<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number: 0-24858
WAVEPHORE, INC.
(Exact name of registrant as specified in its charter)
INDIANA 86-0491428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3311 NORTH 44TH STREET, PHOENIX, AZ 85018
(602) 952-5500
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
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 the filing
requirements for the past 90 days.
Yes X No _______
The number of shares outstanding of the issuer's common stock, as of August 14,
1997:
COMMON SHARES, NO PAR VALUE: 16,577,652 SHARES
<PAGE> 2
WAVEPHORE, INC.
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996...................... 3
Condensed Consolidated Statements of Operations -
Three and six months ended June 30, 1997 and 1996........ 4
Condensed Consolidated Statements of Cash Flows -
Three and six months ended June 30, 1997 and 1996........ 5
Notes to Condensed Consolidated Financial Statements ....... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 8
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K .................. 11
SIGNATURES ......................................................... 13
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WavePhore, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,918,575 $11,793,205
Accounts receivable 4,193,664 3,880,715
Inventories 3,589,379 3,342,975
Other receivables 175,628 90,374
Notes receivable from officers, including interest 634,597 604,605
Prepaid expenses and other 1,082,298 1,133,946
----------- -----------
Total Current Assets 11,594,141 20,845,820
Notes and other receivables -- 129,716
Property and equipment, net 3,587,765 2,281,367
Intangible assets of businesses acquired, net 18,711,734 16,570,338
Deposits and other assets 1,457,423 1,734,929
----------- -----------
$35,351,063 $41,562,170
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,752,117 $ 2,126,129
Accrued expenses 1,565,939 675,322
Deferred revenue 955,206 --
Payable related to business acquisition 6,000,000 --
Bank loans 1,600,093 1,720,731
Current portion of long-term debt 529,515 537,487
Other -- 39,370
----------- -----------
Total Current Liabilities 12,402,870 5,099,039
Long-term debt, less current portion 57,615 97,959
Other long-term liabilities 532,007 511,475
Stockholders' equity 22,358,571 35,853,697
----------- -----------
$35,351,063 $41,562,170
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
WavePhore, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------ ------------ ------------ ------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Networks services and equipment $ 4,916,847 $ 4,245,369 $ 8,153,629 $ 7,980,650
Newscast services 607,149 358,962 1,055,043 667,117
------------ ------------ ------------ ------------
Total Revenues 5,523,996 4,604,331 9,208,672 8,647,767
Cost of revenues 3,150,012 2,809,370 5,137,409 5,300,776
------------ ------------ ------------ ------------
Gross margin 2,373,984 1,794,961 4,071,263 3,346,991
Operating expenses:
Research and development 1,941,811 984,049 3,527,813 1,921,375
Sales and marketing 2,509,017 1,642,117 4,639,911 2,916,373
General and administrative 1,220,218 1,439,118 2,315,732 2,782,533
Amortization 530,225 483,694 1,019,345 967,388
Charge for purchased research and development 6,000,000 -- 6,000,000 --
------------ ------------ ------------ ------------
12,201,271 4,548,978 17,502,801 8,587,669
------------ ------------ ------------ ------------
Loss from operations (9,827,287) (2,754,017) (13,431,538) (5,240,678)
Other (income) expense:
Interest expense 44,428 51,705 92,771 99,691
Interest income (100,062) (180,955) (263,148) (370,853)
Other 12,203 (1,454) 12,203 (2,427)
------------ ------------ ------------ ------------
(43,431) (130,704) (158,174) (273,589)
------------ ------------ ------------ ------------
Net loss $ (9,783,856) $ (2,623,313) $(13,273,364) $ (4,967,089)
============ ============ ============ ============
Less: Preferred stock dividends (283,491) (514,004) (571,225) (1,052,432)
------------ ------------ ------------ ------------
Net loss after preferred stock dividends $(10,067,347) $ (3,137,317) $(13,844,589) $ (6,019,521)
============ ============ ============ ============
Net loss per common share $ (0.60) $ (0.22) $ (0.81) $ (0.42)
============ ============ ============ ============
Net loss per common share after $ (0.62) $ (0.26) $ (0.85) $ (0.51)
============ ============ ============ ============
preferred stock dividends
Number of shares used in per share
calculation 16,345,867 12,082,552 16,303,405 11,865,786
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
WavePhore, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
-----------------------------
June 30, June 30,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(13,273,364) $ (4,967,089)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,726,276 1,466,361
Gain on disposal of assets (57,372) --
