<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: APRIL 1, 1999
------------------------
YAHOO! INC.
(Exact name of registrant as specified in its charter)
0-26822
(Commission File Number)
<TABLE>
<S> <C>
CALIFORNIA 77-0398689
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
3420 CENTRAL EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
(Address of principal executive offices, with zip code)
(408) 731-3300
(Registrant's telephone number, including area code)
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<PAGE>
ITEMS 5 AND 7 ARE HEREBY AMENDED AND RESTATED IN THEIR ENTIRETY AS FOLLOWS:
ITEM 5. OTHER EVENTS
On April 1, 1999, Yahoo! ("Yahoo") and broadcast.com inc. ("broadcast.com")
announced that they had entered into an Agreement and Plan of Merger, dated as
of March 31, 1999 (the "Agreement"), which sets forth the terms and conditions
of the proposed merger of a subsidiary of Yahoo! with and into broadcast.com
(the "Merger") pursuant to which broadcast.com will become a wholly-owned
subsidiary of Yahoo!. A copy of the joint press release of Yahoo! and
broadcast.com with respect to the Merger is included herein as Exhibit 99.1. The
broadcast.com supplementary consolidated financial statements as of and for the
three years ending December 31, 1998 reflecting the acquisition of Net Roadshow,
Inc., on a pooling of interests basis, are included herein as Exhibit 99.2. The
broadcast.com historical consolidated financial statements as of and for the
three years ending December 31, 1998 are included herein as Exhibit 99.3. Such
press release and financial statements are incorporated by reference into this
Item 5.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits.
<TABLE>
<C> <S>
99.1* Press Release dated April 1, 1999.
99.2 broadcast.com Supplementary Consolidated Financial Statements as of and
for the three years ending December 31, 1998.
99.3 broadcast.com Historical Consolidated Financial Statements as of and for
the three years ending December 31, 1998.
</TABLE>
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* Previously filed.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 19, 1999
<TABLE>
<S> <C> <C>
YAHOO! INC.
By: /s/ GARY VALENZUELA
-----------------------------------------
Name: Gary Valenzuela
SENIOR VICE PRESIDENT, FINANCE AND
ADMINISTRATION, AND CHIEF FINANCIAL
OFFICER
</TABLE>
3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
99.1* Press Release dated April 1, 1999.
99.2 broadcast.com Supplementary Consolidated Financial Statements as of and for the three years ending
December 31, 1998.
99.3 broadcast.com Historical Consolidated Financial Statements as of and for the three years ending December
31, 1998.
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
EXHIBIT 99.2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of broadcast.com inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
broadcast.com inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As described in Notes 4 and 11, on March 15, 1999, broadcast.com inc. merged
with Net Roadshow, Inc. in a transaction accounted for as a pooling of
interests. The accompanying supplementary consolidated financial statements give
retroactive effect to the merger of broadcast.com inc. with Net Roadshow, Inc.
In our opinion, based upon our audits, the accompanying supplementary
consolidated balance sheets and the related supplementary consolidated
statements of operations, of stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of
broadcast.com inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
January 27, 1999,
except as to the pooling of interests with
Net Roadshow, Inc. and Note 3 which are
as of March 15, 1999 and Note 11 which
is as of April 1, 1999
1
<PAGE>
BROADCAST.COM INC.
SUPPLEMENTARY BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 49,828 $ 21,350
Accounts receivable, net of allowance of $239 and $76, respectively..................... 4,447 2,007
Prepaid expenses........................................................................ 429 1,995
---------- ----------
Total current assets.................................................................. 54,704 25,352
Property and equipment, net............................................................... 6,786 4,075
Intangible assets, net.................................................................... 850 127
Other..................................................................................... 253 131
---------- ----------
Total assets.......................................................................... $ 62,593 $ 29,685
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 1,033 $ 947
Accrued liabilities..................................................................... 1,954 664
Deferred revenue........................................................................ 1,135 355
Capital lease obligations, current portion.............................................. -- 382
---------- ----------
Total current liabilities............................................................. 4,122 2,348
Capital lease obligations, less current portion........................................... -- 372
Note payable to shareholder............................................................... 60 60
Commitments and contingencies (NOTE 6)
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized, par $.01, none issued and outstanding..... -- --
Common stock, 60,000,000 shares authorized, par $.0l, 35,953,906 and 28,795,650 shares
issued and outstanding, respectively.................................................. 252 180
Additional paid-in capital.............................................................. 84,379 36,746
Common stock subscribed................................................................. -- 45
Deferred compensation................................................................... (156) --
Accumulated deficit..................................................................... (26,064) (10,066)
---------- ----------
Total stockholders' equity............................................................ 58,411 26,905
---------- ----------
Total liabilities and stockholders' equity............................................ $ 62,593 $ 29,685
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
BROADCAST.COM INC.
SUPPLEMENTARY STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Revenues:
Business services............................................................. $ 15,851 $ 5,368 $ 958
Advertising................................................................... 8,419 3,811 1,091
---------- --------- ---------
Total revenues.............................................................. 24,270 9,179 2,049
Operating expenses:
Productions costs............................................................. 4,664 3,005 1,301
Operating and development..................................................... 15,211 5,510 1,621
Sales and marketing........................................................... 11,920 4,208 768
General and administration.................................................... 4,752 1,934 841
Depreciation and amortization................................................. 3,374 1,419 562
Merger costs.................................................................. 1,534 -- --
---------- --------- ---------
Total operating expenses.................................................... 41,455 16,076 5,093
---------- --------- ---------
Net operating loss.......................................................... (17,185) (6,897) (3,044)
Interest and other income....................................................... 1,925 213 76
Interest expense................................................................ (200) (74) (4)
---------- --------- ---------
Loss before income taxes provision.......................................... $ (15,460) $ (6,758) $ (2,972)
Provision for income taxes...................................................... -- $ 43 $ 25
---------- --------- ---------
Net loss.................................................................... $ (15,460) $ (6,801) $ (2,997)
---------- --------- ---------
---------- --------- ---------
Basic and diluted net loss per share............................................ $ (0.47) $ (0.28) $ (0.15)
---------- --------- ---------
---------- --------- ---------
Shares used in the net loss per share calculations.............................. 32,811 24,196 19,754
---------- --------- ---------
---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
BROADCAST.COM INC.
SUPPLEMENTARY STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
---------------------- PAID-IN COMMON STOCK DEFERRED ACCUMULATED EQUITY
SHARES AMOUNTS CAPITAL SUBSCRIBED COMPENSATION DEFICIT (DEFICIT)
--------- ----------- ----------- ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995...... 12,060 $ 13 $ 40 $ -- $ -- $ (268) $ (215)
Issuance of Common Stock.......... 11,005 110 10,703 -- -- -- 10,813
Net loss.......................... -- -- -- -- -- (2,997) (2,997)
--------- ----- ----------- --- ----- ------------ ------------
Balance at December 31, 1996...... 23,065 123 10,743 -- -- (3,265) 7,601
Issuance of Common Stock.......... 5,731 57 25,283 -- -- -- 25,340
Common Stock subscribed........... -- -- -- 45 -- -- 45
Issuance of warrants.............. -- -- 720 -- -- -- 720
Net loss.......................... -- -- -- -- -- (6,801) (6,801)
--------- ----- ----------- --- ----- ------------ ------------
Balance at December 31, 1997...... 28,796 180 36,746 45 -- (10,066) 26,905
Issuance of Common Stock.......... 1,692 17 3,866 (45) -- -- 3,838
Exercise of stock option and
warrants........................ 91 1 322 -- -- -- 323
Issuance of compensator stock
agreements...................... -- -- 257 -- (156) -- 101
Issuance of stock in public
offering net.................... 5,375 54 43,188 -- -- -- 43,242
Distribution to Stockholders...... -- -- -- -- -- (538) (538)
Net loss.......................... -- -- -- -- -- (15,460) (15,460)
--------- ----- ----------- --- ----- ------------ ------------
Balance at December 31, 1998...... 35,954 $ 252 $ 84,379 $ -- $ (156) $ (26,064) $ 58,411
--------- ----- ----------- --- ----- ------------ ------------
--------- ----- ----------- --- ----- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BROADCAST.COM INC.
SUPPLEMENTARY STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (15,460) $ (6,801) $ (2,997)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation............................................................... 3,288 1,350 506
Amortization............................................................... 86 69 56
Recognition of deferred compensation expense............................... 101 45 --
Provision for doubtful accounts............................................ 482 86 84
Changes in operating assets and liabilities................................
Accounts receivable...................................................... (2,922) (1,686) (491)
Prepaid expenses......................................................... 1,566 (227) (1,695)
Other assets............................................................. (122) (112) (8)
Accounts payable......................................................... 86 816 (175)
Accrued liabilities...................................................... 1,290 175 491
Deferred revenue......................................................... 781 297 57
---------- ---------- ---------
Net cash used in operating activities.................................... (10,824) (5,988) (4,172)
---------- ---------- ---------
Cash flows from investing activities:
Purchases of business and other intangible assets............................ (875) -- --
Purchases of property and equipment.......................................... (5,241) (3,197) (1,415)
---------- ---------- ---------
Net cash used in investing activities.................................... (6,116) (3,197) (1,415)
---------- ---------- ---------
Cash flows from financing activities:
Proceeds from common stock issuances......................................... 47,080 25,340 10,049
Proceeds from exercise of warrants and options............................... 323 720 --
Proceeds from notes payable.................................................. 750 -- --
Payment on notes payable..................................................... (750) -- --
Payments on capital lease obligations........................................ (1,447) (161) --
Payments on stockholder loan................................................. -- (7) (25)
Proceeds from stockholder loan............................................... -- 60 4
Distribution to shareholders................................................. (538) -- --
Purchase of treasury stock................................................... -- -- (160)
Proceeds from sale of treasury stock......................................... -- -- 160
---------- ---------- ---------
Net cash provided by financing activities................................ 45,418 25,952 10,028
---------- ---------- ---------
Net increase in cash and cash equivalents...................................... 28,478 16,767 4,441
Cash and cash equivalents at beginning of period............................... 21,350 4,583 142
---------- ---------- ---------
Cash and cash equivalents at end of period..................................... $ 49,828 $ 21,350 $ 4,583
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
(See disclosure of noncash transactions in Note 2)
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Cameron Audio Networks, Inc. ("Cameron") was incorporated and filed its
Articles of Incorporation (the "Articles") with the Secretary of State of Texas
on May 19, 1995. On May 15, 1996, Cameron purchased the rights to the name
AudioNet and subsequently filed a Certificate of Incorporation to form AudioNet,
Inc. ("AudioNet"), a new entity, in the state of Delaware, on September 19,
1996. On November 1, 1996, Cameron and AudioNet filed a Certificate of Merger,
effectively a stock-for-stock merger, whereby Cameron merged with and into
AudioNet, with AudioNet continuing as the surviving entity. Each share of Common
Stock of Cameron was converted to one share of Common Stock of AudioNet, and
Cameron ceased to exist at the date of such merger. Effective as of the date of
the merger, the Common Stock of the Company was changed from no par value to par
value of $0.01. The financial statements have been retroactively restated to
reflect this reincorporation, except for the original issuance of founders'
shares. Effective May 1998, the Company changed its name to broadcast.com inc.
