<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 SEPTEMBER 30, 1999.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number: 0-24858
WAVO CORPORATION
(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.)
3131 E. CAMELBACK ROAD, SUITE 320, PHOENIX, AZ 85016
(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 November 9,
1999:
COMMON SHARES, NO PAR VALUE: 28,924,230 SHARES
<PAGE> 2
WAVO CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three and nine months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WAVO Corporation
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,742,830 $17,719,042
Accounts receivable 3,228,939 3,999,076
Inventories 2,090,749 3,313,490
Other receivables -- 29,308
Prepaid expenses and other 1,477,920 976,933
----------- -----------
Total current assets 9,540,438 26,037,849
Property and equipment, net 5,585,514 4,761,827
Goodwill, net 10,315,997 9,156,592
Intangible assets of businesses acquired, net 10,771,772 11,460,101
Deposits and other assets 1,533,662 1,570,362
----------- -----------
Total assets $37,747,383 $52,986,731
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,403,239 $ 1,073,214
Accrued expenses 1,600,369 2,938,371
Deferred revenue 2,026,151 1,873,618
Bank loans 2,747,629 2,000,000
Current portion of long-term debt 163,315 52,165
----------- -----------
Total current liabilities 7,940,703 7,937,368
Long-term debt, less current portion 62,453 39,563
Other long-term liabilities 355,309 379,342
Shareholders' equity 29,388,918 44,630,458
----------- -----------
Total liabilities and shareholders' equity $37,747,383 $52,986,731
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
WAVO Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Information delivery and
communication systems $ 3,652,644 $ 3,675,189 $ 12,111,650 $ 12,984,225
Subscription and fee services 1,356,940 1,160,384 4,617,363 4,081,023
------------ ------------ ------------ ------------
Total revenues 5,009,584 4,835,573 16,729,013 17,065,248
Cost of revenues 2,765,657 2,668,666 8,876,662 9,005,153
------------ ------------ ------------ ------------
Gross margin 2,243,927 2,166,907 7,852,351 8,060,095
Operating expenses:
Research and development 3,035,452 2,865,695 9,145,296 7,748,390
Sales and marketing 3,084,316 4,862,270 10,030,215 11,570,863
General and administrative 1,423,230 1,493,020 4,372,681 4,592,118
Amortization 432,375 641,185 1,244,394 1,898,065
------------ ------------ ------------ ------------
7,975,373 9,862,170 24,792,586 25,809,436
------------ ------------ ------------ ------------
Loss from operations (5,731,446) (7,695,263) (16,940,235) (17,749,341)
Other (income) expense:
Interest expense 56,382 48,822 156,185 159,834
Interest income (63,969) (251,069) (403,151) (697,266)
Other (9,715) (2,395) 2,445 (6,941)
------------ ------------ ------------ ------------
(17,302) (204,642) (244,521) (544,373)
------------ ------------ ------------ ------------
Net loss $ (5,714,144) $ (7,490,621) $(16,695,714) $(17,204,968)
============ ============ ============ ============
Less: Preferred stock dividends 138,039 392,819 414,117 1,408,810
------------ ------------ ------------ ------------
Net loss after preferred stock dividends $ (5,852,183) $ (7,883,440) $(17,109,831) $(18,613,778)
============ ============ ============ ============
Basic and dilutive net loss per common share $ (0.20) $ (0.33) $ (0.58) $ (0.84)
============ ============ ============ ============
Basic and dilutive net loss per common share
after preferred stock dividends $ (0.20) $ (0.35) $ (0.60) $ (0.91)
============ ============ ============ ============
Number of shares used in per share
calculation 28,924,230 22,366,344 28,721,093 20,534,515
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
WAVO Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
---------------------------------
September 30, September 30,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(16,695,714) $(17,204,968)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 3,200,558 3,198,294
Loss on disposal of assets 366 790
Provision for doubtful accounts 105,000 155,000
Changes in operating assets and liabilities 1,957,299 3,648,168
------------ ------------
Net cash used in operating activities (11,432,491) (10,202,716)
INVESTING ACTIVITIES:
Purchase of property and equipment (2,704,613) (1,658,155)
Proceeds from sale of property & equipment -- 587
Purchase of business, net of cash acquired (1,483,054) (117,600)
Other (19,500) --
------------ ------------
Net cash used in investing activities (4,207,167) (1,775,168)
FINANCING ACTIVITIES:
Issuance of preferred shares, net -- 343,232
Payment of preferred stock dividend (276,080) (467,570)
Issuance of common stock, net 722,548 15,265,896
Borrowings from bank and other 1,260,424 200,000
Payments on debt and capital lease obligations (428,755) (522,139)
Purchase of treasury shares (522,878) (679,485)
Other (91,813) (36,502)
------------ ------------
Net cash provided by financing activities 663,446 14,103,432
------------ ------------
Net increase (decrease) in cash and cash equivalents (14,976,212) 2,125,548
Cash and cash equivalents at beginning of period 17,719,042 11,552,646
------------ ------------
Cash and cash equivalents at end of period $ 2,742,830 $ 13,678,194
============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
WAVO Corporation
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(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, 1998. The results of operations for the period ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the entire year.
