multimedia
messaging capability, message construction and transmission, for the business
market, using our already developed proprietary multimedia composer and
compression technology. The development and commercialization of these services
will require significant additional effort and resources; accordingly, we
currently do not have an anticipated date of introduction.
Software products frequently contain errors, defects or performance
problems, commonly called "bugs", especially when they are first introduced or
when new versions or enhancements
26
<PAGE>
are released. Although we test our products extensively prior to introduction,
we cannot assure you that our testing will detect all serious defects, errors
and performance problems prior to commercial release of our future software
products. Any future software defects, errors or performance problems discovered
after commercial release could result in the diversion of scarce resources away
from customer service and product development, lost revenues or delays in
customer acceptance of our products and damage to our reputation, which, in each
case, could have a material and adverse effect on our business, results of
operations or financial condition.
Although our license agreements with our customers typically contain
provisions designed to limit our exposure to liabilities arising from product
liability claims, we cannot assure you that these provisions will be enforceable
under existing or future international, federal, state or local laws and
judicial decisions. We have not experienced any product liability claims to
date, but we may be subject to such claims in the future. A product liability
claim brought against us could have a material and adverse effect on our
business, results of operations or financial condition.
Technology
----------
Most email systems contain the limited capability to attach digital files
through a technology known as MIME, multi-purpose Internet mail extension.
While MIME technology permits the compression of data before sending and the
decompression of this data at the recipient's end of the transmission, its data
standards are borrowed from other uses and are not optimal for e-mail. The data
compression standards provided by MIME require 960 kbpm for a one-minute audio
file and 12,000 kbpm for a one-minute video file. Audio, video and text
attachments are not integrated in a MIME transmission, but instead must be
played/viewed/read in sequence.
Our eMail inChorus and eMail VOICELink software features our proprietary
multimedia composer and compression technology. This technology uses neural
network architecture to reduce the size of an input data string to a minimal
number of components. The compressed data is then transmitted and
reconstructed by the message recipient. Our multimedia email messages are
integrated, and can be played simultaneously and synergistically, similar to a
movie. A one-minute email can blend text annotation, graphics, audio and
animation into one coherent message. We do not currently own any patented
technology registered with the United States Patent and Trademark Office.
27
<PAGE>
Marketing and Sales
We are focused on building brand awareness and acceptance as well as on
developing strategic marketing and distribution relationships. We have a
comprehensive marketing strategy with several key components:
- image and awareness building;
- direct marketing to prospective and existing customers using demographic
profiling;
- a strong Web presence and broad scale marketing programs in conjunction
with key partners.
Our corporate marketing strategy also includes television commercials and
syndicated interviews, public relations activities and trade shows.
We currently sell or license our products through four channels:
- through distributors to retailers, including Fry's, Comp USA, Office Max
and Electronic Boutique;
- through bundling relationships with original equipment manufacturer as
Sony Electronics, Inc. and Earthlink;
- through e-commerce outlets such as Beyond.com and America Online; and
- through direct sales to the corporate market.
Our products are distributed in North America by Merisel and Norvar, the largest
domestic distributors of computer products. Through our Japanese distribution
channel, we have gained a significant presence in the hard to penetrate Japanese
domestic market. Our Japanese language edition products were rated the fifth and
sixth best selling products in the retail productivity category in the 1998
Softbank retail report. We believe that eMail inChorus and eMail VOICELink have
provided a solution to the Japanese executive's cultural and complexity problem
of typing email by allowing the executives to use their own voice to
communicate, and anticipate that similar solutions may prove attractive to
speakers of other languages.
In March 2000, we entered into an equity investment and partnership
agreement with eNews, a Japanese corporation, which gave eNews the exclusive
right in Japan to develop and market our inChorus Pro technology through March
2003. Under this agreement, eNews must pay us $100,000 by May 31, 2000, $50,000
by June 30, 2000, and $850,000 by July 31, 2000, provided that we have delivered
to eNews the English and Japanese versions of inChorus Pro. As of May 15, 2000,
we had delivered both the English and Japanese versions. We also have agreed to
invest $150,000 in eNews by June 30, 2000 in exchange for a 25% equity interest
in eNews.
From time to time, we have successfully sold our products through other
sales channels. Recently, our products were featured on the QVC home shopping
network and over 5,000 units of eMail VOICELink were sold during the program. We
currently intend to conduct more sales campaigns through television shopping
networks such as QVC, and may evaluate similar sales opportunities in the
future.
28
<PAGE>
Customer and Technical Support
We believe that providing superior customer service is critical to the
successful sale and marketing of our products. We provide email and telephone
support during normal business hours, and supplement this with Web-based support
services 24 hours a day, seven days a week, including product update and
download areas. We also have an instructional guide for our customers for
common product usage questions, and we notify our customers about the latest
product updates.
Research and Development
Our research and development team consists of development engineers,
product managers, quality assurance engineers and technical writers. Research
and development expenses were $907,500 and $286,300, of which no significant
amounts qualified for capitalization, for the years ended March 31, 2000 and
1999, respectively. We intend to continue to make substantial investments in
research and development and related activities to maintain and enhance our
products. We believe that our future success will depend in part on our ability
to support current and future releases of popular operating systems and
applications, to maintain and improve our current products and to timely develop
new products and services that achieve market acceptance.
Competition
We compete in a market that is intensely competitive and characterized by
rapidly changing technology and evolving standards. Our principal competitors
for our eMail inChorus software are companies that create, produce and transmit
mass multimedia email, such as eCommercial.com and CyberLink. While we share
with these companies the goal of using email as a tool to deliver dynamic
marketing messages, they have a greater emphasis on the design and creation of
multimedia email messages rather than the tools for transmission of multimedia
e-mail.
In the voice email market, we compete directly with Qualcomm and a variety
of smaller, privately held companies. Some of our competitors bundle their
voice email solutions with existing email products such as Eudora, an email
product owned and marketed by Qualcomm.
In the multimedia email market, we compete with companies that create,
produce and transmit mass multimedia email, such as eCommercial.com and
CyberLink. These companies have a greater emphasis on the design and creation of
multimedia email messages , however, rather than providing the tools for
transmission of multimedia e-mail.
We believe that the principal competitive factors in our market are
technological innovation and time to market. We believe that we currently
feature the only multimedia email product on the market, and that our products
offer more sophisticated data compression technology than that of our
competitors. However, many of our current and potential competitors have
significantly greater financial, technical, marketing and other resources than
we do, and therefore may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or devote more resources to
the development and commercialization of their products. In addition, certain
our competitors may have greater
29
<PAGE>
name recognition and the ability to leverage significant installed customer
bases. We expect additional competition as other established and emerging
companies enter into the multimedia email solutions market and new products and
technologies are introduced. Increased competition could result in price
reductions, reduced gross margins, longer sales cycles and loss of market share,
any of which would materially and adversely affect our business, operating
results and financial condition. We believe that our ability to compete depends
on many factors both within and beyond our control, including:
- the ease of use, performance, features, price and reliability of our
solutions as compared to those of our competitors;
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our competitors;
- the quality of our customer service and support; and
- the effectiveness of our sales and marketing efforts.
Many of our current and potential competitors are likely to enjoy
substantial competitive advantages, including:
- longer operating histories;
- greater name recognition;
- more extensive customer bases; and
- cooperative relationships among themselves or with third parties to
enhance their products.
Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any one of which could impair our
finances and business prospects. We cannot assure you that we will be able to
compete successfully against existing or potential competitors or that
competitive pressures will not materially impair our finances or business
prospects.
Intellectual Property
We are in the process of registering our trademark "eMail inChorus"
with the United States Patent and Trademark Office.
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. For example, we license our software pursuant to
shrinkwrap or signed license agreements, which impose certain restrictions on
licensees' ability to utilize the software. We have entered into
confidentiality and invention assignment agreements with our employees and
contractors, and nondisclosure agreements with our suppliers
30
<PAGE>
and strategic partners in order to limit access to and disclosure of its
proprietary information. There can be no assurance that these contractual
arrangements or the other steps taken by us to protect our intellectual property
will prove sufficient to prevent misappropriation of our technology or to deter
independent third-party development of similar technologies. While we intend to
pursue registration of our trademarks and service marks in the U.S. and
internationally, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are made
available online. We do not currently own any patented technology registered
with the United States Patent and Trademark Office.
Policing unauthorized use of our products is difficult. The laws of other
countries may afford little or no effective protection of our technology. We
cannot assure you that the steps taken by us will prevent misappropriation of
our technology or that agreements entered into for that purpose will be
enforceable. In addition, litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation, whether successful or
unsuccessful, could have a material and adverse effect on our business, results
of operations or financial condition.
The success and competitiveness of our products depend in part upon our
ability to protect our current and future technology through a combination of
trademark, trade secret and copyright law. Because laws protecting certain
ownership rights in software are uncertain and still evolving, we cannot give
you any assurance about the future viability or value of any of our current
technology ownership rights.
We enter into intellectual property agreements with our employees and
consultants and confidentiality agreements with certain other parties, and
generally control access to and distribution of our software, documentation and
other proprietary information. Notwithstanding these precautions, it may be
possible for a third party to copy or otherwise obtain and use our software or
other proprietary information without authorization or to develop similar
software independently.
Although we do not believe that we infringe the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be time-
consuming, result in costly litigation, cause service upgrade delays or require
us to enter into royalty or licensing agreements. Such royalty or licensing
agreements might not be available on terms acceptable to us or at all. As a
result, any such claim could have a material adverse effect upon our business,
results of operations and financial condition.
Governmental Regulation
Government regulation of communications and commerce on the Internet varies
greatly from country to country. The United States has recently enacted
legislation addressing such issues as the transmission of certain materials to
children, intellectual property protection, taxation, and the transmission of
sexually explicit material. There is some risk that the United
31
<PAGE>
States and other countries will increase their regulation of the Internet in the
future. As our products are utilized solely in connection with the Internet, any
new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could adversely impact our sales, increase our
cost of doing business or otherwise have a material and adverse effect on our
business, results of operations and financial condition.
Litigation
On April 9, 1999, the Securities and Exchange Commission issued a formal
Order Directing Private Investigation and Designating Officers to Take Testimony
in the Matter of Softlink, Inc. and Certain Other Companies.
The private order empowers the SEC enforcement staff to investigate whether
inChorus.com, its employees or associates:
- made misleading statements regarding projected financial revenues of
inChorus.com;
- purchased or sold securities of inChorus.com while in possession of
material non-public information; and
- offered or sold securities through the use or medium of prospectuses or
similar means while no registration statement was in effect.
The private order also authorizes the staff to investigate possible similar
violations by another unrelated, unaffiliated company. In connection with the
private order, the SEC has issued a subpoena duces tecum to which we have
responded. On January 7, 2000, the SEC issued subpoenas compelling the testimony
of Mr. Johnson Lee, a member of our board of directors and our Chairman, Mr.
William Yuan, a member of our board of directors and our Chief Executive Officer
and Mr. Edmund Leung, a member of our board of directors and our Chief Technical
Officer and Secretary. All of these individuals have complied with the subpoenas
and intend to cooperate with the SEC in connection with this matter.
The SEC has not advised us that inChorus.com, our employees or affiliates
are presently or will be the subject of any enforcement action by the SEC. To
the best of our knowledge, there are presently no other material pending legal
proceedings to which we or any of our subsidiaries is a party or to which any of
our property is subject and, to the best of our knowledge, no such actions
against us are contemplated or threatened.
32
<PAGE>
Employees
As of May 11, 2000, we had 29 employees, including 10 in product
development, 12 in sales, marketing and business development, 1 in customer
support and 6 in administration. We believe that our future success will depend
in part on our continued ability to attract, integrate, retain and motivate
highly qualified technical and managerial personnel, and upon the continued
service of our senior management and key technical personnel. The competition
for qualified personnel in our industry and geographical location is intense,
and there can be no assurance that we will be successful in attracting,
integrating, retaining and motivating a sufficient number of qualified personnel
to conduct its business in the future. From time to time, we also employ
independent contractors to support our research and development, marketing,
sales and support and administrative organizations. We have never had a work
stoppage, and no employees are represented under collective bargaining
agreements. We consider our relations with our employees to be good.
Facilities
Our executive offices, comprising a total of approximately 5,236 square
feet, are located in Santa Clara, California. We lease these facilities pursuant
to two lease agreements, one of which has a term of 24 months, expiring in
September 2001, and the other of which has a term of 18 months, expiring in
August 2000. We believe that our current facilities are suitable for our
current needs, however, we anticipate that we will require additional space in
the next six months.
We maintain substantially all of our computer systems at our Santa Clara
facility. Our operations are dependent in part on our ability to protect our
operating systems against physical damage from fire, floods, earthquakes, power
loss, telecommunications failures, break-ins or other similar events.