("broadcast.com" or the "Company").
In March 1999, a newly formed subsidiary of the Company merged with Net
Roadshow, Inc., a provider of Internet initial public offerings and other
financial roadshow services. All financial results include the Merger, which was
accounted for as a pooling of interests (see Note 4).
In November 1998, a newly formed subsidiary of the Company merged with
Simple Network Communications, Inc. ("SimpleNet"), a provider of inexpensive
web-site hosting services to consumers and small businesses. All financial
results include the Merger, which was accounted for as a pooling of interests
(see Note 4).
The Company aggregates content and is a broadcaster of streaming media
programming on the Web with the network infrastructure and expertise to deliver
or "stream" live and on-demand audio and video content on the Internet. The
Company offers a comprehensive selection of live and on-demand audio and video
programming on the Internet, including sports, talk and music radio, television,
business events, full-length music CDs, news, commentary and full-length
audio-books. The Company broadcasts on the Internet 24 hours a day seven days a
week, and its programming includes radio stations, television stations and cable
networks and game broadcasts and other programming for college and professional
sports teams. The Company licenses such programming from content providers, in
most cases under exclusive, multi-year agreements. The Company's Business
Services Group also provides Internet and intranet broadcasting services to
businesses and other organizations. These business services include turnkey
production of press conferences, earnings conference calls, stockholder
meetings, product introductions, training sessions, distance learning
telecourses and media events.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany accounts and transactions have
been eliminated in the consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 financial
statements and the
6
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUES
The Company generates revenues through business services and advertising.
Services paid for in advance are recorded as deferred revenue.
BUSINESS SERVICES. In 1998, 1997 and 1996, the Company derived 65%, 58% and
47%, respectively, of revenues from business services. Included in business
services revenues are fees for broadcasting live and on-demand events as well as
hosting services. Also included are the cash payments the Company receives from
radio and television stations in exchange for the Company broadcasting their
programming over the Internet. Business services revenues are recognized in the
month in which the service is performed, provided that no significant Company
obligations remain and collection of the resulting receivable is probable.
ADVERTISING. In 1998, 1997 and 1996, the Company derived 35%, 42% and 53%,
respectively, of its revenues from the sale of advertisements. Included in
advertising revenues are fees for Web advertising and also the sale of ad spots
received from radio and television stations in exchange for the Company
broadcasting their programming over the Internet. Bartered Web advertising
revenues are derived from transactions in which the Company trades advertising
on its Web sites in exchange for advertisements on the Web sites of other
companies. Bartered Web advertising revenues are recognized at the fair market
value of consideration received or provided, whichever is lower. If a barter
agreement extends over the end of any accounting period, an asset and a
liability are each recorded related to the fair value of the prepaid
advertising expense and for advertisement obligations remaining at such period
end. Because historically all bartered Web advertising agreements have been for
periods not exceeding 30 days, all bartered Web advertising revenues are offset
by an equal amount of bartered Web advertising expense in production costs.
Bartered Web advertising revenues, which were $1.2 million in 1998, $1.0 million
in 1997 and $638,000 in 1996, represented 14%, 27% and 59% of advertising
revenues, or 5%, 11% and 31% of total revenues in 1998, 1997 and 1996,
respectively. The corresponding expenses recorded for bartered Web advertising
were $1.2 million, $1.0 million and $638,000 in 1998, 1997 and 1996,
respectively. Advertising revenues are recognized in the period in which the
advertisement is displayed on one of the Company's Web pages, except for
sponsorship sales, which are recognized ratably over the term of the
sponsorship, provided that no significant Company obligations remain and
collection of the resulting receivable is probable. The duration of the
Company's advertising commitments has generally ranged from one week to one
year.
In 1998 and 1997, no customer accounted for more than 10% of revenues. In
1996, two customers of the Company each accounted for 10% of revenues, one of
which is currently a stockholder.
PRODUCTION COSTS
Production costs consist primarily of event production costs, bartered Web
advertising expenses, expenses from the sale of prepaid advertising credits,
direct personnel expenses associated with event production and performance
license fees.
7
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OPERATING AND DEVELOPMENT EXPENSES
Operating and development expenses consist primarily of data communications
expenses, personnel expenses associated with broadcasting, software and content
license fees, operating supplies and overhead.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of personnel expenses
associated with the sale of the Company's business services and advertising,
marketing of the Company's Web sites, related travel expenses and overhead.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of administrative
personnel expenses, professional fees, expenditures for applicable facilities
costs and overhead.
NET LOSS PER SHARE
Basic net loss per share has been computed in accordance with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE, ("FAS 128") using
the weighted average number of common shares outstanding. The provisions and
disclosure requirements for FAS 128 were required to be adopted for interim and
annual periods ending after December 15, 1997, with restatement of EPS for all
prior periods.
Diluted net loss per share gives effect to all dilutive potential common
shares that were outstanding during the period. The Company had a net loss for
all periods presented herein; therefore, none of the options and warrants
outstanding during each of the periods presented, as discussed in Note 8, were
included in the computations of diluted earnings per share because they were
antidilutive. See Note 8 for a list of options and warrants outstanding at
December 31, 1998, 1997 and 1996 that were excluded from the diluted EPS
computation because they were antidilutive.
CASH EQUIVALENTS
The Company considers investments with original maturity dates of 90 days or
less to be cash equivalents. The carrying values of these investments are
approximately equal to their fair market values at the end of the year.
ADVERTISING EXPENSES
Advertising expenses are either charged to operations when incurred or
purchased in advance and capitalized for future use or sale and expensed as the
advertising credits are used or sold. The cost of advertising used by the
Company is charged to operations while the cost of advertising sold to customers
is included in production costs.
PREPAID EXPENSES
In December 1997, the Company entered into an agreement with Yahoo! Inc.
("Yahoo!"), an existing stockholder, to integrate their services and conduct
certain joint marketing activities. Amounts paid under this agreement for
prepaid advertising credits are capitalized and expensed as the advertising
credits are
8
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
utilized. Amounts paid under this agreement for the use, reproduction and
display of the broadcast.com brand, page views received from Yahoo! for banner
advertising, sponsorships and promotions for the Company are capitalized and
expensed ratably over the term of the agreement, which terminated on January 31,
1999.
In conjunction with a stock transaction with Premiere Radio Networks, Inc.
("Premiere"), the Company entered into an agreement in November 1996 to pay
Premiere $2,000,000 in exchange for an equal value of advertising credits. The
Company is required to utilize a minimum of $250,000 in each twelve-month period
over a maximum of four years. The asset has been and will continue to be
expensed in the period the advertising credits are utilized (see Advertising
expenses). In 1998, 1997 and 1996, the Company utilized approximately $935,000,
$780,000 and $285,000, respectively, in advertising credits.
Prepaid advertising credits that will be utilized within the next twelve
months are classified as current assets.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated over its
estimated useful life, ranging from one to five years. The Company provides for
depreciation of assets using the straight-line method for financial reporting
purposes and accelerated methods for income tax purposes. Prior to 1996,
capitalized software costs were being amortized over three years. However, in
1996, the Company changed the estimated life of all capitalized software costs
to one year. The effect of this change was to increase the net loss during 1996
by approximately $240,000, or $0.01 per share. Leasehold improvements are
amortized over the life of the lease using the straight-line method.
Expenditures for maintenance and repairs are charged to operations in the period
they are incurred.
Long-lived assets held and used by the Company, or to be disposed of, are
reviewed for impairment whenever events or changes in circumstances indicate
that the net book value of the asset may not be recoverable. An impairment loss
is recognized if the sum of the expected future cash flows (undiscounted and
before interest) from the use of the asset is less than the net book value of
the asset. The amount of the impairment loss will generally be measured as the
difference between net book value of the assets and the estimated fair value of
the related assets. Based on its most recent analysis, the Company believes that
no impairment of long-lived assets existed at December 31, 1998.
INTANGIBLE ASSETS
Intangible assets consist of certain transmission and digital programming
distribution rights acquired under license agreements that are accounted for as
a purchase of rights by the Company, as well as the excess of costs over net
assets acquired and certain non-compete agreements related to the Merger. Assets
and related liabilities associated with license agreements are reported at cost
when the license period begins and the program material is available for
distribution. Intangible assets are reported at the lower of unamortized cost or
estimated net realizable value based on management's expectation of the assets'
usefulness and are amortized on a straight-line basis over the asset's estimated
useful life.
In January 1996, the Company entered into an agreement to purchase a license
from Universal Sports in exchange for 780,120 shares of Common Stock. The
license provides the Company with the right to broadcast several college and
university sports programs over the Internet. The license is stated at an
historical cost of $195,000, less accumulated amortization of approximately
$117,000 and $78,000 at
9
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 31, 1998 and 1997, respectively, and is being amortized on a
straight-line basis over a five-year period.
FINANCIAL INSTRUMENTS
As of December 31, 1998 and 1997, the fair values of the Company's accounts
receivable and accounts payable and accrued liabilities approximate the related
carrying values.
ACCRUED LIABILITIES
At December 31, 1998, accrued liabilities included approximately $429,000 in
software license fees, approximately $412,000 in content license fees and
approximately $300,000 in sales commissions payable.
At December 31, 1997, accrued liabilities included approximately $368,000 in
software license fees.
