<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR
[ ] 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: 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 Identification No.)
incorporation or organization)
3131 E. CAMELBACK ROAD, SUITE 320, PHOENIX, ARIZONA 85016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 952-5500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES - NO PAR VALUE
(Title of class)
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 [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Registrant's no par value Common Shares held
by non-affiliates of the Registrant, as of March 10, 2000, was approximately
$201,200,000.
The number of shares outstanding of the Registrant's no par value Common Shares
as of March 10, 2000, was 29,256,438 shares.
No documents are incorporated by reference into the text of this Report.
1
<PAGE> 2
Except as otherwise specified herein, any references to "WAVO" or the "Company"
include WAVO Corporation, an Indiana corporation, and each of its subsidiaries.
PART I
ITEM 1. BUSINESS
WAVO is a digital media services company, connecting media providers
with media consumers. WAVO partners with prominent providers of news, business
data, consumer content and multimedia programming to deliver value added digital
media services to businesses and consumers. The Company's technologies and
services aggregate, filter, customize and distribute digital media (text, music,
graphics and video), using a variety of delivery systems, including the
Internet, satellite broadcast systems, television and FM radio. The Company's
recently launched MediaXpress(TM) service leverages the Company's established
relationships with over 1,800 prominent news, business information and
multimedia content providers, and delivers that content in a customized,
Extensible Markup Language ("XML")-based format to businesses and consumers. The
Company's most recent product offering, Virgin JamCast(TM), a music portal, is a
collaboration with Virgin Entertainment Group that uses the Company's
proprietary multicast "push" technology to deliver digital music to consumers.
MEDIAXPRESS
The Company's MediaXpress service (formerly "NewsPak") delivers
pre-licensed, filtered, real-time news, information and entertainment to any Web
server, wherever located. MediaXpress aggregates content from the Company's
extensive base of content providers of more than 1,800 sources, who are leaders
in their respective markets. These content providers include such well-known
companies as Reuters, Dow Jones & Company, Standard & Poors and Associated
Press, among many others. MediaXpress aggregates the content by collecting
digital media from the content providers and translating it from its original
format into richly marked-up XML documents. The Company's proprietary XML-based
technology integrates and delivers the content quickly and meaningfully,
identifying and labeling important elements of the data and making the content
"smart". Using the Company's advanced technologies, and employing proprietary
hardware and software schemes, MediaXpress personalizes the digital media for
each customer. Only the content desired by the customer, defined by the user via
topic and key word selection, is delivered to that customer. MediaXpress allows
Web site operators to access and integrate the Company's digital media offerings
into their Web sites without the burden of license negotiations, dedicated lines
and special hardware. MediaXpress enables any user, from the largest commercial
portals to small Web sites, to go to the MediaXpress Web site, complete the
online subscription transaction, download a server application and immediately
begin to receive and publish streaming digital media on their Web site. Typical
users include corporate intranets, corporate portals, public portals and focused
Web sites. Because MediaXpress is customizable, it gives Web site operators and
developers the ability to determine the particular digital media to be delivered
to their Web sites, whether it's a full feed of all available sources, or a
filtered feed to deliver only such content which may be of interest to its
specific audiences. The Company also provides a single user version of
MediaXpress, which allows digital media providers to deliver their content
utilizing the Internet as the transport medium.
2
<PAGE> 3
The Company's proprietary WAVO Internet Delivery System ("WINDS") and
the Company's satellite broadcast network are utilized to transport the
MediaXpress digital media to client Web sites. The WINDS protocol creates a
virtual private network on the Internet that allows the Company to move digital
media securely and with assured delivery. The MediaXpress feed distribution
system enforces publisher-dictated policies with regard to usage, embargos,
re-distribution and syndication. MediaXpress also supports ancillary transport
mechanisms using the FTP and HTTP Internet protocols. Thus, the Company's
MediaXpress customers have the option of using the delivery method that they
choose, including multiple methods. The WINDS delivery technology offers the
particular advantage of assuring that the digital media is received by the
customer. Because WINDS caches every item on a packet-by-packet basis, if an
individual packet is not received, WINDS will automatically resend that item, so
that no part of the content is ever lost to the customer.
MediaXpress provides customers with a variety of tools to help them use
the XML documents and to make it easy for customers to integrate the content in
their Web site "out of the box". The customer's ability to display this
third-party content in a customized format in a cost-effective and secure manner
delivers added value and function to the customer's Web site. The integration of
the MediaXpress content in the customer's Web site encourages visitors to linger
and to revisit the Web site regularly. With more than ten million servers
hosting millions of Web sites throughout the world, and thousands of new Web
servers being added continually, the Company believes it is uniquely positioned
to take advantage of this rapidly-growing Internet commerce opportunity. The
Company has enlisted more than 80 business partners and OEMs as distributors of
its MediaXpress product. MediaXpress customers pay a one-time installation fee
and a yearly fee based on the customer's selected content sources. MediaXpress
was formally launched in March 2000.
The Company also provides its Newscast service as a premier business
information source designed for information professionals. Newscast allows 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 their PCs. Newscast enables end-users to filter
real-time news and other data from information providers and allows integration
of this flow of information into an organization's local area network or
electronic mail system for delivery to those within the organization who need
timely access to such information.
Newscast receives information from more than 7,000 national and
international publishing, broadcasting, financial and government data sources
continuously throughout the day, via satellite and other methods of electronic
transmission. Through the use of proprietary technology, the information is
processed and then delivered to approximately 200,000 corporate users throughout
the world via the Internet, and customer's Intranets and extranets. The Newscast
service is Internet-based and requires no dedicated on-site servers. Newscast
provides customization of the user interface and information profiles for
organizations and individuals who subscribe to the service. The Newscast service
utilizes patented Fast Data Finder text filtering and categorization technology
licensed to the Company. The Fast Data Finder is a massively-parallel hardware
accelerator for high-precision, large-scale text profiling that enables the
filtering of raw information and customization of information on a very large
scale. The Fast Data Finder uses the custom-built profiles to filter information
for each customer.
3
<PAGE> 4
The Company's Newscast customers include BankOne, Motorola, Sybase,
IBM, KPMG, Federal Reserve Bank, Towers Perrin, Kimberly Clark, Raytheon,
Hewlett Packard, Midas International and Chevron, among others. The Company's
Newscast customers are charged an annual subscription fee, plus a one-time
installation fee. The subscription fee includes the Newscast software, ongoing
customer support, and the customer's selection of information providers. During
1998, Newscast licensed localized versions of its Newscast service for
distribution by licensees in Canada and Australia.
The Company's MediaXpress Digital Media Delivery Service provides
wireless digital media delivery, digital media network services and related
equipment to providers of financial data, news, and other information, such as
Reuters America, Inc., Dow Jones & Company, Inc., the Associated Press,
Knight-Ridder, Inc., S & P Comstock and Thompson Financial Services. The
Company's broadcast networks utilize established technologies, such as FM
subcarrier and small dish satellite broadcasting technologies, which are well
suited to the economical one-way transmission of time-sensitive data from one
central location to many remote sites. The Company's FM subcarrier transmission
operations are established in 10 major United States markets that, combined with
the Company's small dish satellite coverage, enable the Company to serve the
continental United States and the major population centers in Canada. In
response to increased customer requirements, the Company commenced operation of
a European satellite data network based in London, England in 1998. This network
enables the Company to provide similar digital media delivery services for a
wide variety of information companies throughout Europe, North Africa and parts
of the Middle East. The Company's packet-switched networks are shared by many
content providers and end-users, with data from each content provider uniquely
identified and addressed only to those end-users who subscribe to its services.
Content providers transmit information to the Company's digital media centers in
Salt Lake City and London, using dial-up and dedicated telephone lines or
dedicated satellite channels. The Company's computers process the information
and provide addressing, proprietary error correction and encryption. This
information is then organized into "packets," each of which contains data
identifying the source and destination of the message and other important
network management information. These packets are then multiplexed to form a
single shared transmission stream, which carries the data from multiple content
providers.
The Company's Digital Media Center in Salt Lake City, Utah, routes this
combined data stream over dedicated telephone lines and satellite channels to
shared satellite uplinks where it is transmitted via satellite to 19 FM radio
station subcarriers located in 10 major U.S. cities, reaching more than 10,000
FM receivers. The satellite also transmits the data stream to more than 20,000
satellite receivers at end-user locations that may be outside the range of FM
broadcast signals. The Company's satellite receivers and computer processors at
each FM radio station broadcast the digital information over an unused portion
of the FM station's allocated spectrum, known as the FM subcarrier.
Information broadcast via the FM radio station signal or satellite is
received and processed by the Company's proprietary Intelligent Data Receiver
("IDR"). The IDR receives the signal, decrypts it, and formats it for use by the
end-users' personal computers, printers or other output devices. Each IDR is
programmed to accept only that information which is specifically addressed to
its end-user. This selective addressing capability is controlled remotely at the
Company's Digital Media Center.
4
<PAGE> 5
The IDR is a key component of the Company's digital media networks, and
incorporates several custom integrated circuits in its design. Customers may
purchase or lease IDRs from the Company. The Company's IDRs feature multiple
level addressability, remote programmability, data buffering and integral
diagnostics. IDRs cannot be used in connection with any devices or data other
than those provided by the Company.
The Company sells and leases hardware systems, in the form of
specialized communications equipment, to its network customers, as well as to
audio and data information providers who choose to manage their own networks.
The Company's equipment customers are located around the world, including
Argentina, Brazil, Chile, China, India, Japan, Mexico, Russia, Thailand and
Europe. The Company's equipment customers include Reuters, S&P Comstock, SkyTel
Corp., AEI Music Network, Inc., ALCAS B.V. and WSI Corporation, among others.
Customers, such as ALCAS B.V. and AEI, utilize the Company's hardware systems to
offer delivery of both music alone and music/data combinations to a variety of
customers, including retail outlets, restaurants, grocery stores and offices.
Other equipment customers include the distributor of securities trading
information for the Shenzhen (China) stock exchange; Agencia Estado, a leading
news broadcast and publishing agency in Brazil; Telenor, Norway's
government-owned telecommunications company; InfoSel, Mexico's largest Internet
service provider and a major distributor of news and information; suppliers of
photographs for the newspaper industry; and vendors of digitized weather
imagery, among others. The Company provides receiver site and uplink equipment,
digital media network management systems, equipment maintenance and equipment
installation, as well as complete turnkey systems to operators of private
networks.
The Company's WINDS technology complements the Company's FM and
satellite digital media delivery systems by reaching end-users who may not be
located within a satellite or FM footprint required for the traditional means of
delivery to customers. Data delivered via WINDS is fully compatible with the
broadcast streams sent over the Company's FM and satellite systems. This assures
that customers' software platforms written to the Company's existing protocols
also work with WINDS.
The Company provides fee-based, in-house professional services to
deliver custom digital media integration solutions for certain of the Company's
major corporate customers.
VIRGIN JAMCAST
In September 1999, the Company formed JamCast.com, Inc., and partnered
with Virgin Entertainment Group, Inc., to offer "Virgin JamCast(TM)", a digital
music Internet service. The Company and Virgin Entertainment Group own 75% and
25%, respectively, of JamCast.com, Inc. Virgin JamCast is an innovative digital
music Web portal that uses the Company's proprietary multicast "push" technology
to deliver digital music to an Internet-wide audience. Virgin JamCast
proactively distributes digital music to consumers by delivering it in the
background on the customer's existing connection to the Internet. Customers can
register to download the Virgin JamCast software and receive the Virgin JamCast
service for free. Registered customers of Virgin JamCast can select from a
choice of 13 musical genres that will be delivered each week to the member's PC.
Each week, Virgin JamCast will send to the consumer a package of 20-30 songs
from well-known and independent artists within the
5
<PAGE> 6
respective genres. The Virgin JamCast member has the choice of playing the
entire selection, or reviewing the list and playing only a few of the
selections. If the member does nothing, the files will automatically be replaced
next week with new selections. The Company is not aware of any other digital
music Web site that utilizes this method to distribute music to consumers.
