<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 000-24591
BROADCAST.COM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 75-2600532
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2914 TAYLOR STREET
DALLAS, TEXAS 75226
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214) 748-6660
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING ARE CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MAY 14, 1999: 37,016,629
<PAGE> 2
BROADCAST.COM INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 AND DECEMBER 31, 3
1998
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
broadcast.com inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
---------- ------------
(unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 46,260 $ 49,828
Accounts receivable, net of allowance 6,569 4,447
Prepaid expenses and other current assets 1,512 429
-------- --------
Total current assets 54,341 54,704
Property and equipment, net 7,713 6,786
Other non-current assets 6,568 1,103
-------- --------
Total assets $ 68,622 $ 62,593
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,201 $ 1,033
Accrued liabilities 3,045 1,954
Deferred revenue 991 1,135
-------- --------
Total current liabilities 5,237 4,122
-------- --------
Notes payable 1,858 60
Stockholders' equity:
Common stock 261 252
Additional paid-in capital and other 92,001 84,223
Accumulated deficit (30,735) (26,064)
-------- --------
Total stockholders' equity 61,527 58,411
-------- --------
Total liabilities and stockholders' equity $ 68,622 $ 62,593
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
<PAGE> 4
broadcast.com inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Business services $ 7,124 $ 2,798
Advertising 3,164 1,725
-------- --------
Total revenues 10,288 4,523
-------- --------
Operating expenses:
Production costs 1,537 1,280
Operating and development 5,384 2,699
Sales and marketing 4,012 1,904
General and administrative 2,010 857
Depreciation and amortization 1,318 663
Other non-recurring expenses 462 --
-------- --------
Total operating expenses 14,723 7,403
-------- --------
Net operating loss (4,435) (2,880)
Interest and other income, net 588 242
-------- --------
Net loss $ (3,847) $ (2,638)
======== ========
Basic and diluted net loss per share $ (0.11) $ (0.09)
======== ========
Shares used in the net loss per share calculations 36,392 29,847
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
<PAGE> 5
broadcast.com inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,847) $ (2,638)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,318 663
Provision for doubtful accounts 181 89
Non-cash compensation expense 95 --
Changes in operating assets and liabilities:
Accounts receivable (2,304) (750)
Prepaid expenses and other current assets (843) 510
Other assets 22 (446)
Accounts payable 168 831
Accrued liabilities 1,091 607
Deferred revenue (144) 10
-------- --------
Net cash used in operating activities (4,263) (1,124)
-------- --------
Cash flows from investing activities:
Payments for intangible assets (600) (80)
Purchases of property and equipment (2,161) (1,210)
-------- --------
Net cash used in investing activities (2,761) (1,290)
-------- --------
Cash flows from financing activities:
Payments on capital lease obligations -- (218)
Proceeds from issuances of Common Stock 3,456 3,851
-------- --------
Net cash provided by financing activities 3,456 3,633
-------- --------
Net increase (decrease) in cash and cash equivalents (3,568) 1,219
Cash and cash equivalents at beginning of period 49,828 21,350
-------- --------
Cash and cash equivalents at end of period $ 46,260 $ 22,569
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
<PAGE> 6
broadcast.com inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unless the context otherwise requires, the terms "broadcast.com" and the
"Company" refer to broadcast.com inc., a Delaware corporation.
1. NATURE OF BUSINESS
Broadcast.com is a leading aggregator and broadcaster of streaming
media programming on the Web with the network infrastructure and expertise to
deliver or "stream" hundreds of live and on-demand audio and video programs over
the Internet or intranets. The broadcast.com Web sites offer a comprehensive
selection of programming, including sports, talk and music radio, television,
business events, full-length music CDs, news, video, commentary and full-length
audio-books, serving an average of over 1.1 million unique users per day.
Broadcast.com broadcasts on the Internet 24 hours a day, seven days a week, and
its programming includes 410 radio stations and networks, 50 television stations
and cable networks, and game broadcasts and other programming for over 450
college and professional sports teams. Broadcast.com also provides Internet and
intranet broadcasting services to businesses and other organizations, including
turnkey production of live and archived press conferences, earnings conference
calls, investor conferences, trade shows, stockholder meetings, product
introductions, training sessions, distance learning telecourses and media
events.