INCOME TAXES
The Company presents income taxes pursuant to Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"). FAS 109
uses an asset and liability approach to account for income taxes, wherein
deferred taxes are provided for book and tax basis differences for assets and
liabilities. In the event differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities result in deferred tax
assets, an evaluation of the probability of being able to realize the future
benefits indicated by such assets is required. A valuation allowance is provided
for a portion or all of the deferred tax assets when there is sufficient
uncertainty regarding the Company's ability to recognize the benefits of the
assets in future years.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("FAS 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has elected to continue to account for stock-
based compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. Accordingly, compensation cost for stock options issued
to employees is measured as the excess, if any, of the fair market value of the
Company's Common Stock at the date of grant over the amount the employee must
pay to acquire the stock. Pro forma disclosure of net loss based on the
provisions of FAS 123 is discussed in Note 8.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("FAS 133"), was
issued and is effective for fiscal years beginning after June 15, 1999. FAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company believes that adoption of the standard will
not have a material impact on the Company's consolidated results of operations
or financial position.
In April 1998, Statement of Position 98-5, REPORTING ON THE COSTS OF
START-UP ACTIVITIES ("SOP 98-5"), was issued and is effective for fiscal years
beginning after December 15, 1998. SOP 98-5 provides guidance
10
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on the financial reporting of start-up and organization costs and requires that
these costs be expensed as incurred. The Company believes that the adoption of
this standard will not have a material impact on the Company's consolidated
results of operations or financial position.
In March 1998, Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"), was
issued and is effective for fiscal years beginning after December 15, 1998. SOP
98-1 provides guidelines for companies to capitalize or expense costs incurred
to develop or obtain internal use software. The Company believes that the
adoption of this standard will not have a material impact on the Company's
consolidated results of operations or financial position.
In June 1997, Statement of Financial Accounting Standards No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("FAS 131"),
was issued and was adopted by the Company in the first quarter of fiscal 1998.
This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. As the Company operates and management
monitors the results in only one operating segment, there are no additional
disclosure requirements involved with the Company's adoption of this Statement.
In June 1997, Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME ("FAS 130"), was issued and was adopted by the Company in
the first quarter of fiscal 1998. This Statement establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses). Comprehensive income as defined includes all
changes in equity (net assets) during a period from non-owner sources. Such
items may include foreign currency translation adjustments, unrealized
gains/losses from investing and hedging activities, and other transactions. As
the Company has no components of other comprehensive income for the years ended
December 31, 1998, 1997 and 1996, there are no disclosure requirements currently
required in the Company's financial statements as a result of the adoption of
this statement.
RECLASSIFICATIONS
Certain reclassifications have been made for consistent presentation.
3. STOCK SPLITS
A two-for-one split of the Company's Common Stock was effected in the form
of a stock dividend in February 1999. All references in the financial statements
to shares, share prices, per share amounts and stock plans have been adjusted
retroactively for the two-for-one stock split.
A sixty-for-one split of the Company's Common Stock was effected in the form
of a stock dividend in April 1997. All references in the financial statements to
shares, share prices, per share amounts and stock plans have been adjusted
retroactively for the sixty-for-one stock split.
4. BUSINESS COMBINATIONS
In March 1999, a newly formed subsidiary of the Company merged with Net
Roadshow, Inc., a provider of Internet initial public offerings and other
financial roadshow services, by exchanging 929,094 shares of its Common Stock
for all of the common stock of Net Roadshow. Stockholders of Net Roadshow
11
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS COMBINATIONS (CONTINUED)
received 92.218 shares of the Company's Common Stock for each share of Net
Roadshow common stock in the merger, which has been accounted for as a pooling
of interests. All data presented in the accompanying financial statements has
been restated to reflect the merger. There were no material transactions between
the Company and Net Roadshow prior to the combination, and immaterial
adjustments were recorded to conform Net Roadshow's accounting policies to those
of the Company (see Note 11).
In November 1998, a wholly owned subsidiary of the Company merged with
SimpleNet by exchanging 821,618 shares of the Company's Common Stock for all of
the common stock of SimpleNet. Stockholders of SimpleNet received 398.457 shares
of the Company's Common Stock for each share of SimpleNet common stock in the
merger, which has been accounted for as a pooling of interests. All data
presented in the accompanying financial statements has been restated to reflect
the merger. There were no material transactions between the Company and
SimpleNet prior to the combination, and immaterial adjustments were recorded to
conform SimpleNet's accounting policies to those of the Company. Merger related
costs of $1,534,000 related primarily to legal and accounting fees, underwriting
commissions and certain other expenses related directly to the Merger were
recorded as a result of the transaction.
The following information presents certain statement of operations data of
the separate companies (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Revenues
Broadcast.com............................................ $ 17,654 $ 6,856 $ 1,756
SimpleNet................................................ 4,718 2,293 293
Net Roadshow............................................. 1,898 30 --
---------- --------- ---------
Combined............................................. $ 24,270 $ 9,179 $ 2,049
---------- --------- ---------
---------- --------- ---------
Net income (loss)
Broadcast.com............................................ $ (14,290) $ (6,474) $ (2,989)
SimpleNet................................................ (2,154) (194) (8)
Net Roadshow 984 (133) --
---------- --------- ---------
Combined............................................. $ (15,460) $ (6,801) $ (2,997)
---------- --------- ---------
---------- --------- ---------
</TABLE>
On April 1, 1998, the Company purchased certain Web site design and
development assets from CreateTech, Inc. ("CreateTech assets") for an aggregate
purchase price of $400,000. The acquisition was accounted for as a purchase,
whereby the excess purchase price over the net assets acquired has been recorded
based upon the fair market values of assets acquired and liabilities assumed.
The approximate fair value of property and equipment acquired at the date of
acquisition was $65,000. The excess purchase price over the net assets acquired
is being amortized on a straight-line basis over a ten-year period. Accumulated
amortization totaled $25,000 at December 31, 1998. The Company's consolidated
statements of operations include the results of the operations of the CreateTech
assets since April 1, 1998. The operations of the CreateTech assets are not
significant to the Company's operations.
12
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Computer hardware.............................................. $ 8,453 $ 4,342
Computer software.............................................. 935 588
Furniture and equipment........................................ 702 232
Leasehold improvements......................................... 1,660 792
--------- ---------
11,750 5,954
Accumulated depreciation....................................... (4,964) (1,879)
--------- ---------
$ 6,786 $ 4,075
--------- ---------
--------- ---------
</TABLE>
Computer software represents software purchased from outside vendors for
internal use and is being amortized over one year. Assets under capital leases
totaling $914,000 at December 31, 1997 were purchased by the Company in 1998.
6. COMMITMENTS AND CONTINGENCIES
A summary of future minimum lease payments under operating leases for
buildings and equipment as of December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------
<S> <C>
1999................................................................. $ 996
2000................................................................. 634
2001................................................................. 396
2002................................................................. 318
2003 and thereafter.................................................. 748
---------
Total............................................................ $ 3,092
---------
---------
</TABLE>
Rental expense of approximately $544,000, $262,000 and $28,000 was incurred
during 1998, 1997 and 1996, respectively.
In December 1997, the Company entered into an agreement with Yahoo! to
integrate their services and conduct certain joint marketing activities. In
December 1997, the Company paid Yahoo! $1,000,000, representing a prepaid
advertising credit (see Note 2). The Company agreed to pay Yahoo! an additional
$1,500,000 in 1998, pursuant to which Yahoo! agreed to promote broadcast.com
programming on its Web site. The Company has paid all amounts due and the
agreement terminated on January 31, 1999.
In December 1997, the Company entered into a line of credit, which provides
for borrowings of up to $2,500,000 for working capital needs and equipment
purchases. The Company's right to make borrowings under the line of credit can
be terminated by the lender upon the occurrence of a default by the Company,
including an uncured failure to pay principal or interest due under the
facility, certain breaches of the representations and warranties made by the
Company in connection with the establishment of the line of credit, and certain
insolvency events of the Company. The Company is obligated to pay monthly
interest on
13
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
amounts outstanding under the line of credit, but no commitment fee is payable
by the Company with respect to unaccessed funding capacity. The agreement
expired in 1998.
Pursuant to an agreement with Capitol Radio Network, Inc. ("Capitol"), the
Company is obligated to purchase a minimum of $75,000 of advertising spots from
Capitol each year during the term of the agreement which began in February 1997
and which expires on December 31, 2000.
From time to time, the Company is subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights. The Company is not currently
aware of any legal proceedings or claims that the Company believes will have,
individually or in the aggregate, a material adverse effect on the Company's
financial position, results of operations or cash flows.
7. INCOME TAXES
The components of income tax expense for the years ended December 31, 1998,
1997, and 1996 are (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ----- -----
<S> <C> <C> <C>
Current:
Federal................................................ -- $ 34 $ 18
State.................................................. -- 9 7
--------- --- ---
-- 43 25
Deferred:
Federal................................................ -- -- --
State.................................................. -- -- --
--------- --- ---
Provision for income taxes................................. -- $ 43 $ 25
--------- --- ---
--------- --- ---
</TABLE>
Deferred taxes are provided for those items reported in different periods
for income tax and financial reporting purposes. The net deferred tax asset has
been fully reserved because of uncertainty regarding the Company's ability to
recognize the benefit of the asset in future years. Included in the deferred tax
asset and valuation allowance is approximately $172,000 resulting from the
exercise of stock warrants which will
14
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
be credited to additional paid-in-capital when realized. The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets are presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................................... $ 10,451 $ 3,797
Intangible amortization............................................. 59 35
Depreciation........................................................ 438 124
Deferred revenue.................................................... 161 101
Other............................................................... 46 12
---------- ---------
Gross deferred tax assets........................................... 11,155 4,069
Deferred tax liabilities:
Accrual to cash adjustment.......................................... 576 368
Capital leases...................................................... 320 1
---------- ---------
Net deferred tax assets................................................. 10,259 3,700
Valuation allowance..................................................... (10,259) (3,700)
---------- ---------
Deferred tax balance.................................................... $ -- $ --
---------- ---------
---------- ---------
</TABLE>
The provision for income taxes is different than the amount computed using
the applicable statutory federal income tax rate with the difference for each
year summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal tax benefit at statutory rate...................................... (34)% (34)% (34)%
State taxes, net of federal benefit........................................ (3)% (4)% (4)%
Adjustment due to increase in valuation allowance.......................... 37% 39% 39%
--- --- ---
Provision for income taxes................................................. --% 1% 1%
</TABLE>
As of December 31, 1998, the Company has available net operating loss
carryforwards totaling approximately $28,270,000 which expire beginning in 2011.
Utilization of net operating loss carryforwards may be limited by ownership
changes which may have occurred or could occur in the future and by the separate
return limitation year ("SRLY") rules.
Net Roadshow was taxed as an S corporation for all periods presented,
therefore all income taxes were paid by the stockholders individually.