Provision for doubtful accounts 27,000 21,000
Charge for purchased research and development 6,000,000 --
Changes in operating assets and liabilities (157,142) (899,190)
------------ ------------
Net cash used in operating activities (5,734,602) (4,378,918)
INVESTING ACTIVITIES:
Purchase of property and equipment (901,919) (609,134)
Proceeds from sale of property & equipment 88,233 --
Purchase of business net of cash acquired (2,905,634) --
Purchase of treasury stock (362,954) (2,036,419)
Loans to officers, including interest (29,992) (435,280)
------------ ------------
Net cash used in investing activities (4,112,266) (3,080,833)
FINANCING ACTIVITIES:
Issuance of preferred shares, net 172,217 5,499,276
Payment of preferred stock dividend (276,093) (552,164)
Issuance of common stock, net 185,629 2,564,733
Payments on notes payable (48,316) (1,514,351)
Credit line; net (120,638) 1,359,186
Other 59,439 (10,369)
------------ ------------
Net cash (used in) provided by financing activities (27,762) 7,346,311
------------ ------------
Net increase (decrease) in cash and cash equivalents (9,874,630) (113,440)
Cash and cash equivalents at beginning of period 11,793,205 10,945,178
------------ ------------
Cash and cash equivalents at end of period $ 1,918,575 $ 10,831,738
============ ============
Supplemental cash flow information
- Payable related to business acquisition $ 6,000,000
============
- Issuance of common stock in connection
with dividend payment on preferred stock $ 296,066 $ 527,812
============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
WavePhore, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 1997
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles, pursuant
to the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Certain
information and footnote disclosures normally included in financial statements
have been condensed or omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996. The results of operations for the three and
six month periods ended June 30, 1997 are not necessarily indicative of the
results to be expected for the full year.
(2) LOSS PER SHARE
Loss per share is based on the weighted average number of common shares
outstanding during each period. Common stock equivalents, which were
anti-dilutive, were not included in the computation of net loss per share.
(3) RECLASSIFICATIONS
Certain amounts presented for the three and six months ended June 30, 1996
have been reclassified to conform to June 30, 1997 presentation.
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Finished goods $ 975,762 $ 687,914
Work-in-process 747,640 1,298,893
Raw materials 1,865,977 1,356,168
---------- ----------
$3,589,379 $3,342,975
========== ==========
</TABLE>
(5) RECENTLY ENACTED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
128 on the calculation of primary and fully diluted earnings per share for these
quarters is not expected to be material.
6
<PAGE> 7
(6) ACQUIRED BUSINESS
On May 29, 1997, WavePhore, Inc., an Indiana Corporation (the "Company"),
through its wholly-owned subsidiary, WavePhore Newscast, Inc., a Delaware
Corporation ("WavePhore Newscast"), purchased substantially all of the assets
and assumed certain of the liabilities of Paracel Online Systems, Inc., a
California Corporation ("Paracel Online") of Dallas, Texas, in consideration of
cash and future consideration based on achieving certain future financial
performance, pursuant to an Agreement for the Purchase and Sale of Assets among
the Company, WavePhore Newscast, Paracel Online and Paracel, Inc., dated May 29,
1997.
The pro forma unaudited results of operations for the six months ended
June 30, 1997 and June 30, 1996, assuming consummation of the purchase as of
January 1, 1996 are as follows:
<TABLE>
<CAPTION>
Six months ended June 30
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 9,776,000 $ 8,959,000
Net loss (14,429,000) (5,973,000)
Net loss after preferred stock
dividends (15,000,000) (7,025,000)
Net income per common share (0.89) (0.50)
Net loss per common share after
preferred stock dividends (0.92) (0.59)
</TABLE>
(7) EQUITY OFFERING
On July 24, 1997, the Company completed a private placement of WavePhore
Series C Convertible Preferred Shares priced at $1,000 per share resulting in
gross proceeds of $24 million. The preferred shares carry a dividend rate of 6%
per annum, which may be paid in cash or common stock and are non-voting.
7
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
WavePhore, Inc. including its wholly-owned subsidiaries, WavePhore Canada,
Inc., WavePhore Newscast, Inc., WavePhore Networks, Inc. and WavePhore Japan
K.K. (collectively the "Company"), is a developer and provider of proprietary
products and services for low-cost, high-speed data broadcasting systems for
distributing electronic information via existing worldwide television, radio and
satellite broadcast infrastructures, and the Internet.