The quarterly financial information presented herein should be read in
conjunction with the Company's annual financial statements for the year ended
December 31, 1998, which can be found in the Company's Annual Report on Form
10-K/A. The unaudited interim financial statements reflect all adjustments (all
of which are of a normal recurring nature) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. Certain prior period balances have been reclassified to conform to
current period presentation. The results for the interim periods are not
necessarily indicative of the results to be expected for the year.
2. STOCK SPLIT
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.
3. ACQUISITIONS
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.
Under the terms of the acquisition, which was accounted for as a pooling of
interests, the Company exchanged
6
<PAGE> 7
821,618 shares of broadcast.com common stock for all of SimpleNet's outstanding
common stock.
On March 15, 1999, the Company acquired all of the outstanding capital
stock of Net Roadshow, Inc. ("Net Roadshow"), an Internet provider of initial
public offering roadshows and other financial roadshow services. Under the terms
of the acquisition, which was accounted for as a pooling of interests, the
Company exchanged 929,094 shares of broadcast.com common stock for all of Net
Roadshow's outstanding common stock. During March 1999, the Company recorded a
one-time charge of $462,000 for acquisition related costs. These costs consisted
of legal and accounting fees and certain other expenses directly related to the
acquisition.
The unaudited condensed consolidated financial statements and
accompanying notes reflect the Company's financial position and the results of
operations as if SimpleNet and Net Roadshow were wholly-owned subsidiaries of
the Company since inception.
4. JOINT VENTURE
In January 1999, the Company and SOFTBANK Corp., Japan's largest
distributor of software and computer technology publications, announced plans 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 the amount of 220,000,000 Japanese Yen, which had a carrying
value of approximately $1.9 million at March 31, 1999. The note payable is
full-recourse, bears interest at a rate of 5% per annum, and is not secured.
Interest is payable quarterly and the note matures on the earlier of (a) the
closing of an initial public offering of the joint venture, or (b) January 25,
2003.
5. INVESTMENT IN TRIMARK
In March 1999, the Company signed an agreement with Trimark Holdings,
Inc. ("Trimark") in which the Company will license Trimark's library of films
for distribution over the Internet. Under the terms of the agreement, Trimark
exchanged 412,363 shares of its common stock for 45,858 shares of the Company's
Common Stock. Based upon the average fair market value of each Company's common
stock over the ten days prior to the signing of the agreement, the Company paid
a 20% premium over the fair market value of Trimark's common stock. Such premium
was capitalized as an intangible asset and is being amortized over the length of
the license agreement. The remaining amount has been accounted for under
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
7
<PAGE> 8
6. LEGAL PROCEEDINGS
On or about August 25, 1998, Venson M. Shaw and Steven M. Shaw
("Plaintiffs") filed a lawsuit against the Company and RealNetworks in the
United States District Court for the Northern District of Texas, Dallas
Division, and on or about December 29, 1998, Plaintiffs filed a lawsuit against
the Company and Microsoft in the same District. The two lawsuits have been
consolidated into one action. In both claims in the consolidated action,
Plaintiffs allege that the Company's use of streaming media software products
and services directed to media delivery systems infringes on Plaintiffs' patent.
The Plaintiffs are seeking to enjoin the Company, RealNetworks and Microsoft
from further alleged infringement of their patents and an unspecified amount of
monetary damages. Although no assurance can be given as to the outcome of the
lawsuit, the Company believes that the allegations in the action are without
merit and intends to vigorously defend against the action and seek its early
dismissal. In addition, the Company believes it is entitled to be indemnified
under the terms of its license agreements with RealNetworks and Microsoft for
the claims raised by Plaintiffs. No assurances, however, can be given as to the
availability of such indemnification at this time or the results of such
proceeding.
From time to time the Company has been, and expects to continue to be,
subject to legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of third-party trademarks and other
intellectual property rights by the Company and its licensees. Such claims, even
if not meritorious, could result in the expenditure of significant financial and
managerial resources. The Company is not aware of any legal proceedings or
claims that it believes will, individually or in the aggregate, adversely affect
the Company's business.
7. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive
Income," which was adopted by the Company in the first quarter of fiscal 1998.