Furthermore, despite our implementation of network security measures, our
servers are also vulnerable to computer viruses, break-ins and similar
disruptive problems. To the extent commercially feasible, we have secured
casualty insurance to protect our properties. However, the occurrence of any of
these events could result in interruptions, delays or cessations in service to
our users which could have a material adverse effect on our business, results of
operations and financial condition.
33
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth the names and positions of our directors and
executive officers as of June 15, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------------------------------------------------------------------
<S> <C> <C>
William Yuan 45 President, Chief Executive Officer, Director and Member of
the Compensation Committee.
------------------------------------------------------------------------------------------------
Edmund T. Leung 32 Chief Technical Officer and Director and Member of the
Compensation Committee. Mr. Leung also served as our Chief
Financial Officer until October 1999.
------------------------------------------------------------------------------------------------
Johnson C. Lee 33 Chairman, Director and Member of the Compensation Committee.
Mr. Lee served as our Chief Executive Officer until March 1,
1999.
------------------------------------------------------------------------------------------------
Ralph G. Coan 57 Chief Financial Officer and Vice President of Operations.
Mr. Coan has served as our Chief Financial Officer since
October 1999.
------------------------------------------------------------------------------------------------
</TABLE>
All members of our board of directors hold office until the next annual
meeting of the shareholders following their election or until their successors
have been elected and qualified. Executive officers are appointed by and serve
at the pleasure of the Board of Directors. The following sets forth
biographical information concerning our directors and executive officers for at
least the past five years:
William Yuan. Mr. Yuan was appointed to the Board of Directors and became
president and Chief Executive Officer of inChorus.com in March 1999. Mr. Yuan
served as the chief operating officer of Net USA, a provider of
telecommunications and technology softward solutions, from July 1998 to December
1998. He served as the president of KPY Corp., a systems integration company,
from March 1990 until June 1998, and was also the president of Network Partners,
a software company, from November 1993 until December 1994. Mr. Yuan earned his
bachelor's degree in Computer Science in 1986 from the University of California
at Santa Cruz and his master's degree in Business Administration in 1989 from
National University.
Edmund Leung. Mr. Leung co-founded inChorus.com in September 1995. He has
served as the Chief Financial Officer and as a member of the board of directors
since 1995. He became the Chief Technical Officer of inChorus.com in September
1998. Mr. Leung has over nine years' experience in software development, and has
participated in the development of several commercial software products. Prior
to founding inChorus.com, he served as a software engineer at MediaMotion, Inc.,
a multimedia software company, from November 1993 to August 1995, and worked at
Integrated Information Technology, Inc. from June 1990 to October 1993 as a
software engineer. At Integrated Information Technology, Inc., he developed
algorithms for the most time-critical portion of that company's "XtraDrive".
Mr. Leung received his bachelors'
34
<PAGE>
degree in Computer Science from the University of California at Berkeley in 1989
and his masters' degree in Computer Science from Stanford University in 1990.
Johnson C. Lee. Mr. Lee was a co-founder of inChorus.com and has served as
a member of the board of directors since September 1995 and as Chairman since
March 1999. From September 1995 to March 1999, he served as inChorus.com's
Chief Executive Officer. As Chairman, Mr. Lee is a full time employee of
inChorus.com. Mr. Lee has over nine years of extensive experience in network
multimedia software development. Prior to founding inChorus.com, he worked as a
software engineer for MediaMotion, Inc. from November 1993 to August 1995. From
June 1989 to November 1993 he worked as a software engineer for Oracle Corp. Mr.
Lee received his bachelor's degree in Computer Science from the University of
California at Berkeley in 1989.
Ralph G. Coan, Jr, Mr. Coan has served as our Chief Financial Officer and
Vice President of Operations since October 1999. Mr. Coan has over twenty-five
years of financial management and operations experience with high technology
companies. Prior to joining inChorus.com, he was Chief Financial Officer of
Dryden Engineering Company from January 1998 until to September 1999, where he
was instrumental in the negotiation and sale of the company to MPW Corporation.
Previously, he served as Chief Financial Officer of Fairchild Technologies from
February 1997 until December 1997. Previously, he served as Chief Operating
Officer and Chief Financial Officer of Optical Media International from April
1994 until December 1996, where he negotiated the sale of the company to
Microtest Corporation. His previous employment experience includes ten years at
Memorex Corporation and three years at Raychem Corporation. His contributions
include raising capital, renegotiation of debt repayment terms, joint venture
structuring, technology sales, mergers and acquisitions, growing company sales,
and IPO preparation. Mr. Coan earned his B.S. in Economics from the University
of Oregon in Eugene in June of 1965 and an MBA in Finance from the University of
Oregon in June of 1967.
Board Committees
The Compensation Committee of the board of directors determines the
salaries and incentive compensation of our officers and provides recommendations
for the salaries and incentive compensation of our other employees. The
compensation committee also administers our Stock Option Plan. The current
members of the Compensation Committee are Messrs. Yuan, Leung and Lee. Prior to
September 1999, we did not have a Compensation Committee or any other committee
of the board of directors that performed any similar functions. See
"Compensation Committee Interlocks and Insider Participation."
The board of directors does not currently have an audit or nominating
committee.
Compensation Committee Interlocks and Insider Participation
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<PAGE>
Messrs. Yuan, Leung and Lee, current members of the Compensation Committee,
are also officers and directors of inChorus.com. However, no member of the
Compensation Committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or Compensation Committee.
Compensation Summary
The following table sets forth the compensation awarded or paid to, or
earned by, our Chief Executive Officer and all our other executive officers who
earned in excess of $100,000 in salary and bonus, collectively the "Named
Executives" for services rendered to us during the years ended March 31, 1999
and 2000. Mr. William Yuan became our Chief Executive Officer in March 1999 and
thus, the table only reflects one month's salary earned by Mr. Yuan in fiscal
1999.
Summary Compensation Table
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
NAME YEAR SALARY ($) NUMBER OF SECURITIES UNDERLYING
OPTIONS (#)
<S> <C> <C> <C>
William Yuan, Chief Executive 2000 166,289 657,143
Officer 1999 12,000 500,000
---------------------------------------------------------------------------------------------------------------------
Johnson C. Lee, Chairman 2000 151,645 50,000
1999 96,000 80,201
---------------------------------------------------------------------------------------------------------------------
Edmund T. Leung, Chief Technical 2000 151,644 50,000
Officer 1999 96,000 80,201
---------------------------------------------------------------------------------------------------------------------
</TABLE>
On March 1, 1999, Mr. Yuan was granted options to purchase up to 500,000
shares of our common stock. These options were rescinded by our Board of
Directors. Mr. Yuan was subsequently granted options to purchase 657,143 shares
of our common stock on September 1, 1999, of which options to purchase 260,000
shares will vest upon the achievement of certain business objectives which have
been described elsewhere in this prospectus.
Option Grants in Last Year
The following table sets forth information concerning options granted to
the Named Executives during the fiscal year ended March 31, 2000. Each option
listed in the table, represents the right to purchase one share of our common
stock. Options may terminate before their expiration dates if the optionee's
status as an employee or consultant is terminated or upon the optionee's death
or disability.
36
<PAGE>
<TABLE>
<CAPTION>
Name 0 Number of Securities % of Total Options Exercise Price Fair Market Expira-
Underlying Options Granted to Employees Per Share ($/Sh) Value of Stock tion Date
Granted (#) on Grant Date
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William Yuan 657,143 29% $ 1.75 $ 1.75 9/09
--------------------------------------------------------------------------------------------------------------------------------
Johnson C. Lee 50,000 2% $ 2.00 $ 1.75 9/09
--------------------------------------------------------------------------------------------------------------------------------
Edmund T. Leung 50,000 2% $ 2.00 $ 1.75 9/09
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the year ended March 31, 2000, we granted officers, employees and
consultants options to purchase an aggregate of 2,284,883 shares of our common
stock. In September 1999, we rescinded options to purchase 958,000 shares issued
during the year ended March 31, 1999 to officers, employees and consultants.
In April 1999, we rescinded options to purchase an aggregate of 500,000
shares of common stock granted in fiscal 1999 to Mr. Yuan. The Board
subsequently granted Mr. Yuan options to purchase 657,143 shares of our common
stock, of which options to purchase 260,000 shares will vest upon the
achievement of certain business objectives described elsewhere in this
prospectus.
In September 1999, we issued each of Johnson C. Lee and Edmund Leung
options to purchase 50,000 shares of common stock pursuant to our stock option
plan. These options had an exercise price of $2.00, which was more than 110% of
the fair market value of our common stock on the date of grant. For each of Mr.
Lee and Mr. Leung, the right to purchase 6,250 shares vested on the date of
grant and the right to purchase the remainder vest in seven quarterly
installments.
Aggregate Option Exercises in Year Ended March 31, 2000 and Year-End Option
Values
The following table sets forth certain information with respect to the
Named Executives concerning exercisable and unexercisable stock options held by
them as of March 31, 2000. No Named Executives exercised options to purchase
shares of our common stock in the year ended March 31, 2000.
<TABLE>
<CAPTION>
Name Number of Unexercised Options at Year End(#) Value of Unexercised In-the-Money Options at
Year End($)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exercisable Unexercisable Exercisable Unexercisable
-------------------------------------------------------------------------------------------------------------------------
William Yuan 287,143 370,000 502,500 647,500
-------------------------------------------------------------------------------------------------------------------------
Johnson C. Lee 20,833 29,167 41,666 58,334
-------------------------------------------------------------------------------------------------------------------------
Edmund Leung 20,833 29,167 41,666 58,334
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
The calculation of the value of unexercised in-the-money options at year end
is based on a per share fair market value of our common stock equal to $2.78 at
March 31, 2000, the closing price for our common stock on that date as reported
by various market makers for our common stock on the NASD Over-The-Counter
Market Bulletin Board.
Employment Agreements And Termination Of Employment And Change Of Control
Arrangements
We have entered into executive employment agreements with each of Mr. William
W. Yuan, Mr. Johnson C. Lee, Mr. Edmund Leung and Mr. Ralph G. Coan. Under the
agreements, the executives receive paid vacation and are eligible to participate
in the health and other benefit programs which we may offer from time to time.
We may terminate any executive at any time with or without "cause". The term
"cause" is defined in the executive employment agreements as:
- the failure to follow directions of our board of directors which are
not inconsistent with the executive employment agreement;
- the gross neglect of the executive's responsibilities;
- any act by the executive of dishonesty, fraud, misrepresentation,
harassment or employment discrimination;
- the executive's indictment for a felony; and
- the executive's unauthorized dissemination of our confidential
information or trade secrets.
The executives are eligible to receive severance pay if they are terminated
without cause. The severance payment would be an amount equal to one year's
salary in one lump sum and must be paid no later than 30 days from the date of
termination. The executive employment agreements also contain covenants
regarding the assignment of inventions, the disclosure of our confidential
information, the solicitation of our employees or agents and the ability of the
executives to engage in competing activities.
William Yuan's executive employment agreement has a term of three years
commencing March 1, 1999 and automatically renews for successive periods of one
year unless terminated prior to such renewal. He serves as our President and
Chief Executive Officer and will perform duties consistent with these positions
and under the direction of the board of directors. He receives a monthly salary
of $15,000. His agreement specifically provides that our failure to pay him as
required by the agreement is to be deemed a breach of the agreement. If there
is a change in control of inChorus.com and Mr. Yuan is terminated without cause
within 12 months of the change, he will be eligible for severance pay and all of
his outstanding options will immediately vest. "Change in control" is defined
as a new owner controlling more than 50% of our common stock.
38
<PAGE>
Johnson C. Lee's agreement has a term of three years commencing August 31,
1999 and automatically renews for successive periods of one year unless
terminated prior to such renewal. He serves as our Chairman and will perform
duties consistent with the position and under the direction of the board of
directors. He receives a monthly salary of $10,000.
Edmund Leung's agreement has a term of three years commencing August 31,
1999 and automatically renews for successive periods of one year unless
terminated prior to such renewal. He serves as our Secretary and Chief Technical
Officer and will perform duties consistent with the positions and under the
direction of the board of directors. He receives a monthly salary of $10,000.
Ralph G. Coan's agreement has a term of two years commencing October 1999 and
automatically renews for successive periods of one year unless terminated prior
to such renewal. He serves as our Chief Financial Officer and will perform
duties consistent with the position and under the direction of the board of
directors. He receives a monthly salary of $11,250. The agreement also provides
that Mr. Coan is to receive options to purchase up to two hundred thousand
(200,000) shares of our common stock pursuant to our stock option plan. The
right to exercise the options vests quarterly over four years and the exercise
price is $1.75, the fair market value of the stock on the date of grant.
