[ASSET WATCH UPDATE3]--(Redmond, Washington)--STOCK FRAUD? AND OTHER TEXTBOOK SEC RULE 10b-5 Violation(s).*
3. Retention and Restructuring Costs
On April 23, 2001, the Company announced that it was focusing the business operations to further increase operating efficiencies and address only the most strategic market opportunities. To ensure financial flexibility, the Company announced its plans to streamline operations with decreased spending in marketing and administrative expenses and a reduction in headcount of about 50 employees. During the three months ended June 30, 2001, the Company recorded a charge of $0.7 million as a result of the announced restructuring plans comprising $0.1 million of legal costs, $0.2 million of assets to be retired, $0.3 million of severance costs and $0.1 million of costs to terminate agreements early. The severance costs were paid in April 2001 and the remaining costs were accrued as of June 30, 2001.
Concurrent with the restructuring, the Company entered into retention agreements with its remaining employees, pursuant to which the employees would receive bonuses aggregating $2.3 million. In addition, notes receivable from certain employees in connection with previous stock option exercises, together with associated interest and tax liabilities, aggregating $2.4 million, would be forgiven. The employees are required to stay through either October 31 or November 30, 2001 in order to earn the bonuses and have their notes forgiven, though these payments would be accelerated assuming the involuntary termination of the employees. As of June 30, 2001, the Company has accrued approximately of $1.3 million relating to the portion of the retention bonuses earned and the notes receivable forgiven during the period. As discussed in Note 8, the Company announced its decision, subsequent to June 30, 2001, to pursue an orderly wind down and cessation of the Company's business operations and sale of its assets, which will accelerate the payment of retention bonuses under the retention agreements and cause the remaining outstanding notes receivable to be forgiven.
4. Redemption and Repurchase of Common Stock
As part of the Resounding acquisition that was completed in 1999, Common Stock Put Rights were granted to Resounding's employees to enable them to sell their pro-rata portion of 200,000 shares of the Company's common stock back to the Company at a price of $10.00 per share. Such put rights expire in October 2001. During the six-month period ended June 30, 2001, put rights for a total of 193,414 shares were exercised, whereby the Company repurchased the shares for a total of approximately $1,934,000. As of June 30, 2001, put rights for 128 shares remain outstanding.
On March 30, 2001, the Company entered into an agreement with one of its customers, which gave the customer the option to make payments on their account by transferring to the Company all shares of HearMe common stock currently owned by the customer. For purposes of this transfer, such shares were valued at the closing price on the date of the agreement, which was $0.50 per share. On April 4, 2001, the customer elected to exercise this option and transferred 313,551 shares of HearMe common stock to the Company at a value of $156,776 as part of the full settlement of the outstanding balance.
8. Subsequent Events
On July 30, 2001, the Company announced its decision to pursue an orderly wind down and cessation of the Company's business operations and sale of its assets. The Board of Directors and Management have been engaged in a concerted effort for the past several months to explore various strategic alternatives for the future of the Company, including its sale. The Company contacted over 30 prospects, of which the Company met with 15. These efforts did not result in the identification of a party that was prepared to provide capital or acquire the Company. The Board of Directors has concluded that an orderly wind down of the Company is the course of action that most likely offers the highest return to stockholders and that to continue operations of the business at this time would reduce assets and cash that may ultimately be available to be returned to the stockholders. The Company intends to develop and present to the Board of Directors and stockholders a plan for the orderly wind down of the business, unless it receives a credible offer to purchase the Company. However, no assurance can be given that the Company will be successful in pursuing a sale of its assets, or that an orderly winding-down of the Company's operations would actually increase stockholder value or result in any remaining capital for distribution to stockholders. Moreover, the timing of any possible distribution is uncertain. The Company may not be able to find qualified buyers for its assets. Furthermore, because many of the Company's assets, particularly its intellectual property, will decline in value over time, the Company may not be able to consummate the sale of these assets in time to generate meaningful value. We expect to recognize little or no revenue following this announcement, other than revenue recognized from the licensing of source code and the sale of any assets. The Company may not be able to negotiate a settlement of all of its obligations to creditors. These include, without limitation, long term contractual obligations associated with facilities leases and business agreements with third parties. Estimated future costs of retention and severance resulting from the wind down are expected to be $4 million to $4.5 million...On July 30, 2001, the Company received notification from its bank that, based upon its June 30, 2001 financial statements, it was in violation of the Minimum Quick Ratio and Minimum Revenue covenants of its loan agreement and due to the announcement of the wind down of the Company, it is in default of this agreement. As a result, the $0.8 million due under such agreements became immediately due and payable. On August 2, 2001, the Company paid off the $0.8 million balance on its loan agreement...However, no assurance can be given that the Company will be successful in pursuing a sale of its assets, or that an orderly winding-down of the Company's operations would actually increase stockholder value or result in any remaining capital for distribution to stockholders. Moreover, the timing of any possible distribution is uncertain. The Company may not be able to find qualified buyers for its assets. Furthermore, because many of the Company's assets, particularly its intellectual property, will decline in value over time, the Company may not be able to consummate the sale of these assets in time to generate meaningful value. We expect to recognize little or no revenue following this announcement, other than revenue recognized from the sale of any assets. The Company may not be able to negotiate a settlement of all of its obligations to creditors. These include, without limitation, long term contractual obligations associated with facilities leases and business agreements with third parties. Estimated future costs of retention and severance resulting from the wind down are expected to be $4 million to $4.5 million...At June 30, 2001, the Company had cash and cash equivalents and investments in marketable debt securities totaling $13.8 million compared to $30.5 million at December 31, 2000...The major use of cash in financing activities during the period ended June 30, 2001 was for payments on the term loan of $1.8 million as a result of the sale of Live Communities to GameSpy and $1.9 million for the repurchase of redeemable common stock subject to put rights.