On February 10, 1997, the Company announced the creation of its consumer
broadcast service, Wavetop(TM) , which the company expects will become a
nationwide wireless broadcast medium for the home PC. This new service is
intended to deliver information and entertainment programming, utilizing "push
technology," via existing analog television broadcast signals without the
bandwidth limitations associated with the Internet or tying up of phone lines.
In preparation for providing this consumer service, the Company signed an
agreement with PBS National Datacast, Inc. ("PBS") during 1996. Utilizing the
Company's technology, information will be sent to the consumer by embedding it
in the existing television broadcast signals of PBS's 264 member stations.
On May 29, 1997, the Company, through its wholly-owned subsidiary,
WavePhore Newscast, Inc., purchased substantially all of the assets and assumed
certain of the liabilities of Paracel Online Systems, Inc., a California
Corporation ("Paracel Online") of Dallas, Texas, in consideration of cash and
future consideration based on achieving certain future financial performance,
pursuant to an Agreement for the Purchase and Sale of Assets among the Company,
WavePhore Newscast, Paracel Online and Paracel, Inc.
During 1996, the Company licensed certain software to Compaq Computer
Corporation ("Compaq"). The software, when installed in Compaq PC's, will allow
the home PC user to receive the Company's broadcast services.
RESULTS OF OPERATION - THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues. Revenues are derived from networks services and related
equipment sales and Newscast(TM) services. Revenues for the three and six months
ended June 30, 1997 were $5,524,000 and $9,209,000, compared to $4,604,000 and
$8,648,000, respectively, for the comparable periods in the prior year. The
increase in revenues is the result of increased subscribers to the Newscast
service and increases in data transmission by network services customers.
Cost of Revenues. Cost of revenues consists primarily of costs associated
with transmitting news services to customer sites and cost of hardware and
software sold to customers. Cost of revenues for the three and six months ended
June 30, 1997 were $3,150,000 and $5,137,000, compared to $2,809,000 and
$5,301,000, respectively, for the comparable period in the prior year. Gross
margin percentages are 43% and 44% for the three and six months ended June 30,
1997, and 39% and 39% in 1996, respectively. The improvement in gross margin is
the result of revenue mix changes to higher margin networks and Newscast
services.
Research and Development. Research and development expenses were
$1,942,000 and $3,528,000 for the three and six months ended June 30, 1997,
respectively, compared to $984,000 and $1,921,000, respectively, for the
comparable periods in the prior year. The increase in expenses is attributable
to spending by the Company to advance existing technologies and products, and
for the continued development of the consumer based WaveTop(TM) service. The
research and development expenses consists primarily of design, testing and
support of the Company's existing and developing hardware, software, and
services. The Company anticipates continuing to make significant expenditures in
8
<PAGE> 9
product development as it develops new and enhanced services, and provides
services to a growing customer base.
Sales and Marketing. Sales and marketing expenses for the three and six
month periods ended June 30, 1997 were $2,509,000 and $4,640,000, respectively,
compared to $1,642,000 and $2,916,000, respectively, for the comparable periods
of the prior year. The increase relates primarily to additional sales personnel,
increased travel, and advertising and promotional costs.
General and administrative. General and administrative expenses for the
three and six months ended June 30, 1997 were $1,220,000 and $2,316,000,
respectively compared to $1,439,000 and $2,783,000, respectively for the
comparable periods of the prior year. The decrease relates primarily to cost
control measures taken by the Company.
Charge for purchased research and development. The charge for purchased
research and development of $6,000,000 was recorded in connection with Paracel
Online acquisition. The amount represents research and development of new
products and product upgrades that were in process by Paracel Online at the
acquisition date.
Interest Expense. Interest expense was $44,000 and $93,000 for the three
and six months ended June 30, 1997, respectively, and $52,000 and $100,000 for
the same periods in 1996. The fluctuation corresponds to the amount of debt
outstanding during the respective periods.
Interest Income. Interest income decreased during the three and six months
ended June 30, 1997, compared to the same period of the prior year, due to
reduction in the outstanding cash balances available for investment.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1997 and 1996, the Company used cash
in its operations of $5,735,000 and $4,379,000, respectively. Cash used in
operations is less than the net losses primarily because of non cash charges of
depreciation, amortization and purchased research and development. Cash flows
used in investing activities was $4,112,000 for the six months ended June 30,
1997, compared to cash used in investing activities of $3,081,000 for the same
period in the prior year. During the six months ended June 30, 1997, the Company
used approximately $3 million in the purchase acquisition of Paracel Online. The
Company made purchases of $363,000 and $902,000 of treasury stock and property
and equipment, respectively, during the first six months of 1997. For the six
months ended June 30, 1997, the Company used cash in financing activities of
$28,000 and for the six months ended June 30, 1996, the Company generated
$7,346,000 from financing activities. The generation of cash in 1996 was
primarily from the issuance of preferred and common stock.