Virgin JamCast offers thousands of selections of digital music for downloading,
storing to play at a later time, or purchasing. The Virgin JamCast member is
permitted to listen to the selection three times, or to hold the selection for
three days to sample it before buying a download of the digital music. Because
Virgin JamCast delivers digital music to the customer's PC in the background,
utilizing the Company's proprietary technology, it eliminates the wait generally
associated with traditional music downloads on the Internet.
Virgin JamCast utilizes WAVO's Asynchronous Reliable Multicast Protocol
("WARM") technology, an enhancement of the current IP/Multicast ("IP/M")
service, to deliver digital music. IP/M is an open standard for broadcasting on
the Internet that has been used primarily for business-to-business purposes and
has been endorsed by Microsoft, Oracle and others. The Company believes that
Virgin JamCast is the first consumer application to use IP/M. IP/M technology
establishes an address on the Internet as a broadcast frequency, similar to a
radio frequency, which users can access. Because IP/M does not require the user
to have a direct connection to the host server, it has an advantage over other
Internet downloading and streaming technology. Also because IP/M does not
require a connection to the host server at the other end, the user's download
speed is only determined by the speed of the individual user's modem. This
technology assures that each consumer can receive high quality music, no matter
how many other users are accessing the service.
The Company's proprietary WARM Protocol eliminates the problem of
partial or incomplete delivery of IP/M digital music packets. The Company's WARM
technology assures a reliable IP/M method of delivery that ensures the integrity
of the digital media. Currently, approximately half of the Internet service
providers offer IP/M service. However, the Company believes that most Internet
service providers will convert to this technology in the future as it becomes
more accepted and its benefits more apparent. If a Virgin JamCast customer does
not have access to an Internet service provider that offers IP/M, his PC will
revert to a regular TCP/IP Internet connection directly with the Virgin JamCast
server.
The Company believes its WARM technology is superior to the downloading
and streaming technologies that are currently utilized in the online music
distribution market. Downloading is a very time-consuming process that requires
that the entire file be moved before any part of it can be used. Because
downloading uses compressed files, the quality of the delivered data is not as
good as the original. Streaming technology is similar to a radio broadcast, but
the digital media content cannot be captured on the consumer's hard drive and
replayed in the future. The Company's WARM technology allows the music both to
be heard immediately and to be saved on the user's hard drive for future use.
Through the participation of Virgin Entertainment Group, Virgin JamCast
will offer a full range of digital music selections encompassing the entire
spectrum of musical preferences. In addition, Virgin JamCast will offer music
from independent artists who can submit their digital music creations to the
Virgin JamCast site where it can be offered along with the rest of the
6
<PAGE> 7
Virgin JamCast selections. Virgin JamCast currently has access to digital music
catalogs with more than 100,000 total tracks.
Virgin JamCast will also permit the customer to purchase CDs and tapes
through its Web site. Virgin JamCast customers will be able to purchase music
online from the Virgin Mega Store, an affiliate of Virgin Entertainment Group.
As part of its partnership with the Company, Virgin Entertainment Group will
provide $15,000,000 of promotional consideration to Virgin JamCast, including
prominent display of Virgin JamCast promotions at its Virgin Mega Stores and
promotion of Virgin JamCast to its customers. Virgin JamCast will also offer the
opportunity to purchase physical goods from the library of Liquid Audio and
other major music distributors. The Company believes that this "clicks and
bricks" relationship, which combines the Internet and the traditional retail
experience, provides a significant revenue opportunity.
The Company has recently entered into an agreement with RealNetworks,
Inc. to feature a customized version of RealNetwork's Real JukeBox player on the
Virgin JamCast Web site. As a result, users of the Virgin JamCast Web site will
have the ability to easily receive and manage extensive personalized digital
music collections directly on their PC and play them back on the PC, a portable
music player or stereo system. The Virgin JamCast edition of the Real JukeBox
player will also be distributed on CD-ROM at Virgin Megastores.
Virgin JamCast expects to enter into additional strategic partnerships,
including agreements to link its service with other Web sites and portals, which
will provide for sharing of the revenue generated from sales on their sites. The
Company expects to initiate a significant Virgin JamCast advertising campaign
commencing in March 2000.
STRATEGIC ALLIANCES
The Company expects to seek additional strategic alliances or business
relationships with digital media providers, computer hardware and software
developers and manufacturers, set-top box manufacturers, sales and marketing
partners, consumer electronics manufacturers and others. Through such
relationships, the Company will seek to develop additional commercial
opportunities in digital media delivery. The Company is also seeking to enter
into further agreements for foreign commercialization of its products and
services.
RECENT EVENTS
In January 2000, the Company sold its eWatch Internet monitoring
business to PRNnet, an affiliate of PR Newswire, as a result of the Company's
decision to focus its Internet efforts on MediaXpress and Virgin JamCast.
In addition, during the first quarter of 2000, the Company decided to
transition its WaveTop service over the Vertical Blanking Interval ("VBI") of
the PBS television network to the Virgin JamCast service.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information regarding the Company's industry segments is
contained in Note 18 to the Company's Consolidated Financial Statements included
in Item 8.
7
<PAGE> 8
GOVERNMENT REGULATION
The Federal Communications Commission ("FCC") authorizes FM station
licensees to utilize subcarriers within the FM baseband signal for specified
purposes, including digital media delivery. The Company has entered into
contracts with certain FM licensees to lease their subcarriers to deliver
digital media. The Company is not currently required to hold an FCC license to
act as a private carrier to use FM subcarrier channels. An FM license is granted
for a period of seven years and may be renewed by the FCC for like terms.
Although there can be no assurance that the licenses for the FM stations used by
the Company will be renewed, the Company believes that adequate alternative FM
stations would be available for use by the Company.
The Company currently holds two FCC licenses for satellite uplinks in
Salt Lake City, Utah, which licenses expire in October 2002 and January 2008.
These uplink licenses are subject to renewal and may be revoked for cause. There
can be no assurance that these licenses will be renewed upon their expiration.
SALES AND MARKETING
The Company sells its various digital media services and related
hardware products through focused sales channels. Currently, the Company has a
direct sales force, a leveraged reseller sales organization of value-added
resellers and web developers, relationships with key Internet software
companies, Original Equipment Manufacturers (OEMs) and Strategic Partners. The
Company has a structured selling process that targets digital media content
providers as well as media consumers who could benefit from the use of the
Company's technologies and services. By utilizing the various sales channels,
the Company is capable of national geographic coverage, as well as targeting
specific potential customers. The Company's direct sales force targets senior
decision makers at designated high profile accounts. The reseller channel
focuses on selling the Company's products and services to meet their own
clients' digital media information requirements. The OEM Channel brings the
Company's technologies to the premier portal software development companies to
be included in their product offering. The Company demonstrates its services and
displays its equipment at industry trade shows, conferences, and in-person sales
presentations and demonstrations, and conducts real-time demonstrations on the
Internet at www.mediaxpress.com.
The Company's sales efforts expect to capitalize on the rapidly
expanding market for Internet-based delivery of digital media to businesses and
consumers.
The Company uses both online and offline marketing strategies to
stimulate demand and develop brand awareness for its core product lines,
MediaXpress and Virgin JamCast. This includes print, broadcast and online
advertising, public relations, direct marketing, trade shows and sales promotion
activities.
In the fourth quarter of 1999, the Company significantly expanded the
music content available on the Virginjamcast.com Web site and, in support
thereof, has developed an aggressive marketing program, planned to launch in the
first quarter of 2000. In addition to national print, radio, television, online
advertising and direct marketing, the program will also feature extensive
8
<PAGE> 9
retail promotion at Virgin Megastores throughout the country, sponsorships of
major music industry events, and promotional activities of major and independent
artists in partnership with major record labels. The goals of these marketing
programs are to generate brand awareness, significant user traffic to the
Company's Web site and subscribers to the Virgin JamCast service.
The Company's MediaXpress service, which was launched in October 1999
under its former name, "NewsPak", was initially marketed to develop partnerships
with major media providers as well as to develop a "reseller" partner program.
This program resulted in the licensing of over 1,000 new content sources and
developing partnerships with over 80 Web development and services firms who, in
turn, provide the MediaXpress service to their clients. The extension of this
marketing program began in the first quarter of 2000, with the repositioning of
NewsPak to MediaXpress, and commencing a national business-to-business, online
and print advertising program targeted at Web site owners who have a need for
real-time streaming news and information on their Web sites.
MANUFACTURERS AND SUPPLIERS
The Company contracts with outside providers of manufacturing services
to produce its digital delivery equipment. In addition, the Company customizes,
tests and repairs network products at its Salt Lake City facility. The Company
believes that it will be able to obtain digital delivery equipment in a timely
manner, either from its current suppliers or from one or more other suppliers,
to meet present and future orders for such equipment. However, there can be no
assurance that extended interruption in the supply of digital delivery equipment
would not result in delays and/or order cancellations, which could have a
material adverse effect on the Company's business.
The Company does not intend to directly manufacture products in the
future, but will contract with third parties for their manufacture, as
appropriate.
PATENTS AND PROPRIETARY RIGHTS
The Company relies upon a combination of patent, copyright, trademark
and trade secret laws, confidentiality and nondisclosure agreements, and other
measures to establish and protect its proprietary rights to its technologies,
products and services. Such protection may not preclude competitors from copying
or learning from the Company's technologies, products and services, or from
developing similar technologies, products and services. Also, there can be no
assurance as to the range or degree of protection that the Company's existing
patents and any future patents will afford, that such patents will provide any
competitive advantages for the Company, or that others will not obtain patents
similar to any patents issued to the Company. Any patents issued to the Company
may be challenged by third parties, invalidated, rendered unenforceable or
designed around. The Company's pending patent applications or future
applications may not result in the issuance of any additional patents to the
Company. Since patent applications in the United States are maintained in
secrecy until patents issue, and since publication of inventions in technical or
patent literature tends to lag behind actual discoveries, others may obtain
patents for technology that the Company's technology will infringe, and that
technology would need to be designed around or licensed from the inventor by the
Company. No assurance can be given that the Company's technology will not
infringe patents or
9
<PAGE> 10
proprietary rights of others, nor that the Company can obtain licenses to use
such proprietary rights if necessary. If the Company deems it necessary to
license technology to avoid infringement, such licenses may not be available on
terms acceptable to the Company. In addition, the Company's competitors may
independently develop technologies that are substantially equivalent or superior
to the Company's technology. Further, the laws of certain countries in which the
Company's products may be sold or licensed may not protect the Company's
products and intellectual property rights to the same extent as the laws of the
United States. Any litigation to determine the validity of any third party
claims could result in significant expense to the Company, adversely affect
operating results and divert the efforts of the Company's technical and
management personnel, whether or not such litigation is resolved in favor of the
Company. Although the Company is not aware of any pending or threatened
litigation involving such matters as of the date hereof, in the event of an
adverse result in any such litigation, the Company could be required to expend
significant resources to develop non-infringing technology or obtain licenses to
the disputed technology. The Company may not be successful in such development,
and any such licenses may not be available on commercially reasonable terms.
The Company's technologies, products and services also incorporate
subject matter that the Company believes is in the public domain and subject
matter that is licensed to the Company or that it otherwise believes it has the
right to use. However, third parties may assert patent or other intellectual
property infringement claims against the Company with respect to such
technologies, products and services, or other matters. There may be patents and
other intellectual property relevant to the Company's technologies, products and
services which are unknown to the Company and which are owned by third parties.
SEASONAL NATURE OF BUSINESS
The Company has experienced quarterly fluctuations in operating
results, and expects that such fluctuations will continue. These fluctuations
are caused by various factors, including the timing of significant orders from
major customers and the timing of installations and deliveries. In addition, the
Company's operating results may be influenced by seasonality, which in the past
has generated additional sales, resulting in increased revenue in the fourth
quarter. Because of these factors, the Company expects that its future quarterly
results of operations will continue to be subject to significant fluctuations.
WORKING CAPITAL -- INVENTORY AND RECEIVABLES
As of December 31, 1999, the inventory and accounts receivable portion
of working capital totaled approximately $6,040,000.
MAJOR CUSTOMERS
No single customer accounted for 10% or more of the Company's
consolidated revenues for the year ended December 31, 1999.