FAS 130 establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustment and unrealized
gains and losses on available-for-sale securities. For the three month periods
ended March 31, 1999 and 1998, the difference between net loss, as reported, and
comprehensive income relates to the change in the cumulative translation
adjustment and unrealized gains on available-for-sale securities for the
respective periods which were not material to these financial statements.
8. PROPOSED ACQUISITION
On March 31, 1999, the Company signed a definitive agreement to be
acquired by Yahoo! Inc. ("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
8
<PAGE> 9
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 to certain conditions, including regulatory approval and approval
by the Company's stockholders, is expected to be completed in the third quarter
of 1999.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis contains
forward-looking statements within the meaning of Federal securities law. You can
identify these statements because they use forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate," "continue," "believe,"
"intend," or other similar words. These words, however, are not the exclusive
means by which you can identify these statements. You can also identify
forward-looking statements because they discuss future expectations, contain
projections of results of operations or of financial conditions, characterize
future events or circumstances or state other forward-looking information. We
have based all forward-looking statements included in Management's Discussion
and Analysis on information currently available to us, and we assume no
obligation to update any such forward-looking statements. Although we believe
that the expectations reflected in such forward-looking statements are based on
reasonable assumptions, actual results could differ materially from those
projected in the forward-looking statements. Potential risks and uncertainty
include, among others, those set forth under the caption "Additional Factors
That May Affect Future Results" included in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in the "Risk
Factors" section of our annual report on Form 10-K/A for the year ended December
31, 1998, as filed with the SEC. Particular attention should be paid to the
cautionary statements involving:
o risks relating to our pending merger with Yahoo!;
o our limited operating history;
o our dependence on third party providers of content;
o our dependence on the acceptance of streaming media technology;
o our dependence on the continuing acceptance of the Internet as an
advertising medium;
o our potential inability to manage our growth; and
o intense competition for Internet broadcasting and services;
We caution you that our business and financial performance are subject to
substantial risks and uncertainties. The following Management's Discussion and
Analysis should be read in conjunction with the Unaudited Condensed Consolidated
Financial Statements, which appear in this report beginning on page 3.
10
<PAGE> 11
INTRODUCTION
In Management's Discussion and Analysis, we explain the general
financial condition and the results of operations for broadcast.com and its
subsidiaries including:
o what factors affect our business;
o what our revenues and costs were in the three months ended March 31, 1999
and 1998;
o why those revenues and costs were different from the year before;
o where our revenues came from;
o how all of the above affects our overall financial condition; and
o where cash will come from to provide working capital and to pay for future
capital expenditures.
As you read Management's Discussion and Analysis, it may be helpful to refer to
our Unaudited Condensed Consolidated Statements of Operations, which appear on
page 4 of this report and which present the results of our operations for the
three months ended March 31, 1999 and 1998.
OVERVIEW
From our inception on May 19, 1995 through December 31, 1995, we had no
revenues and our operating activities consisted primarily of investing in
necessary network infrastructure and in the initial planning and development of
our Web sites and operations.
During 1996, we generated revenues from business services and
advertising. Our operating activities were primarily as follows:
o we continued to develop the network infrastructure required for
large-scale streaming media broadcasts;
o we continued to enhance our Web sites; and
o we opened a sales office in New York.
During 1997, we significantly increased revenues from business services
and advertising. In addition, we began generating revenues from the sale of ad
spots received from radio stations in exchange for broadcasting their
programming over the Internet. Our operating activities were primarily as
follows:
11
<PAGE> 12
o we continued to expand our network infrastructure;
o we moved to a 28,000 square foot facility in Dallas, Texas;
o we continued to enhance our Web sites; and
o we added qualified personnel for sales, marketing, operations and general
and administrative.
In 1998, we added television ad spot sales to our advertising revenues.
Our operating activities were primarily as follows:
o we continued to enhance our Web sites;
o we expanded our customer and user base;
o we hired regional sales managers and vice presidents;
o we expanded our sales force into Los Angeles, San Francisco, Houston,
Austin, Seattle, Toronto and Washington, D.C.;
o we continued to expand our network infrastructure; and
o we continued to expend significant resources as we further aggregated
content by obtaining Internet broadcasting rights to audio and video
programming.