Accordingly, no provision or liability has been made in the financial statements
for Net Roadshow; however, an amount sufficient to cover the stockholders' tax
liabilities on the Company's taxable income was paid out in the form of
distributions to stockholders. The pro-forma adjustments for a provision for
income taxes would have been $0 for all periods presented.
8. STOCK PLANS
The Company's 1998 Stock Option Plan for employees and consultants was
approved by the Board of Directors in August 1997 and approved by the
stockholders of the Company in June 1998, and, as
15
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS (CONTINUED)
amended, authorizes the grant of up to 5,600,000 shares of the Company's Common
Stock in the form of incentive stock options ("ISOs") and nonqualified stock
options ("NSOs"). The plan is administered by the Compensation Committee of the
Board of Directors (the "Committee"). Options typically expire 10 years from the
date of grant, and become exercisable in installments of 20% per year commencing
one year from the date of grant, or over such other vesting period determined by
the Committee. Compensation expense is recorded and amortized over the options'
vesting period for options granted to consultants. The amount of compensation
expense is calculated based on the fair value of the options determined using
the Black-Scholes Option Pricing Model. Shares issued for such options come from
the Company's authorized but unissued or reacquired Common Stock.
The Company's 1996 Stock Option Plan for employees and consultants was
approved by the Board of Directors and stockholders of the Company in April 1996
and authorizes the grant of up to 2,880,000 shares of the Company's Common Stock
in the form of ISOs and NSOs. The plan is administered by the Committee. Options
typically expire 10 years from the date of grant, and under Committee policy
become exercisable in installments of 20% per year commencing one year from the
date of grant, or over such other vesting period determined by the Committee.
Shares issued for such options come from the Company's authorized but unissued
or reacquired Common Stock. Effective August 19, 1997, the Company discontinued
the 1996 Stock Option Plan.
The Company's 1996 Stock Option Plan for Non-Employee Directors, which was
approved by the Board of Directors and the stockholders in April 1996,
authorizes the grant of up to 300,000 shares of the Company's Common Stock in
the form of ISOs and NSOs. The plan is administered by the Committee. Options
typically expire 10 years from the date of grant, and under Committee policy
become exercisable in installments of 50% per year commencing one year from the
date of grant, or over such other vesting period determined by the Committee.
Shares issued for such options come from the Company's authorized but unissued
or reacquired Common Stock. During 1998, the Company granted to non-employee
directors options to purchase 30,000 shares of Common Stock at an exercise price
of $4.95 per share and options to purchase 34,800 shares of Common Stock at an
exercise price of $9.00 per share. During 1996, the Company granted to a
non-employee director an option to purchase 30,000 shares of Common Stock at an
exercise price of $0.54 per share. At December 31, 1998 and December 31, 1997,
79,800 and 30,000, respectively, of these options were outstanding.
If compensation cost for the Company's stock option plans had been
determined based on the fair value at the grant date for awards issued in 1998,
1997 and 1996 consistent with the provisions of FAS 123, then the Company's net
loss would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Net loss--as reported (in thousands)................................... $ (15,460) $ (6,801) $ (2,997)
Net loss--pro forma (in thousands)..................................... (17,335) (7,004) (3,034)
Basic and diluted net loss per share--as Reported...................... (0.47) (0.28) (0.15)
Basic and diluted net loss per share--pro forma........................ (0.53) (0.29) (0.15)
</TABLE>
The weighted average fair value at date of grant for options granted during
1998, 1997 and 1996 was $20.82, $1.08 and $0.43 per option, respectively. The
fair value of each option grant was estimated on the
16
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS (CONTINUED)
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Dividend yield.................................................. -- -- --
Expected volatility............................................. 80.2% -- --
Risk-free rate of return........................................ 4.9% 5.9% 6.2%
Expected life................................................... 3.0 years 3.0 years 3.0 years
Expected forfeiture rate........................................ 15.0% 15.0% --
</TABLE>
The following table summarizes activity under the Company's stock option
plans during the years ended December 31, 1998 1997 and 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE PRICE
---------- ------------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1995............................. --
Granted.................................................. 1,416,614 $ 0.54- 9.00 $ 1.57
----------
Outstanding at December 31, 1996............................. 1,416,614 0.54- 9.00 1.57
Granted.................................................. 2,554,132 3.40- 8.05 3.41
Forfeited................................................ (174,080) 1.35- 3.40 3.14
----------
Outstanding at December 31, 1997............................. 3,796,666 0.54- 9.00 2.74
Granted.................................................. 4,084,568 4.71-38.13 19.44
Exercised................................................ (59,364) 1.35- 4.95 3.65
Forfeited................................................ (312,754) 0.54-25.75 3.88
----------
Outstanding at December 31, 1998............................. 7,509,116 0.54-38.13 11.77
----------
----------
Options exercisable at December 31, 1998..................... 1,304,606 $ 0.54-27.88 $ 3.14
</TABLE>
17
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER REMAINING NUMBER
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- --------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$ 0.54 15,000 7.4 years 15,000
1.35 1,280,800 7.4 years 505,360
1.67 12,000 7.9 years 4,800
3.40 2,184,880 8.5 years 542,394
4.03 6,240 8.0 years 1,248
4.71 858,122 9.3 years 73,722
4.95 463,000 9.4 years 103,000
8.05 6,240 8.0 years 1,248
9.00 176,134 9.1 years 47,834
20.22 65,000 9.7 years 0
20.97 55,000 9.8 years 0
25.75 107,500 9.8 years 0
27.88 1,981,200 9.9 years 10,000
38.13 32,000 10.0 years 0
38.82 266,000 10.0 years 0
</TABLE>
In addition to the option activity described above, in September 1996, the
Company issued a warrant to purchase 31,920 shares of Common Stock at an
exercise price of $3.40 per share, which was subsequently exercised in July
1998. In February and December 1997, the Company issued 294,240 and 318,472
warrants, respectively, for the purchase of Common Stock to two participants in
private placement offerings at exercise prices of $3.40 and $4.71, respectively
(see Note 9).
During May 1998, the Company's Board of Directors adopted the 1998 Employee
Stock Purchase Plan (the Plan). Under the Plan, eligible employees may purchase
shares of the Company's Common Stock at a discount through voluntary monthly
payroll deductions with a maximum contribution being 10% of an eligible
employee's salary, beginning in August 1998. Semi-annually, on February 15 and
August 15, participant account balances are used to purchase shares at the
lesser of 85 percent of the fair market value of the Common Stock on either the
first or last day of the subscription period.
The Company sponsors a defined contribution plan covering substantially all
employees; the plan is qualified under Section 401(k) of the Internal Revenue
Code. Under the provisions of the plan, eligible participating employees may
elect to contribute up to the maximum amount of tax deferred contribution
allowed by the Internal Revenue Code. The Company did not make matching
contributions to the plan in 1998, 1997 or 1996.
9. STOCKHOLDERS' EQUITY
The Company completed an initial public offering in July 1998. The Company's
Registration Statement on Form S-1 with respect to the initial public offering
was declared effective on July 16, 1998, and the Company's stock began trading
on the Nasdaq National Market under the symbol BCST on July 17, 1998. The
Company sold 5,375,000 shares of Common Stock at a per share price of $9.00. Net
proceeds to the
18
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
Company, after deduction of the underwriting discount and related expenses, were
approximately $43.2 million. A selling shareholder also sold 375,000 shares at a
per share price of $9.00. Net proceeds to the shareholder after deduction of the
underwriting discount was approximately $3.1 million. The Company did not
receive any proceeds from the sale of shares by the selling shareholder.
The Company granted to certain owners of Common Stock preemptive rights that
expired immediately prior to the Company's initial public offering.
In March 1998, the Company issued 814,332 shares of Common Stock to new and
existing stockholders for $3,835,504 or $4.71 per share.
In December 1997, the Company issued 4,591,570 shares of Common Stock for
$21,626,294 or $4.71 per share to new and existing stockholders, including
Motorola, Intel and Yahoo! In connection with these transactions, the two
largest stockholders agreed to vote their shares so as to elect a second nominee
of Motorola to the Board of Directors and the Company issued a warrant to Yahoo!
for approximately $600,000 representing the right to purchase 318,472 shares of
the Company's Common Stock at a strike price of $4.71 per share or $1,500,000.
The warrant is exercisable immediately and expires on December 30, 2000.
Between September 1996 and May 1997, the Company issued a total of 3,741,360
shares of Common Stock to new and existing stockholders, including Motorola and
Intel, for approximately $3.40 per share or $12,712,830. In connection with
Motorola's investment in September 1996, the two largest stockholders agreed to
vote their shares so as to elect a nominee of Motorola to the Board of
Directors. In February 1997, the Company issued a warrant to Intel for $120,000
representing the right to acquire 294,240 shares of the Company's Common Stock
at a price of $3.40 per share, or $1,000,416. Under the terms of the warrant,
the right to acquire 117,720 shares is exercisable immediately and expires on
February 23, 2004. However, the right to acquire the remaining 176,520 shares of
the Company's Common Stock at $3.40 per share did not vest and expired on June
30, 1998. In addition, an underwriting fee related to certain of these
transactions totaling approximately $365,000 was recorded as a reduction in
additional paid-in capital.
In July 1996, the Company repurchased 240,000 shares of Common Stock from
Cameron for $0.67 per share or $160,000 and subsequently resold these shares to
new and existing stockholders for $0.67 per share.
In June 1996, the Company issued 998,160 shares of Common Stock to new and
existing stockholders for $536,012 or approximately $0.54 per share.
Between January and March 1996, the Company issued a total of 6,561,120
shares of Common Stock to new and existing stockholders of the Company for $0.25
per share or $1,640,280.
10. RELATED PARTY TRANSACTIONS
A shareholder of the Company loaned the Company $60,120 during 1997. No
interest accrued in 1997. The note was formalized in 1998 and accrues interest
at 7%. The note and related interest is due on December 31, 1999. The note was
settled in stock in conjunction with the merger with Net Road Show (see Note 4).
The Company and Motorola, a stockholder of the Company, entered into a
Negotiation Rights Agreement in September 1996 pursuant to which the Company
agreed to offer Motorola a non-exclusive
19
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
license to certain of its technologies as well as certain rights of notice and
first negotiation with Motorola regarding licenses that the Company proposes to
grant to other parties. In connection with this agreement, the Company,
Motorola, and the two largest stockholders entered into a stockholders agreement
pursuant to which Motorola was granted representation rights on the Company's
Board of Directors and certain tag-along rights with respect to certain sales of
shares by the two largest stockholders after the date of the Offering. Motorola
is also a customer of the Company, to which the Company provides business
services. These relationships with Motorola have generated revenues for the
Company of $406,000 and $10,000 for the twelve months ending December 31, 1998
and 1997, respectively.