10
<PAGE> 11
BACKLOG
At December 31, 1999, the Company's backlog was approximately
$1,898,000, all of which is expected to be delivered in 2000. As of December 31,
1998, the Company had approximately $2,300,000 of backlog.
RENEGOTIATION OR TERMINATION OF GOVERNMENT CONTRACTS
As of December 31, 1999, no material portion of the Company's business
was subject to renegotiation of profits or termination of contracts or
subcontracts at the election of the government.
COMPETITION
The Company has aggressive competitors in the Internet, content
aggregation and digital media delivery business. The Company's sales and
potential profitability will be affected by competition from other businesses,
including established firms with greater financial and technical resources, and
more experience in digital media delivery than the Company. The Company is aware
of numerous competitors that provide products and services similar to those
offered by the Company, including, among others, (i) content providers and
content delivery providers, such as Screaming Media.net, Isyndicate.com, Tibco,
Starburst, Globalcast, Harmonic Data Systems, Digital Island, Akamai, Loral
Space and Communications, Cidera and Moreover.com, with respect to MediaXpress;
(ii) digital music providers and deliverers, such as A2B Music, Crunch Music,
Digital on Demand/Red Hot, Direct Audio, Emusic.com, Epitonic, Liquid Audio,
Mjuice, MP3.com, MusicMaker, NEW (Nordic Entertainment Worldwide), Riffage,
TechnoMusic and Tunes.com, with respect to Virgin JamCast; (iii) News Edge
Corporation, Data Broadcasting Corporation, AP SatNet, Sandpiper Networks,
Fantastic Corporation, MicroSpace Corp., EchoStar, Hughes DirectPC, cable
television operators and telephone/long distance companies with respect to
digital media delivery services; and (iv) Wegener Communications, Comstream
Corporation, International Datacasting Corporation and Scientific-Atlanta, Inc.
in the digital media delivery equipment business.
Additional competitors will enter these markets as demand for such
products and services expands. The Company's product development, sales and
marketing efforts will be critical, as the Company will continue to face intense
competition in the marketplace. There can be no assurance that the Company will
be able to provide the technological enhancements and new products and services
necessary to maintain its competitive position, or have the financial resources
to make the required investments in sales, marketing, engineering, and research
and development necessary to sustain a competitive position for its products and
services. The Company's financial condition and results of operations may be
adversely affected by the actions of existing or future competitors, including
the development of new technologies, the introduction of new products and
services, and the reduction of prices to gain or retain market share.
RESEARCH AND DEVELOPMENT
As of March 10, 2000, the Company's research, development and
engineering staff consisted of 33 full-time employees. The Company also engages
consultants on a contract basis
11
<PAGE> 12
to perform certain research and development projects. In the three years ended
December 31, 1999, 1998 and 1997, the Company incurred approximately
$13,269,000, $10,913,000 and $7,440,000, respectively, in research and
development expenses.
ENVIRONMENTAL PROTECTION
As of December 31, 1999, the Company's business, capital expenditures,
earnings and competitive position were not materially affected by compliance
with federal, state or local provisions that have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, and the Company does not
anticipate any material capital expenditures for environmental control
facilities in the foreseeable future.
EMPLOYEES
As of March 10, 2000, the Company employed approximately 140 full-time
and no part-time employees. None of the Company's employees are represented by a
labor union. The Company considers its relations with its employees to be good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
During the fiscal years ended December 31, 1999, 1998 and 1997,
approximately 20%, 22% and 27% of the Company's revenues were from sales to
customers outside of the United States. The majority of the exports in 1999 were
to customers in Europe and Asia, with sales of $2,665,700 and $589,300,
respectively. The remaining export sales of $187,500 were primarily to customers
in North and South America. Currently, all of the Company's significant
operations are based in the U.S. and, accordingly, the Company does not report
operating profits or assets by geographic regions.
ITEM 2. PROPERTIES
The Company leases a 13,000 square-foot facility in Phoenix, Arizona,
for its Virgin JamCast operations, and certain of its product development, sales
and marketing operations. The lease provides for annual rent expense of
approximately $216,000, and expires in July 2001.
The Company leases a 12,126 square-foot facility in Phoenix, Arizona,
for its executive offices. The lease provides for annual rent expense of
approximately $333,465, and expires in April 2004.
The Company leases a 30,000 square-foot facility in Salt Lake City,
Utah, for a Digital Media Center. The lease provides for annual rent expense of
approximately $396,000, and expires in July 2001.
The Company leases a 2,667 square-foot facility in New York City for
its MediaXpress sales staff. The lease provides for annual rent expense of
approximately $109,000, and expires in August 2004.
12
<PAGE> 13
The Company leases a 1,818 square-foot facility in London, England, for
its European Digital Media Center. The lease provides for an annual rent expense
of approximately pound sterling 25,500, and expires in June 2002.
The Company leases a 10,000 square-foot facility in Dallas, Texas, for
its Newscast operations. The lease provides for an annual rent expense of
approximately $130,000, and expires in May 2001.
The Company leases a 6,310 square-foot facility in Rosewood, New
Jersey, for its software product development center. The lease provides for an
annual rent expense of $151,440, and expires in June 2004.
The Company believes that its current facilities are adequate to
support the levels of its present operations and that suitable additional or
alternative space will be available as needed to accommodate expansion needs.
ITEM 3. LEGAL PROCEEDINGS
As of March 10, 2000, the Company was not a party to any material
pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Company's Common Shares are traded on the Nasdaq Stock Market under
the symbol "WAVO".
The following table sets forth the range of high and low sales prices
for the Company's Common Shares for each quarter during 1998 and 1999, as
reported by Nasdaq:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH SALES PRICE LOW SALES PRICE
------------- ---------------- ---------------
<S> <C> <C>
March 31, 1998 $ 11.750 $ 8.188
June 30, 1998 $ 19.125 $10.500
September 30, 1998 $ 16.938 $ 4.875
December 31, 1998 $ 15.500 $ 3.250
March 31, 1999 $ 10.688 $ 5.688
June 30, 1999 $ 10.875 $ 5.563
September 30, 1999 $ 6.656 $ 3.469
December 31, 1999 $ 6.000 $ 3.625
</TABLE>
(B) HOLDERS
As of March 10, 2000, the Company had approximately 444 holders of
record of its Common Shares, and believes it has approximately 18,000 beneficial
holders who are participants in security position listings of its Common Shares.
(C) DIVIDENDS
The Company has not paid any cash dividends on its Common Shares. The
Company currently intends to retain all available funds for use in its business,
and does not anticipate paying any cash dividends on its Common Shares in the
foreseeable future.
The Company's revolving line and equipment line credit agreements with
Silicon Valley Bank contain certain financial covenants, which include the
prohibition of dividends on Common Shares. In addition, the provisions of the
Company's 1994 Cumulative Convertible Preferred Stock and Series D Convertible
Preferred Stock may limit or prohibit the payment of dividends on its Common
Shares in certain circumstances.
14
<PAGE> 15
(D) RECENT SALES OF UNREGISTERED SECURITIES
Information regarding the Company's sales of equity securities that
were not registered under the Securities Act of 1933, as amended, is contained
in the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1999, June 30, 1999, and September 30, 1999.
On November 5, 1999, the Company issued 224,960 restricted Common
Shares to the former shareholders of eWatch, Inc. as final consideration for the
Company's acquisition of eWatch, Inc. in 1998. The Company's Common Shares
issued in the transaction were valued at $807,796. The Common Shares were issued
pursuant to the non-public offering exemption from registration in Section 4(2)
of the Securities Act of 1933, as amended.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes the last five years of financial information for
the Company. This selected data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7, and the Consolidated Financial Statements, related notes thereto, and
the auditors' reports included in Item 8 hereof.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data(1)
Revenues $ 22,115 $ 22,296 $ 22,590 $ 19,020 $ 813
Cost of Revenues 11,481 11,646 12,481 11,226 560
-------- -------- -------- -------- --------
Gross Margin 10,634 10,650 10,109 7,794 253
Operating Expenses:
Research and development 13,269 10,913 7,440 3,874 3,812
Sales and marketing 12,929 15,503 9,918 5,758 1,547
General and administrative 6,039 5,756 4,902 5,389 2,311
Amortization 1,783 2,548 2,134 1,931 42
Nonrecurring charges 8,491 4,600 -- -- --
Charge for purchased research
and development -- 480 6,000 -- 8,474
-------- -------- -------- -------- --------
42,511 39,800 30,394 16,952 16,186
Other (income) expense:
Interest expense 258 210 239 197 15
Interest income & other (605) (875) (740) (740) (492)
Minority interest (417) -- -- -- --
-------- -------- -------- -------- --------
Net loss $(31,113) $(28,485) $(19,784) $ (8,615) $(15,456)
-------- -------- -------- -------- --------
Less: Preferred stock dividends (1,437) (1,552) (1,708) (1,693) (552)
-------- -------- -------- -------- --------
Net loss after preferred stock dividends $(32,550) $(30,037) $(21,492) $(10,308) $(16,008)
======== ======== ======== ======== ========
Basic and diluted net loss per common share
after preferred stock dividends $ (1.13) $ (1.38) $ (1.29) $ (0.76) $ (1.57)
======== ======== ======== ======== ========
Number of shares used in
per share calculation 28,827 21,774 16,676 13,554 10,195
======== ======== ======== ======== ========
Balance Sheet Data(1)
Short-term debt, including
accrued interest $ 2,831 $ 2,052 $ 2,232 $ 2,258 $ 1,197
Working capital 10,304 18,100 17,970 15,747 10,999
Long-term debt 1,056 40 12 98 638
Property and equipment, net 5,672 4,762 4,507 2,281 2,014
Total assets 42,425 52,987 52,991 41,562 38,258
Series D preferred shares 12,120 -- -- -- --
Shareholders' equity 19,873 44,630 45,612 35,854 30,806
</TABLE>
(1) See Note 2 of the Notes to Consolidated Financial Statements regarding
business acquisitions.
No cash dividends have been paid on common stock.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
WAVO Corporation (the "Company"), formerly WavePhore, Inc., is in the
business of moving media. As an industry leading Digital Media Services
Provider, WAVO partners with the foremost providers of news, business data,
content and multimedia programming. Adding value for media providers over the
Company's Internet-based delivery systems, including content management and
electronic commerce services, the Company delivers quality content to an
information - dependent society. The Company enables people and enterprises to
more efficiently receive, manage and productively use all types of time
sensitive, 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 delivery
systems. It has technology sourcing and strategic alliances with Microsoft,
Virgin Entertainment Group, Liquid Audio, Ask Jeeves, Inc. and Real Networks,
Inc.
The Company's 75% owned subsidiary, JamCast.com, Inc., was created in
conjunction with the Company's agreement with Virgin Entertainment Group
("Virgin Entertainment"), to form Virgin JamCast. Virgin JamCast is an Internet
broadcasting service that provides music and computer game fans with the most
direct way to enjoy their favorite artists or games without the long wait
typically associated with such downloads. In return for providing $15,000,000 of
in-store promotion and other consideration, Virgin Entertainment has a 25%
equity stake in JamCast.com, Inc. Additionally, Virgin Entertainment acquired
warrants to purchase WAVO Common Shares. JamCast.com operates as an independent
entity with the Company, providing developmental, technical, financial and
operational support. The Company expects to launch the Virgin JamCast service in
March 2000.
The Company's MediaXpress service, an Internet-driven broadcasting
solution, delivers various media from 34 top sources, generating more than 2,000
stories a day. It allows Web site operators and developers to put pre-licensed,
real-time news and other entertainment media from top-name content sources on
their sites quickly and with minimum effort. Pre-packaged news feeds are
delivered over the Internet in a standardized format. A MediaXpress developer's
kit provides easy integration into an enterprise's Web site or Intranet. The
service uses XML delivery format, based on open standards to allow more complex
data processing and analysis, perform more precise searches, share data
efficiently and navigate data more easily than HTML formats.
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.