We also completed our acquisition of Simple Network Communications, a provider
of inexpensive Web-site hosting services to consumers and small businesses.
Thus far in 1999, our operating activities were primarily as follows:
o we continued to enhance our Web sites;
o we expanded our customer and user base;
o we expanded our sales force into Chicago and Detroit;
o we continued to expand our network infrastructure; and
o we continued to expend significant resources as we further aggregated
content by obtaining Internet broadcasting rights to audio and video
programming.
We also completed our acquisition of Net Roadshow, Inc., the leading provider of
financial roadshows on the Internet, including IPO and secondary equity
offerings, convertible and debt roadshows, investor conferences and other
company presentations.
12
<PAGE> 13
Sales of business services and advertising are the main sources of our
revenues. 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. We recognize
business services revenues in the month in which we perform the service,
provided that we have no significant obligations remaining and collection of the
resulting receivable is probable. We derive advertising revenues by selling
gateway ads with guaranteed click-thrus, channel and event sponsorships and
multimedia and traditional banner ads, as well as by selling ad spots received
from radio and television stations in exchange for broadcasting their
programming over the Internet. We recognize advertising revenues in the period
in which we display the advertisement on one of our Web pages, except for
sponsorship sales, which we recognize ratably over the term of the sponsorship,
provided that we have no significant obligations remaining and collection of the
resulting receivable is probable.
We have incurred significant losses since inception and, as of March
31, 1999, had an accumulated deficit of approximately $30.7 million. We believe
that our success will depend largely on our ability to extend our leadership
position as a leading source for streaming media programming and business
services on the Web. Accordingly, we intend to invest heavily in order to:
o enhance our sales and marketing;
o acquire content; and
o continue our development of our network infrastructure.
We expect to continue to incur substantial operating losses for the foreseeable
future.
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of our revenues
and operating results, including operating expenses as a percentage of total net
revenues, are not necessarily meaningful and should not be relied upon as
indications of future performance. Although we have experienced sequential
quarterly growth in revenues, we do not believe that our historical growth rates
are necessarily sustainable or indicative of future growth.
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES
Our total revenues increased $5.8 million, or 127.5%, to $10.3 million
from $4.5 million, for the three months ended March 31, 1999 and 1998,
respectively.
Business Services. Our business services revenues increased $4.3
million, to $7.1 million from $2.8 million, for the three months ended March 31,
1999 and 1998, respectively. Business services revenues represented 69.2% of
total revenues for the
13
<PAGE> 14
three months ended March 31, 1999 and 61.9% of total revenues for the three
months ended March 31, 1998. The increase in business services revenues was due
primarily to (i) an increase in the number of broadcasted business services
events to 660 events from 368 events in the three months ended March 31, 1999
and 1998, respectively, and (ii) an increase in the number of customer Web sites
hosted by SimpleNet.
Advertising. Our advertising revenues increased $1.4 million, to $3.2
million from $1.7 million for the three months ended March 31, 1999 and 1998,
respectively. Advertising revenues represented 30.8% of total revenues for the
three months ended March 31, 1999 and 38.1% of total revenues for the three
months ended March 31, 1998. Our bartered Web advertising revenues increased
$327,000, to $607,000 from $280,000, for the three months ended March 31, 1999
and 1998, respectively. The increase in our advertising revenues was due
primarily to an increase in the number of sponsorships sold as well as increases
in the number of ads sold to existing and new advertisers on the Company's Web
sites.
OPERATING EXPENSES
Production Costs. Our production costs increased $257,000, to $1.5
million from $1.3 million, for the three months ended March 31, 1999 and 1998,
respectively. These expenses increased primarily due to the increased number of
business services events. These increases were partially offset by a decrease in
the amount of expenses related to prepaid advertising credits, as the Company
had no such expenses in the first three months of 1999. Excluding both the
revenues and expenses associated with bartered Web advertising transactions, our
production costs decreased to 9.6% of total revenues for the three months ended
March 31, 1999 from 23.6% of total revenues for the three months ended March 31,
1998.