(2) RECLASSIFICATIONS
Certain amounts presented for the three and nine months ended September
30, 1998 have been reclassified to conform to September 30, 1999 presentation.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------- ----------
<S> <C> <C>
Finished goods $ 243,340 $ 555,321
Work-in-process 538,493 1,016,123
Raw materials 1,308,916 1,742,046
---------- ----------
$2,090,749 $3,313,490
========== ==========
</TABLE>
6
<PAGE> 7
WAVO Corporation
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
(4) SEGMENT INFORMATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Sept. 30, 1999 WaveTop Business Other Total
Products and
Services
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ -- $ 5,010,000 $ -- $ 5,010,000
Interest revenue -- -- 64,000 64,000
Interest and other expense -- -- 47,000 47,000
Depreciation and amortization expense 100,000 1,006,000 38,000 1,144,000
Segment loss (1,494,000) (2,626,000) (1,594,000) (5,714,000)
Segment assets 1,179,000 31,478,000 5,090,000 37,747,000
Expenditures for long-lived assets 29,000 247,000 65,000 341,000
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Sept. 30, 1998 WaveTop Business Other Total
Products and
Services
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ -- $ 4,836,000 $ -- $ 4,836,000
Interest revenue -- -- 251,000 251,000
Interest and other expense -- 46,000 -- 46,000
Depreciation and amortization expense 90,000 987,000 25,000 1,102,000
Segment loss (4,681,000) (5,618,000) 2,808,000 (7,491,000)
Segment assets 1,604,000 33,853,000 15,647,000 51,104,000
Expenditures for long-lived assets 111,000 667,000 38,000 816,000
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Sept. 30, 1999 WaveTop Business Other Total
Products and
Services
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ -- $ 16,729,000 $ -- $ 16,729,000
Interest revenue -- 9,000 394,000 403,000
Interest and other expense -- 14,000 145,000 159,000
Depreciation and amortization expense 318,000 2,783,000 100,000 3,201,000
Segment loss (5,110,000) (6,875,000) (4,711,000) (16,696,000)
Segment assets 1,179,000 31,478,000 5,090,000 37,747,000
Expenditures for long-lived assets 70,000 2,318,000 317,000 2,705,000
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Sept. 30, 1998 WaveTop Business Other Total
Products and
Services
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ -- $ 17,065,000 $ -- $ 17,065,000
Interest revenue -- -- 697,000 697,000
Interest and other expense -- 150,000 3,000 153,000
Depreciation and amortization expense 246,000 2,883,000 69,000 3,198,000
Segment loss (8,181,000) (9,305,000) 281,000 (17,205,000)
Segment assets 1,604,000 33,853,000 15,647,000 51,104,000
Expenditures for long-lived assets 378,000 1,209,000 71,000 1,658,000
</TABLE>
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes. There are no intersegment sales or
transfers.