17
<PAGE> 18
The Company utilizes VBI technology, whereby data is embedded into
existing TV broadcast signals. The Company has an agreement with PBS National
Datacast, Inc., and its member stations that provide nationwide broadcast
coverage.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues
Revenues are derived primarily from the following activities: (i)
digital media delivery services generate volume-based fees and revenues from the
sale or rental of communication systems; and (ii) subscriptions to information
services and related fee-based integration consulting services. Revenues for the
years ended December 31, 1999, 1998 and 1997 were $22,115,000, $22,296,000 and
$22,590,000, respectively. Subscription and fee services in 1999 grew 12% over
the prior year. There was a 5% decrease in information delivery services and
communications systems, most of which related to reduced sales of communications
systems. Recurring information delivery services remained relatively constant
from 1998. Subscription and fee services revenue during 1998 increased 87% from
1997. Information delivery services and communication systems sales were
significantly impacted by decreased overseas sales of communication systems,
caused primarily by economic turmoil in certain international markets.
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 computer hardware and software sold to customers. Cost of
revenues for the years ended December 31, 1999, 1998 and 1997 were $11,481,000,
$11,646,000 and $12,481,000, respectively. Gross margin dollars were comparable
from 1999 to 1998. Margins have steadily improved as a larger percentage of the
Company's revenue is generated by higher margined products, such as information
delivery and subscription services. Gross margins were 48% in 1999 and 1998, and
45% in 1997.
Research and Development
Research and development expenses for the years ended December 31,
1999, 1998 and 1997 were $13,269,000, $10,913,000 and $7,440,000, respectively.
Product development expenses consist primarily of design, testing and support of
the Company's existing and developing hardware, software and services. In 1999,
research and development expenses increased $2,356,000, or 22%. The significant
increases in expenditures relate to the development of new and enhanced services
for a growing customer base, including MediaXpress and the Company's new
consumer product, Virgin JamCast. Additionally, expenses associated with leasing
the infrastructure used in the Company's media delivery services increased
approximately $1,000,000 from 1998. Increases in 1998 from 1997 corresponded to
the investments made in the Company's VBI technology, and additions and
enhancements made to products within the business-to-business market.
18
<PAGE> 19
Sales and Marketing
Sales and marketing expenses for the years ended December 31, 1999,
1998 and 1997 were $12,929,000, $15,503,000 and $9,918,000, respectively.
Advertising expenses decreased over $1,700,000 from 1998, the year in which the
WaveTop product was launched. The Company anticipates significant marketing
expenditures in 2000 and beyond to promote the Virgin JamCast and MediaXpress
products. Virgin Entertainment Group will also contribute advertising and
promotion dollars to cultivate consumer awareness of the Virgin JamCast product.
Sales and marketing expenses in 1998 increased $5,585,000, or 56% from 1997.
These increases related primarily to advertising and promotional costs incurred
for the WaveTop service, additional compensation, increased travel, and
expansion of the sales force to aggressively pursue new markets and to
accommodate growth, particularly in the subscription and fee service area.
General and Administrative
General and administrative expenses for the years ended December 31,
1999, 1998 and 1997 were $6,039,000, $5,756,000 and $4,902,000, respectively.
Expenses increased 5% in 1999 from 1998 relating to increased personnel costs.
The increase in 1998 as compared to 1997 relates primarily to human resources
and other administrative areas in conjunction with the growth of the Company.
Amortization
Amortization expense was $1,782,000, $2,548,000 and $2,134,000 for
1999, 1998 and 1997, respectively. The increase in 1998 from 1997 relates to
increases in intangible assets of acquired businesses, specifically, Paracel
Online Systems ("Paracel Online") in 1997 and two smaller non-material business
acquisitions in 1998. Amortization expense in 1999 was down from 1998, resulting
from a write-down of intangible assets at the end of 1998.
Nonrecurring Charge
During the fourth quarter 1999, the Company made the decision to place
its ongoing focus on its MediaXpress and Virgin JamCast products. As a result of
this decision, the Company recorded an $8,491,000 non-cash charge in the fourth
quarter of 1999. Based on projected earnings and undiscounted cash flow analysis
of the business activities not related to its core products, the Company
determined an impairment of certain intangibles, primarily goodwill, existed,
and accordingly adjusted the carrying value of these assets to their estimated
fair value. Fair value was based on an estimate of future cash flows. The
Company does not anticipate any significant additional costs related to this
nonrecurring charge beyond those recorded.
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. This allowed the Company to create and integrate new products
and services for the business marketplace, leverage key portions of various
existing
19
<PAGE> 20
WAVO technologies, and emphasize a more narrow focus on key equipment customers
and equipment products. As a result, an evaluation 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 an
impairment of certain intangibles existed, and accordingly adjusted the carrying
value of these assets to their estimated fair value. Fair value was based on an
estimate of future cash flows. A nonrecurring, non-cash expense of $4,000,000
was recorded. The nonrecurring charge also included $600,000 in costs associated
with a reduction in work force resulting from the change in strategic direction.
The Company does not anticipate any significant additional costs, beyond those
recorded, to complete implementation of its new strategic direction.
Charge for Purchased Research and Development
The charges for purchased research and development of $480,000 in 1998
and $6,000,000 in 1997 were recorded in connection with the acquisitions of
eWatch and Paracel Online, respectively. The amounts represent research and
development of new products and product upgrades that were in process by the
acquired companies at the dates of acquisition.
Interest Expense
Interest expense for the years ended December 31, 1999, 1998 and 1997
was $258,000, $210,000 and $239,000, respectively. The increase in 1999 expense
relates to additional borrowings on the Company's credit facilities.
Interest Income
Interest income for the years ended December 31, 1999, 1998 and 1997
was $605,000, $875,000 and $740,000, respectively. The decrease in interest
income in 1999 is attributed to less cash available for investment. Conversely,
the increase from 1997 to 1998 relates to increased cash invested.
Minority Interest
Minority interest in 1999 represents a 25% interest in JamCast.com,
Inc., held by Virgin Entertainment Group ("Virgin"). The Company sold this
interest to Virgin in September 1999, in exchange for certain promotional
commitments.
Net Operating Loss Carryforward
At December 31, 1999, the Company has net operating loss carryforwards
of approximately $104,670,000 for federal income tax purposes that expire in
years 2004 through 2019, and $71,368,000 for state income tax purposes that
expire in years 2000 through 2004. The primary difference between the loss
carryforwards for financial reporting and tax purposes relates to the
capitalization of start-up costs for income tax purposes. Start-up costs are
deductible over a five-year period commencing in 1996, which is the year the
Company advanced from the research and development stage into production and
sales for federal and state income tax purposes. For financial reporting
purposes, a valuation allowance of $45,852,000 has
20
<PAGE> 21
been recognized to offset the Company's deferred tax assets. Certain of the
Company's net operating loss carryforward may be limited based upon change in
ownership rules.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1999, 1998 and 1997, the Company
used cash in its operations of $16,616,000, $15,315,000 and $13,407,000,
respectively. Cash flows used in investing activities were $4,755,000 in 1999,
$2,457,000 in 1998 and $11,396,000 in 1997.
In 1999, the Company used cash to make an acquisition payment to
Paracel Online of $1,434,000. In 1998, the Company used $456,000 to purchase
WavePhore Labs and eWatch, and $8,906,000 in 1997 to purchase Paracel Online,
all net of the cash acquired. During 1999, 1998 and 1997, the Company's capital
expenditures totaled $3,253,000, $2,003,000 and $2,385,000, respectively.
The Company received cash from financing activities of $15,148,000 in
1999, $23,939,000 in 1998 and $24,563,000 in 1997. In October 1999, the Company
issued 1,500 shares of Series D Convertible Preferred Shares, generating
$15,000,000 before cash issuance costs of $1,161,000. See Note 11 to the
Consolidated Financial Statements for additional discussion.
In December 1998, the Company completed a private placement of 879,116
of its Common Shares for gross proceeds of $7,500,000. In 1997, the Company
authorized and issued 24,000 Series C Convertible Preferred Shares with a stated
value of $1,000 per share. Net proceeds were $22,763,000 after placement costs.
The Company also received proceeds of $359,000 in 1998 and $1,094,000 in 1997
from the exercise of Series B Preferred Share warrants. Additionally, the
Company received proceeds of $17,943,000 and $1,771,000 in 1998 and 1997,
respectively, from the issuance of Common Shares relating to the exercise of
previously issued warrants and stock options. The Company purchased $523,000,
$705,000 and $363,000 of its Common Shares in 1999, 1998 and 1997, respectively.
In August 1998, the Board of Directors of the Company approved a stock
repurchase program under which the Company may purchase up to 1,000,000 shares
of the Company's common stock through open market transactions at prevailing
market prices. In addition, the Company paid cash dividends on its 1994
Cumulative Convertible Preferred Stock in 1999, 1998 and 1997, and Series A and
B Preferred Shares in 1998. Dividends paid during 1999, 1998 and 1997 were
$552,000, $761,000 and $552,000, respectively.
Depending upon the pace of revenue growth during 2000, the Company may
need additional equity funding and/or credit facilities to support operating
activities late in 2000. If necessary, the Company believes that it will be able
to generate additional funding for operations and its accelerated internal
growth plans through equity offerings similar to those it has completed in the
past. Additionally, the Company currently has credit facilities available
totaling $8,000,000. Available credit on facilities is approximately $4,300,000
at December 31, 1999.
21
<PAGE> 22
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 interest to the extent they are
funded through equity financings.
RISKS ASSOCIATED WITH THE YEAR 2000
The Year 2000 issue refers to the potential for system and processing
failures of date-related calculations, and is the result of some earlier
computer-controlled systems using two, rather than four, digits to define the
applicable year. For example, computers that have time-sensitive software may
recognize a date using "00" as the year 1900, rather than the year 2000.
To date, the Company has not experienced any material Year 2000 issues,
and has been informed by its material suppliers and vendors that they have also
not experienced material Year 2000 issues that would affect the Company's
business. The Company's products were developed and refined with an awareness of
the Year 2000 issue, and do not employ two digits to define the applicable year.
The Company's Year 2000 expenses related to the operating costs associated with
time spent by employees in the evaluation process, the purchase of compliant
equipment and software, and year 2000 compliance matters generally.
FORWARD-LOOKING STATEMENTS
Certain statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and certain other sections of
this Annual 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 the Company's 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 digital media delivery services industry 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; and volatility of
the Company's Common Share price.