Employee Benefit Plans
1999 Stock Option Plan. Our 1999 Stock Option Plan was adopted by the board of
directors as of September 3, 1999 and has not yet been ratified by our
stockholders. We plan to present the 1999 Stock Option Plan to our stockholders
for approval at the next annual meeting of stockholders, which we currently
anticipate will occur in the fall of 2000. The following description of the 1999
Stock Option Plan is a summary and qualified in its entirety by the text of the
Plan, which is filed as an exhibit to the registration statement of which this
prospectus is a part.
The purpose of the 1999 Stock Option Plan is to enhance our profitability and
stockholder value by enabling us to offer stock based incentives to employees,
directors and consultants. The plan authorizes the grant of options to purchase
shares of common stock to employees, directors and consultants of inChorus.com
and its affiliates. Under the plan, we may grant incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986 and non-
qualified stock options. Incentive stock options may only be granted to our
employees.
The number of shares available for options under the 1999 Stock Option Plan is
3,398,000. The Plan is administered by our board of directors. Subject to the
provisions of the plan, the board of directors has authority to determine the
employees, directors and consultants who are to be awarded options and the terms
of such awards, including the number of shares subject to such options, the fair
market value of the common stock subject to options, the exercise price per
share and other terms.
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Incentive stock options must have an exercise price equal to at least 100% of
the fair market value of a share on the date of the award and generally cannot
have a duration of more than 10 years. If the grant is to a stockholder holding
more than 10% of our voting stock, the exercise price must be at least 110% of
the fair market value on the date of grant. Terms and conditions of awards are
set forth in written agreements between inChorus.com and the respective option
holders. Awards under the Plan may not be made after the tenth anniversary of
the date of its adoption but awards granted before that date may extend beyond
that date.
If the employment of the holder of an incentive stock option is terminated for
any reason other than as a result of the holder's death or disability or for
"cause" as defined in the 1999 Stock Option Plan, the holder may exercise the
option, to the extent exercisable on the date of termination of employment,
until the earlier of the option's specified expiration date and 90 days after
the date of termination. If an option holder dies or becomes disabled, both
incentive and non-qualified stock options may generally be exercised, to the
extent exercisable on the date of death or disability, by the option holder or
the option holder's survivors until the earlier of the option's specified
termination date and one year after the date of death or disability.
As of May 11, 2000, no shares had been issued as the result of the exercise of
options previously granted under the 1999 Stock Option Plan; however, 1,914,714
shares were subject to outstanding options and 1,483,286 shares were available
for future grants. The exercise prices of the outstanding options ranged from
$1.45 to $2.00. The options under the Plan vest over varying lengths of time
pursuant to various option agreements that we have entered into with the
grantees of such options. We have registered the 1999 Stock Option Plan, and the
shares subject to issuance thereunder, pursuant to the Securities Act of 1933.
Optionees have no rights as stockholders with respect to shares subject to
option prior to the issuance of shares pursuant to the exercise thereof. Options
issued to employees under the Plan shall expire no later than ten years after
the date of grant. An option becomes exercisable at such time and for such
amounts as determined at the discretion of the board of directors at the time of
the grant of the option. An optionee may exercise a part of the option from the
date that part first becomes exercisable until the option expires. The purchase
price for shares to be issued to an employee upon his exercise of an option is
determined by the board of directors on the date the option is granted. The
purchase price is payable in full in cash, by promissory note, by net exercise
or by delivery of shares of our common stock when the option is exercised. The
plan provides for adjustment as to the number and kinds of shares covered by the
outstanding options and the option price therefor to give effect to any stock
dividend, stock split, stock combination or other reorganization of or by
inChorus.com.
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Directors' Compensation
Directors who are also employees of inChorus.com receive no compensation
for serving on the board of directors. With respect to directors who are not
employees, we intend to reimburse such directors for all travel and other
expenses incurred in connection with attending meetings of the board of
directors and any committees of the board. Non-employee directors will also be
eligible to receive grants of non-qualified stock options under our 1999 Stock
Option Plan. We also intend to establish a non-employee director stock option
plan which will provide for initial option grants of a fixed number of shares of
our common stock to non-employee directors and successive annual option grants
to such non-employee directors covering an additional fixed number of shares, to
provide us with an effective way to recruit and retain qualified individuals to
serve as members of the board of directors.
Limitation of Liability and Indemnification
Our Articles of Incorporation, with certain exceptions, eliminate any
personal liability of directors or officers to us or our stockholders for
monetary damages for the breach of such person's fiduciary duty, and, therefore,
an officer or director cannot be held liable for damages to us or our
stockholders for gross negligence or lack of due care in carrying out his or her
fiduciary duties as a director or officer except in certain specified instances.
We may also adopt by-laws which provide for indemnification to the full extent
permitted under law which includes all liability, damages and costs or expenses
arising from or in connection with service for, employment by, or other
affiliation with us to the maximum extent and under all circumstances permitted
by law.
There are presently no material pending legal proceeding to which a
director, officer and employee of ours is a party. There is no pending
litigation or proceeding involving one of our directors, officers, employees or
other agents as to which indemnification is being sought, and we are not aware
of any pending or threatened litigation that may result in claims for
indemnification by any director, officer, employee or other agent.
We have purchased directors' and officers' liability insurance to defend
and indemnify directors and officers who are subject to claims made against them
for their actions and omissions as directors and officers of inChorus.com. The
insurance policy provides standard directors' and officers' liability insurance
in the amount of $1,000,000 per claim.
We intend to enter into indemnification agreements with our directors and
officers. These agreements will provide, in general, that we shall indemnify and
hold harmless such directors and officers to the fullest extent permitted by law
against any judgments, fines, amounts paid in settlement, and expenses,
including attorneys' fees and disbursements, incurred in connection with, or in
any way arising out of, any claim, action or proceeding against, or affecting,
such directors and officers resulting from, relating to or in any way arising
out of, the service of such persons as our directors and officers.
To the extent provisions of our articles of incorporation provide for
indemnification of directors for liabilities arising under the Securities Act of
1933 or the Securities Exchange Act of
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1934, those provisions are, in the opinion of the Securities and Exchange
Commission, against public policy and therefore are unenforceable.
RELATED PARTY TRANSACTIONS
The following describes transactions to which we were or are a party and in
which any of our directors, officers, or significant stockholders, or members of
the immediate family of any of the foregoing persons, had or has a direct or
indirect material interest.
Unless otherwise indicated, information in this section regarding shares of
our common stock reflect the conversion ratio applied to shares of our common
stock at the time of the reorganization described below.
Stock Transactions by Softlink, Inc., a California Corporation
Issuances to Founders. Softlink, Inc., a California corporation ("Softlink
California") was formed in November 1995 by Johnson C. Lee and Edmund Leung. At
the time of formation, each of them was issued 1,011,802 shares of common stock
of Softlink California in consideration of their efforts in establishing that
company and developing its initial business strategy.
All the shares of Softlink California held by Johnson C. Lee and Edmund
Leung were converted into shares of our common stock in the reorganization with
Draco Technologies, Inc. described below.
Reorganization with Draco Technologies, Inc.
In March 1998, Softlink California entered into the reorganization with
Draco Technologies, Inc., a Nevada corporation incorporated in July 1997. Under
the reorganization, the Softlink California stockholders received approximately
0.6745344 shares of common stock of Draco in exchange for each of the 4,259,449
outstanding shares of Softlink California common stock, and Softlink California
became a wholly-owned subsidiary of Draco. An aggregate of 2,873,145 shares was
issued to the former Softlink California stockholders in the reorganization with
Draco and the Softlink California stockholders owned approximately 52% of Draco
immediately after the reorganization. As part of the reorganization, all of the
executive officers and directors of Draco resigned and the executive officers
and directors of Softlink California became the executive officers and directors
of Draco, which then changed its name to Softlink, Inc.
Stock Option Grants
In May 1998, Johnson C. Lee and Edmund Leung each were issued options to
purchase 80,201 shares of inChorus.com common stock.
In March 1999, we issued William Yuan options to purchase up to 500,000
shares of our common stock, and in April 1999, each of Johnson C. Lee and Edmund
Leung were granted
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options to purchase up to 50,000 shares of our common stock. All of these
options were rescinded by our board of directors and are now of no further force
or effect.
In September 1999, we issued each of Johnson C. Lee and Edmund Leung
options to purchase 50,000 shares of inChorus.com common stock pursuant to our
stock option plan. These options had an exercise price of $2.00, which was more
than 110% of the fair market value of our common stock on the date of grant. For
each of Mr. Lee and Mr. Leung, the right to purchase 6,250 shares vested on the
date of grant and the right to purchase the remainder vest in seven quarterly
installments.
In September 1999, we also issued William Yuan options to purchase up to
657,143 shares of our common stock. These options have an exercise price of
$1.75, the fair market value of our common stock on the date of grant. Mr.
Yuan's right to purchase 217,143 shares vested on the date of grant. Options to
purchase 180,000 of the shares vest in 18 monthly installments. The right to
purchase 130,000 shares vests upon the listing of inChorus.com with Nasdaq. The
right to purchase the remaining 130,000 shares vests upon the recording by
inChorus.com of $12 million in revenue.
In October 1999, we issued Ralph G. Coan options to purchase up to 200,000
shares of our common stock. These options have an exercise price of $1.45, the
fair market value of our common stock on the date of grant. The right to
exercise these options vests in 16 equal quarterly installments.
Offering of Preferred Stock and Warrants
On August 17, 1999, we entered into a convertible preferred stock purchase
agreement with Deephaven Private Placement Trading Ltd. and Hornbower Investors
LLC pursuant to which Deephaven and Hornbower were each issued 150 shares of
convertible preferred stock and received warrants to purchase 120,000 shares of
our common stock. The preferred stock is convertible at the option of our
preferred stockholders into that number of shares of our common stock equal to
the stated value of the preferred stock ($10,000 per share plus all accrued but
unpaid dividends) divided by the conversion price. The conversion price is equal
to the lesser of (i) $2.51 and (ii) 85% of the lowest three closing bid prices
of our common stock on the Over-the Counter Market during the 50 trading days
preceding the conversion date. In addition, subject to certain exceptions any
remaining preferred stock automatically converts into common stock on August 17,
2002. Holders of preferred stock are entitled to receive cumulative dividends at
the rate of seven percent per year, payable in cash or shares of our common
stock. We may redeem the preferred stock at any time, with prior notice, if the
conversion price falls below or equals $1.75 per share. The warrants may be
exercised at any time during the five-year period following their issuance at an
exercise price of $2.43756 per share. In connection with this private placement
of preferred stock and warrants, we issued warrants to purchase 150,000 shares
of common stock to Cardinal Capital Management LLC. Cardinal Capital Management
LLC, who also received a payment of $180,000, acted as a finder in this
financing. From January through March 2000, Hornblower Investors LLC converted
an aggregate of 59 shares of preferred stock into an aggregate of 850,253 shares
of common stock, and from February through March 2000 Deephaven Private
Placement Trading Ltd. converted an aggregate of 82 shares of preferred stock
into 1,286,017 shares of common stock.
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Other Agreements
As described above, we have entered into employment agreements with
William Yuan, our President and Chief Executive Officer, Johnson C. Lee, our
Chairman, and Edmund Leung, our Chief Technical Officer and Vice President of
Engineering.
During the year ended March 31, 1999, we accepted a loan from Silicon
Valley New Issues, a shareholder of inChorus.com, in the amount of $165,000. We
repaid this loan during the quarter ended September 30, 1999.
In December 1999, we issued each of William Yuan, Johnson C. Lee and
Edmund Leung 1,250 shares of common stock as bonus compensation for services
rendered by them on behalf of inChorus.com.
In December 1999, we issued 1,000 shares of common stock to Ralph G. Coan
as bonus compensation for services rendered by Mr. Coan.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested directors, and will be on terms no less favorable
to us than could be obtained from unaffiliated third parties.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of May 11, 2000, the ownership of our
common stock by each of our directors and executive officers, all of our
executive officers and directors as a group, and all persons known by us to
beneficially own more than 5% of our common stock.
Unless otherwise indicated in the footnotes to the table, the following
individuals have sole vesting and sole investment control with respect to the
shares they beneficially own and the address of each beneficial owner listed
below is c/o inChorus.com, 2041 Mission College Boulevard, Suite 259, Santa
Clara, California 95054.
The amount of shares owned by each shareholder in the following table was
calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding for the
purpose of calculating the number and percentage owned by each other person
listed. The total number of outstanding shares of common stock at May 11, 2000
is 11,619,038.