7
<PAGE> 8
(5) EQUITY OFFERING
On October 4, 1999, the Company completed a private placement of Series D
Convertible Preferred Shares ("Series D Shares") priced at $10,000 per share,
resulting in gross proceeds of $15,000,000. The Company estimates the net
proceeds of the offering, after expenses, to be approximately $13,925,000. The
Series D Shares carry a dividend rate of 10% per annum, which may be paid in
cash or common stock, and are non-voting. The conversion price of the Series D
Shares will be 100% of the lowest weighted average trading price of the
Company's common shares for any day during the six days ending on the conversion
date. The Company may call for conversion of various amounts of the outstanding
Series D Shares and at various times throughout the term of the agreement,
subject to certain conditions, including the availability of an effective
registration statement covering the resale of the underlying shares of common
stock. In addition, the Company has the right, subject to certain conditions, to
redeem any outstanding Series D Shares for cash, in whole or in part, at 110% of
par plus accrued dividends. In connection with this transaction, the Company
issued warrants to purchase up to 900,000 shares of its common stock at $4.641
per share. In addition, subject to certain conditions, the Company may elect to
sell an additional $5,000,000 of Series D Shares to the investors. The Company
intends to use the proceeds of the funding for working capital and to grow the
Company's business.
8
<PAGE> 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
WAVO Corporation (the "Company") partners with providers of news,
business data, Internet-based content and multimedia programming in order to
deliver customized information and quality content to an information - dependent
society. The Company enables people and enterprises to more efficiently receive,
manage and productively use all types of urgent, insightful, and relevant
information. The Company's technologies and services aggregate, filter,
customize and distribute digital content (text, graphics, music and video) using
a wide range of reliable, low-cost broadcast, satellite and Internet-based
delivery systems. It has technology sourcing and strategic alliances with Virgin
Entertainment Group, Microsoft, Intel, and PBS National Datacast, among others,
in addition to information service agreements with approximately two hundred
Fortune 1000 companies worldwide.
The Company provides wireless data broadcasting transmission services
and equipment to providers of financial data, news, and other information. The
Company's broadcast networks utilize established technologies, such as FM
subcarrier and small dish satellite broadcasting technologies, that are well
suited to the economical one-way transmission of time-sensitive data from one
central location to many remote sites. Those operations are established in 13
major United States markets that, combined with the Company's small dish
satellite coverage, enable the Company to service the continental U.S. and the
major population centers in Canada.
The Company's Newscast(TM) Today service allows business users to
create customized information profiles and have news and information matching
those profiles electronically "clipped" from a large variety of information
sources and delivered to the corporate users' PCs. The Newscast service, which
incorporates hardware and software elements, enables end-users to filter
real-time news and other data from information providers and allows integration
of this information into an organization's local area network or e-mail system
for delivery to persons who need timely access to such information. In October,
1999, the Company launched Wavo NewsPak. NewsPak provides a packaged news
solution to companies who want to incorporate real-time news from the world's
leading sources into their intranets or their Internet web sites. The Company is
already delivering real-time content to customers' Web sites on all five
continents.
The Company's WaveTop(TM) ("WaveTop") service is a wireless consumer
broadcast service medium for delivering entertainment, news and other
information to the home PC user. The WaveTop broadcast service delivers news,
sports and entertainment programming, utilizing the vertical blanking interval
("VBI") of existing analog TV broadcast signals, to broadcast ready PCs or
TV/PCs, without the bandwidth limitations associated with the Internet. WaveTop
leverages its partnership with PBS National Datacast, Inc., by broadcasting data
over the broadcast signals of 264 PBS member stations. The WaveTop service is
free of charge to the consumer. The Company is seeking to generate revenue from
advertisers and content-provider sponsors for the respective "channels". Through
a strategic partnership with Microsoft, Inc., the WaveTop software is included
within the Windows(R) 98 operating system. WaveTop software is bundled with TV
tuner boards of most of the manufacturers of such products. The tuner boards are
an integral piece of hardware, allowing the PC to be broadcast ready. The
WaveTop service, currently reaches the top 100 markets and is available in
approximately 99% of U.S. households. In September 1999, the Company, through
its subsidiary JamCast.com, Inc., entered into a partnership with the Virgin
Entertainment Group, Inc. to create Virgin JamCast, an innovative Web site and
service that will put an end to users waiting for downloads of popular digital
music and games. The Virgin JamCast service will provide users with rich media
entertainment files for music and games that are broadcast to their PC and
set-top box using IP Multicasting technology.
RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30,
1999 AND 1998
Revenues
Revenues are currently derived primarily from the following activities:
(i) information delivery services generate volume-based fees and revenues, and
from the sale or rental of communication systems; and (ii) subscriptions to
information services and related fee-based integration consulting services.
9
<PAGE> 10
Revenues for the nine months ended September 30, 1999 and 1998 were $16,729,000
and $17,065,000, respectively. Revenues for the third quarter were up $174,000
from the same prior year quarter, the result of an increase in subscription and
fee services.
Cost of Revenues
Cost of revenues consists primarily of costs associated with
transmitting news services to customer sites, royalties to information content
providers and costs of communication systems sold to customers. Cost of revenues
for the quarters ended September 30, 1999 and 1998 were $2,766,000 and
$2,669,000, respectively, while the costs for the nine month periods ending
September 30 were $8,877,000 in 1999 and $9,005,000 in 1998. The decrease in
costs for the nine months ending September 30, 1999, compared to the same period
in 1998, corresponds to the decrease in revenues for the same periods. Year to
date gross margins were 47% in both 1999 and 1998.
Research and Development
Product development expenses consist primarily of design, testing and
support of the Company's existing and developing hardware, software and
services. Research and development expenses for the quarter ended September 30,
1999 increased 6% to $3,035,000 from the third quarter of 1998. Year to date
expenses increased 18% to $9,145,000 over the comparable prior year period. The
increases can be attributed primarily to the acquisition of WavePhore Labs, Inc.
in May, 1998 and eWatch, Inc. in November, 1998. The Company is integrating
products and services acquired, and is adding product offerings to its online
news delivery service in the business-to-business market. Additionally, the
Company continues to invest in its NewsPak and Jamcast services.
Sales and Marketing
Sales and marketing expenses for the nine months ending
September 30, 1999 decreased $1,541,000 or 13% from the same period in 1998, and
$1,778,000 or 37% for the three month periods. Decreased costs can be attributed
to a decrease in advertising dollars. Included in third quarter of 1998 were
marketing costs incurred with the launch of the WaveTop service.
General and Administrative
General and administrative expenses for the third quarter ended
September 30, 1999 and 1998 decreased $70,000 or 5%. Year to date expenses at
September 30, 1999 decreased $219,000 or 5% from the comparable period in 1998.
The reduction is primarily attributable to reduced professional fees being
incurred in 1999.
10
<PAGE> 11
Amortization
Amortization expense was $1,244,000 and $1,898,000 for the nine months
ending September 30, 1999 and 1998, respectively. During the fourth quarter of
1998, the Company evaluated several aspects of its business and made strategic
decisions that affected portions of the Company's businesses. The Company moved
to consolidate separate and autonomous business units and related functional
areas into one centralized WAVO operating company. The move has, and will
continue to allow the Company to create and integrate new products and services
for the business marketplace, leverage key portions of various existing WAVO
technologies, and emphasize a more narrow focus on key equipment customers and
equipment products. As a result, an evaluation and analysis of the Company's
intangible assets was conducted. Based on the projected earnings and
undiscounted cash flow analysis of the affected business activities, the Company
determined the fair value of certain intangibles should be adjusted.
Accordingly, intangibles were revalued, and $4,000,000 was recorded as a
nonrecurring, non-cash charge at that time. The nonrecurring charge in 1998
resulted in reduced amortization expense in the first nine months and third
quarter of 1999 compared to the same periods of the prior year.
Interest Expense and Interest Income
Interest expense for the first nine months of 1999 and 1998 was
comparable. Interest income declined in the first nine months of 1999 as
compared to 1998 due to a reduction in cash available for investment.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999 and 1998, the Company
used cash in its operations of $11,432,000 and $10,203,000, respectively.