Operating and Development. Our operating and development expenses
increased $2.7 million, to $5.4 million from $2.7 million, for the three months
ended March 31, 1999 and 1998, respectively. The increase was due primarily to
expenditures for (i) data communications as user traffic increased; (ii)
operations personnel to handle additional broadcasts of our additional live
events and content; and (iii) content license fees in order to acquire
additional content. As our user traffic increases and the number of business
services events we produce increases, we expect these expenditures to increase.
Sales and Marketing. Our sales and marketing expenses increased $2.1
million, to $4.0 million from $1.9 million, for the three months ended March 31,
1999 and 1998, respectively. The increase was due primarily to growth in our
sales force.
General and Administrative. Our general and administrative expenses
increased $1.2 million, to $2.0 million from $857,000, for the three months
ended March 31, 1999 and 1998, respectively. The increase was due primarily to
increases in expenses necessary to support our growth such as increased
professional fees, increased personnel expenses and increased building expenses.
14
<PAGE> 15
Depreciation and Amortization. Our depreciation and amortization
expenses increased $655,000, to $1.3 million from $663,000, for the three months
ended March 31, 1999 and 1998, respectively. These expenses increased primarily
because we added property and equipment as we expanded our network
infrastructure, incurred leasehold improvement costs and purchased equipment
necessary to support the growth in our personnel.
Other Non-Recurring Expenses. In the three months ended March 31, 1999,
we incurred $462,000 of non-recurring expenses related to our merger with Net
Roadshow. These costs consisted primarily of legal and accounting fees and
certain other expenses directly related to the merger.
Interest and Other Income, Net. Our interest and other income, net
increased to $588,000 from $242,000 for the three months ended March 31, 1999
and 1998, respectively. The increase was due primarily to interest we earned
from the investment of higher cash and cash equivalent balances which were
derived from sales of Common Stock in December 1997 and our initial public
offering in July 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through
sales of Common Stock and warrants. Net proceeds from these sales from inception
to March 31, 1999 have totaled approximately $87.8 million. At March 31, 1999,
our principal source of liquidity was approximately $46.3 million of cash and
cash equivalents. In April 1998, we entered into an operating lease facility
which provides for up to $2.5 million for equipment leasing, of which we have
utilized approximately $814,000 as of March 31, 1999.
We used net cash in our operating activities equaling $4.3 million and
$1.1 million in the three months ended March 31, 1999 and 1998, respectively.
The net cash we used in operating activities was primarily attributable to net
losses, offset in part by increases in accounts payable and accrued liabilities.
We used net cash in our investing activities equaling $2.8 million and
$1.5 million in the three months ended March 31, 1999 and 1998, respectively.
The net cash we used in our investing activities was related primarily to
purchases of property and equipment.
Our financing activities provided net cash equaling $3.5 million and
$3.8 million in the three months ended March 31, 1999 and 1998, respectively.
The net cash provided by our financing activities resulted primarily from
exercises of stock options in the three months ended March 31, 1999 and sales of
Common Stock in the three months ended March 31, 1998.
We believe that current cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
the next twelve months. However, we may need to raise additional funds through
public or private
15
<PAGE> 16
financings or other arrangements. We can make no assurance that we will be able
to obtain such additional financings, if needed, on terms attractive to us, if
at all. Failure to raise capital when needed could adversely affect our
business. If we raise additional funds through the issuance of equity
securities, then current broadcast.com stockholders would have their percentages
of ownership of broadcast.com reduced. Furthermore, such equity securities might
have rights, preferences or privileges senior to those of Common Stock.
On April 1, 1999, the Company announced that it had reached an
agreement to be acquired by Yahoo! Inc. ("Yahoo!"). Under the terms of the
agreement, the Company's stockholders will receive 0.7722 share of Yahoo! common
stock for each share of the Company's Common Stock. Assuming satisfaction of
certain conditions, including regulatory approval and receipt of the requisite
stockholder approval, the proposed merger is expected to be consummated in the
third quarter of 1999. Completion of the proposed merger is expected to enhance
the Company's ability to finance its growth as cash flow and capital markets
access of the combined companies will be greater than prior to the proposed
merger. In the event that the proposed merger with Yahoo! is not consummated,
the Company believes it will have sufficient resources to fund its planned
capital growth and operating requirements.