22
<PAGE> 23
ITEM 7A. 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 effect on its operating results or
financial condition.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
24
<PAGE> 25
Independent Auditors' Report
Board of Directors and Shareholders
WAVO Corporation
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of WAVO Corporation
as of December 31, 1998, and the related consolidated statements of operations,
changes in preferred stock and shareholders' equity, and cash flows for each of
the two years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WAVO Corporation
at December 31, 1998, and the consolidated results of its operations and its
cash flows for each of the two years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
January 25, 1999
25
<PAGE> 26
Independent Auditors' Report
Board of Directors and Shareholders
WAVO Corporation
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of WAVO Corporation
(formerly WavePhore, Inc.) as of December 31, 1999, and the related consolidated
statement of operations, changes in preferred stock and shareholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WAVO Corporation
at December 31, 1999, and the consolidated results of its operations and its
cash flows for the year then ended December 31, 1999, in conformity with
generally accepted accounting principles
DELOITTE & TOUCHE LLP
Phoenix, Arizona
January 27, 2000
26
<PAGE> 27
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 1998
------------- -------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 11,496,888 $ 17,719,042
Accounts receivable, less allowance for doubtful
accounts of $289,000 in 1999 and $425,000 in 1998 4,256,546 4,028,384
Inventories 1,783,742 3,313,490
Prepaid expenses and other 1,215,580 976,933
------------- -------------
Total current assets 18,752,756 26,037,849
Property and equipment, net 5,671,675 4,761,827
Goodwill, net 4,325,714 9,206,263
Intangible assets of businesses acquired, net 13,096,816 11,410,430
Deposits and other assets 577,837 1,570,362
-------------- -------------
Total assets $ 42,424,798 $ 52,986,731
============== ==============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 899,099 $ 1,073,214
Deferred revenues 2,217,020 1,873,618
Accrued expenses 2,502,379 2,938,371
Bank credit lines 1,713,451 2,000,000
Current portion of long-term debt 1,117,160 52,165
------------- -------------
Total current liabilities 8,449,109 7,937,368
------------- -------------
Long-term debt, less current portion 1,055,793 39,563
Other long-term liabilities 1,338,141 379,342
------------- -------------
2,393,934 418,905
------------- -------------
Minority Interest (411,675) --
------------- -------------
Series D preferred shares, stated value $10,000 per share;
authorized 2,000 shares, issued and outstanding 1,500 shares
liquidation value $15,000,000 12,120,305 --
------------- -------------
Commitments and Contingencies (Notes 7, 8 and 16)
Shareholders' equity:
Common shares, no par; authorized 100,000,000
shares, shares issued, 29,655,190 in 1999 and
29,022,092 in 1998 147,367,490 139,411,649
Series 1994 cumulative convertible preferred shares,
stated value $11 per share; authorized, issued and out-
standing 501,963 shares; liquidation value $5,521,593 5,521,593 5,521,593
Accumulated other comprehensive income (28,766) (23,180)
Accumulated deficit (128,534,667) (96,349,957)
------------- -------------
24,325,650 48,560,105
Treasury shares, at cost, 506,000 common shares in 1999
and 446,000 in 1998 (4,452,525) (3,929,647)
------------- -------------
Total shareholders' equity 19,873,125 44,630,458
------------- -------------
Total liabilities and shareholders' equity $ 42,424,798 $ 52,986,731
============== ==============
</TABLE>
See accompanying notes
27
<PAGE> 28
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 22,114,944 $ 22,296,273 $ 22,590,362
Cost of revenues 11,481,327 11,646,431 12,481,549
------------------------------------------------------
Gross margin 10,633,617 10,649,842 10,108,813
------------------------------------------------------
Operating expenses
Research and development 13,269,200 10,913,002 7,440,119
Sales and marketing 12,929,373 15,502,790 9,918,038
General and administrative 6,038,835 5,755,573 4,901,527
Amortization 1,782,680 2,547,748 2,134,429
Nonrecurring charge 8,490,537 4,600,000 --
Charge for purchased research and development -- 480,000 6,000,000
------------------------------------------------------
42,510,625 39,799,113 30,394,113
------------------------------------------------------
Other (income) expense:
Interest expense 257,929 210,496 238,997
Interest income and other (604,959) (875,116) (739,891)
Minority interest (416,675) -- --
------------------------------------------------------
(763,705) (664,620) (500,894)
------------------------------------------------------
Net loss $(31,113,303) $(28,484,651) $(19,784,406)
------------------------------------------------------
Less: Preferred stock dividends (1,437,152) (1,552,008) (1,707,767)
------------------------------------------------------
Net loss after preferred stock dividends $(32,550,455) $(30,036,659) $(21,492,173)
======================================================
Basic and dilutive net loss per common
share after preferred stock dividends $ (1.13) $ (1.38) $ (1.29)
======================================================
Number of shares used in per share calculations 28,826,587 21,774,450 16,676,499
======================================================
</TABLE>
See accompanying notes.
28
<PAGE> 29
CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series D Convertible
Preferred Shares Common Shares
Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996 -- -- 16,520,714 $ 66,964,819
Cash proceeds from issuance of
Series C preferred shares, net of
share issuance costs of $1,236,626 -- -- -- --
Conversion of Series A & B
Convertible preferred shares
to common shares -- -- 1,032,864 4,967,380
Conversion of Series C
Convertible preferred shares
to common shares -- -- 68,203 600,000
Common shares dividends paid on
Series A & B preferred shares -- -- 66,873 532,773
Common shares dividends paid on
Series C preferred shares -- -- 60,138 622,159
Cash proceeds from exercise of
common share warrants -- -- 24,000 205,500
Cash proceeds from exercise of
Series B preferred share warrants -- -- -- --
Cash dividends on 1994 preferred shares -- -- -- --
Cash proceeds from exercise of
common share options -- -- 248,750 1,565,466
Common shares issued in purchase
of a business -- -- 454,654 4,200,000
Other -- -- 45,000 590,102
Treasury shares purchased -- -- -- --
Gain on foreign currency translation -- -- -- --
Net loss -- -- -- --
-----------------------------------------------------------------------
Balances at December 31, 1997 -- -- 18,521,196 80,248,199
Cash proceeds from issuance of common shares -- -- 879,116 7,500,000
Conversion of Series A & B
Convertible preferred shares
to common shares -- -- 1,966,804 7,634,742
Conversion of Series C
Convertible preferred shares
to common shares -- -- 4,324,710 22,160,672
Common shares dividends paid on
Series A & B preferred shares -- -- 3,764 20,668
Common shares dividends paid on
Series C preferred shares -- -- 81,753 771,425
Cash proceeds from exercise of
common share warrants -- -- 1,001,200 7,208,400
Cash proceeds from exercise of
Series B preferred share warrants -- -- -- --
Cash dividends on 1994 preferred shares -- -- -- --
Cash dividends on Series A&B preferred shares -- -- -- --
Cash proceeds from exercise of
common share options -- -- 1,809,885 10,734,296
Common shares issued in purchase
of businesses -- -- 433,664 3,333,902
Other -- -- -- (200,655)
Treasury shares purchased -- -- -- --
Gain on foreign currency translation -- -- -- --
Net loss -- -- -- --
-----------------------------------------------------------------------------
Balances at December 31, 1998 -- -- 29,022,092 139,411,649
Issuance of common share warrants
in connection with Series D preferred shares -- -- -- 2,206,700
Cash dividends on 1994 preferred shares -- -- -- --
Cash proceeds from exercise of common share options -- -- 108,109 722,548
Cash proceeds from Series D Preferred Shares,
net of share issuance costs of $1,192,237 1,500 $ 11,601,063 -- --
Accreted dividends on Series D preferred shares -- 519,242 -- --
Common shares issued in purchase of businesses -- -- 524,989 2,420,296
Common share warrants issued to business partner -- -- -- 2,649,450
Other -- -- -- (43,153)
Treasury shares purchased -- -- -- --
Gain on foreign currency translation -- -- -- --
Net loss -- -- -- --
-----------------------------------------------------------------------------
Balances at December 31, 1999 1,500 $ 12,120,305 29,655,190 $ 147,367,490
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
Series 1994 Treasury Shares
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996 501,963 $ 5,521,593 303,500 $ (2,938,298)
Cash proceeds from issuance of
Series C preferred shares, net of
share issuance costs of $1,236,626 -- -- -- --
Conversion of Series A & B
Convertible preferred shares
to common shares -- -- -- --
Conversion of Series C
Convertible preferred shares
to common shares -- -- -- --
Common shares dividends paid on
Series A & B preferred shares -- -- -- --
Common shares dividends paid on
Series C preferred shares -- -- -- --
Cash proceeds from exercise of
common share warrants -- -- -- --
Cash proceeds from exercise of
Series B preferred share warrants -- -- -- --
Cash dividends on 1994 preferred shares -- -- -- --
Cash proceeds from exercise of
common share options -- -- -- --
Common shares issued in purchase
of a business -- -- -- --
Other -- -- -- --
Treasury shares purchased -- -- 51,000 (362,954)
Gain on foreign currency translation -- -- -- --
Net loss -- -- -- --
-----------------------------------------------------------------------------
Balances at December 31, 1997 501,963 5,521,593 354,500 (3,301,252)
Cash proceeds from issuance of common shares -- -- -- --
Conversion of Series A & B
Convertible preferred shares
to common shares -- -- -- --
Conversion of Series C
Convertible preferred shares
to common shares -- -- -- --
Common shares dividends paid on
Series A & B preferred shares -- -- -- --
Common shares dividends paid on
Series C preferred shares -- -- -- --
Cash proceeds from exercise of
common share warrants -- -- -- --
Cash proceeds from exercise of
Series B preferred share warrants -- -- -- --
Cash dividends on 1994 preferred shares -- -- -- --
Cash dividends on Series A&B preferred shares -- -- -- --
Cash proceeds from exercise of
common share options -- -- -- --
Common shares issued in purchase
of businesses -- -- -- --
Other -- -- (10,000) 76,405
Treasury shares purchased -- -- 101,500 (704,800)
Gain on foreign currency translation -- -- -- --
Net loss -- -- -- --
----------------------------------------------------------------------------
Balances at December 31, 1998 501,963 5,521,593 446,000 (3,929,647)
Issuance of common share warrants
in connection with Series D preferred shares -- -- -- --
Cash dividends on 1994 preferred shares -- -- -- --
Cash proceeds from exercise of common share options -- -- -- --
Cash proceeds from Series D Preferred Shares,
net of share issuance costs of $1,192,237 -- -- -- --
Accreted dividends on Series D preferred shares -- -- -- --
Common shares issued in purchase of businesses -- -- -- --
Common share warrants issued to business partner -- -- -- --
Other -- -- -- --
Treasury shares purchased -- -- 60,000 (522,878)
Gain on foreign currency translation -- -- -- --
Net loss -- -- -- --
-----------------------------------------------------------------------------
Balances at December 31, 1999 501,963 $ 5,521,593 506,000 $ (4,452,525)
=============================================================================
</TABLE>
See accompanying notes.
29
<PAGE> 30
<TABLE>
<CAPTION>
Series A&B Convertible Preferred Shares Series C Convertible Preferred Shares
- --------------------------------------------------------------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
489,151 $ 11,149,755 -- --
-- -- 24,000 22,763,374
(211,788) (4,967,380) -- --
-- -- (600) (600,000)
-- -- -- --
-- -- -- --
-- -- -- --
43,755 1,093,867 -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
- --------------------------------------------------------------------------------
321,118 7,276,242 23,400 22,163,374
-- -- -- --
(335,458) (7,634,742) -- --
-- -- (23,400) (22,160,672)
-- -- -- --
-- -- -- --
-- -- -- --
14,340 358,500 -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- (2,702)
-- -- -- --
-- -- -- --
-- -- -- --
- --------------------------------------------------------------------------------
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
-- -- -- --
- --------------------------------------------------------------------------------
-- $-- -- $--
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income Accumulated Deficit Total
- ---------------------------------------------------------
Amount Amount Amount
- ---------------------------------------------------------
<S> <C> <C>
$ (22,984) $ (44,821,188) $ 35,853,697
-- -- 22,763,374
-- -- --
-- -- --
-- (532,773) --
-- (622,159) --
-- -- 205,500
-- -- 1,093,867
-- (552,163) (552,163)
-- -- 1,565,466
-- -- 4,200,000
-- -- 590,102
-- -- (362,954)
39,942 -- 39,942
-- (19,784,406) (19,784,406)
- ---------------------------------------------------------
16,958 (66,312,689) 45,612,425
-- -- 7,500,000
-- -- --
-- -- --
-- (20,668) --
-- (771,425) --
-- -- 7,208,400
-- -- 358,500
-- (552,160) (552,160)
-- (208,364) (208,364)
-- -- 10,734,296
-- -- 3,333,902
-- -- (126,952)
-- -- (704,800)
(40,138) -- (40,138)
-- (28,484,651) (28,484,651)
- ---------------------------------------------------------
(23,180) (96,349,957) 44,630,458
-- -- 2,206,700
-- (552,162) (552,162)
-- -- 722,548
-- (519,245) (519,245)
-- -- 2,420,296
-- -- 2,649,450
-- -- (43,153)
-- -- (522,878)
(5,586) -- (5,586)
-- (31,113,303) (31,113,303)
- ---------------------------------------------------------
$ (28,766) $(128,534,667) $ 19,873,125
=========================================================
</TABLE>
30
<PAGE> 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(31,113,303) $(28,484,651) $(19,784,406)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 2,649,921 1,828,484 1,334,121
Amortization 1,782,680 2,547,748 2,134,429
Loss (gain) on disposal of assets -- 1,099 (55,763)
Provision for doubtful accounts 107,256 315,000 122,871
Charge for purchased research and development -- 480,000 6,000,000
Nonrecurring charge 8,490,537 4,350,000 --
Minority interest in net income (416,675) -- --
Changes in operating assets and liabilities:
Accounts receivable (364,726) 4,206,231 (4,369,612)
Inventories 1,296,456 (550,443) (63,470)
Prepaid expenses and other (246,291) 459,226 99,708
Notes and other receivables -- 660,899 73,422
Deposits and other assets 883,298 (117,734) 306,428
Accounts payable (174,115) (30,519) (1,212,098)
Deferred revenues 343,402 (313,616) 1,424,299
Accrued expenses (51,465) (647,432) 968,530
Other liabilities 197,465 (19,311) (385,939)
--------------------------------------------------------
Net cash used in operating activities (16,615,560) (15,315,019) (13,407,480)
INVESTING ACTIVITIES
Purchase of property and equipment (3,252,556) (2,002,575) (2,385,068)
Proceeds from sale of property and equipment 365 1,479 81,718
Purchase of businesses, net of cash acquired (1,483,054) (456,109) (8,905,634)
Other (19,500) -- (187,366)
--------------------------------------------------------
Net cash used in investing activities (4,754,745) (2,457,205) (11,396,350)
FINANCING ACTIVITIES
Issuance of preferred shares, net of issuance costs 13,839,338 323,791 23,857,241
Issuance of common shares 722,548 25,442,696 1,770,966
Borrowings from bank and other 3,260,424 700,000 3,045,678
Payments on notes payable and to bank (1,515,748) (1,038,605) (3,157,627)
Payment of preferred stock dividend (552,162) (760,524) (552,163)
Purchase of treasury shares (522,878) (704,800) (362,954)
Other (83,371) (23,938) (37,870)
--------------------------------------------------------
Net cash provided by financing activities 15,148,151 23,938,620 24,563,271
--------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (6,222,154) 6,166,396 (240,559)
Cash and cash equivalents at beginning of year 17,719,042 11,552,646 11,793,205
--------------------------------------------------------
Cash and cash equivalents at end of year $ 11,496,888 $ 17,719,042 $ 11,552,646
========================================================
Supplemental cash flow information:
Issuance of common shares in connection with
purchase of businesses and related acquisition payments,
including the accrual of cash portion of the payment $ 2,420,296 $ 6,203,902 $ 4,200,000
Issuance of common shares as dividends
on preferred stock $ -- $ 792,093 $ 1,154,932
Accretion of dividends on series D preferred shares $ 519,245 $ -- $ --
</TABLE>
See accompanying notes.