Cash used in operations amounts are reduced by non-cash charges of
depreciation and amortization. Cash flows used in investing activities were
$4,207,000 in 1999 and $1,775,000 in 1998. The increase is partially due to the
Company's capital expenditures which totaled $2,705,000 in 1999 and $1,658,000
in 1998. The Company also made a $1,400,000 incentive payment in connection with
a previous purchase of a business.
The Company received net cash from financing activities of $663,000 in
1999 and $14,103,000 in 1998. The generation of cash in 1999 was from borrowings
on the credit facility. Additionally, in both 1999 and 1998, the Company
recorded proceeds from the issuance of common shares in connection with the
exercise of employee stock options, and also in 1998, from the exercise of
warrants to purchase common stock. Proceeds in 1999 were offset by treasury
stock purchases, payment of preferred share dividends and repayments of debt.
The Company purchased 60,000 treasury shares totaling $523,000 in the first nine
months of 1999.
On October 4, 1999, the Company completed a private placement of Series
D Convertible Preferred Shares ("Series D Shares") priced at $10,000 per share,
resulting in gross proceeds of $15,000,000. The Company estimates the net
proceeds of the offering, after expenses, to be approximately $13,925,000. The
Series D Shares carry a dividend rate of 10% per annum, which may be paid in
cash or common stock, and are non-voting. The conversion price of the Series D
Shares will be 100% of the lowest weighted average trading price of the
Company's common shares for any day during the six days ending on the conversion
date. The Company may call for conversion of various amounts of the outstanding
Series D Shares and at various times throughout the term of the agreement,
subject to certain conditions, including the availability of an effective
registration statement covering the resale of the underlying shares of common
stock. In addition, the Company has the right, subject to certain conditions, to
redeem any outstanding Series D Shares for cash, in whole or in part, at 110% of
par plus accrued dividends. In connection with this transaction, the Company
issued warrants to purchase up to 900,000 shares of its common stock at $4.641
per share. In addition, subject to certain conditions, the Company may elect to
sell an additional $5,000,000 of Series D Shares to the investors. The Company
intends to use the proceeds of the funding for working capital and to grow the
Company's business.
The Company currently has bank credit facilities available totaling
$7,000,000.
11
<PAGE> 12
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 and
may cause dilution of existing stockholder interests to the extent they are
funded through equity financings.
IMPACT OF YEAR 2000
The Year 2000 presents potential concerns for business computing due to
calculation problems from the general use of the two digit year format as the
year changes from 1999 to 2000. This problem may affect certain computer
software, hardware, and other systems containing processors and embedded chips.
Consequently, information technology ("IT") systems and Non-IT systems
(collectively, "Business Systems") may not be able to accurately process certain
transactions or information before, during or after January 1, 2000. As a
result, users of IT systems and Business Systems are at risk for potential
disruption to their business from malfunctions or failures of such systems. This
is commonly referred to as the Year 2000 Issue.
The Company could be impacted by any failure of its own IT and Business
Systems, as well as that of its suppliers, customers and business partners. The
Company relies on computer hardware, software and related technology, together
with data, in the operation of its business. Such technology and data are used
in creating and delivering the Company's products and services, as well as the
Company's internal operations, such as billing and accounting. The Company has
implemented an enterprise-wide Year 2000 compliance program utilizing a Year
2000 team, including the executive officers of the Company, to identify and
evaluate its IT and Business Systems, to identify and assess Year 2000 issues
related thereto, and to develop and implement a testing, remediation, and
contingency plan. The Year 2000 program has compiled a detailed inventory of the
hardware and software used in the Company's IT and Business Systems operations
and has substantially completed testing the components for Year 2000 compliance.
The Company is using the results of such procedures to determine which systems
are compliant, and which will be replaced or remediated. The Company believes
that replacement or remediation of its critical IT and Business Systems were
substantially completed by September 30, 1999.
The Year 2000 plan also includes resolving any Year 2000 issues that
are related to the Company's customers, suppliers and business partners.