YEAR 2000 COMPUTER SYSTEMS AND SOFTWARE PRODUCTS READINESS
Many currently installed computer systems and software products only
accept two digits to identify the year in any date. Thus, the year 2000 will
appear as "00", which the system might consider to be the year 1900 rather than
the year 2000. This could result in system failures, delays or miscalculations
causing disruptions to our operations.
With the assistance of an independent consultant, we have evaluated the
Year 2000 readiness of the hardware and software utilized in our operations,
including non-information technology operations, such as building security,
voice mail and other systems. Our evaluation included:
o the identification of internally utilized products;
o checking of products' Year 2000 readiness; and
o assessment of repair or replacement.
Based on this assessment, we have determined that there are no material
Year 2000 issues within our systems and services. A plan addressing the issues
which were identified has been formulated, with implementation scheduled to be
completed by the end of 1999.
Since third parties developed and currently support many of the systems
that we use, a significant part of this effort will be to ensure that these
third-party systems are Year 2000 ready. We plan to confirm this readiness
through a combination of the representation by these third parties of their
products' Year 2000 readiness, as well as specific testing of these systems. The
failure of systems maintained by third parties to be
16
<PAGE> 17
Year 2000 ready could cause us to incur significant expense to remedy any
problems, reduce our revenues from such third parties or otherwise seriously
damage our business. A significant Year 2000-related disruption of the network
services or equipment that third-party vendors provide to us could also cause
our users to consider seeking alternate providers or cause an unmanageable
burden on our technical support.
Additionally, we rely upon various governmental agencies, utility
companies, telecommunications service companies, delivery service companies and
other service providers. There is no assurance that such parties will not suffer
a year 2000 business disruption, which could adversely affect our ability to
conduct our business.
Our failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, some of our normal business activities or
operations.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1998, we had available net operating loss
carryforwards totaling approximately $28.3 million, which expire beginning in
2011. Under the Tax Reform Act of 1986, our use of net operating loss
carryforwards may be subject to limitations triggered by ownership changes which
may have occurred or could occur in the future or limitations imposed by the
separate return limitation year rules.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the factors discussed in the Company's annual report of
Form 10-K/A for the year ended December 31, 1998, as filed with the SEC,
including, among others, our limiting operating history, our dependence on third
party providers of content, our dependence on the acceptance of streaming media
technology, our dependence on the continuing acceptance of the Internet as an
advertising medium, our potential inability to manage our growth and intense
competition for Internet broadcasting and services, the following additional
factors may affect our future results.
The consummation of the proposed merger with Yahoo! is subject to a
number of conditions including, without limitation, approval by the Company's
stockholders and certain regulatory approvals. We cannot provide any assurance
that all conditions upon which the merger is contingent will be met. If the
merger is not consummated for any reason, the trading price of our Common Stock
could be materially adversely affected. In addition, if the merger is not
consummated, then the attention and effort devoted to the integration of the two
companies will have significantly diverted management's attention from other
important issues, and could have a material adverse impact on broadcast.com in
the future.
17
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of changes in the market values of
its investments and foreign currency fluctuations.
INVESTMENT RISK AND FOREIGN CURRENCY RISK.
In February 1999, the Company formed a joint venture with SOFTBANK
Corporation of Japan called broadcast.com japan. The Company owns 40% of the
joint venture. To date, the Company has not generated any revenue from its
ownership interest in the joint venture. This investment is included in other
assets and is accounted for under the equity method. The Company's policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying value of this joint venture. The
Company identifies and records impairment losses on long-lived assets when
events and circumstances indicate that such assets might be impaired. To date,
no such impairment has been recorded.
The Company's exposure to foreign exchange rate fluctuations arises
from its investment in the joint venture, which was funded by a note payable to
SOFTBANK Corp. in the amount of 220,000,000 Japanese Yen, which had a carrying
value of approximately $1.9 million at March 31, 1999. The Company is exposed to
foreign exchange rate fluctuations as the financial results of the joint venture
and the carrying value of the note payable are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations. The effect of foreign exchange rate fluctuations on the
Company in the first quarter of 1999 was not material.