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
Organization and Business
WAVO Corporation is an Indiana corporation formed in November 1990. The
Company is an Internet-based digital media delivery organization. During 1995,
WAVO Corporation acquired all of the outstanding common stock of WavePhore
Canada, Inc. and WavePhore Networks, Inc. In 1997, the Company purchased all of
the assets and assumed certain of the liabilities of Paracel Online Systems,
Inc. and formed WavePhore NewsCast Inc., and WavePhore WaveTop, Inc. In 1999,
the Company created a new, 75%-owned subsidiary, JamCast.com, Inc. to support an
agreement entered into with Virgin Entertainment Group ("Virgin"). Virgin owns
the remaining 25% interest. Through its majority-owned subsidiary, the Company
offers the Virgin JamCast service in the form of a digital music portal.
Reference to "the Company" includes WAVO Corporation and all of its majority and
wholly-owned subsidiaries.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Inventories
Inventories, consisting primarily of communications equipment, are
stated at the lower of cost or market, cost being determined using primarily the
weighted-average cost method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization of property and equipment are recorded using the straight-line
method over the estimated useful lives of the assets, as follows:
Furniture and equipment 5 to 7 years
Computer, lab and production equipment 3 to 5 years
Leasehold improvements Life of the lease or useful life,
whichever is less
Equipment rented to others 5 years
32
<PAGE> 33
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the net
assets acquired in business combinations and is being amortized on a
straight-line basis over 15 years. Other intangibles consist primarily of
developed technology and assembled workforce purchased from third parties that
are being amortized on a straight-line basis over estimated useful lives ranging
from 5 to 15 years. We review goodwill and other intangibles for possible
impairment of value whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset.
Long-lived Assets
In accordance with Statement of Financial Accounting Standard No. 121,
the Company reviews the carrying values of its long-lived assets and
identifiable intangibles such as assembled work-force and developed technology,
for possible impairment whenever events or changes in circumstances indicate
that the carrying amount of assets to be held and used may not be recoverable.
If an impairment of the carrying value were to be indicated by this review, the
Company would adjust the carrying value to its estimated fair value.
Revenue Recognition
Revenue for digital media delivery services is recognized upon
transmission of data and is based on the number of characters transmitted, or
the number of sites receiving transmissions. Revenue from communication system
sales is recognized upon shipment and from equipment rentals over the rental
period. Revenue for subscription and fee services is deferred and is recognized
ratably over the subscription period and as the fee services are provided.
During 1999, 1998 and 1997, export sales represented 20%, 22% and 27%,
respectively, of consolidated revenues.
Advertising
The cost of advertising is expensed as incurred. The Company incurred
$2,057,000, $3,760,000, and $1,310,000 in advertising costs during 1999, 1998
and 1997, respectively.
Income Taxes
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes".
Net Loss Per Share
Basic and dilutive net loss per common share amounts are calculated in
accordance with FAS128, "Earnings Per Share", and are based on the
weighted-average number of shares actually outstanding and exclude potential
common shares from stock options, warrants and convertible preferred stock, as
the effect would be antidilutive.
33
<PAGE> 34
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of trade receivables. In the
normal course of business, the Company provides credit to its customers.
Accordingly, the Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when realized, have been
within the range of management's expectations.
The Company's customer base consists primarily of news service and
Fortune 1000 companies in the United States. Although the Company is directly
affected by the financial and operational well being of the companies in this
industry, management does not believe significant credit risk exists at present.
Fair Values of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for
cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate fair value because of the immediate or short-term
maturity of these financial instruments. The fair value of bank credit lines and
long-term debt is determined using current applicable interest rates as of the
balance sheet date and approximates the carrying value of such debt, because the
underlying instruments are at variable rates, and accordingly are generally
reflective of the market rates.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements in order to conform to the 1999 presentations.
These reclassifications had no effect on reported earnings or stockholders'
equity.
Recently Issued Accounting Standards
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Company expects to adopt the
new Statement effective January 1, 2001. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value. The Company has
not evaluated the impact that the adoption of this Statement will have on its
results of operations or financial position.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS
In 1998, the Company purchased all of the outstanding common stock of
WavePhore Labs and eWatch, Inc. These acquisitions were accounted for as
purchases and, accordingly, the
34
<PAGE> 35
operating results have been included in the consolidated financial statements of
the Company from the dates of acquisition. The aggregated purchase price of both
companies was $2,200,000, paid in the form of 274,341 shares of the Company's
Common Shares and $300,000 in cash. Approximately $480,000 of the purchase price
was attributed to research and development projects eWatch had undertaken and,
accordingly, was charged to the Company's operations at the date of acquisition.
Each purchase agreement provides for an incentive payment should certain
financial performance criteria be met. During 1999, the Company made a
contingent payment for each of these acquisitions. Payments totaled $2,420,296,
and were issued in the form of 524,989 shares of the Company's Common Shares.
In May 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. The acquired business
is engaged in the delivery of customized and aggregated news and other
information derived from newspapers, newswires and news magazines to general
business customers worldwide, utilizing proprietary and licensed technology.
This acquisition was accounted for as a purchase and, accordingly, the
operating results of Paracel Online have been included in the consolidated
financial statements from the date of acquisition. The initial purchase price of
$9,000,000 was paid in cash. The purchase agreement also provided for potential
contingent payments to be made to Paracel Online in 1998 and 1999, should
certain financial performance be met. The purchase price has been allocated to
the assets and liabilities of Paracel Online based on their estimated respective
fair values. Approximately $6,000,000 of the purchase price was attributed to
research and development projects Paracel Online had undertaken and,
accordingly, was charged to the Company's operations at the date of acquisition.
The excess of the purchase price over the fair value of the tangible net assets
acquired, after allocation of purchased research and development, totaled
approximately $2,770,000, with $1,200,000 assigned to developed technology,
$470,000 to assembled workforce, and $1,100,000 to goodwill. These intangibles
are being amortized over fifteen years.
In December 1997, the Company recorded the first contingent payment to
the former owner of Paracel Online in the form of 454,654 Common Shares, valued
at $4,200,000. The 1998 contingent payment, paid March 31, 1999 totaled
$2,870,000. The payment was made in the form of 164,580 shares of the Company's
Common Shares and $1,435,000 in cash. No further contingent payments are
required under this agreement.
The following unaudited combined pro-forma information reflects the
results of the Company's operations for the years ended December, 31, 1998 and
1997, assuming consummation of the acquisition of WavePhore Labs and eWatch,
Inc. had occurred at the beginning of 1998 and 1997, and Paracel Online had
occurred at the beginning of 1997. Pro-forma results from 1999 are not
presented, as these operations were included during all of 1999.
35
<PAGE> 36
<TABLE>
<CAPTION>
(in thousands except per share data) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 22,892 $ 23,641
Net loss $(28,736) $(20,949)
Net loss after preferred stock dividends $(30,288) $(22,657)
Basic and dilutive net loss per common share
after preferred stock dividends $ (1.39) $ (1.36)
</TABLE>
The pro-forma information does not purport to represent what the
Company's results of operations would actually have been had the acquisitions
occurred at the beginning of the period indicated, nor to project the Company's
results of operations for any future date or period.
3. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Finished goods $ 281,922 $ 555,321
Work-in-process 908,089 1,016,123
Raw materials 593,731 1,742,046
---------- ----------
$1,783,742 $3,313,490
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Computer, lab and operations equipment $ 8,013,583 $ 5,133,911
Office furniture and leasehold improvements 1,969,938 1,434,151
Equipment rented to others 2,601,524 2,449,091
------------ ------------
12,585,045 9,017,153
Less accumulated depreciation and amortization (6,913,370) (4,255,326)
------------ ------------
$ 5,671,675 $ 4,761,827
============ ============
</TABLE>
36
<PAGE> 37
5. INTANGIBLE ASSETS OF BUSINESSES ACQUIRED
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Developed technology $ 1,778,892 $ 1,778,892
Assembled workforce 1,382,606 1,382,607
Customer base 10,200,000 10,200,000
Other 3,769,450 1,100,000
------------ ------------
Intangibles 17,130,948 14,461,499
Less accumulated amortization (4,034,132) (3,051,069)
------------ ------------
$ 13,096,816 $ 11,410,430
============ ============
Goodwill 4,625,704 9,537,389
Less accumulated goodwill amortization (299,990) (331,126)
------------ ------------
Goodwill, net $ 4,325,714 $ 9,206,263
============ ============
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Acquisition payment $ -- $1,433,903
Contract liability 1,040,000 --
Payroll and vacation 709,275 819,273
Royalties 237,480 162,947
Other accrued expenses 515,624 522,248
---------- ----------
$2,502,379 $2,938,371
========== ==========
</TABLE>
7. LINE OF CREDIT AND LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Line of Credit $1,713,451 $2,000,000
Equipment Term Loan 2,000,000 --
Other 172,953 91,728
---------- ----------
Total debt 3,886,404 2,091,728
Less current portion 2,830,611 2,052,165
---------- ----------
Long-term debt $1,055,793 $ 39,563
========== ==========
</TABLE>
37
<PAGE> 38
In December 1999, the Company renewed a $5,000,000 Line of Credit,
established a $1,000,000 Non-revolving Equipment Line of Credit ("Equipment
Line") and maintained a $2,000,000 Equipment Term Loan ("Equipment Loan").
Available credit at December 31, 1999, was $3,300,000 and $1,000,000 on the Line
of Credit and Equipment Line, respectively. Accrued interest on the Line of
Credit is due monthly, and principal is due on the January 31, 2001 maturity
date. The Company may borrow against the Equipment Line through December 2000.
Accrued interest is payable monthly until December 2000, at which time any
amounts outstanding are to be converted into a twenty-four month term loan, with
monthly installments of principal and interest ending December 2002. Accrued
interest only on the Equipment Loan is payable monthly through February 2000,
with monthly payments of principal and interest beginning March 2000, and ending
February 2002.