Accordingly, the Company has sent correspondence to its information providers,
vendors and other suppliers requesting confirmation that they have a Year 2000
compliance program, the date they expect to be Year 2000 compliant, and to
warrant their products and services will function properly with respect to dates
after December 31, 1999. Because of the vast number of Business Systems used by
such third parties and their varying levels of Year 2000 readiness, it is
difficult to access the likelihood and impact of a malfunction due to third
party Year 2000 issues. The Company is not currently aware of any business
relationships with key third parties which it believes will be likely to result
in a significant disruption of its business. However, such a Year 2000 failure
could occur and have a material adverse affect on the Company. The Company
currently believes that its greatest Year 2000 risk is with its utility
suppliers, information providers, financial institutions, and suppliers of
telecommunications services, in the United States and various other locations
throughout the world in which the Company operates. Potential consequences of
the failure of the Company or key third parties to have Year 2000 compliant
systems include the failure to operate due to an interuption of utility and
property services, disruption, delays or errors in information collection,
management and distribution, network operation failures, the inability to
deliver products and services to or for customers, and delays in receiving
inventory and supplies. If any of such events were to occur, the results could
have a material adverse impact on the Company and its operations.
Concurrent with the remediation and evaluation of the IP Systems and
Business Systems of the Company, and the Business Systems of key third parties,
the Company is developing contingency plans to mitigate the risks that could
occur in the event of a Year 2000 business disruption. These contingency plans
may include securing alternate sources of critical services and supplies, and
such other actions as the Company may deem prudent. The Company currently is
unable to estimate the costs associated with developing and implementing these
contingencies.
12
<PAGE> 13
The Company estimates that the total cost of the Year 2000 Program will
be approximately $80,000, which is being funded by available cash. To date, the
Company has incurred approximately $70,000 ($20,000 expensed and $50,000
capitalized for new systems and equipment) related to all phases of the Year
2000 Program. The Company believes that approximately 50% of its remaining
estimated Year 2000 Program costs relate to remediation and will be expensed as
incurred.
The Company believes it has an effective Year 2000 Program in place to
resolve Year 2000 issues in a timely manner. Disruptions in the economy
generally resulting from Year 2000 issues could materially adversely affect the
Company.
FORWARD-LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and otherwise in this Report
are forward-looking. These may be identified by the use of forward-looking words
or phrases such as "believe", "expect", "anticipated", "should", "planned",
"estimated" and "potential" among others. These forward-looking statements are
based on the Company's reasonable current expectations. A variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in such
forward-looking statements. The risk and uncertainties that may affect the
operations, performance, development and results of the Company include: the
complexity and uncertainty regarding the development and implementation of high
technology products and services; market acceptance of new products and
services; the introduction of competing products or technologies by other
companies; pricing pressures from competitors and/or customers; changes in the
information services and data broadcasting industries and markets; the Company's
ability to protect its proprietary information and technology or to obtain
necessary licenses on commercially reasonable terms; the dependence of the
Company's businesses upon a variety of suppliers and vendors; the ability to
maintain computer and telecommunications systems, essential to its business
operations; the integration and assimilation of acquisitions; the need for
future additional financing; the risks and uncertainties of expansion into
various international markets; the ability to retain key employees; dependence
upon strategic alliances or relationships with other parties; volatility of the
Company's Common Share price; the adoption of new or change in existing
governmental regulations affecting the Company's business; and the Company's
ability to complete the implementation of its Year 2000 plan timely.
13
<PAGE> 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's exposure to market risk relates primarily to fluctuations
in short-term interest rates. The Company has performed a sensitivity analysis
and determined that based on current economic conditions, changes in short-term
interest rates would not have a material affect on its operating results or
financial condition.
14
<PAGE> 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(c) On September 24, 1999, the Company entered into a loan modification
agreement with Silicon Valley Bank to revise its credit facility. In connection
with this agreement, the Company issued to Silicon Valley Bank a warrant to
purchase 7,500 shares of common stock at an exercise price of $5.42 per share.
The exercise price and number of shares purchasable upon exercise of the
warrants are subject to adjustment upon the occurrence of certain dilution
events. The warrants were issued pursuant to the non-public offering exemption
from registration in Section 4(2) of the Securities Act of 1933, as amended.