11. SUBSEQUENT EVENTS
On March 31, 1999 the Company entered into a definitive agreement to be
acquired by Yahoo!. Under the terms of the agreement, Yahoo! will issue 0.7722
of a share of Yahoo! common stock for each share of the Company's Common Stock.
In addition, all outstanding options of the Company will be converted into
Yahoo! options. The acquisition, which will be accounted for as a pooling of
interests and is subject tocertain conditions, including regulatory approval and
approval by the Company's shareholders, is expected to be completed in the third
quarter of 1999.
In March 1999, a newly formed subsidiary of the Company merged with Net
Roadshow, Inc., a provider of Internet initial public offerings and other
financial roadshow services (see Note 4).
In February 1999, the Company announced an agreement with Trimark Holdings,
Inc. in which the Company will license Trimark's library of films for
distribution over the Internet. Under the terms of the agreement, Trimark will
exchange 412,363 of its common stock and the rights to broadcast its films for
45,858 of the Company's Common Stock. This agreement will be accounted for under
Statement of Financial Accounting Standards No. 115, "ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES."
In January 1999, the Company and Softbank Corp., Japan's largest distributor
of software and computer technology publications, announced plan to form a joint
venture to launch broadcast.com japan. The new company will aggregate and
broadcast Japanese language-based audio and video programming to Internet users,
and will also sell the Company's Internet and intranet broadcasting services to
business customers in Japan. The joint venture will be accounted for using the
equity method of accounting as the Company owns 40% of the joint venture. The
Company's investment was funded by a note payable to Softbank Corp.
20
<PAGE>
EXHIBIT 99.3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of broadcast.com inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
broadcast.com inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
January 27, 1999, except as to Notes 3 and 11
which are as of March 15, 1999
1
<PAGE>
BROADCAST.COM INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 49,680 $ 21,341
Accounts receivable, net of allowance of $239 and $76,
respectively.......................................... 4,244 1,977
Prepaid expenses........................................ 429 1,995
------------ ------------
Total current assets.............................. 54,353 25,313
Property and equipment, net............................... 6,676 4,071
Intangible assets, net.................................... 850 127
Other..................................................... 200 131
------------ ------------
Total assets...................................... $ 62,079 $ 29,642
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Currents liabilities:
Accounts payable........................................ $ 1,006 $ 832
Accrued liabilities..................................... 1,867 663
Deferred revenue........................................ 1,135 355
Capital lease obligations, current portion.............. -- 382
------------ ------------
Total current liabilities......................... 4,008 2,232
Capital lease obligations, less current portion........... -- 372
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized, par $.01,
none issued and outstanding........................... -- --
Common stock, 60,000,000 shares authorized, par $.01,
35,054,780 and 28,749,540 shares issued and
outstanding, respectively............................. 243 180
Additional paid-in capital.............................. 84,592 36,746
Common stock subscribed................................. -- 45
Deferred compensation................................... (387) --
Accumulated deficit..................................... (26,377) (9,933)
------------ ------------
Total stockholders' equity........................ 58,071 27,038
------------ ------------
Total liabilities and stockholders' equity........ $ 62,079 $ 29,642
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
BROADCAST.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Business services....................................... $ 13,953 $ 5,338 $ 958
Advertising............................................. 8,419 3,811 1,091
------------ ------------ ------------
Total revenues.................................... 22,372 9,149 2,049
------------ ------------ ------------
Operating expenses:
Production costs........................................ 4,415 2,950 1,301
Operating and development............................... 14,955 5,460 1,621
Sales and marketing..................................... 11,760 4,172 768
General and administration.............................. 4,518 1,915 841
Depreciation and amortization........................... 3,360 1,416 562
Merger costs............................................ 1,534 -- --
------------ ------------ ------------
Total operating expenses.......................... 40,542 15,913 5,093
------------ ------------ ------------
Net operating loss................................ (18,170) (6,764) (3,044)
Interest and other income................................. 1,922 213 76
Interest expense.......................................... (196) (74) (4)
------------ ------------ ------------
Loss before income tax provision........................ (16,444) (6,625) (2,972)
Provision for income taxes................................ -- 43 25
------------ ------------ ------------
Net loss.......................................... $ (16,444) $ (6,668) $ (2,997)
------------ ------------ ------------
------------ ------------ ------------
Basic and diluted net loss per share...................... $ (0.52) $ (0.28) $ (0.15)
------------ ------------ ------------
------------ ------------ ------------
Shares used in the net loss per share calculations........ 31,911 24,157 19,754
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
BROADCAST.COM INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
---------------------- PAID-IN COMMON STOCK DEFERRED ACCUMULATE EQUITY
SHARES AMOUNT CAPITAL SUBSCRIBED COMPENSATION DEFICIT (DEFICIT)
--------- ----------- ----------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ 12,060 $ 13 $ 40 $ -- $ -- $ (268) $ (215)
Issuance of Common Stock.......... 11,005 110 10,703 -- -- -- 10,813
Net loss.......................... -- -- -- -- -- (2,997) (2,997)
--------- ----- ----------- --- ------------- ----------- ------------
Balance at December 31, 1996........ 23,065 123 10,743 -- -- (3,265) 7,601
Issuance of Common Stock.......... 5,685 57 25,283 -- -- -- 25,340
Common Stock subscribed........... -- -- -- 45 -- -- 45
Issuance of warrants.............. -- -- 720 -- -- -- 720
Net loss.......................... -- -- -- -- -- (6,668) (6,668)
--------- ----- ----------- --- ------------- ----------- ------------
Balance at December 31, 1997........ 28,750 180 36,746 45 -- (9,933) 27,038
Issuance of Common Stock.......... 839 8 3,875 (45) -- -- 3,838
Exercise of stock options and
warrants........................ 91 1 322 -- -- -- 323
Issuance of compensatory stock
options......................... -- -- 461 -- (387) -- 74
Issuance of stock in public
offering, net................... 5,375 54 43,188 -- -- -- 43,242
Net loss.......................... -- -- -- -- -- (16,444) (16,444)
--------- ----- ----------- --- ------------- ----------- ------------
Balance at December 31, 1998........ 35,055 $ 243 $ 84,592 $ -- $ (387) $ (26,377) $ 58,071
--------- ----- ----------- --- ------------- ----------- ------------
--------- ----- ----------- --- ------------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BROADCAST.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (16,444) $ (6,668) $ (2,997)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation.......................................... 3,274 1,347 506
Amortization.......................................... 86 69 56
Recognition of deferred compensation expense.......... 74 45 --
Provision for doubtful accounts....................... 482 86 84
Changes in operating assets and liabilities:
Accounts receivable................................. (2,749) (1,656) (491)
Prepaid expenses.................................... 1,566 (227) (1,695)
Other assets........................................ (69) (112) (8)
Accounts payable.................................... 175 701 (175)
Accrued liabilities................................. 1,203 174 491
Deferred revenue.................................... 781 297 57
------------ ------------ ------------
Net cash used in operating activities............. (11,621) (5,944) (4,172)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of business and other intangible assets....... (875) -- --
Purchases of property and equipment..................... (5,121) (3,190) (1,415)
------------ ------------ ------------
Net cash used in investing activities............. (5,996) (3,190) (1,415)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from common stock issuances.................... 47,080 25,340 10,049
Proceeds from exercise of warrants and options.......... 323 720 --
Proceeds from notes payable............................. 750 -- --
Payment on notes payable................................ (750) -- --
Payments on capital lease obligations................... (1,447) (161) --
Payments on stockholder loans........................... -- (7) (25)
Proceeds from stockholder loans......................... -- -- 4
Purchase of treasury stock.............................. -- -- (160)
Proceeds from sale of treasury stock.................... -- -- 160
------------ ------------ ------------
Net cash provided by financing activities......... 45,956 25,892 10,028
------------ ------------ ------------
Net increase in cash and cash equivalents................. 28,339 16,758 4,441
Cash and cash equivalents at beginning of period.......... 21,341 4,583 142
------------ ------------ ------------
Cash and cash equivalents at end of period................ $ 49,680 $ 21,341 $ 4,583
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(See disclosure of noncash transactions in Note 2.)
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Cameron Audio Networks, Inc. ("Cameron") was incorporated and filed its
Articles of Incorporation (the "Articles") with the Secretary of State of Texas
on May 19, 1995. On May 15, 1996, Cameron purchased the rights to the name
AudioNet and subsequently filed a Certificate of Incorporation to form AudioNet,
Inc. ("AudioNet"), a new entity, in the state of Delaware, on September 19,
1996. On November 1, 1996, Cameron and AudioNet filed a Certificate of Merger,
effectively a stock-for-stock merger, whereby Cameron merged with and into
AudioNet, with AudioNet continuing as the surviving entity. Each share of Common
Stock of Cameron was converted to one share of Common Stock of AudioNet, and
Cameron ceased to exist at the date of such merger. Effective as of the date of
the merger, the Common Stock of the Company was changed from no par value to par
value of $0.01. The financial statements have been retroactively restated to
reflect this reincorporation, except for the original issuance of founders'
shares. Effective May 1998, the Company changed its name to broadcast.com inc.
("broadcast.com" or the "Company").
On November 30, 1998, the Company acquired all of the outstanding capital
stock of Simple Network Communications, Inc. ("SimpleNet"), a provider of
inexpensive web-site hosting services to consumers and small businesses,
pursuant to an Agreement and Plan of Reorganization, dated as of November 16,
1998 (the "Merger Agreement"), by and among the Company, SN Acquisition, Inc., a
Delaware corporation and wholly-owned subsidiary of the Company, and SimpleNet.
In accordance with the terms of the Merger Agreement, SN Acquisition merged with
and into SimpleNet, with SimpleNet as the surviving corporation (the "Merger").
All financial results include the Merger, which was accounted for as a pooling
of interests (see Note 4).