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[Update]
<TABLE>
<CAPTION>
Name And Address Of Beneficial
Owner Amount And Nature Percent Of Percent Of
Of Beneficial Class Before the Class After the
Executive Officers and Directors: Ownership Offering Offering
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Johnson C. Lee 1,097,666 9.4% 5.1%
--------------------------------------------------------------------------------------------------------------------------------
William Yuan 278,393 2.3% 1.3%
--------------------------------------------------------------------------------------------------------------------------------
Edmund T. Leung 1,097,666 9.4% 5.1%
--------------------------------------------------------------------------------------------------------------------------------
Ralph G. Coan 26,000 * *
--------------------------------------------------------------------------------------------------------------------------------
All directors and executive officers as 2,487,225 20.7% 11.4%
a group (four persons)
--------------------------------------------------------------------------------------------------------------------------------
Other 5% Stockholders:
--------------------------------------------------------------------------------------------------------------------------------
EPB Industries, Inc. 861,696 7.4% 4.0%
696 Orion Drive
New Braunfels, TX 78130
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Less than one percent.
The number of shares shown for Mr. Leung and Mr. Lee each includes 67,762
shares of common stock subject to options that are exercisable within 60 days of
May 11, 2000. The number of shares shown for Mr. Yuan includes 277,143 shares of
common stock subject to options that are exercisable within 60 days of May 11,
2000. The number of shares shown for Mr. Coan includes 25,000 shares of common
stock subject to options that are exercisable within 60 days of May 11, 2000.
The number of shares shown for all directors and executive officers includes
425,167 shares of common stock subject to options that are exercisable within 60
days of May 11, 2000.
We have been informed that the principal of EPB Industries is Mr. Norvell
D. Berg.
Our executive officers and directors will beneficially own, in the
aggregate, 11.4% of our outstanding common stock after the offering. As a result
these stockholders may, as a practical matter, be able to influence all matters
requiring stockholder approval including the election of directors, merger or
consolidation and the sale of all or substantially all of our assets. This
concentration of ownership may delay, deter or prevent acts that would result in
a change of control, which in turn could reduce the market price of our common
stock.
DESCRIPTION OF CAPITAL STOCK
The descriptions in this section and in other sections of this prospectus
of our securities and various provisions of our articles of incorporation and
our bylaws are descriptions of the material terms of our securities. Our
articles of incorporation and bylaws have been filed with the SEC as exhibits to
this registration statement of which this prospectus forms a part.
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Our authorized capital stock consists of 59,000,000 shares of common stock,
par value $.001 per share, and 1,000,000 shares of preferred stock, par value
$.001 per share. As of May 31, 2000, 11,624,038 shares of our common stock were
issued and outstanding and 5,776,701 shares of common stock were reserved for
issuance upon exercise of outstanding options and warrants. As of June 30, 2000,
118 shares of our Preferred Stock were issued and outstanding.
Description of Common Stock
The holders of our common stock are entitled to equal amounts per share of
any dividends and distributions declared by the board of directors. No holder of
any shares of our common stock has a pre-emptive right to subscribe for any of
our securities, nor are any common shares subject to redemption or convertible
into other of our securities. Upon liquidation, dissolution or winding up of
inChorus.com, and after payment of creditors and preferred stockholders, if any,
the assets will be divided pro-rata on a share-for-share basis among the holders
of the shares of common stock. All shares of common stock now outstanding are
fully paid, validly issued and non-assessable.
Each share of common stock is entitled to one vote with respect to the
election of any director or any other matter upon which shareholders are
required or permitted to vote. Holders of the common stock do not have
cumulative voting rights, so the holders of more than 50% of the combined shares
voting for the election of directors may elect all of the directors if they
choose to do so, and, in that event, the holders of the remaining shares will
not be able to elect any members to the board of directors.
Description of the Equity Line Agreement
We entered into an equity line agreement with Plumrose Holdings, Ltd. and
WEC Global Telecom Ltd. effective April 24, 2000. This agreement entitles us to
sell, from time to time through April 24, 2001, up to $5,000,000 of our common
stock.
Beginning on the date the registration statement, of which this prospectus
forms a part, is declared effective by the Securities and Exchange Commission,
and continuing from that date through April 24, 2001, we may from time to time,
in our sole discretion, sell ("put") shares of our common stock to Plumrose
Holdings, Ltd. and WEC Global Telecom Ltd. at a price per share equal to the
average daily price on each separate trading day during each draw down pricing
period. The pricing period is 15 days for the first draw down period and all
other draw down periods except the second, and 45 days for the second draw down
period. We may sell as much as $2,000,000 in common stock during the first draw
down period, up to $3,000,000 in common stock during the second draw down
period, and up to $500,000 in common stock during subsequent draw down periods,
subject to certain conditions, with the total amount sold not to exceed
$5,000,000. The maximum dollar amount of the draw down during the first draw
down period and all other draw down periods except the second draw down period
is limited to an amount equal to 20% of the product of (i) the average stock
price over the 15-day draw down period, (ii) the average trading volume during
that period and (iii) 15. The maximum dollar amount of the second draw down is
limited to an amount equal to 20% of the product of (i) the average stock price
over the 45-day draw down period, (ii) the average trading volume during that
period and (iii) 45. The minimum draw down is $250,000.
As soon as practicable after the effective date of this registration
statement, we plan to draw down the maximum initial amount permitted under the
equity line. Based on our 15-day average daily price, as of May 11, 2000, of
approximately $1.17 per share and our 15-day average daily trading volume of
72,920 shares, we would be entitled to draw down approximately $255,950. We
expect to effect subsequent draw downs of the applicable maximum amount
available under the equity line every 45 trading days thereafter until April 24,
2001, the termination date of the equity line.
Our ability to put shares of our common stock to Plumrose Holdings, Ltd.
and WEC Global Telecom Ltd. is subject to certain conditions and limitations,
including but not limited to the following:
. the registration statement, of which this prospectus is a part, must
have previously become effective and shall remain effective on the date
of each put;
. our representations and warranties to Plumrose and WEC set forth in the
equity line agreement must be true and correct in all material respects
as of the date of each put;
. no statute, rule, regulation, executive order, decree, ruling or
injunction shall be in effect that prohibits, nor any action, suit or
proceeding shall be in progress, pending or threatened that seeks to
enjoin or prohibit, the transactions contemplated under the equity line
agreement, or otherwise has a material adverse effect on our
business, operations, properties or financial condition;
. at the time of a put, there shall have been no material adverse change
in our business, operations, properties, prospects or financial
condition, except as disclosed in our reports filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended;
. our common stock shall not have been delisted from its principal market
nor suspended from trading;
. the total of all of Plumrose's and WEC's purchases of common stock
under the equity line agreement shall not exceed $5,000,000;
and
. at least 15 trading days (and in the case of the second draw down, 45
days) shall have elapsed between puts.
Plumrose and WEC, or other underwriters of the securities, have the right
to review this registration statement and our records and properties to obtain
information about us and the accuracy of this registration statement and
prospectus. Plumrose and WEC have the opportunity to comment on the registration
statement and prospectus, but are not entitled to reject a put by us based on
their review. Plumrose and WEC may be entitled to indemnification by us for any
lawsuits based on language in this prospectus with which they do not agree.
We cannot assure you that we will satisfy all conditions required under the
equity line agreement, or that we will be able to sell any shares to
Plumrose and/or WEC thereunder.
We have filed a registration statement, of which this prospectus forms a
part, in order to permit Plumrose and WEC to resell to the public any common
stock issued under the equity line agreement.
In connection with the equity line agreement, on April 24, 2000, we issued
to each of Plumrose and WEC a warrant to purchase 50,000 shares of our common
stock, at an exercise price of $1.50 per share. The warrants are exercisable
through April 24, 2003, and contain provisions that protect Plumrose and WEC
against dilution upon the occurrence of certain events, such as a stock split,
reverse stock split, stock dividend or recapitalization. Under a registration
rights agreement, we agreed to register for resale the common stock issuable to
Plumrose and WEC under the equity line agreement and the warrants. Registration
will permit Plumrose and WEC to resell this common stock from time to time in
the market or in privately-negotiated transactions. We will prepare and file
amendments and supplements to the registration statement as may be necessary in
order to keep the registration statement effective as long as Plumrose or WEC
hold shares of our stock. We have agreed to bear certain expenses (other than
broker discounts and commissions, if any) in connection with the registration
statement.
Description of the 8% Convertible Debentures
We issued 8% convertible debentures in the original principal amount of
$2,000,000 to AMRO in March 2000. The debentures are convertible, at the option
of the holder, into shares of our common stock at a price per share of $1.75,
subject to adjustment for stock splits, stock dividends and reverse stock
splits. Interest is payable quarterly.
Pursuant to the agreement with AMRO providing for the issuance of the
debentures, we have filed a registration statement that includes up to 1,142,857
shares of common stock available for issuance upon conversion of the debentures,
which shares AMRO may then offer and sell to the public through this prospectus.
In August 2000, we issued 100,000 shares of common stock to AMRO in lieu of
$40,000 in penalties for failure to file the registration statement on a timely
basis. We have also issued warrants to AMRO to purchase 100,000 shares of common
stock at an exercise price of $3.187 per share, which shares AMRO may then also
offer and sell to the public through this prospectus.
Description of Preferred Stock
The board of directors is authorized, without further stockholder approval,
to issue from time to time up to an aggregate of 1,000,000 shares of preferred
stock. The preferred stock may be issued in one or more series and the board of
directors may fix its rights, preferences and designations.
On August 17, 1999, we issued 300 shares of Series A Convertible Preferred
Stock to two investors. The Series A Convertible Preferred Stock is convertible
at the option of the preferred stockholders into shares of our common stock
equal to the stated value of the Series A Convertible Preferred Stock, equal to
$10,000 per share plus all accrued but unpaid dividends, divided by the
conversion price. The conversion price is the lesser of (i) $2.51 and (ii) 85%
of the lowest three closing bid prices of our common stock on the Over-The-
Counter market during the 50 trading days preceding the conversion date. From
January through July 2000, Hornblower Investors LLC converted an aggregate of
105 shares of preferred stock into an aggregate of 1,703,261 shares of common
stock, and from January through March 2000 Deephaven Private Placement Trading
Ltd. converted an aggregate of 82 shares of preferred stock into 1,286,017
shares of common stock.
No holder of Series A Convertible Preferred Stock together with any
affiliate thereof may beneficially own in excess of 4.999% of the outstanding
shares of common stock following
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conversion. These restrictions may only be waived by a holder of the Series A
Preferred Stock after providing 61 days' notice to us.
If the Series A Convertible Preferred Stock has not been converted or
redeemed by August 17, 2002, it will automatically convert into common stock on
that date, subject to exceptions. Upon the occurrence of certain events
specified in the securities purchase agreement, the holders of Series A
Convertible Preferred Stock may elect to have us redeem the Series A Convertible
Preferred Stock at a premium to their purchase price. These events include, the
following:
- failure by us to maintain the effectiveness of the registration statement
filed to register the common stock underlying the preferred stock;
- failure of our common stock to be eligible for quotation on the Nasdaq O-T-C
Market, or any subsequent market on which our common stock may be listed;
- failure by us to issue shares of our common stock upon conversion of the
Series A Convertible Preferred Stock;
- participation by us in a change of control transaction, agreement by us to
sell, in one or a series of related transactions all or substantially all of
our assets, or redemption by us of more than a de minimus amount of
securities;
- failure by us to cure an event of default under the securities purchase
agreement within 60 days after receipt of notice of such default; and
- failure by us to keep the specified number of shares of our common stock
reserved for issuance upon conversion of the Series A Convertible Preferred
Stock.
We may also redeem the Series A Convertible Preferred Stock at any time,
with prior notice, if the conversion price is equal to or falls below $1.75 per
share. Holders of Series A Convertible Preferred Stock are entitled to receive
cumulative dividends at the rate of seven percent per year, payable in cash or
shares of our common stock.
The foregoing has been a brief description of some of the terms of our
Series A Convertible Preferred Stock. For a more detailed description of the
rights of the holders of the Series A Convertible Preferred Stock, prospective
investors are directed to the actual certificate of designation that has been
filed as an exhibit to the registration statement of which this prospectus is a
part.
Other than the Series A Convertible Preferred Stock described above, no
shares of preferred stock are currently outstanding and we have no present plans
to issue any shares of preferred stock. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from
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<PAGE>
acquiring, a majority of our outstanding voting stock. This difficulty could
adversely affect prevailing market prices for our common stock.
Description of Series A Warrants
In connection with the August 1999 issuance of our Series A Preferred
Stock, we also issued warrants to purchase shares of our common stock to the two
investors, Deephaven Private Placement Trading Ltd. and Hornblower Investors
LLC. These warrants may be exercised at any time during the five-year period
following their issuance at an exercise price of $2.43756 per share. The
warrants contain certain provisions that limit the number of shares of common
stock into which they are exercisable. Under these provisions, no holder of a
warrant may exercise his or her warrant if such exercise would result in the
holder beneficially owning more than 4.999% of our common stock.