In May 2000, the Company entered into a term loan with a financial institution and initially drew down funds of $2.9 million under this agreement. Amounts borrowed under this agreement are collateralized by substantially all of its assets, bear interest at the prime rate plus 1 percent and are scheduled to mature in September 2003. $1.8 million of this loan was repaid during the period ended June 30, 2001. On July 30, 2001, the Company received notification that, based upon its June 30, 2001 financial statements, it was in violation of the Minimum Quick Ratio and Minimum Revenue covenants of its loan agreement and due to the wind down of the Company, it is in default of this agreement. As a result, the remaining $0.8 million due under such agreements became immediately due and payable. On August 2, 2001, the Company paid off the $0.8 million balance on the loan agreement.
On January 19, 2001, we completed the sale of our Live Communities business unit, including the Mplayer.com voice-enabled Internet site and the affiliated advertising network, to GameSpy Industries. Consideration for the sale consisted of $500,000 in cash, a short-term note receivable for $4,521,000 and 2,404,890 shares of GameSpy common stock. GameSpy has not made payment on the note receivable, which was due on July 19, 2001. The Company sent a demand for payment to GameSpy on July 20, 2001...Concurrent with the restructuring, the Company entered into retention agreements with its remaining employees, pursuant to which the employees would receive bonuses aggregating $2.3 million. In addition, notes receivable from certain employees in connection with previous stock exercises, together with associated interest and tax liabilities, aggregating $2.4 million, would be forgiven. The employees are required to stay through either October 31 or November 30, 2001 in order to earn the bonuses and have their notes forgiven, though these payments would be accelerated assuming the involuntary termination of the employee. As of June 30, 2001, the Company has accrued approximately $1.3 million relating to the portion of the retention bonuses earned and the notes receivable forgiven during the period. As discussed in Note 8, the Company announced its decision, subsequent to June 30, 2001, to pursue an orderly wind down and cessation of the Company's business operations and sale of its assets, which will accelerate the payment of retention bonuses under the retention agreements and cause the remaining outstanding notes receivable to be forgiven.
The Company has incurred significant losses since inception. In the period ended June 30, 2001, the Company incurred losses from continuing operations of $6.5 million and used $8.4 million of cash in its operating activities. With the Company's announced plans to wind down normal business operations, we cannot estimate the level of these losses in future periods. Management anticipates that existing sources of liquidity and anticipated revenue will not be sufficient to satisfy projected working capital and other cash requirements through the second quarter of Fiscal 2002.
Certain Business Risks
The Company has announced its intent to wind down its business and may not be able to generate meaningful cash, or any cash, which could be returned to stockholders.
On July 30, 2001, the Company announced its decision to pursue an orderly wind down and cessation of the Company's business operations and sale of its assets. The Board of Directors and Management have been engaged in a concerted effort for the past several months to explore various strategic alternatives for the future of the Company, including its sale. The Company contacted over 30 prospects, of which the Company met with 15. These efforts did not result in the identification of a party that was prepared to provide capital or acquire the Company. The Board of Directors has concluded that the orderly wind down of the Company is the course of action that most likely offers the highest return to stockholders and that to continue operations of the business at this time would reduce assets and cash that may ultimately be returned to the stockholders...the timing of any possible distribution is uncertain. The Company may not be able to find qualified buyers for its assets. Furthermore, because many of the Company's assets, particularly its intellectual property, will decline in value over time, the Company may not be able to consummate the sale of these assets in time to generate meaningful value. We expect to recognize little or no revenue following this announcement, other than revenue recognized from the licensing of source code and the sale of any assets. The Company may not be able to negotiate a settlement of all of its obligations to creditors. These include, without limitation, long term contractual obligations associated with facilities leases and business agreements with third parties. Estimated future costs of retention and severance resulting from the wind down are expected to be $4 million to $4.5 million.
Stockholders may not receive any distributions as part of the Company's wind down. Furthermore, if the Company's contingency reserve, established upon dissolution, is inadequate to cover expenses and liabilities, stockholders may be liable to creditors of the Company for amounts previously received. Source: 10k WIZARD ragingbull.tenkwizard.com
*Compare said HEAR SEC FORM 10-Q for period ending 30 June 2001 with representations made by HEARs Rob Csongor, CEO, in his Report to Shareholders in HEARs SEC FORM DEF/14A Shareholder Form of Proxy filed 27 June 2001 ragingbull.tenkwizard.com
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