The Company aggregates content and is a broadcaster of streaming media
programming on the Web with the network infrastructure and expertise to deliver
or "stream" live and on-demand audio and video content on the Internet. The
Company offers a comprehensive selection of live and on-demand audio and video
programming on the Internet, including sports, talk and music radio, television,
business events, full-length music CDs, news, commentary and full-length
audio-books. The Company broadcasts on the Internet 24 hours a day seven days a
week, and its programming includes radio stations, television stations and cable
networks and game broadcasts and other programming for college and professional
sports teams. The Company licenses such programming from content providers, in
most cases under exclusive, multi-year agreements. The Company's Business
Services Group also provides Internet and intranet broadcasting services to
businesses and other organizations. These business services include turnkey
production of press conferences, earnings conference calls, stockholder
meetings, product introductions, training sessions, distance learning
telecourses and media events.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany accounts and transactions have
been eliminated in the consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 financial
statements and the
6
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUES
The Company generates revenues through business services and advertising.
Services paid for in advance are recorded as deferred revenue.
BUSINESS SERVICES. In 1998, 1997 and 1996, the Company derived 62%, 58% and
47%, respectively, of revenues from business services. Included in business
services revenues are fees for broadcasting live and on-demand events as well as
hosting services. Also included are the cash payments the Company receives from
radio and television stations in exchange for the Company broadcasting their
programming over the Internet. Business services revenues are recognized in the
month in which the service is performed, provided that no significant Company
obligations remain and collection of the resulting receivable is probable.
ADVERTISING. In 1998, 1997 and 1996, the Company derived 38%, 42% and 53%,
respectively, of its revenues from the sale of advertisements. Included in
advertising revenues are fees for Web advertising and also the sale of ad spots
received from radio and television stations in exchange for the Company
broadcasting their programming over the Internet. Bartered Web advertising
revenues are derived from transactions in which the Company trades advertising
on its Web sites in exchange for advertisements on the Web sites of other
companies. Bartered Web advertising revenues are recognized at the fair market
value of consideration received or provided, whichever is lower. If a barter
agreement extends over the end of any accounting period, an asset and a
liability are each recorded related to the fair value of the prepaid advertising
expense and for advertisement obligations remaining at such period end. Because
historically all bartered Web advertising agreements have been for periods not
exceeding 30 days, all bartered Web advertising revenues are offset by an equal
amount of bartered Web advertising expense in production costs. Bartered Web
advertising revenues, which were $1.2 million in 1998, $1.0 million in 1997 and
$638,000 in 1996, represented 14%, 27% and 59% of advertising revenues, or 5%,
11% and 31% of total revenues in 1998, 1997 and 1996, respectively. The
corresponding expenses recorded for bartered Web advertising were $1.2 million,
$1.0 million and $638,000 in 1998, 1997 and 1996, respectively. Advertising
revenues are recognized in the period in which the advertisement is displayed on
one of the Company's Web pages, except for sponsorship sales, which are
recognized ratably over the term of the sponsorship, provided that no
significant Company obligations remain and collection of the resulting
receivable is probable. The duration of the Company's advertising commitments
has generally ranged from one week to one year.
In 1998 and 1997, no customer accounted for more than 10% of revenues. In
1996, two customers of the Company each accounted for 10% of revenues, one of
which is currently a stockholder.
PRODUCTION COSTS
Production costs consist primarily of event production costs, bartered Web
advertising expenses, expenses from the sale of prepaid advertising credits,
direct personnel expenses associated with event production and performance
license fees.
7
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OPERATING AND DEVELOPMENT EXPENSES
Operating and development expenses consist primarily of data communications
expenses, personnel expenses associated with broadcasting, software and content
license fees, operating supplies and overhead.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of personnel expenses
associated with the sale of the Company's business services and advertising,
marketing of the Company's Web sites, related travel expenses and overhead.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of administrative
personnel expenses, professional fees, expenditures for applicable facilities
costs and overhead.
NET LOSS PER SHARE
Basic net loss per share has been computed in accordance with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE, ("FAS 128") using
the weighted average number of common shares outstanding. The provisions and
disclosure requirements for FAS 128 were required to be adopted for interim and
annual periods ending after December 15, 1997, with restatement of EPS for all
prior periods.
Diluted net loss per share gives effect to all dilutive potential common
shares that were outstanding during the period. The Company had a net loss for
all periods presented herein; therefore, none of the options and warrants
outstanding during each of the periods presented, as discussed in Note 8, were
included in the computations of diluted earnings per share because they were
antidilutive. See Note 8 for a list of options and warrants outstanding at
December 31, 1998, 1997 and 1996 that were excluded from the diluted EPS
computation because they were antidilutive.
CASH EQUIVALENTS
The Company considers investments with original maturity dates of 90 days or
less to be cash equivalents. The carrying values of these investments are
approximately equal to their fair market values at the end of the year.
ADVERTISING EXPENSES
Advertising expenses are either charged to operations when incurred or
purchased in advance and capitalized for future use or sale and expensed as the
advertising credits are used or sold. The cost of advertising used by the
Company is charged to operations while the cost of advertising sold to customers
is included in production costs.
PREPAID EXPENSES
In December 1997, the Company entered into an agreement with Yahoo! Inc.
("Yahoo!"), an existing stockholder, to integrate their services and conduct
certain joint marketing activities. Amounts paid under this agreement for
prepaid advertising credits are capitalized and expensed as the advertising
credits are utilized. Amounts paid under this agreement for the use,
reproduction and display of the broadcast.com
8
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
brand, page views received from Yahoo! for banner advertising, sponsorships and
promotions for the Company are capitalized and expensed ratably over the term of
the agreement, which terminated on January 31, 1999.
In conjunction with a stock transaction with Premiere Radio Networks, Inc.
("Premiere"), the Company entered into an agreement in November 1996 to pay
Premiere $2,000,000 in exchange for an equal value of advertising credits. The
Company is required to utilize a minimum of $250,000 in each twelve-month period
over a maximum of four years. The asset has been and will continue to be
expensed in the period the advertising credits are utilized (see Advertising
expenses). In 1998, 1997 and 1996, the Company utilized approximately $935,000,
$780,000 and $285,000, respectively, in advertising credits.
Prepaid advertising credits that will be utilized within the next twelve
months are classified as current assets.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated over its
estimated useful life, ranging from one to five years. The Company provides for
depreciation of assets using the straight-line method for financial reporting
purposes and accelerated methods for income tax purposes. Prior to 1996,
capitalized software costs were being amortized over three years. However, in
1996, the Company changed the estimated life of all capitalized software costs
to one year. The effect of this change was to increase the net loss during 1996
by approximately $240,000, or $0.01 per share. Leasehold improvements are
amortized over the life of the lease using the straight-line method.
Expenditures for maintenance and repairs are charged to operations in the period
they are incurred.
Long-lived assets held and used by the Company, or to be disposed of, are
reviewed for impairment whenever events or changes in circumstances indicate
that the net book value of the asset may not be recoverable. An impairment loss
is recognized if the sum of the expected future cash flows (undiscounted and
before interest) from the use of the asset is less than the net book value of
the asset. The amount of the impairment loss will generally be measured as the
difference between net book value of the assets and the estimated fair value of
the related assets. Based on its most recent analysis, the Company believes that
no impairment of long-lived assets existed at December 31, 1998.
INTANGIBLE ASSETS
Intangible assets consist of certain transmission and digital programming
distribution rights acquired under license agreements that are accounted for as
a purchase of rights by the Company, as well as the excess of costs over net
assets acquired and certain non-compete agreements related to the Merger. Assets
and related liabilities associated with license agreements are reported at cost
when the license period begins and the program material is available for
distribution. Intangible assets are reported at the lower of unamortized cost or
estimated net realizable value based on management's expectation of the assets'
usefulness and are amortized on a straight-line basis over the asset's estimated
useful life.
In January 1996, the Company entered into an agreement to purchase a license
from Universal Sports in exchange for 780,120 shares of Common Stock. The
license provides the Company with the right to broadcast several college and
university sports programs over the Internet. The license is stated at an
historical cost of $195,000, less accumulated amortization of approximately
$117,000 and $78,000 at
9
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 31, 1998 and 1997, respectively, and is being amortized on a
straight-line basis over a five-year period.
FINANCIAL INSTRUMENTS
As of December 31, 1998 and 1997, the fair values of the Company's accounts
receivable and accounts payable and accrued liabilities approximate the related
carrying values.
ACCRUED LIABILITIES
At December 31, 1998, accrued liabilities included approximately $429,000 in
software license fees, approximately $412,000 in content license fees and
approximately $300,000 in sales commissions payable.
At December 31, 1997, accrued liabilities included approximately $368,000 in
software license fees.
INCOME TAXES
The Company presents income taxes pursuant to Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"). FAS 109
uses an asset and liability approach to account for income taxes, wherein
deferred taxes are provided for book and tax basis differences for assets and
liabilities. In the event differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities result in deferred tax
assets, an evaluation of the probability of being able to realize the future
benefits indicated by such assets is required. A valuation allowance is provided
for a portion or all of the deferred tax assets when there is sufficient
uncertainty regarding the Company's ability to recognize the benefits of the
assets in future years.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("FAS 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has elected to continue to account for stock-
based compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, accounting for stock issued to employees, and
related Interpretations. Accordingly, compensation cost for stock options issued
to employees is measured as the excess, if any, of the fair market value of the
Company's Common Stock at the date of grant over the amount the employee must
pay to acquire the stock. Pro forma disclosure of net loss based on the
provisions of FAS 123 is discussed in Note 8.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("FAS 133"), was
issued and is effective for fiscal years beginning after June 15, 1999. FAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company believes that adoption of the standard will
not have a material impact on the Company's consolidated results of operations
or financial position.
In April 1998, Statement of Position 98-5, REPORTING ON THE COSTS OF
START-UP ACTIVITIES ("SOP 98-5"), was issued and is effective for fiscal years
beginning after December 15, 1998. SOP 98-5 provides guidance
10
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on the financial reporting of start-up and organization costs and requires that
these costs be expensed as incurred. The Company believes that the adoption of
this standard will not have a material impact on the Company's consolidated
results of operations or financial position.
In March 1998, Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"), was
issued and is effective for fiscal years beginning after December 15, 1998. SOP
98-1 provides guidelines for companies to capitalize or expense costs incurred
to develop or obtain internal use software. The Company believes that the
adoption of this standard will not have a material impact on the Company's
consolidated results of operations or financial position.
In June 1997, Statement of Financial Accounting Standards No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("FAS 131"),
was issued and was adopted by the Company in the first quarter of fiscal 1998.
This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. As the Company operates and management
monitors the results in only one operating segment, there are no additional
disclosure requirements involved with the Company's adoption of this Statement.