In consideration for services provided by Cardinal Capital Management, Inc.
to us, we have issued to Cardinal Capital warrants to purchase up to 150,000
shares of our common stock. The warrants may be exercised at any time during the
five-year period following their issuance at an exercise price of $2.25 per
share. The number of shares issuable upon exercise of the warrants is subject to
adjustment upon the occurrence of stock splits, dividends or reclassifications.
The warrants carry registration rights which are described below.
This has been a brief description of some of the terms of our outstanding
warrants. For a more detailed description of the rights of the holders of the
warrants, prospective investors are directed to the actual forms of warrants
that have been filed as exhibits to the registration statement of which this
prospectus is a part.
Registration Rights
Deephaven Private Placement Trading Ltd. and Hornblower Investors LLC have
registration rights with respect to the Series A Preferred Stock and warrants
they hold. Pursuant to a registration rights agreement, the common stock
underlying the Series A Preferred Stock and warrants issued to these investors
is to be registered as part of the registration statement of which this
prospectus forms a part. The registration rights agreement requires us to file a
registration statement with respect to the common stock within a specified
period of time, and to have the registration statement declared effective within
a specific period of time. We must also keep the registration statement
effective until all of the common stock offered has been sold. We are
responsible for the payment of all fees and costs associated with the
registration of the common stock, except that we are not responsible for fees
generated by the investors' counsel or other advisors. We are required to
indemnify and hold harmless each investor and its officers, directors, agents
and brokers against any untrue statement of a material fact in a registration
statement, prospectus or amendment or supplement to a registration statement or
prospectus. Specific procedures for carrying out the indemnification are set
forth in the registration rights agreement.
Cardinal Capital Management, Inc. has registration rights with respect to
the warrants it holds. Pursuant to our agreement with Cardinal Capital, the
common stock underlying warrants
48
<PAGE>
issued to Cardinal Capital is to be registered as part of the registration
statement filed for the Series A Preferred Stock.
Anti-Takeover Effects of Various Provisions of Nevada Law and Our Articles of
Incorporation and Bylaws
We are incorporated under the laws of the State of Nevada and are therefore
subject to various provisions of the Nevada Corporation laws, which may have the
effect of delaying or deterring a change in the control or management of
inChorus.com.
Nevada's "Combination with Interested Stockholders Statute," Nevada Revised
Statutes 78.411-78.444 applies to Nevada corporations having at least 200
stockholders. It prohibits a stockholder who owns at least 10% of the
outstanding voting shares of a company from entering into a merger, exchange,
sale of assets, liquidation or other similar, major transaction with that
company unless certain conditions are met.
A company to which the statute applies may not engage in such a
"combination" within three years after the interested stockholder acquired its
shares, unless the combination or the interested stockholder's acquisition of
shares was approved by the board of directors before the interested stockholder
acquired the shares. If this approval was not obtained, then after the three-
year period expires, the combination may be consummated if all the requirements
in the Articles of Incorporation are met and either
- the board of directors or the shareholders approve of the transaction;
- the market value of cash and other consideration other than cash to be
received by holders of common shares and holders of any other class or series of
shares meets the minimum requirements set forth in Sections 78.411 through
78.443, inclusive, and prior to the consummation of the combination, except in
limited circumstances, the "interested stockholder" will not have become the
beneficial owner of additional voting shares of the corporation.
Nevada's "Control Share Acquisition Statute," Nevada Revised Statute
Section 78.378-78.379, generally prohibits a shareholder from attempting to
acquire the company from acquiring voting shares of the company's stock once the
shareholder owns a certain percentage of the company's stock unless the
shareholders first approve.This statute only applies to Nevada corporations with
at least 200 stockholders, including at least 100 record stockholders who are
Nevada residents, and which do business directly or indirectly in Nevada. While
we do not currently exceed these thresholds, we may well do so in the near
future. The Control Share Acquisition Statute also provides that the
stockholders who do not vote in favor of restoring voting rights to the Control
Shares may demand payment for the "fair value" of their shares (which is
generally equal to the highest price paid in the transaction subjecting the
stockholder to the statute).
Certain provisions of our Bylaws, which are summarized below, may affect
potential changes in control of inChorus.com. The board of directors believes
that these provisions are in the best interests of stockholders because they
will encourage a potential acquiror to negotiate with the board of directors,
which will be able to consider the interests of all stockholders in a change in
control situation. However, the cumulative effect of these terms maybe to make
it
49
<PAGE>
more difficult to acquire and exercise control of inChorus.com and to make
changes in management more difficult.
The Bylaws provide the number of directors of inChorus.com shall be
established by the board of directors, but shall be no less than one. Between
stockholder meetings, the Board may appoint new directors to fill vacancies or
newly created directorships. A director may be removed from office by the
affirmative vote of 66-2/3% of the combined voting power of the then outstanding
shares of stock entitled to vote generally in the election of directors.
The Bylaws further provide that stockholder action may be taken at a
meeting of stockholders and may be effected by a consent in writing if such
consent is signed by the holders of the percentage of our shares required to
approve the action at a meeting. We are not aware of any proposed takeover
attempt or any proposed attempt to acquire a large block of our common stock.
The provisions described above may have the effect of delaying or deterring
a change in the control or management of inChorus.com.
Application of California GCL
Although we are incorporated in Nevada, our headquarters is in the State of
California. Section 2115 of the California GCL ("Section 2115") provides that
certain provisions of the California GCL shall be applicable to a corporation
organized under the laws of another state to the exclusion of the law of the
state in which it is incorporated, if the corporation meets certain tests
regarding the business done in California and the number of its California
stockholders.
An entity such as us can be subject to Section 2115 if the average of the
property factor, payroll factor and sales factor deemed to be in California
during its latest full income year is more than 50 percent and more than one-
half of its outstanding voting securities are held of record by persons having
addresses in California. Section 2115 does not apply to corporations with
outstanding securities listed on the New York or American Stock Exchange, or
with outstanding securities designated as qualified for trading as a national
market security on NASDAQ, if such corporation has at least 800 beneficial
holders of its equity securities. Since the average of our property factor,
payroll factor and sales factor deemed to be in California during our latest
fiscal year was almost 100%, and over 60% of our outstanding voting securities
are held of record by persons having addresses in California, and our securities
do not currently qualify as a national market security on NASDAQ, we are subject
to Section 2115.
During the period that we are subject to Section 2115, the provisions of
the California GCL regarding the following matters are made applicable to the
exclusion of the law of the State of Nevada:
- general provisions and definitions;
- annual election of directors;
- removal of directors without cause;
- removal of directors by court proceedings;
- filling of director vacancies where less than a majority in office were
elected by the stockholders;
50
<PAGE>
- directors' standard of care;
- liability of directors for unlawful distributions;
- indemnification of directors, officers and others;
- limitations on corporate distributions of cash or property;
- liability of a stockholder who receives an unlawful distribution;
- requirements for annual stockholders' meetings;
- stockholders' right to cumulate votes at any election of directors;
- supermajority vote requirements;
- limitations on sales of assets;
- limitations on mergers;
- reorganizations;
- dissenters' rights in connection with reorganizations;
- required records and reports;
- actions by the California Attorney General; and
- rights of inspection.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is U.S. Stock
Transfer, and its telephone number is (800) 835-8778.
SHARES ELIGIBLE FOR FUTURE SALE
On June 30, 2000, 10,956,004 shares of our common stock were outstanding,
and 3,574,957 shares of common stock were subject to options granted under our
1999 Stock Option Plan and otherwise. Of the outstanding shares, 7,077,241
shares of common stock are immediately eligible for sale in the public market
without restriction or further registration under the Securities Act of 1933,
unless purchased by or issued to any "affiliate" of ours, as that term is
defined in Rule 144 promulgated under the Securities Act of 1933, described
below. All other outstanding shares of our common stock are "restricted
securities" as such term is defined under Rule 144, in that such shares were
issued in private transactions not involving a public offering and may not be
sold in the absence of registration other than in accordance with Rules 144,
144(k) or 701 promulgated under the Securities Act of 1933 or another exemption
from registration.
In general, under Rule 144 as currently in effect, a person, including an
affiliate, who has beneficially owned shares for at least one year is entitled
to sell, within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of one percent
of the then outstanding shares of our common stock or the average weekly trading
volume in our common stock during the four calendar weeks preceding the date on
which notice of such sale is filed, subject to various restrictions. In
addition, a person who is not deemed to have been an affiliate of ours at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate, such person's
holding period for the purpose of effecting a sale under Rule 144 commences on
the date of transfer from the
51
<PAGE>
affiliate.
There has been very limited trading volume in our common stock to date.
Sales of substantial amounts of our common stock under Rule 144, this prospectus
or otherwise could adversely affect the prevailing market price of our common
stock and could impair our ability to raise capital through the future sale of
our securities.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
. ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
. block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
. purchases by a broker-dealer as principal and resale by the broker-
dealer for its account;
. an exchange distribution in accordance with the rules of the
applicable exchange;
. privately negotiated transactions;
. short sales;
. broker-dealer may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
. a combination of any such methods of sale; and
. any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in puts and calls and other
transactions in our securities or derivatives of our securities and may sell or
deliver shares in connection with these trades. The selling stockholders may
pledge their shares to their brokers under the margin provisions of customer
agreements. If a selling stockholder defaults on a margin loan, the broker may,
from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders, or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
52
<PAGE>
If dealers are used in any of the sales of common stock covered by this
prospectus, the common stock will be sold to such dealers as principals. The
dealers may then resell the common stock to the public at varying prices the
dealers determine at the time of resale. The names of the dealers and the terms
of the transactions will be set forth in a prospectus supplement.
The common stock may be sold directly to institutional investors or
others who may be deemed to be underwriters within the meaning of the Securities
Act of 1933 with respect to any sale thereof. The terms of any such sales will
be described in a prospectus supplement.
If so indicated in a prospectus supplement, agents, underwriters or
dealers will be authorized to solicit offers from certain types of institutions
to purchase common stock at the public offering price set forth in the
prospectus supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. These contracts will be
subject only to those conditions set forth in the prospectus supplement, and the
prospectus supplement will set forth the commission payable for solicitation of
such contracts.
Agents, dealers and underwriters may be entitled under agreements entered
into with us to indemnification by us against certain civil liabilities,
including liabilities under the Securities Act of 1933, or to contribution with
respect to payments which such agents, dealers or underwriters may be required
to make in respect thereof. Agents, dealers and underwriters may be customers
of, engage in transactions with, or perform services on our behalf.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Silicon Valley Law Group, San Jose, California.
EXPERTS
The financial statements included in the registration statement on Form
SB-2 have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report, which
contains an explanatory paragraph regarding our ability to continue as a going
concern, appearing elsewhere herein and in the registration statement, and are
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2. This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement. Some information is omitted, and you should refer to the
registration statement and its exhibits. With respect to references made in
this prospectus to any contract, agreement or other document of Softlink, such
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. You may review a copy of the
53
<PAGE>
registration statement, including exhibits, at the Securities and Exchange
Commission's public reference room at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or Seven World Trade Center, 13th Floor, New York, New
York 10048 or Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
The public may obtain information on the operation of the public
reference room by calling the Securities and Exchange Commission at 1-800-SEC-
0330.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information on file at the public
reference rooms. You can also request copies of these documents, for a copying
fee, by writing to the Securities and Exchange Commission.
Our Securities and Exchange Commission filings and the registration
statement can also be reviewed by accessing the Securities and Exchange
Commission's Internet site at http://www.sec.gov, which contains reports, proxy
------------------
and information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission.
You should rely only on the information provided in this prospectus or
any prospectus supplement. We have not authorized anyone else to provide you
with different information. We are not making an offer to sell, nor soliciting
an offer to buy, these securities in any jurisdiction where that would not be
permitted or legal. Neither the delivery of this prospectus nor any sales made
hereunder after the date of this prospectus shall create an implication that the
information contained herein or our affairs have not changed since the date
hereof.
54
<PAGE>
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated balance sheets F-3 - F-4
Consolidated statements of operations F-5
Consolidated statements of stockholders' equity (deficiency) F-6
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8 - F-26
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders of
inChorus.com (formerly known as Softlink, Inc.)
We have audited the accompanying consolidated balance sheets of inChorus.com
(formerly known as Softlink, Inc.) and subsidiary as of March 31, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for each of the two years in the period ended
March 31, 2000. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
inChorus.com (formerly known as Softlink, Inc.) and subsidiary as of March 31,
2000 and 1999, and the results of their consolidated operations and cash flows
for each of the two years in the period ended March 31, 2000, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has an accumulated deficit of $8,887,900 as of
March 31, 2000 and incurred net losses of $6,148,600 and $1,015,900 for the
years ended March 31, 2000 and 1999, respectively. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding those matters are also described in Note 1. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amount and
classification of liabilities that might result from the outcome of this
uncertainty.