In July 1997, the Company received the net proceeds from a $24 million capital
fund raising which will be used for working capital and general corporate
purposes including the Paracel Online acquisition.
The Company estimates that its present financial resources including the
July 1997 equity offering funds, will be sufficient to fund operating activities
including the company's accelerated internal growth beyond 1997. The Company
will continue to evaluate business acquisitions and the development of strategic
partnerships to help accelerate its growth. The pace at which these acquisitions
and strategic partnerships occur will have an impact on the capital resources of
the Company to the extent they are funded with cash, or upon the dilution of
existing shareholder interests to the extent they are entered into for equity.
Certain of the above statements may constitute forward looking statements
which may involve risks and uncertainties. Actual results could differ
materially from such forward looking statements as a result of a variety of
factors, including, but not limited to, technology changes, competitive
developments, industry and market acceptance of new products and services, and
risk factors listed from time to time in the Company's SEC filings.
9
<PAGE> 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) On May 2, 1997, the Company held its Annual Meeting of Shareholders at which
the following matters were voted upon:
(i) Election of Directors.
All six management nominees for election as directors were unopposed and
elected by the following votes:
<TABLE>
<CAPTION>
Director Shares for Shares Withheld
- -------- ---------- ---------------
<S> <C> <C>
David Deeds 13,344,592 75,071
R. Glenn Williamson 13,344,592 75,071
Kenneth D. Swenson 13,346,292 73,371
C. Roland Haden 13,345,592 74,071
Glenn Scolnick 13,346,292 73,371
J. Robert Collins 13,330,142 109,421
</TABLE>
(ii) Approval of the 1997 Incentive Plan
The 1997 Incentive Plan was approved as follows:
For: 6,553,141 Shares
Against: 553,804 Shares
Abstain: 91,283 Shares
Not Voted: 6,221,409 Shares
(iii) Approval of the Executive Management Incentive Plan
The Executive Management Incentive Plan was approved as follows:
For: 12,458,465 Shares
Against: 405,679 Shares
Abstain: 81,283 Shares
Not Voted: 474,240 Shares
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included herein:
27 Financial Data Schedule
(b) Reports on Form 8-K.
On June 12, 1997, the Company filed a Report on Form 8-K, reporting in
Item 2 the purchase of substantially all of the assets and assumption of certain
of the liabilities of Paracel Online on May 29, 1997. On August 12, 1997, the
Company filed Amendment No. 1 to such Report, which included audited financial
statements of Paracel Online for the period from January 1, 1995 to December 4,
1995, period from December 5, 1995 to December 31, 1995, and year ended December
31, 1996, and unaudited financial statements as of March 31, 1997 and for the
three months ended March 31, 1997, and pro forma unaudited consolidated balance
sheet as of March 31, 1997 and pro forma unaudited consolidated statements of
operations for the three months ended March 31, 1997 and the year ended December
31, 1996, which gave effect to such acquisition as of the date and for the
periods indicated therein.
10
<PAGE> 11
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.
WavePhore, Inc.
Date: August 14, 1997 By /s/ David E. Deeds
---------------------------------------
David E. Deeds,
President and Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 1997 By /s/ Kenneth D. Swenson
---------------------------------------
Kenneth D. Swenson,
Executive Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
11
<PAGE> 12
EXHIBIT INDEX
Exhibit Exhibit
Number Description
------- -----------
27 Financial Data Schedule
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,919
<SECURITIES> 0
<RECEIVABLES> 4,559
<ALLOWANCES> (365)
<INVENTORY> 3,589
<CURRENT-ASSETS> 11,594
<PP&E> 5,218
<DEPRECIATION> (1,630)
<TOTAL-ASSETS> 35,351
<CURRENT-LIABILITIES> 12,403
<BONDS> 2,187
16,024
0
<COMMON> 67,980
<OTHER-SE> (61,645)
<TOTAL-LIABILITY-AND-EQUITY> 35,351
<SALES> 9,209
<TOTAL-REVENUES> 9,209
<CGS> 5,137
<TOTAL-COSTS> 5,137
<OTHER-EXPENSES> 17,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (158)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,273)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,273)
<EPS-PRIMARY> (.81)
<EPS-DILUTED> (.81)
</TABLE>