In June 1997, Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME ("FAS 130"), was issued and was adopted by the Company in
the first quarter of fiscal 1998. This Statement establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses). Comprehensive income as defined includes all
changes in equity (net assets) during a period from non-owner sources. Such
items may include foreign currency translation adjustments, unrealized
gains/losses from investing and hedging activities, and other transactions. As
the Company has no components of other comprehensive income for the years ended
December 31, 1998, 1997 and 1996, there are no disclosure requirements currently
required in the Company's financial statements as a result of the adoption of
this statement.
RECLASSIFICATIONS
Certain reclassifications have been made for consistent presentation.
3. STOCK SPLITS
A two-for-one split of the Company's Common Stock was effected in the form
of a stock dividend in February 1999. All references in the financial statements
to shares, share prices, per share amounts and stock plans have been adjusted
retroactively for the two-for-one stock split.
A sixty-for-one split of the Company's Common Stock was effected in the form
of a stock dividend in April 1997. All references in the financial statements to
shares, share prices, per share amounts and stock plans have been adjusted
retroactively for the sixty-for-one stock split.
4. BUSINESS COMBINATIONS
In November 1998, a wholly owned subsidiary of the Company merged with
SimpleNet by exchanging 821,618 shares of the Company's Common Stock for all of
the common stock of SimpleNet. Stockholders of SimpleNet received 398.457 shares
of the Company's Common Stock for each share of SimpleNet
11
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS COMBINATIONS (CONTINUED)
common stock in the merger, which has been accounted for as a pooling of
interests. All data presented in the accompanying financial statements has been
restated to reflect the merger.
Under the terms of the Merger Agreement and the related Escrow Agreement
dated November 30, 1998, a total of 41,080 shares of Common Stock will be held
in escrow for the purpose of indemnifying the Company against certain
liabilities of SimpleNet. Such escrow will terminate on March 31, 1999.
There were no material transactions between the Company and SimpleNet prior
to the combination, and immaterial adjustments were recorded to conform
SimpleNet's accounting policies to those of the Company. Merger related costs of
$1,534,000 related primarily to legal and accounting fees, underwriting
commissions and certain other expenses related directly to the Merger were
recorded as a result of the transaction. The following information presents
certain statement of operations data of the separate companies (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Broadcast.com................................................. $ 17,654 $ 6,856 $ 1,756
SimpleNet..................................................... 4,718 2,293 293
--------- --------- ---------
Combined.................................................... $ 22,372 $ 9,149 $ 2,049
--------- --------- ---------
--------- --------- ---------
Net loss
Broadcast.com................................................. $ 14,290 $ 6,474 $ 2,989
SimpleNet..................................................... 2,154 194 8
--------- --------- ---------
Combined.................................................... $ 16,444 $ 6,668 $ 2,997
--------- --------- ---------
--------- --------- ---------
</TABLE>
On April 1, 1998, the Company purchased certain Web site design and
development assets from CreateTech, Inc. ("CreateTech assets") for an aggregate
purchase price of $400,000. The acquisition was accounted for as a purchase,
whereby the excess purchase price over the net assets acquired has been recorded
based upon the fair market values of assets acquired and liabilities assumed.
The approximate fair value of property and equipment acquired at the date of
acquisition was $65,000. The excess purchase price over the net assets acquired
is being amortized on a straight-line basis over a ten-year period. Accumulated
amortization totaled $25,000 at December 31, 1998. The Company's consolidated
statements of operations include the results of the operations of the CreateTech
assets since April 1, 1998. The operations of the CreateTech assets are not
significant to the Company's operations.
12
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Computer hardware........................................................ $ 8,373 $ 4,335
Computer software........................................................ 935 588
Furniture and equipment.................................................. 678 232
Leasehold improvements................................................... 1,636 792
--------- ---------
11,622 5,947
Accumulated depreciation................................................. (4,946) (1,876)
--------- ---------
$ 6,676 $ 4,071
--------- ---------
--------- ---------
</TABLE>
Computer software represents software purchased from outside vendors for
internal use and is being amortized over one year. Assets under capital leases
totaling $914,000 at December 31, 1997 were purchased by the Company in 1998.
6. COMMITMENTS AND CONTINGENCIES
A summary of future minimum lease payments under operating leases for
buildings and equipment as of December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------
<S> <C>
1999................................................................. $ 949
2000................................................................. 611
2001................................................................. 393
2002................................................................. 317
2003 and thereafter.................................................. 748
---------
Total................................................................ $ 3,018
---------
---------
</TABLE>
Rental expense of approximately $523,000, $260,000 and $28,000 was incurred
during 1998, 1997 and 1996, respectively.
In December 1997, the Company entered into an agreement with Yahoo! to
integrate their services and conduct certain joint marketing activities. In
December 1997, the Company paid Yahoo! $1,000,000, representing a prepaid
advertising credit (see Note 2). The Company agreed to pay Yahoo! an additional
$1,500,000 in 1998, pursuant to which Yahoo! agreed to promote broadcast.com
programming on its Web site. The Company has paid all amounts due and the
agreement terminated on January 31, 1999.
In December 1997, the Company entered into a line of credit, which provides
for borrowings of up to $2,500,000 for working capital needs and equipment
purchases. The Company's right to make borrowings under the line of credit can
be terminated by the lender upon the occurrence of a default by the Company,
including an uncured failure to pay principal or interest due under the
facility, certain breaches of the representations and warranties made by the
Company in connection with the establishment of the line of credit, and certain
insolvency events of the Company. The Company is obligated to pay monthly
interest on
13
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
amounts outstanding under the line of credit, but no commitment fee is payable
by the Company with respect to unaccessed funding capacity. The agreement
expired in 1998.
Pursuant to an agreement with Capitol Radio Network, Inc. ("Capitol"), the
Company is obligated to purchase a minimum of $75,000 of advertising spots from
Capitol each year during the term of the agreement which began in February 1997
and which expires on December 31, 2000.
From time to time, the Company is subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights. The Company is not currently
aware of any legal proceedings or claims that the Company believes will have,
individually or in the aggregate, a material adverse effect on the Company's
financial position, results of operations or cash flows.
7. INCOME TAXES
The components of income tax expense for the years ended December 31, 1998,
1997, and 1996 are (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................... -- $34 $18
State..................................................... -- 9 7
---- ---- ----
-- 43 25
Deferred:
Federal................................................... -- -- --
State..................................................... -- -- --
---- ---- ----
---- ---- ----
Provision for income taxes.................................. -- $43 $25
---- ---- ----
---- ---- ----
</TABLE>
Deferred taxes are provided for those items reported in different periods
for income tax and financial reporting purposes. The net deferred tax asset has
been fully reserved because of uncertainty regarding the Company's ability to
recognize the benefit of the asset in future years. Included in the deferred tax
asset and valuation allowance is approximately $172,000 resulting from the
exercise of stock warrants which will
14
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
be credited to additional paid-in-capital when realized. The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets are presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................................... $ 10,451 $ 3,797
Intangible amortization............................................... 59 35
Depreciation.......................................................... 438 124
Deferred revenue...................................................... 161 101
Other................................................................. 46 12
---------- ---------
Gross deferred tax assets............................................. 11,155 4,069
Deferred tax liabilities:
Accrual to cash adjustment............................................ 576 368
Capital leases........................................................ 320 1
---------- ---------
Net deferred tax assets................................................. 10,259 3,700
Valuation allowance..................................................... (10,259) (3,700)
---------- ---------
Deferred tax balance.................................................... $ -- $ --
---------- ---------
---------- ---------
</TABLE>
The provision for income taxes is different than the amount computed using
the applicable statutory federal income tax rate with the difference for each
year summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal tax benefit at statutory rate.............................. (34)% (34)% (34)%
State taxes, net of federal benefit................................ (3)% (4)% (4)%
Adjustment due to increase in valuation allowance.................. 37% 39% 39%
-- -- --
Provision for income taxes......................................... --% 1% 1%
</TABLE>
As of December 31, 1998, the Company has available net operating loss
carryforwards totaling approximately $28,270,000 which expire beginning in 2011.
Utilization of net operating loss carryforwards may be limited by ownership
changes which may have occurred or could occur in the future and by the separate
return limitation year ("SRLY") rules.
8. STOCK PLANS
The Company's 1998 Stock Option Plan for employees and consultants was
approved by the Board of Directors in August 1997 and approved by the
stockholders of the Company in June 1998, and, as amended, authorizes the grant
of up to 5,600,000 shares of the Company's Common Stock in the form of incentive
stock options ("ISOs") and nonqualified stock options ("NSOs"). The plan is
administered by the Compensation Committee of the Board of Directors (the
"Committee"). Options typically expire 10 years from the date of grant, and
become exercisable in installments of 20% per year commencing one year from the
date of grant, or over such other vesting period determined by the Committee.
Compensation expense is recorded and amortized over the options' vesting period
for options granted to consultants. The
15
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS (CONTINUED)
amount of compensation expense is calculated based on the fair value of the
options determined using the Black-Scholes Option Pricing Model. Shares issued
for such options come from the Company's authorized but unissued or reacquired
Common Stock.
The Company's 1996 Stock Option Plan for employees and consultants was
approved by the Board of Directors and stockholders of the Company in April 1996
and authorizes the grant of up to 2,880,000 shares of the Company's Common Stock
in the form of ISOs and NSOs. The plan is administered by the Committee. Options
typically expire 10 years from the date of grant, and under Committee policy
become exercisable in installments of 20% per year commencing one year from the
date of grant, or over such other vesting period determined by the Committee.
Shares issued for such options come from the Company's authorized but unissued
or reacquired Common Stock. Effective August 19, 1997, the Company discontinued
the 1996 Stock Option Plan.
The Company's 1996 Stock Option Plan for Non-Employee Directors, which was
approved by the Board of Directors and the stockholders in April 1996,
authorizes the grant of up to 300,000 shares of the Company's Common Stock in
the form of ISOs and NSOs. The plan is administered by the Committee. Options
typically expire 10 years from the date of grant, and under Committee policy
become exercisable in installments of 50% per year commencing one year from the
date of grant, or over such other vesting period determined by the Committee.
Shares issued for such options come from the Company's authorized but unissued
or reacquired Common Stock. During 1998, the Company granted to non-employee
directors options to purchase 30,000 shares of Common Stock at an exercise price
of $4.95 per share and options to purchase 34,800 shares of Common Stock at an
exercise price of $9.00 per share. During 1996, the Company granted to a
non-employee director an option to purchase 30,000 shares of Common Stock at an
exercise price of $0.54 per share. At December 31, 1998 and December 31, 1997,
79,800 and 30,000, respectively, of these options were outstanding.