/s/ BDO Seidman, LLP
San Jose, California
May 15, 2000, except for the third paragraph of Note 13, for which the date is
June 8, 2000
F-2
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Consolidated Balance Sheets
================================================================================
March 31, 2000 1999
--------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 1,995,900 $ 307,500
Accounts receivable, net of allowance for doubtful
accounts of $672,200 in 2000 (Notes 6 and 10) 701,400 430,600
Inventories 98,100 39,600
Prepaid expenses and other current assets 154,600 83,500
--------------------------------------------------------------------------------
Total Current Assets 2,950,000 861,200
Property and Equipment, net (Note 3) 157,000 54,300
Deposits and Other Assets (Note 4) 181,600 52,000
--------------------------------------------------------------------------------
$ 3,288,600 $ 967,500
================================================================================
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
====================================================================================================
March 31, 2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities:
Accounts payable $ 524,300 $ 79,700
Accrued expenses 207,000 6,700
Deferred revenue (Note 6) 734,700 --
Obligations under capital lease, current
portion (Note 3) 6,800 --
----------------------------------------------------------------------------------------------------
Total Current Liabilities 1,472,800 86,400
Convertible notes payable (Notes 4, 5 and 13) 1,878,800 --
Obligations under capital lease, net of current
portion (Note 3) 25,900 --
----------------------------------------------------------------------------------------------------
Total Liabilities 3,377,500 86,400
----------------------------------------------------------------------------------------------------
Commitments, Contingencies, and Subsequent
Events (Notes 6, 7, 9, 12, and 13)
Stockholders' Equity (Deficiency) (Notes 1, 5, 7, 9, and 13):
Convertible preferred stock, $0.001 par value; 1,000,000
shares authorized; 159 shares issued and outstanding
in 2000 1,264,400 --
Common stock, $0.001 par value; 59,000,000
and 50,000,000 shares authorized; 10,261,714 and
9,363,130 shares issued and outstanding 10,300 9,400
Additional paid-in capital 7,542,100 5,634,700
Accumulated deficit (8,887,900) (1,646,500)
----------------------------------------------------------------------------------------------------
(71,100) 3,997,600
Less: Treasury stock at cost (1,593,750 shares in 1999) -- (3,116,500)
Less: Notes receivable (17,800) --
----------------------------------------------------------------------------------------------------
Total Stockholders' Equity (Deficiency) (88,900) 881,100
----------------------------------------------------------------------------------------------------
$ 3,288,600 $ 967,500
====================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
=============================================================================================================
Years Ended March 31, 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales, including license fee income (Notes 6 and 10) $ 680,200 $ 731,100
Cost of Sales 491,100 39,200
-------------------------------------------------------------------------------------------------------------
Gross Profit 189,100 691,900
-------------------------------------------------------------------------------------------------------------
Operating Expenses (Notes 7 and 9):
Research and development 907,500 286,300
Sales and marketing 1,625,800 688,600
General and administrative 2,523,400 845,100
-------------------------------------------------------------------------------------------------------------
Total Operating Expenses 5,056,700 1,820,000
-------------------------------------------------------------------------------------------------------------
Loss From Operations (4,867,600) (1,128,100)
-------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 72,500 115,500
Interest expense, including noncash interest of $1,298,400
in 2000 (Notes 5 and 11) (1,311,100) (2,500)
Other (6,700) --
-------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (1,245,300) 113,000
-------------------------------------------------------------------------------------------------------------
Loss Before Provision for Income Taxes (6,112,900) (1,015,100)
Provision for Income Taxes (Note 8) 35,700 800
-------------------------------------------------------------------------------------------------------------
Net Loss (6,148,600) (1,015,900)
Preferred Stock Dividends (120,200) --
Deemed Dividend on Beneficial Conversion of
Preferred Stock (Note 9) (972,600) --
-------------------------------------------------------------------------------------------------------------
Net Loss Allocable to Common Shareholders $(7,241,400) $ (1,015,900)
=============================================================================================================
Basic and diluted loss per share $ (0.88) $ (0.14)
=============================================================================================================
Basic and diluted weighted-average common shares outstanding 8,195,300 7,132,600
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Consolidated Statements of Stockholders' Equity (Deficiency)
(Note 1, 5, 9, and 13)
<TABLE>
<CAPTION>
==========================================================================================================================
Additional
Preferred Stock Common Stock Paid-in Accumulated
--------------------------- --------------------------
Shares Amount Shares Amount Capital Deficit
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, April 1, 1998 -- $ -- 5,500,425 $ 5,500 $ 1,111,700 $ (630,600)
Issuance of common stock for cash
and notes receivable -- -- 6,512,835 6,500 5,033,400 --
Stock option grants -- -- -- -- 343,000 --
Repurchase and retirement of common
stock -- -- (2,650,130) (2,600) (971,300) --
Treasury stock acquired, at cost -- -- -- -- -- --
Issuance of treasury stock for
retirement of debt -- -- -- -- 22,600 --
Issuance of treasury stock as bonus
to existing shareholders -- -- -- -- 95,300 --
Payments received on notes receivable -- -- -- -- -- --
Net loss -- -- -- -- -- (1,015,900)
--------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1999 -- -- 9,363,130 9,400 5,634,700 (1,646,500)
Stock option grants -- -- -- -- 538,200 --
Issuance of treasury stock for cash
and notes receivable -- -- -- -- 700 --
Issuance of treasury stock for cash -- -- -- -- 19,400 --
Issuance of common stock as
employee bonus -- -- 28,244 -- 26,500 --
Issuance of common stock for cash -- -- 1,000 -- 1,200 --
Exercise of common stock options -- -- 40,000 100 24,300 --
Issuance of convertible preferred stock
and warrants, net of offering costs of
$211,300 300 2,385,700 -- -- 403,000 --
Deemed dividend on beneficial
conversion of preferred stock -- -- -- -- 972,600 (972,600)
Dividend in arrears - convertible preferred
stock -- -- -- -- 120,200 (120,200)
Conversion of preferred stock and accrued
dividends to common stock (141) (1,121,300) 2,283,696 2,300 1,119,000 --
Retirement of treasury stock -- -- (1,454,356) (1,500) (2,737,300) --
Deemed interest on beneficial
conversion of note payable to common
stock -- -- -- -- 1,298,400 --
Issuance of warrants to purchase common
stock in conjunction with debt
financing -- -- -- -- 121,200 --
Net loss -- -- -- -- -- (6,148,600)
--------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 2000 159 $ 1,264,400 10,261,714 $ 10,300 $ 7,542,100 $ (8,887,900)
==========================================================================================================================
<CAPTION>
Treasury Stock Notes
--------------------------
Shares Amount Receivable Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, April 1, 1998 -- $ -- $ (550,000) $ (63,400)
Issuance of common stock for cash
and notes receivable -- -- (4,976,300) 63,600
Stock option grants -- -- -- 343,000
Repurchase and retirement of common
stock -- -- 973,900 --
Treasury stock acquired, at cost (1,771,209) (3,186,500) 3,186,500 --
Issuance of treasury stock for
retirement of debt 21,209 57,000 -- 79,600
Issuance of treasury stock as bonus
to existing shareholders 156,250 13,000 -- 108,300
Payments received on notes receivable -- -- 1,365,900 1,365,900
Net loss -- -- -- (1,015,900)
----------------------------------------------------------------------------------------------------------------
Balances, March 31, 1999 (1,593,750) (3,116,500) -- 881,100
Stock option grants -- -- -- 538,200
Issuance of treasury stock for cash
and notes receivable 72,727 197,100 (17,800) 180,000
Issuance of treasury stock for cash 66,667 180,600 -- 200,000
Issuance of common stock as
employee bonus -- -- -- 26,500
Issuance of common stock for cash -- -- -- 1,200
Exercise of common stock options -- -- -- 24,400
Issuance of convertible preferred stock
warrants, net of offering costs of
$211,300 -- -- -- 2,788,700
Deemed dividend on beneficial
conversion of preferred stock -- -- -- --
Dividend in arrears - convertible preferred
stock -- -- -- --
Conversion of preferred stock and accrued
dividend to common stock -- -- -- --
Retirement of treasury stock 1,454,356 2,738,800 -- --
Deemed interest on beneficial
conversion of note payable to common stock -- -- -- 1,298,400
Issuance of warrants to purchase common
stock in conjunction with debt
financing -- -- -- 121,200
Net loss -- -- -- (6,148,600)
----------------------------------------------------------------------------------------------------------------
Balances, March 31, 2000 -- $ -- $ (17,800) $ (88,900)
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
=============================================================================================================================
March 31, 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss $ (6,148,600) $ (1,015,900)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 22,900 7,100
Allowance for doubtful accounts 672,200 -
Compensation relating to stock options issued 538,200 343,000
Compensation relating to stock issued for services 26,500 -
Deemed interest on beneficial conversion of note payable to common stock 1,298,400 -
Compensation relating to issuance of treasury stock - 108,300
Changes in current operating assets and liabilities:
Accounts receivable (943,000) (423,700)
Inventories (58,500) (25,600)
Prepaid expenses and other current assets (71,100) (82,700)
Accounts payable 444,600 77,200
Accrued expenses 200,300 6,700
Deferred revenue 734,700 -
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities (3,283,400) (1,005,600)
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Payments to acquire property and equipment (90,300) (49,800)
Deposits and other assets (129,600) (52,000)
Payments for notes receivable (155,000) -
Proceeds from repayment of notes receivable 155,000 -
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (219,900) (101,800)
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from note payable to shareholder 218,300 -
Principal payments on notes payable to shareholder (218,300) (50,000)
Proceeds from borrowing on notes payable 120,000 -
Principal payments on notes payable (120,000) (16,500)
Principal payments on capital lease obligations (2,600) -
Proceeds from issuance of convertible preferred stock 2,788,700 -
Proceeds from issuance of convertible note payable 2,000,000 -
Proceeds from issuance of common stock 25,600 63,600
Proceeds from issuance of treasury stock 380,000 -
Payments received on shareholder notes receivable - 1,365,900
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 5,191,700 1,363,000
-----------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 1,688,400 255,600
Cash and Cash Equivalents, beginning of period 307,500 51,900
-----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 1,995,900 $ 307,500
=============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
1. Summary of The Company
Significant
Accounting Policies Softlink, Inc. (formerly Draco Technologies, Inc.,
and Basis of a publicly traded shell corporation
Presentation (the Company), a Nevada Corporation, was
incorporated on July 24, 1997. In February 2000,
the Company changed its name to inChorus.com.
On March 31, 1998 the Company completed the
acquisition of 100% of the outstanding common stock
of Softlink, Inc., a California corporation,
(Softlink CA) in exchange for 2,873,145 shares of the
Company's $.001 par value common stock. For
accounting purposes, the acquisition was treated as
the acquisition of the Company by Softlink CA with
Softlink CA as the acquirer (reverse acquisition).
All shares and per share data prior to the
acquisition have been restated to reflect the stock
issuance as a recapitalization of Softlink CA. The
2,627,280 shares held by the shareholders of the
Company prior to the acquisition have been recognized
as if they were issued in connection with the
acquisition of the Company by Softlink CA. On October
21, 1998, the Company's stock became publicly traded.
Softlink CA was incorporated on November 8, 1995.
Softlink CA's principal activities consist of
developing e-mail enhancement software, and licensing
and marketing its products through wholesalers and
end-users located primarily in North America.
Basis of Presentation
The accompanying financial statements have been
prepared on a going concern basis, which contemplates
the realization of assets and the satisfaction of
liabilities in the normal course of business. As
shown in the financial statements, the Company had an
accumulated deficit of $8,887,900 as of March 31,
2000 and incurred losses of $6,148,600 and $1,015,900
for the years ended March 31, 2000 and 1999,
respectively.
F-8
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
These conditions give rise to substantial doubt about
the Company's ability to continue as a going concern.
The consolidated financial statements do not include
any adjustments relating to the recoverability and
classification of reported asset amounts or the
amount and classification of liabilities that might
be necessary should the Company be unable to continue
as a going concern. The Company's continuation as a
going concern is dependent upon its ability to obtain
additional financing or refinancing as may be
required and ultimately to attain profitability. The
Company is actively marketing its existing and new
products, which it believes will ultimately lead to
profitable operations. Management is also pursuing
additional financing and has obtained an equity line
under which it may issue to $5,000,000 (Note 13).
Consolidation
The accompanying consolidated financial statements
include the accounts of inChorus.com (formerly known
as Softlink, Inc.) and its wholly-owned subsidiary,
Softlink CA. All intercompany accounts and
transactions have been eliminated in the consolidated
financial statements.
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 and disclosure of contingent assets and
liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results
could differ from those estimates.
The determination of the adequacy of the allowances
for accounts receivable and inventory are based on
estimates that are particularly susceptible to
significant changes in the economic environment and
market conditions.