On October 4, 1999, the Company completed a private placement to
institutional investors of 1,500 of the Company's $10,000 par value Series D
Convertible Preferred Shares (the "Series D Shares") and 900,000 warrants (the
"Warrants") to purchase the Company's common stock. The Series D Shares and
Warrants were sold with the assistance of Donaldson, Lufkin & Jenrette ("DLJ").
As the placement agent, DLJ received a fee of $1,000,000, plus reimbursement of
expenses in the amount of $25,000. The net proceeds of the offering, after
expenses, were approximately $13,925,000.
The Series D Shares carry a dividend rate of 10% per annum, which may
be paid in cash or common stock, and are non-voting. The conversion price of the
Series D Shares will be 100% of the lowest weighted average trading price of the
Company's common shares for any day during the six days ending on the conversion
date. The Company may call for conversion of various amounts of the outstanding
Series D Shares and at various times throughout the term of the agreement,
subject to certain conditions, including the availability of an effective
registration statement covering the resale of the underlying shares of common
stock. In addition, the Company has the right, subject to certain conditions, to
redeem any outstanding Series D Shares for cash, in whole or in part, at 110% of
par plus accrued dividends. In connection with this transaction, the Company
issued warrants to purchase up to 900,000 shares of its common stock at $4.641
per share. In addition, subject to certain conditions, the Company may elect to
sell an additional $5,000,000 of Series D Shares to the investors. The Company
intends to use the proceeds of the funding for working capital and to grow the
Company's business. The Series D Shares and Warrants were sold pursuant to the
non-public offering exemption from registration in Section 4(2) of the
Securities Act of 1933, as amended.
In September, 1999, JamCast.com, Inc. was formed as a collaboration
between the Company and Virgin Entertainment Group. In return for its
contributions, including its agreement to provide $15,000,000 of in-store
promotion over the next three years, Virgin Entertainment Group received a 25%
equity stake in JamCast.com, Inc. The remaining 75% interest in JamCast.com,
Inc. is owned by the Company. On September 14, 1999, in connection with the
formation of JamCast.com, Inc., the Company issued warrants to Virgin
Entertainment Group, Inc. to purchase an aggregate of 1,000,000 shares of the
Company's common stock. Warrants to purchase 500,000 shares are exercisable at
$4.00 per share and expire on September 14, 2001. Warrants to purchase the
remaining 500,000 shares are exercisable at $5.00 per share and expire on
September 14, 2004. The warrants were issued pursuant to the non-public offering
exemption from registration in Section 4(2) of the Securities Act of 1933, as
amended.
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 October 4, 1999, the Company filed a Current Report on Form 8-K,
reporting in Item 5, the issuance of 1,500 shares of its Series D Convertible
Preferred Stock and related Warrants in a private placement to institutional
investors.
15
<PAGE> 16
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.
WAVO Corporation
Date: November 12, 1999 By /s/ David E. Deeds
---------------------------------------
David E. Deeds,
President and Chief Executive Officer
(Duly Authorized Officer)
Date: November 12, 1999 By /s/ Kenneth D. Swenson
-----------------------------------------
Kenneth D. Swenson,
Executive Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
17
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,743
<SECURITIES> 0
<RECEIVABLES> 3,574
<ALLOWANCES> 345
<INVENTORY> 2,091
<CURRENT-ASSETS> 9,540
<PP&E> 11,795
<DEPRECIATION> 6,209
<TOTAL-ASSETS> 37,747
<CURRENT-LIABILITIES> 7,941
<BONDS> 2,973
5,521
0
<COMMON> 141,672
<OTHER-SE> (117,804)
<TOTAL-LIABILITY-AND-EQUITY> 37,747
<SALES> 16,729
<TOTAL-REVENUES> 16,729
<CGS> 8,877
<TOTAL-COSTS> 8,877
<OTHER-EXPENSES> 24,793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (245)
<INCOME-PRETAX> (16,696)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,696)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,696)
<EPS-BASIC> (.58)
<EPS-DILUTED> (.58)
</TABLE>