If compensation cost for the Company's stock option plans had been
determined based on the fair value at the grant date for awards issued in 1998,
1997 and 1996 consistent with the provisions of FAS 123, then the Company's net
loss would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Net loss--as reported (in thousands)......................... $ (16,444) $ (6,668) $ (2,997)
Net loss--pro forma (in thousands)........................... (18,319) (6,872) (3,034)
Basic and diluted net loss per share--as reported............ (0.52) (0.28) (0.15)
Basic and diluted net loss per share--pro forma.............. (0.57) (0.28) (0.15)
</TABLE>
The weighted average fair value at date of grant for options granted during
1998, 1997 and 1996 was $20.82, $1.08 and $0.43 per option, respectively. The
fair value of each option grant was estimated on the
16
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS (CONTINUED)
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Dividend yield.......................................... -- -- --
Expected volatility..................................... 80.2% -- --
Risk-free rate of return................................ 4.9% 5.9% 6.2%
Expected life........................................... 3.0 years 3.0 years 3.0 years
Expected forfeiture rate................................ 15.0% 15.0% --
</TABLE>
The following table summarizes activity under the Company's stock option
plans during the years ended December 31, 1998 1997 and 1996:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED AVERAGE
OPTIONS PRICE EXERCISE PRICE
---------- ------------- -----------------
<S> <C> <C> <C>
Outstanding at December 31, 1995................ --
Granted....................................... 1,416,614 $ 0.54- 9.00 $ 1.57
----------
Outstanding at December 31, 1996................ 1,416,614 0.54- 9.00 1.57
Granted....................................... 2,554,132 3.40- 8.05 3.41
Forfeited..................................... (174,080) 1.35- 3.40 3.14
----------
Outstanding at December 31, 1997................ 3,796,666 0.54- 9.00 2.74
Granted....................................... 4,084,568 4.71-38.13 19.44
Exercised..................................... (59,364) 1.35- 4.95 3.65
Forfeited..................................... (312,754) 0.54-25.75 3.88
----------
Outstanding at December 31, 1998................ 7,509,116 0.54-38.13 11.77
----------
----------
Options exercisable at December 31, 1998........ 1,304,606 $ 0.54-27.88 $ 3.14
</TABLE>
17
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER REMAINING NUMBER
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- --------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$ 0.54 15,000 7.4 years 15,000
1.35 1,280,800 7.4 years 505,360
1.67 12,000 7.9 years 4,800
3.40 2,184,880 8.5 years 542,394
4.03 6,240 8.0 years 1,248
4.71 858,122 9.3 years 73,722
4.95 463,000 9.4 years 103,000
8.05 6,240 8.0 years 1,248
9.00 176,134 9.1 years 47,834
20.22 65,000 9.7 years 0
20.97 55,000 9.8 years 0
25.75 107,500 9.8 years 0
27.88 1,981,200 9.9 years 10,000
38.13 32,000 10.0 years 0
38.82 266,000 10.0 years 0
</TABLE>
In addition to the option activity described above, in September 1996, the
Company issued a warrant to purchase 31,920 shares of Common Stock at an
exercise price of $3.40 per share, which was subsequently exercised in July
1998. In February and December 1997, the Company issued 294,240 and 318,472
warrants, respectively, for the purchase of Common Stock to two participants in
private placement offerings at exercise prices of $3.40 and $4.71, respectively
(see Note 9).
During May 1998, the Company's Board of Directors adopted the 1998 Employee
Stock Purchase Plan (the Plan). Under the Plan, eligible employees may purchase
shares of the Company's Common Stock at a discount through voluntary monthly
payroll deductions with a maximum contribution being 10% of an eligible
employee's salary, beginning in August 1998. Semi-annually, on February 15 and
August 15, participant account balances are used to purchase shares at the
lesser of 85 percent of the fair market value of the Common Stock on either the
first or last day of the subscription period.
The Company sponsors a defined contribution plan covering substantially all
employees; the plan is qualified under Section 401(k) of the Internal Revenue
Code. Under the provisions of the plan, eligible participating employees may
elect to contribute up to the maximum amount of tax deferred contribution
allowed by the Internal Revenue Code. The Company did not make matching
contributions to the plan in 1998, 1997 or 1996.
9. STOCKHOLDERS' EQUITY
The Company completed an initial public offering in July 1998. The Company's
Registration Statement on Form S-1 with respect to the initial public offering
was declared effective on July 16, 1998, and the Company's stock began trading
on the Nasdaq National Market under the symbol BCST on July 17, 1998. The
Company sold 5,375,000 shares of Common Stock at a per share price of $9.00. Net
proceeds to the
18
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
Company, after deduction of the underwriting discount and related expenses, were
approximately $43.2 million. A selling shareholder also sold 375,000 shares at a
per share price of $9.00. Net proceeds to the shareholder after deduction of the
underwriting discount was approximately $3.1 million. The Company did not
receive any proceeds from the sale of shares by the selling shareholder.
The Company granted to certain owners of Common Stock preemptive rights that
expired immediately prior to the Company's initial public offering.
In March 1998, the Company issued 814,332 shares of Common Stock to new and
existing stockholders for $3,835,504 or $4.71 per share.
In December 1997, the Company issued 4,591,570 shares of Common Stock for
$21,626,294 or $4.71 per share to new and existing stockholders, including
Motorola, Intel and Yahoo! In connection with these transactions, the two
largest stockholders agreed to vote their shares so as to elect a second nominee
of Motorola to the Board of Directors and the Company issued a warrant to Yahoo!
for approximately $600,000 representing the right to purchase 318,472 shares of
the Company's Common Stock at a strike price of $4.71 per share or $1,500,000.
The warrant is exercisable immediately and expires on December 30, 2000.
Between September 1996 and May 1997, the Company issued a total of 3,741,360
shares of Common Stock to new and existing stockholders, including Motorola and
Intel, for approximately $3.40 per share or $12,712,830. In connection with
Motorola's investment in September 1996, the two largest stockholders agreed to
vote their shares so as to elect a nominee of Motorola to the Board of
Directors. In February 1997, the Company issued a warrant to Intel for $120,000
representing the right to acquire 294,240 shares of the Company's Common Stock
at a price of $3.40 per share, or $1,000,416. Under the terms of the warrant,
the right to acquire 117,720 shares is exercisable immediately and expires on
February 23, 2004. However, the right to acquire the remaining 176,520 shares of
the Company's Common Stock at $3.40 per share did not vest and expired on June
30, 1998. In addition, an underwriting fee related to certain of these
transactions totaling approximately $365,000 was recorded as a reduction in
additional paid-in capital.
In July 1996, the Company repurchased 240,000 shares of Common Stock from
Cameron for $0.67 per share or $160,000 and subsequently resold these shares to
new and existing stockholders for $0.67 per share.
In June 1996, the Company issued 998,160 shares of Common Stock to new and
existing stockholders for $536,012 or approximately $0.54 per share.
Between January and March 1996, the Company issued a total of 6,561,120
shares of Common Stock to new and existing stockholders of the Company for $0.25
per share or $1,640,280.
10. RELATED PARTY TRANSACTIONS
The Company and Motorola, a stockholder of the Company, entered into a
Negotiation Rights Agreement in September 1996 pursuant to which the Company
agreed to offer Motorola a non-exclusive license to certain of its technologies
as well as certain rights of notice and first negotiation with Motorola
regarding licenses that the Company proposes to grant to other parties. In
connection with this agreement, the Company, Motorola, and the two largest
stockholders entered into a stockholders agreement pursuant to which Motorola
was granted representation rights on the Company's Board of Directors and
certain tag-
19
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
along rights with respect to certain sales of shares by the two largest
stockholders after the date of the Offering. Motorola is also a customer of the
Company, to which the Company provides business services. These relationships
with Motorola have generated revenues for the Company of $406,000 and $10,000
for the twelve months ending December 31, 1998 and 1997, respectively.
11. SUBSEQUENT EVENTS
In February 1999, the Company announced an agreement with Trimark Holdings,
Inc. in which the Company will license Trimark's library of films for
distribution over the Internet. Under the terms of the agreement, Trimark will
exchange 9% of its common stock (412,363 shares) for the equivalent dollar value
of the Company's Common Stock (45,858 shares). The transaction, which is subject
to certain conditions, is expected to be completed in the first quarter of 1999.
This agreement will be accounted for under Statement of Financial Accounting
Standards No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES."
In January 1999, the Company and Softbank Corp., Japan's largest distributor
of software and computer technology publications, announced plan to form a joint
venture to launch broadcast.com japan. The new company will aggregate and
broadcast Japanese language-based audio and video programming to Internet users,
and will also sell the Company's Internet and intranet broadcasting services to
business customers in Japan. The joint venture will be accounted for using the
equity method of accounting as the Company owns 40% of the joint venture. The
Company's investment was funded by a note payable to Softbank Corp.
In March 1999, a newly formed subsidiary of the Company merged with Net
Roadshow, Inc., a provider of Internet initial public offerings and other
financial roadshow services by exchanging 929,094 shares of its Common Stock for
all of the common stock of Net Roadshow. Stockholders of Net Roadshow received
92.218 shares of the Company's Common Stock for each share of Net Roadshow
common stock in the merger, which has been accounted for as a pooling of
interests.
There were no material transactions between the Company and Net Roadshow
prior to the combination, and immaterial adjustments were recorded to conform
Net Roadshow's accounting policies to those
20
<PAGE>
BROADCAST.COM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS (CONTINUED)
of the Company. The following information presents certain statement of
operations data of the separate companies (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Revenues
Broadcast.com.............................................. $ 22,372 $ 9,149 $ 2,049
Net Roadshow............................................... 1,898 30 --
---------- --------- ---------
Combined................................................. $ 24,270 $ 9,179 $ 2,049
---------- --------- ---------
---------- --------- ---------
Net income (loss)
Broadcast.com.............................................. $ (16,444) $ (6,668) $ (2,997)
Net Roadshow............................................... 984 (133) --
---------- --------- ---------
Combined................................................. $ (15,460) $ (6,801) $ (2,997)
---------- --------- ---------
---------- --------- ---------
Loss per share
Broadcast.com.............................................. $ (0.52) $ (0.28) $ (0.15)
Combined................................................. $ (0.47) $ (0.28) $ (0.15)
</TABLE>
21