Cash and Cash Equivalents
The Company considers all highly liquid investments
with original maturities of three months or less to
be cash equivalents. The Company places its cash and
cash equivalents with a high quality institution. At
times, such funds may be in excess of the Federal
Deposit Insurance Company limit of $100,000.
F-9
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
Accounts Receivable and Allowance for Doubtful
Accounts
The Company grants credit to its customers after
undertaking an investigation of credit risk for all
significant amounts and generally does not require
cash collateral. When necessary, an allowance for
doubtful accounts is provided for estimated credit
losses at a level deemed appropriate to adequately
provide for known and inherent risks related to such
amounts. The allowance is based on reviews of loss,
adjustments history, current economic conditions and
other factors that deserve recognition in estimating
potential losses. While management uses the best
information available in making its determination,
the ultimate recovery of recorded accounts receivable
is also dependent upon future economic and other
conditions that may be beyond management's control.
Inventories
Inventories, which consist principally of software
and packaging, are stated at the lower of cost
(average) or market (net realizable value).
Property and Equipment
Property and equipment are stated at cost, net of
accumulated depreciation and amortization.
Depreciation is provided on the straight-line method
over the estimated useful lives of the assets,
generally ranging from two to five years.
Long-Lived Assets
The Company periodically reviews its long-lived
assets for potential impairment based upon the
estimated future cash flows expected to result from
the use of the asset and its eventual disposition.
When events or changes in circumstances indicate that
the carrying amount of an asset may not be
recoverable, the Company writes the asset down to its
estimated then-current fair value.
F-10
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
Revenue Recognition
Revenues consist of sale of the Company's software
products, and fees for license of its products (Note
6). Revenues are recognized when persuasive evidence
of an arrangement exists, delivery has occurred, the
fee is fixed and determinable, and collectibility is
probable. Deferred revenue represents the unearned
portion of amounts billed to customers .
Research and Development Costs
Costs incurred in the research and development of new
software products are expensed as incurred until
technological feasibility has been established. To
date, the establishment of technological feasibility
of the Company's products and general release
substantially coincide. As a result, the Company has
not capitalized any software development costs since
such costs qualifying for capitalization have not
been significant.
Advertising Costs
The cost of advertising is expensed as incurred,
except for direct response advertising, which is
capitalized and amortized over its expected period of
future benefits. Direct response advertising consists
primarily of television infomercials which are
broadcast to elicit sales to customers who respond
specifically to the advertisement. The capitalized
costs of the advertising are amortized over the
period that the infomercial is broadcasted. As of
March 31, 2000 and 1999, $0 and $76,100 of these
advertising costs, pertaining to infomercial
production, are included in prepaid expenses and
other current assets. Advertising expense for 2000
and 1999 aggregated $660,600 and $23,900,
respectively.
F-11
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
Income Taxes
The Company reports income taxes in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. Deferred income
taxes are recognized for the tax consequences of
temporary differences by applying the tax rate
expected to be in effect in future years to
differences between the financial statements carrying
amounts and the tax basis of existing assets and
liabilities. Tax credits are recorded as a reduction
of the provision for federal income taxes in the year
realized. A valuation allowance is established for
deferred income tax assets when realization is not
deemed uncertain.
Adoption of New Accounting Pronouncements
In March 1998, the American Institute of Certified
Public Accountants issued Statement of Position (SOP)
No. 98-1, Software for Internal Use, which provides
guidance on accounting for the cost of computer
software developed or obtained for internal use. The
adoption of SOP No. 98-1 as of April 1, 1999 did not
have a material impact on the Company's consolidated
financial statements.
In June 1998, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS
No. 133 requires companies to recognize all
derivatives contracts as either assets or liabilities
in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the
objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of
the hedged assets or liability that are attributable
to the hedged risk or (ii) the earnings effect of the
hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain and loss
is recognized in income in the period of change. SFAS
No. 133, as amended, is effective for all fiscal
quarters of fiscal years beginning after June 15,
2000.
Historically, the Company has not entered into
derivatives contracts either to hedge existing risks
or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to
affect its financial statements.
In March 2000, the Financial Accounting Standards
Board issued Interpretation No. 44 ("FIN 44")
Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No.
25. FIN 44 clarifies the application of Opinion No.
25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences
of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1,
2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January
12, 2000. Due to the repricing of options, FIN 44 may
have a material effect on our financial position or
results of operations.
F-12
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
Fair Values of Financial Instruments
The following methods and assumptions were used by
the Company in estimating its fair value disclosures
for financial instruments:
Cash and cash equivalents:
The carrying amount reported in the consolidated
balance sheet for cash and cash equivalents
approximates fair value for cash and cash
equivalents.
Loan receivable:
The fair value of the loan receivable from Global
Access Telephone & Technology, Inc. approximates
fair value.
Short-term debt:
The fair value of short-term debt approximates
cost because of the short period of time to
maturity.
All other financial instruments are carried at
amounts that approximate estimated fair value.
Earnings Per Share
Basic earnings per share includes no dilution and is
computed by dividing income available to common
stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings
per share reflects the potential dilution of
securities that could share in the earnings of an
entity. For 2000 and 1999, options to purchase
3,079,957 and 2,306,493 shares of common stock,
respectively, were excluded from the computation of
diluted earnings per share since their effect would
be antidilutive.
2. Notes Receivable During 2000, the Company loaned an aggregate of
$130,000 to two unrelated companies. As of March 31,
2000, these notes receivable had been repaid.
F-13
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
3. Property and A summary of property and equipment follows:
Equipment
March 31, 2000 1999
------------------------------------------------------------
Furniture and fixtures $ 61,200 $ 38,900
Equipment 119,200 25,900
Software 13,400 3,400
------------------------------------------------------------
193,800 68,200
Less accumulated depreciation 36,800 13,900
------------------------------------------------------------
$ 157,000 $ 54,300
============================================================
Equipment under capital lease obligations aggregated $35,300
as of March 31, 2000 with related accumulated depreciation
of $2,700.
4. Deposits and Included in deposits and other assets as of March 31, 2000
Other Assets and 1999 is a $49,200 loan receivable from Actanet Inc., an
unrelated company. During 2000, Actanet Inc. assigned the
loan to Global Access Telephone & Technology, Inc., an
unrelated Company, which has agreed to repay the loan at 10%
interest in twelve equal payments beginning August 1, 2000.
Also included in deposits and other assets as of March 31,
2000 are loan fees of $115,000 relating to the issuance of a
$2,000,000 convertible note payable (Note 5). The loan fees
are being amortized over the three-year life of the note.
5. Notes Payable In March 1998, the Company borrowed $50,000 from a
stockholder under the terms of a promissory note bearing a
12% interest rate. In August 1998, the note payable and
accrued interest were repaid in full.
F-14
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
In December 1997, the Company received a $100,000 deposit
from Compressant, Inc., a company who had previously entered
into a merger agreement with the Company. In April 1998, the
Company cancelled the merger agreement with Compressant,
Inc. and executed an 8% promissory note payable in December
1998. In July 1998, the promissory note was assigned to
Harris & Hull, who subsequently filed a complaint against
the Company for breach of contract on the promissory note.
In March 1999, the Company entered into a settlement
agreement with Harris & Hull which provided for a $5,000
cash payment and a transfer of 21,209 shares of the
Company's common stock as full payment on the $84,600
remaining balance due under the promissory note. Since the
Company issued shares of treasury stock carried at their
acquisition cost of $57,000 to settle this note payable, the
resulting gain on this transaction has been recorded as an
increase to additional paid-in capital.
In June and July 1999, the Company borrowed a total of
$202,300 with zero interest from four shareholders, and a
$16,000 interest-free loan from an officer, respectively. In
August 1999, all of these loans were paid in full.
In July 1999, the Company borrowed $100,000 from an
unrelated lender under the terms of a promissory note
bearing a 10% interest rate. In August 1999, the loan was
paid in full.
In March 2000, the Company borrowed $2,000,000 from an
independent lender. Interest at 8% is payable quarterly. The
holder of the notes may convert the entire outstanding
principal amount into shares of the Company's common stock
at $1.75 per share (Note 13). The outstanding principal
amount of the notes is due September 30, 2001, if not
converted. In connection with the notes payable, the Company
issued warrants to purchase 100,000 shares of common stock
at $3.187 per share. The Company recorded a discount on the
notes payable of $121,200, based on the fair value of the
warrants, to be amortized as additional interest expense
over the life of the notes. The Company also recorded deemed
interest of $1,298,400, relating to the beneficial
conversion price of the notes payable.
F-15
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
6. License In March 1998, the Company entered into a license agreement
Agreements with an unrelated Japanese company, which provides for the
exclusive right to sell certain of inChorus.com's products
in Japan through June 2000. The license agreement calls for
the payment of a minimum guarantee royalty by the licensee
of $800,000 during the first fifteen months and $1,200,000
during the next twelve months. The Company recognized
$153,100 and $640,000 in license fee income during the years
ended March 31, 2000 and 1999, respectively. Included in
accounts receivable as of March 31, 2000 and 1999 are
$479,900 and $421,900, respectively, due from the licensee.
Included in the allowance for doubtful accounts as of March
31, 2000 is $479,900 relating to this receivable. The
$1,200,000 that pertains to the second twelve-month period
has not been recognized as receivable collection because it
is not deemed probable.
In June 1999, the Company entered into a license agreement
with an unrelated U.S. company, which grants the licensee
the right to bundle certain software with a hardware product
and/or computer services provided by the licensee. The
agreement also provides the right to make, sell and offer
for sale copies of the licensed software. The licensee paid
the Company a one-time license fee of $50,000 for the use of
the licensed software for a period of 12 months from the
date of the July 1999 initial shipment of the licensed
software with licensee's products, not to exceed 300,000
units. The Company shall share a fixed amount of upgrade
revenue with licensee each time the licensee's customers
upgrade to the Company's product. The license fee is being
recognized as revenue over the 12 month contract term, with
$35,400 recognized in 2000.
In July 1999, the Company entered into a license agreement
with a U.S. based Japanese company, which allows the
licensee to replicate, copy and license certain computer
software programs as part of a bundle for use with a
hardware product. As part of the agreement, the Company will
deliver its standard user manual as well as the user guide
for the program. The Company will also provide continued
upgrades and support to the program. The licensee shall pay
the Company a royalty for the program at a fixed price per
unit, and the royalty payments will be made to the Company
on a quarterly basis. No revenue from this agreement had
been recognized as of March 31, 2000.
F-16
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
In September 1999, the Company entered into a license
agreement with an unrelated Japanese Company, which gives
the licensee an exclusive right in Japan to utilize and sell
the Company's technology for phone-to-PC voice email through
March 31, 2001. The licensee made a $12,000 payment for the
product development and a prepaid royalty of $10,000
to the Company. The licensee shall also pay a fixed price
per copy of software provided to users, and a fixed
percentage of usage charge for the phone-to-PC voice email
system. Royalty payments will be made to the Company on a
quarterly basis. The $12,000 product development payment was
recognized as revenue in 2000.
In October 1999, the Company entered into a license
agreement with an unrelated U.S. Company, which gives the
licensee the right to bundle certain software with a
hardware product and/or computer services provided by the
licensee. The agreement also provides the right to make,
sell, and offer for sale copies of the licensed software.
The Company shall share a fixed amount of upgrade revenue
with the licensee each time the licensee's customers upgrade
to the Company's product. No revenue from this agreement had
been recognized as of March 31, 2000.
In March 2000, the Company entered into a license agreement
with a Japanese company, which gives the licensee an
exclusive right in Japan to develop and market the Company's
inChorus Pro technology through March 31, 2003. Under the
license agreement, the licensee is to pay $100,000 by May
31, 2000, $50,000 by June 30, 2000, and $850,000 by July 31,
2000, provided that the Company has delivered both the
English and Japanese versions of inChorus Pro. The English
version was delivered upon inception of the agreement and
the Japanese version was delivered in May 2000. The English
version license fee of $700,000 was recorded as a
receivable and deferred revenue as of March 31, 2000.
Additionally, the Company is to invest $150,000 in the
licensee by June 30, 2000, in exchange for a 25% equity
position in the licensee. No revenue from this agreement had
been recognized as of March 31, 2000.
F-17
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
7. Commitments The Company has employment agreements with four of its
officers which provide for severance payments equal to one
year's salary if the officer is terminated without cause.
The employment agreement for one of the officers also
provides for immediate vesting of outstanding stock options
if terminated without cause.
The Company leases its facilities under operating leases.
The facility leases require the Company to pay certain
maintenance and operating expenses such as utilities,
property taxes and insurance costs. Rent expense related to
these leases was $146,100 and $32,000 for 2000 and 1999,
respectively.