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about August 25, 1998, Venson M. Shaw and Steven M. Shaw
("Plaintiffs") filed a lawsuit against the Company and RealNetworks in the
United States District Court for the Northern District of Texas, Dallas
Division, and on or about December 29, 1998, Plaintiffs filed a lawsuit against
the Company and Microsoft in the same District. The two lawsuits have been
consolidated into one action. In both claims in the consolidated action,
Plaintiffs allege that our use of streaming media software products and services
directed to media delivery systems infringes on Plaintiffs' patent. The
Plaintiffs are seeking to enjoin the Company, RealNetworks and Microsoft from
further alleged infringement of their patents and an unspecified amount of
monetary damages. Although no assurance can be given as to the outcome of the
lawsuit, we believe that the allegations in the action are without merit and
intend to vigorously defend against the action and seek its early dismissal. In
addition, we believe we are entitled to be indemnified under the terms of our
license agreements with RealNetworks and Microsoft for the claims raised by
Plaintiffs. No assurances, however, can be given as to the availability of such
indemnification at this time or the results of such proceeding.
From time to time we have been, and expect to continue to be, subject
to legal proceedings and claims in the ordinary course of our business,
including claims of alleged infringement of third-party trademarks and other
intellectual property rights by us and our licensees. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources. We are not aware of any legal proceedings or claims that
we believe will, individually or in the aggregate, adversely affect on our
business.
ITEM 2. CHANGES IN SECURITIES
A two-for-one split of the Company's Common Stock was effected in the
form of a stock dividend in February 1999.
The Company's registration statement (Registration No. 333-52877) under
the Securities Act of 1933, as amended, for its initial public offering became
effective on July 16, 1998. Offering proceeds, net of aggregate expenses to the
Company, were approximately $43.2 million. The Company has used all of the net
offering proceeds for the purchase of temporary investments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
19
<PAGE> 20
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
2.1 Agreement and Plan of Merger, dated as of March 31, 1999, by
and among Yahoo! Inc., Alamo Acquisition Corp. and
broadcast.com inc. (incorporated by reference to Exhibit 1 to
the Schedule 13D filed by Yahoo! Inc. on April 9, 1999 with
respect to the Common Stock of the Company).
2.2 Voting Agreement, dated as of March 31, 1999, by and among
Yahoo! Inc., Motorola, Inc., Mark Cuban and Todd R. Wagner
(incorporated by reference to Exhibit 2 to the Schedule 13D
filed by Yahoo! Inc. on April 9, 1999 with respect to the
Common Stock of the Company).
b) Reports on Form 8-K
On February 16, 1999, we filed Amendment No. 1 to Current Report on
Form 8-K/A amending a Report dated November 30, 1998.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
broadcast.com inc.
(Registrant)
Date: May 14, 1999 By: /s/ Jack A Riggs
-----------------------------
Jack A. Riggs
Chief Financial Officer and Treasurer
(Principal Financial Officer and Duly
Authorized Officer)
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
27 Financial Data Schedule
2.1 Agreement and Plan of Merger, dated as of March 31, 1999, by
and among Yahoo! Inc., Alamo Acquisition Corp. and
broadcast.com inc. (incorporated by reference to Exhibit 1 to
the Schedule 13D filed by Yahoo! Inc. on April 9, 1999 with
respect to the Common Stock of the Company).
2.2 Voting Agreement, dated as of March 31, 1999, by and among
Yahoo! Inc., Motorola, Inc., Mark Cuban and Todd R. Wagner
(incorporated by reference to Exhibit 2 to the Schedule 13D
filed by Yahoo! Inc. on April 9, 1999 with respect to the
Common Stock of the Company).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 46,260
<SECURITIES> 0
<RECEIVABLES> 6,569
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,341
<PP&E> 13,894
<DEPRECIATION> 6,181
<TOTAL-ASSETS> 68,622
<CURRENT-LIABILITIES> 5,237
<BONDS> 1,858
0
0
<COMMON> 261
<OTHER-SE> 61,266
<TOTAL-LIABILITY-AND-EQUITY> 68,622
<SALES> 10,288
<TOTAL-REVENUES> 10,288
<CGS> 0
<TOTAL-COSTS> 14,723
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (588)
<INCOME-PRETAX> (3,847)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,847)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,847)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