A summary of the future minimum lease payments under these
non-cancelable operating leases follows:
Years Ended March 31, Amount
------------------------------------------------------------
2001 $ 203,200
2002 155,800
------------------------------------------------------------
$ 359,000
============================================================
8. Income Taxes Income tax expense for the year ended March 31, 2000
consisted of foreign taxes of approximately $35,000 relating
to license fee income from a Japanese company (Note 6) and
state minimum taxes. Income tax expense for the year ended
March 31, 1999 consisted of state minimum taxes.
The Company's effective tax rate differs from the statutory
federal income tax rate principally as a result of Federal
and State net operating losses for which a full valuation
allowance has been provided.
F-18
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
Deferred tax assets (liabilities) comprise the following
<TABLE>
<CAPTION>
March 31, 2000 1999
---------------------------------------------------------------------
<S> <C> <C>
Loss and credit carryforwards $ 1,955,100 $ 455,200
Depreciation and amortization (10,000) (2,800)
Deferred compensation 396,500 159,800
Reserves not currently deductible 354,100 39,400
---------------------------------------------------------------------
2,695,700 651,600
Valuation allowance (2,695,700) (651,600)
---------------------------------------------------------------------
Net deferred tax asset $ -- $ --
=====================================================================
</TABLE>
As of March 31, 2000, the Company has net operating loss
carryforwards of approximately $4,525,200 and $3,486,400
available to reduce future taxable income, if any, for Federal
and California state income tax purposes. The net operating
loss carryforwards expire in various years through 2020.
Pursuant to the "change in ownership" provisions of the Tax
Reform Act of 1986, utilization of the Company's net operating
loss carryforwards may be limited, if a cumulative change of
ownership of more than 50% occurs within any three-year
period. The Company has not made this determination as of
March 31, 2000.
9.Capital Stock Preferred Stock
In August 1999, the Company restated its Articles of
Incorporation to authorize 59,000,000 shares of common stock
and 1,000,000 shares of preferred stock, each unit a par value
of $0.001 per share.
F-19
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
In August 1999, the Company obtained an additional
financing of $3,000,000 through the issuance of 300
shares of Series A convertible preferred stock to
investors. Holder of the Series A convertible
preferred stock are entitled to cumulative
dividends of 7% per annum, payable upon conversion
in the form of cash or shares of common stock.
During the year ended March 31, 2000, the Company
recorded dividends of $120,200. The Company also
issued warrants to purchase an aggregate of 390,000
shares of common stock. The warrants, which have
exercise prices ranging from $2.25 to approximately
$2.44 per share, expire in August 2004. The
preferred stock is convertible into that number of
shares of common stock equal to the stated value of
the Series A convertible preferred stock divided by
the conversion price in effect at the time of the
conversion. During the year ended March 31, 2000,
the Company recorded deemed dividends of $972,600
relating to beneficial conversion prices of the
preferred stock.
From January through March 2000, two shareholders
converted an aggregate of 141 shares of preferred
stock and accrued dividends into 2,283,696 shares
of common stock.
Common Stock
During the year ended March 31, 1999, the Company
sold 6,512,835 shares of its common stock in
exchange for 8% notes receivable totaling
$4,976,300 and $63,600 in cash. On October 21, 1998
(prior to when the Company's stock became publicly
traded), 2,650,130 of these shares of common stock
were repurchased at the original per-share issuance
price and retired by the Company in exchange for
the cancellation of $973,900 in notes receivable.
In December 1999, the Company issued an aggregate
of 20,250 shares of the Company's common stock to
employees as a bonus, resulting in compensation
costs of $20,900.
Treasury Stock
During 1999 the Company repurchased 1,771,209
shares of its common stock at the then-current
market value in exchange for the cancellation of
$3,186,500 in notes receivable.
F-20
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
The Company reserved 625,000 of these treasury
shares (with a cost of $52,000) for issuance to its
existing shareholders upon achieving the following
three milestones: 25% of the shares would be issued
upon the collection of the first $250,000 due under
a license agreement (Note 6), 35% of the shares
would be issued if the Company generated $2 million
in sales and $100,000 in "audited profits" for the
year ended December 31, 1998, the remaining 40% of
the shares would be issued if the Company generated
$1.5 million in sales and $200,000 in "audited
profits" for the six months ended June 30, 1999.
The Company met the first milestone in June 1998,
and recorded $108,300 in compensation expense for
the issuance of 156,250 of these reserved treasury
shares based on their cost. However, the Company
did not achieve the second and third milestones.
On March 31, 1999, 21,209 of the shares held in
treasury were reissued for the retirement of
$79,600 in debt (Note 5).
In March 1999, the Company reserved 875,000 shares
of treasury stock (with a cost of $2,400,000) for
issuance in exchange for radio and television
advertising. In March 2000, this arrangement was
canceled.
In May 1999, the Company issued 66,667 shares of
treasury stock to a shareholder for proceeds of
$200,000 as an exercise of that shareholder's
contractual right to repurchase shares of treasury
stock.
In June 1999, the Company issued 72,727 shares of
treasury stock to two investors for notes
receivable totaling $17,800 and $180,000 in cash.
In February 2000, the Company's board of directors
canceled the remaining 1,454,356 shares of treasury
stock outstanding.
F-21
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
Stock Options
Options are exercisable as determined by the Board
of Directors on the date of grant and expire five
years from the date of grant. The Company applies
Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees, and
Related Interpretations in Accounting for Stock
Options Issued to Employees. Under APB Opinion No.
25, employee compensation cost is only recognized
when the estimated fair value of the underlying
stock on date of grant exceeds the exercise price
of the stock option. For stock options issued to
non-employees, the Company applies SFAS No. 123,
Accounting for Stock-Based Compensation, which
requires the recognition of compensation cost based
upon the fair value of stock options at the grant
date, using the Black-Scholes option pricing model.
During 2000 and 1999, the Company recognized
$538,200 and $343,000 in compensation cost relating
to stock options issued to employees and
consultants.
In September 1999, the Company's board of directors
adopted the 1999 Stock Option Plan, which has not
yet been ratified by the stockholders. Under the
Plan, 2,400,000 shares of common stock are
available for options, which may be granted to
employees, directors, and consultants.
In September 1999, the Company's board of directors
voted by unanimous consent to rescind options to
purchase 958,000 shares of common stock previously
granted to various employees. The board then
granted options to purchase 1,082,714 shares of
common stock under the newly adopted stock option
plan.
F-22
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
A summary of the status of the Company's stock
options as of March 31, 2000 and 1999, and changes
during the years then ended is presented in the
following table:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------------------------------
March 31, 2000 March 31, 1999
----------------------------------- -----------------------------------
Weighted- Weighted-
average average
exercisable exercisable
Shares price Shares price
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning 2,306,493 $ 0.90 480,702 $ 0.74
Granted 2,284,883 1.48 1,834,324 0.94
Exercised (40,000) 0.61 -- --
Forfeited (1,471,419) 1.19 (8,533) 0.74
--------------------------------------------------------------------------------------------
Ending 3,079,957 1.20 2,306,493 0.90
============================================================================================
Exercisable
at year-end 2,013,308 1.04 1,150,177 0.75
========= =========
</TABLE>
The following table summarizes information about stock options granted during
the year ended March 31, 2000:
<TABLE>
<CAPTION>
Exercise
price equals,
exceeds or Weighted-
Number of is less than average Range of Weighted-
options market price exercise exercise average
granted of stock price prices fair value
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,246,714 Equals $ 1.60 $ 0.50-2.12 $ 1.43
298,000 Exceeds 2.00 2.00 1.63
740,169 Less than 1.06 0.61-2.00 0.65
------------------------------------------------------------------------------------------
2,284,883 $ 1.48 $ 1.20
========== ============= =============
</TABLE>
F-23
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
The weighted-average exercise price and weighted-average
fair value of stock options granted during the year ended
March 31, 1999 was $0.94 and $1.70, respectively.
The following table summarizes information about stock
options outstanding as of March 31, 2000:
<TABLE>
<CAPTION>
Options outstanding
--------------------------------------------------------
Weighted-
Options exercisable
-----------------------------
average Weighted- Weighted-
Range of remaining average average
exercise Number contractual exercise Number exercise
price outstanding life (years) price exercisable price
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.00-0.50 125,589 6.96 $ 0.34 125,589 $ 0.34
0.51-1.00 1,257,571 4.08 0.67 1,053,743 0.67
1.01-1.50 545,333 7.36 1.30 327,791 1.26
1.51-2.12 1,151,464 9.00 1.83 506,185 1.83
---------- ---------
3,079,957 6.62 1.20 2,013,308 1.04
========== =========
</TABLE>
SFAS No. 123 requires the Company to provide pro forma
information regarding net loss and loss per share as if
compensation cost for the Company's stock option plans had
been determined in accordance with the fair value based
method prescribed in SFAS No. 123. The Company estimates the
fair value of stock options at the grant date by using the
Black-Scholes option pricing-model with the following
weighted-average assumptions used for grants in 2000 and
1999, respectively: no dividend yield; expected volatility
of 191.6% and 227.3% in 2000 and 1999 (for options granted
while the Company's stock was publicly traded) and 0.1% (for
options granted prior to when the Company's stock was
publicly traded) in 1999; risk-free interest rate of 5.7%
and 5.7%; and expected lives of approximately three years
for all plan options.
F-24
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
Under the accounting provisions of SFAS No. 123, the
Company's net loss and loss per share would have been
increased to the pro forma amounts as follows:
<TABLE>
<CAPTION>
Years ended March 31, 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Net loss allocable to common shareholders:
As reported $ (7,241,400) $ (1,015,900)
===================================================================================
Pro forma $ (8,280,500) $ (1,069,100)
===================================================================================
Basic loss per share:
As reported $ (0.88) $ (0.14)
===================================================================================
Pro forma $ (1.01) $ (0.15)
===================================================================================
</TABLE>
10. Major Customers For 2000, revenues from three customers amounted to 18%,
18%, and 13% of net sales, respectively, excluding the
revenue from license fees (Note 6). Included in accounts
receivable as of March 31, 2000 is $83,400 due from these
customers, all of which is reserved. For 1999, revenues from
two customers amounted to $72,000, or 79% of net sales,
excluding the revenue from license fees (Note 6). Included
in accounts receivable as of March 31, 1999 is $5,500 due
from these two customers.
11. Statements of The Company paid $12,700 and $2,500 for interest in 2000 and
Cash Flows 1999, respectively. The Company paid $800 and $0 for income
taxes during 2000 and 1999, respectively.
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
During 2000, the Company accrued dividends to the
shareholders of convertible preferred stock in the amount of
$120,200.
During 2000, the Company purchased equipment in the amount
of $35,300 under capital leases.
In June 1999, the Company received notes receivable totaling
$17,800 for the issuance of treasury stock.
F-25
<PAGE>
inChorus.com
(formerly known as Softlink, Inc.)
Notes to Consolidated Financial Statements
================================================================================
During 2000, the Company recorded deemed interest in the
amount of $1,298,400, relating to a beneficial conversion
feature of a convertible note payable.
During 2000, the Company recorded deemed dividends of
$972,600, relating to beneficial conversion prices of its
preferred stock.
During the year ended March 31, 1999, the Company received
notes receivable totaling $4,976,300 for the sale of common
stock. Of this amount, $973,900 in notes receivable were
cancelled for the repurchase and retirement of common stock,
and $3,186,500 in notes receivable were cancelled for the
acquisition of treasury stock. In addition, a note payable
amounting to $79,600 was retired through the issuance of
treasury stock (Notes 5 and 9).
12. Contingency The Company is currently under an investigation by the
Securities and Exchange Commission. As of the date of this
report, the outcome of this investigation is not
determinable.
13. Subsequent In April 2000, a shareholder converted 25 shares of
Events preferred stock and accrued dividends into 295,121 shares of
common stock.
In April 2000, the Company entered into an equity line
agreement in which the Company may sell up to $2,000,000 in
common stock during the first draw down period, up to
$3,000,000 in common stock during the second draw down
period, and up to $500,000 in common stock during subsequent
draw down periods, with the total amount sold in all draw
down periods not to exceed $5,000,000. In connection with
the equity line, the Company issued warrants to purchase
100,000 shares of common stock, exercisable immediately, at
120% of the closing bid price of the Company's common stock
on the trading day immediately prior to the closing date,
and expiring April 2003.
In June 2000, a shareholder converted 16 shares of preferred
stock and accrued dividends into 269,162 shares of common
stock.
In July 2000, a shareholder converted 5 shares of preferred
stock and accrued dividends into 141,299 shares of common
stock (unaudited).
In July 2000, the holder of the convertible notes payable
made a claim for the issuance of common stock with a value
of $40,000 as damages for the late filing of a registration
statement (unaudited).
F-26
<PAGE>
INCHORUS.COM
8,200,000 Shares of
Common Stock
________________________
PROSPECTUS
________________________
August 11, 2000