The Line of Credit bears interest at a minimum of prime plus .75%, or
maximum of prime plus 1.00%. The Equipment Line of Credit and Term Loan bear
interest at a minimum of prime plus 1.00% or maximum of prime plus 1.50%. The
variable portion of the interest rates is dependent upon the status of certain
financial covenants established by the lender. The interest rate on the Line of
Credit was 9.25% at December 31, 1999, while the interest rate on the Equipment
Line and Equipment Loan was 9.50%.
The agreements are collateralized by inventories and accounts
receivable. The credit agreements contain certain financial covenants, including
the limitation of preferred stock dividends and the prohibition of common stock
dividends.
At December 31, 1999, the Company also has various capital leases and
insurance financing arrangements totaling $173,000. Remaining principal payments
to be made on debt are $2,830,600 in 2000, $1,022,200 in 2001, $15,600 in 2002,
$11,700 in 2003 and $6,300 in 2004.
Cash paid for interest was $269,000 in 1999, $266,000 in 1998 and
$190,000 in 1997.
8. LEASE COMMITMENTS AND PURCHASE OBLIGATIONS
The Company leases office and warehouse facilities and sub-channels of
FM radio stations under operating lease arrangements. The following is a
schedule of future minimum lease payments:
<TABLE>
<CAPTION>
Years ending
December 31,
- ------------------------------------
<S> <C>
2000 $ 3,098,500
2001 1,126,000
2002 881,000
2003 609,000
2004 262,400
-----------------
$ 5,976,900
=================
</TABLE>
Total rent expense for the years ended December 31, 1999, 1998 and 1997
was approximately $2,597,000, $2,143,000 and $2,746,000, respectively.
38
<PAGE> 39
The Company has entered into several long-term non-cancelable purchase
agreements with certain companies, which require the purchase of minimum
satellite uplink capacity and the use of certain TV broadcast signals. Future
minimum purchase commitments are $3,698,000 in 2000, $2,848,000 in 2001,
$803,000 in 2002, $121,000 in 2003 and $30,000 in 2004.
9. RELATED PARTY TRANSACTIONS
In 1999 and 1998, the Company rented certain equipment from an entity
owned by its Chairman of the Board and Chief Executive Officer. Rental payments
made amounted to $388,600 and $459,600 in 1999 and 1998, respectively. Also in
1999, the Company purchased $250,000 of common stock for cash, and $250,000 of
common stock for future services from a company controlled by a relative of the
Company's President.
10. CAPITAL SHARES
The Series 1994 Preferred Shares are held solely by the Company's
Chairman and Chief Executive Officer and are stated at liquidation value and are
not entitled to vote. The holder of the Series 1994 Preferred Shares is entitled
at any time to convert Series 1994 Preferred Shares into Common Shares equal to
the aggregate value of the Series 1994 Preferred Shares divided by the
conversion price, as defined, initially set at $11.00. The Series 1994 Preferred
Shares may be redeemed, in whole or in part, by the Company at any time at
$11.00 per share, plus any accrued and unpaid dividends.
The holder of the Series 1994 Preferred Shares is entitled to receive,
when and as declared by the Company's Board of Directors, cash dividends that
are cumulative and cumulate annually at the rate of 10% per share. During 1999,
1998 and 1997, the Board of Directors declared the payment of two semi-annual
cash dividends totaling $552,160 each year on the Series 1994 Preferred Shares.
Dividends payable on the Series 1994 Preferred Shares is $92,027 at December 31,
1999.
In December 1995 and January 1996, the Company engaged in a private
placement of shares of its Series A and B Convertible Preferred Shares ("Series
A and B Shares") to accredited investors. Holders of the Series A and B Shares
were entitled to receive cumulative dividends at the rate of $1.25 per annum,
payable semi-annually on June 30 and December 31 of each year, when and as
declared by the Company's Board of Directors, in preference and priority to any
payment of any dividend on the Common Shares or any other class or series of
shares of the Company. As of September 1996, the existing preferred shareholders
had received a total of 925,200 warrants to purchase the Company's Common Shares
at $7.00 per share in consideration for agreeing not to convert their
outstanding preferred shares for a period of twelve months. All outstanding
warrants were called for redemption in May of 1998, and the Company received
cash proceeds of $6,308,400.
During 1998 and 1997, holders of the Company's Series A and B Shares
were paid dividends of 3,764 and 66,873 shares, respectively, of the Company's
Common Shares in accordance with the preferred stock purchase agreement which
aggregated $20,668 and $532,773, respectively.
39
<PAGE> 40
During 1998 and 1997, holders of the Company's Series A and B Shares
converted an aggregate of 307,618 shares in 1998, and 175,033 shares in 1997
(exclusive of exercised warrants, which were subsequently converted), into
1,838,580 and 864,628 Common Shares, respectively, of the Company.
During 1998 and 1997, certain holders of warrants to purchase the
Company's Series B Shares exercised 14,340 and 43,755 warrants, respectively, at
an aggregate exercise price of approximately $358,500 and $1,093,867, and
subsequently the preferred shares were converted into 128,224 and 168,236 Common
Shares, respectively. Currently, there are no Series A or B Shares outstanding.
All other authorized, unissued Series A and B shares have been cancelled.
In July 1997, the Company issued 24,000 shares of its Series C
Convertible Preferred Shares ("Series C Preferred Shares"). Holders of the
Series C Preferred Shares were entitled to receive cumulative dividends at the
rate of 6% per annum, payable quarterly in cash or Common Shares, at the option
of the Company, when and as declared by the Company's Board of Directors in
preference and priority to any payment of any dividend on Common Shares.
During 1998 and 1997, holders of the Company's Series C Preferred
Shares converted an aggregate of 23,400 shares and 600 shares into 4,324,710 and
68,203 Common Shares, respectively. There are no Series C Preferred Shares
outstanding.
In connection with the issuance of the Series C Preferred Shares, a
total of 545,455 warrants to purchase that number of Common Shares were issued
to the holders of the Series C Preferred Shares. The exercise price of the
warrants is equal to $8.80. Each warrant has a three-year term, expiring July
24, 2000. As of December 31, 1999, none of the warrants has been exercised.
In September 1997, the Company issued 100,000 warrants, each
exercisable into one Common Share, to a consultant for services to be performed
on the Company's behalf. The warrants were exercised at $9.00 per share in April
of 1998.
In December 1998, the Company received proceeds of $7,500,000 upon
completion of a private placement of 879,116 of its Common Shares and a warrant
to purchase 250,000 Common Shares of the Company. The warrants are exercisable
at $10.66 per share. At December 31, 1999, all such warrants are outstanding and
will expire in December 2004.
In October 1999, the Company issued warrants exercisable into 1,000,000
Common Shares, to Virgin Entertainment, as part of an agreement creating
JamCast.com, Inc. The warrant exercise price is $4.00 per Common Share for the
first 500,000, and $5.00 per Common Share for the remaining 500,000. The warrant
value of $2,649,450 was estimated using the Black-Scholes valuation model and is
being amortized over five years. The warrants expire in September 2001 and
September 2004, respectively.
At December 31, 1999, the Company had 27,051,006 Common Shares reserved
for future issuances related to outstanding stock options, warrants and
convertible preferred shares.
40
<PAGE> 41
11. SERIES D PREFERRED SHARES
In October 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. Proceeds from the Series D issuance,
net of expenses, which included $32,000 in stock warrants, were approximately
$13,807,000. The Series D Shares carry a dividend rate of 10% per annum, which
may be paid at the Company's option in cash or the Company's Common Shares, 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 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 Common Shares. 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. Subject to certain
conditions, the holders of Series D Shares will have the right to convert them
into the Company's Common Shares; to require the Company to redeem Series D
Shares for cash at 120% of par plus accrued dividends; and are entitled to a
liquidation preference before any liquidation amounts are paid to the holders of
Common Shares. In connection with this transaction, the Company issued warrants
to purchase up to 900,000 shares of its Common Shares at $4.641 per share. The
warrants were valued at $2,206,700, and are being accreted as a preferred stock
dividend over a one-year term. The anticipated impact of the non-cash preferred
dividend on the Company's earnings available to common shareholders is expected
to be approximately $560,000 per quarter for the first three quarters of 2000.
In addition, subject to certain conditions, the Company may elect to sell an
additional $5,000,000 of Series D Shares to the investors. At December 31, 1999,
all 1,500 shares issued are outstanding. The warrants expire in October 2004,
and all were outstanding at December 31, 1999.
12. STOCK OPTIONS
The Company has various stock option plans that have been recommended
and approved by the Board of Directors (the "Board") and, where necessary,
approved by the shareholders. The plans are: (i) the 1995 Incentive Plan (the
"1995 Plan"); (ii) the 1995 Non-employee Director Stock Plan (the "Directors
Plan"); (iii) the 1997 Incentive Plan (the "1997 Plan"); and (iv) the 1998
Employee Incentive Plan (the "1998 Plan"). Each plan is administered by a
committee appointed by the Board and is authorized to issue certain of the
following: incentive stock options, non-qualified stock options, restricted
stock and other common stock-based awards. Generally, awards can be granted to
employees, consultants and advisors to the Company; however, the Directors Plan
is restricted to non-employee directors and the 1998 Plan specifically excludes
participation by executive officers of the Company. Awards under the Directors
Plan vest after six months and expire five years and six months after date of
issuance. Awards under the other plans may be issued with various vesting
schedules and with lives of up to ten years. Common Shares reserved for issuance
under the 1995 Plan, the Directors Plan, the 1997 Plan and the 1998 Plan are
2,500,000, 300,000, 10,000,000 and 4,000,000, respectively.
41
<PAGE> 42
The following summarizes stock option activity in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Number of Option Price Range Weighted Average
Shares Per Share Exercise Price
------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 2,827,875 $0.20-14.63 $6.42
Granted 2,584,750 6.63-12.13 7.34
Forfeited (1,316,625) 6.25-14.63 9.02
Exercised (248,750) 0.20-7.50 6.33
------------------------------------------------------
Outstanding at December 31, 1997 3,847,250 0.20-12.13 6.62
Granted 5,076,475 4.13-13.75 7.53
Forfeited (649,315) 6.88-13.75 9.64
Exercised (1,807,302) 0.20-11.69 5.93
------------------------------------------------------
Outstanding at December 31, 1998 6,467,108 0.20-13.51 7.23
Granted 2,338,960 3.75-10.00 5.48
Forfeited (530,398) 4.00-13.00 7.22
Exercised (108,109) 5.44-7.50 6.68
------------------------------------------------------
Outstanding at December 31, 1999 8,167,561 3.75-13.51 6.89
------------------------------------------------------
Exercisable at December 31, 1999 5,482,216 $ 4.00-13.51 $7.22
Weighted average fair value of options ============ ============
granted during 1999 $ 2.07
============
</TABLE>
<TABLE>
<CAPTION>
Average
Remaining
Range of Exercise Number Contractual Weighted-Average
Prices Outstanding Life Exercise Price
- ---------------------------------------------------------
<S> <C> <C> <C>
$3.75-4.64 3,388,500 7.8 $ 4.06
4.64-6.19 599,996 5.2 5.48
6.19-7.74 2,372,065 2.5 6.92
7.74-12.38 602,000 8.6 9.74
12.38-13.51 1,205,000 3.8 13.01
</TABLE>
In the fourth quarter of 1998, the Company's Board of Directors
cancelled all employee stock options that were issued from August 1997 through
November 1998, excluding those granted to executive officers of the Company. The
cancelled stock options were replaced with stock options of the same quantity,
terms and vesting schedule issued under the 1998 Plan and therefore no
compensation expense was recorded. These new options were issued at the market
price of the Company's Common Shares on the date of grant.
For the stock option plans previously discussed, the Company has
adopted the disclosure only provisions of Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123") "Accounting for Stock-Based Compensation".
Accordingly, no compensation costs has been recognized in the accompanying
financial statements for the stock option plans.
Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1999, 1998
and 1997 consistent with the provision of SFAS No. 123, the estimated fair value
of the options would be amortized to expense over the
42
<PAGE> 43
option's vesting period and the Company's net loss and net loss per basic and
dilutive common share would have increased to the pro-forma amounts indicated
below at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actual
Net loss $ (31,113,000) $ (28,485,000) $ (19,784,000)
Net loss per basic and dilutive
common share $ (1.13) $ (1.38) $ (1.29)
- --------------------------------------------------------------------------------------------------------
Pro-Forma:
Net loss $ (35,415,000) $ (34,490,000) $ (28,556,000)
Net loss per basic and dilutive
common share $ (1.23) $ (1.58) $ (1.71)
- --------------------------------------------------------------------------------------------------------
</TABLE>
Pro-forma results disclosed are based on the provisions of SFAS No.
123, using the Black-Scholes option valuation model and are not likely to be
representative of the effects on pro-forma net income for future years. In
addition, the Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. Further, option valuation models require the input
of highly subjective assumptions, including the expected stock price volatility.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield (%) 0.00 0.00 0.00
Expected volatility (%) 0.84 0.88 0.67
Risk-free interest rate (%) 5.87 5.11 5.38
Expected lives - in years 3.00 3.00 2.50
</TABLE>
13. NONRECURRING CHARGE
During the fourth quarter of 1999, the Company made the decision to
place its ongoing focus on its MediaXpress and Virgin JamCast products. As a
result of this decision, the Company recorded an $8,491,000 non-cash charge in
the fourth quarter of 1999. Based on projected earnings and undiscounted cash
flow analysis of the business activities not related to its core products, the
Company determined an impairment of certain intangibles, primarily goodwill
existed, and accordingly adjusted the carrying value of these assets to their
estimated fair value. The fair value was based on an estimate of future cash
flows. The Company does not anticipate any significant additional costs related
to this nonrecurring charge beyond those recorded.
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
43
<PAGE> 44
moved to consolidate separate and autonomous business units and related
functional areas into one centralized WAVO operating company. This allowed the
Company to create and integrate new products and services for the business
marketplace, leveraging key portions of various existing WAVO technologies, and
emphasized 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 and
impairment of certain intangibles existed, and accordingly adjusted the carrying
value of these assets to their estimated fair value. The fair value was based on
an estimate of future cash flows. A nonrecurring, non-cash expense of $4,000,000
was recorded. The nonrecurring charge also included $600,000 in costs associated
with a reduction in workforce, resulting from the change in strategic direction.
14. INCOME TAXES
At December 31, 1999, the Company had net operating loss carryforwards
of approximately $104,670,000 for U.S. Federal, $2,259,000 for foreign, and
$71,368,000 for State income tax purposes that expire in years 2004 through 2019
for Federal income tax purposes and years 2000 through 2004 for State income tax
purposes. Utilization of the net operating losses is subject to a substantial
annual limitation due to "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar State provisions. Approximately $11,000,000 of
the Federal net operating loss carryforwards resulted from the Company's
acquisition of WavePhore Networks and eWatch. At December 31, 1999, the Company
also had research and development credits available totaling approximately
$924,000, which begin to expire in 2004.
For financial reporting purposes, a valuation allowance of $45,852,000
has been recognized to offset the Company's net deferred tax assets. That
valuation allowance was increased by $8,391,000, $14,656,000 and $6,306,000
during the years ended December 31, 1999, 1998, and 1997, respectively, as a
result of increased deferred tax assets created principally by the operating
losses and capitalized startup costs which are not capitalizable under Generally
Accepted Accounting Principles.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets are as follows:
44
<PAGE> 45
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Start-up costs capitalized for income
tax purposes $ 5,927,000 $ 7,885,000
Net operating loss carryforwards 36,356,000 29,554,000
Research and development credits 924,000 463,000
Valuation allowances 173,000 228,000
Amortization of intangibles 4,722,000 2,274,000
Other 868,000 459,000
------------ ------------
Total deferred tax assets 48,970,000 40,863,000
Valuation allowance for deferred tax assets (45,852,000) (37,461,000)
------------ ------------
Net deferred taxes 3,118,000 3,402,000
Deferred tax liabilities:
Intangible assets (3,118,000) (3,402,000)
------------ ------------
Net deferred taxes $ -- $ --
============ ============
</TABLE>
The reconciliation of income tax attributable to operations computed at
the U.S. federal statutory tax rates is a difference equal to the federal
statutory rate given that the annual losses resulted in no tax benefits.
15. SUBSEQUENT EVENTS
Subsequent to year-end, the Company sold its Internet monitoring
service, eWatch, to a company that had been WAVO's primary partner in the
development and marketing of eWatch to users worldwide. This agreement
strengthens the long-term business relationship and ensures that eWatch
customers continue to receive the highest caliber support and service, while
enabling WAVO to focus and leverage the Company's technical expertise and
corporate resources on building its digital media initiatives. Cash proceeds
from the sale were $3,250,000. Additionally, the Company will receive additional
cash proceeds on or prior to April 30, 2001, based on a percentage of total
sales of the eWatch service during the twelve months following the January 2000
closing date. The Company recorded a $1,544,000 gain on the sale in January
2000.
16. SAVINGS PLAN
The Company maintains a savings plan covering all qualified employees
in accordance with the provisions of Section 401(k) of the Internal Revenue
Code. The Company matches 25% of employee contributions up to the first 10% of
eligible employee compensation. Contributions to the savings plan during the
year ended December 31, 1999, 1998 and 1997 were $138,267, $145,754 and
$130,241, respectively.
17. SIGNIFICANT CUSTOMERS
No single customer accounted for more than ten percent of total
revenues in 1999 and 1998. In 1997, one customer had revenues of approximately
$2,760,000, or 12% of total revenue.
45
<PAGE> 46
18. SEGMENT INFORMATION
WAVO Corporation has two reportable segments: Business Products and
Services that are focused on the business marketplace; and the Consumer
Products, which are focused on the consumer market. Revenues for Business
Products and Services are derived from digital media delivery services, which
generate volume-based fees and revenues from the sale or rental of communication
systems. The consumer product revenues will be generated primarily from
e-commerce and advertising.
The Company evaluates performance and allocates resources based on
profit or loss from operations before income taxes. The accounting policies of
the reportable segments are the same as those described in the summary of
significant accounting policies. There are no intersegment sales or transfers.
The Company's reportable segments are business units that offer
different products.
46
<PAGE> 47
<TABLE>
<CAPTION>
AS OF AND FOR THE CONSUMER BUSINESS PRODUCTS
YEAR ENDED DECEMBER 31, 1999 PRODUCTS AND SERVICES OTHER TOTAL
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ -- $ 22,115,000 $ -- $ 22,115,000
Interest revenue 2,000 7,000 596,000 605,000
Interest expense -- 15,000 243,000 258,000
Nonrecurring charge -- 8,491,000 -- 8,491,000
Depreciation and amortization expense 502,000 3,785,000 146,000 4,433,000
Segment loss (8,302,000) (20,623,000) (2,188,000) (31,113,000)
Segment assets 3,699,000 25,893,000 12,833,000 42,425,000
Expenditures for long-lived assets 188,000 2,563,000 502,000 3,253,000
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE CONSUMER BUSINESS PRODUCTS
YEAR ENDED DECEMBER 31, 1998 PRODUCTS AND SERVICES OTHER TOTAL
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ -- $ 22,296,000 $ -- $ 22,296,000
Interest revenue -- 1,000 874,000 875,000
Interest expense 3,000 207,000 -- 210,000
Nonrecurring charge 38,000 4,562,000 -- 4,600,000
Depreciation and amortization expense 340,000 3,941,000 95,000 4,376,000
Segment (loss) profit (11,073,000) (17,955,000) 543,000 (28,485,000)
Other significant noncash item:
Purchased Research & Development -- 480,000 -- 480,000
Segment assets 1,319,000 32,101,000 19,567,000 52,987,000
Expenditures for long-lived assets 419,000 1,460,000 124,000 2,003,000
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE CONSUMER BUSINESS PRODUCTS
YEAR ENDED DECEMBER 31, 1997 PRODUCTS AND SERVICES OTHER TOTAL
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ -- $ 22,590,000 $ -- $ 22,590,000
Interest revenue -- 15,000 725,000 740,000
Interest expense 8,000 226,000 5,000 239,000
Depreciation and amortization expense 172,000 3,212,000 85,000 3,469,000
Segment loss (5,422,000) (14,076,000) (286,000) (19,784,000)
Other significant noncash item:
Purchased Research & Development -- 6,000,000 -- 6,000,000
Segment assets 1,050,000 36,563,000 15,378,000 52,991,000
Expenditures for long-lived assets 171,000 1,832,000 382,000 2,385,000
</TABLE>
47
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
48
<PAGE> 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the directors and executive officers of
the Company and their ages as of the date of this report.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David E. Deeds 58 Chairman of the Board and Chief Executive Officer
Peter M. White 35 President, Chief Operating Officer and Director
Kenneth D. Swenson 50 Executive Vice President, Chief Financial Officer, Treasurer and
Director
Douglas J. Reich 56 Senior Vice President, General Counsel and Secretary
Joseph A. Meza 45 Vice President, Human Resources
Glenn Scolnik (1) (2) 48 Director
J. Robert Collins, Ph.D. (1) (2) 58 Director
</TABLE>
- --------------------------------------- --------
(1) Member of Audit Committee
(2) Member of Compensation/Incentive Plan Committee
DAVID E. DEEDS has been Chairman of the Board and Chief Executive of
the Company since February 1990. He was President from February 1990 to July
1999. He is also Chairman of the Board of Directors and Chief Executive Officer
of each of the Company's operating subsidiaries. Mr. Deeds was co-founder of
Conseco, Inc. ("Conseco"), a New York Stock Exchange-listed financial services
holding company, and was President, Co-chief Executive Officer and a Director of
Conseco from 1979 until retiring in 1988. Mr. Deeds has over 30 years of
executive level experience in management and finance of companies.
PETER M. WHITE has been President of the Company since July 1999, a
Director since September 1999, and its Chief Operating Officer since December
1999. He is also the President and a Director of each of the Company's
subsidiaries. Mr. White was a co-founder in 1993, and Chief Executive Officer of
Carthage International, Inc., which launched the first personalized information
service on the Internet in 1994. In 1995, that company was sold to Paracel,
Inc., and renamed Paracel Online Systems, Inc. Mr. White served as President of
Paracel Online Systems from 1995 to 1997, when that business was acquired by the
Company and renamed WavePhore Newscast, Inc., with Mr. White as its President.
Since 1993, Mr. White has focused his career on efforts to utilize the Internet
for delivery of digital media to businesses and consumers. Mr. White received an
M.S. degree in Management Information Systems from the University of Arizona.
KENNETH D. SWENSON has been Executive Vice President and Director of
the Company since December 1996, and its Chief Financial Officer and Treasurer
since April 1995. He is also Treasurer of each of the Company's subsidiaries.
Mr. Swenson, a CPA, was a partner with Ernest & Young LLP, an international
professional services firm, from 1983 to 1995, with responsibilities that
included coordination of audit, tax and business consulting services. Mr.
Swenson received a B.B.A. degree in Accounting from the University of Notre
Dame.
49
<PAGE> 50
DOUGLAS J. REICH has been Senior Vice President of the Company since
December 1996, and General Counsel and Secretary of the Company since July 1996.
He is also Secretary of each of the Company's subsidiaries. Mr. Reich, an
attorney, was a shareholder in the law firm of Krys Boyle Golz Reich Freeman and
Scott, P.C., from 1986 to June 1996. Mr. Reich received a B.S. degree in
Economics and a Juris Doctor degree from the University of Wisconsin, Madison.
JOSEPH A. MEZA has been Vice President of Human Resources of the
Company since August 1998. Prior thereto, Mr. Meza had 19 years of Human
Resource management experience with Bank of America in progressively more
responsible positions. Mr. Meza is a graduate of the Graduate School of Human
Resource Management through the American Bankers Association, which he completed
at the University of Colorado.
GLENN SCOLNIK has been a director of the Company since October 1995.
Mr. Scolnik has been Chief Executive Officer of Hammond, Kennedy, Whitney &
Company, Inc. ("HKW"), a private capital firm located in New York, Chicago and
Indianapolis since January 1999, has been its President since January 1998, and
was a Managing Director of HKW from 1993 to 1998. He is responsible for all HKW
operations and acquisitions, and works in HKW's offices in Indianapolis,
Indiana. He was a merger and acquisitions attorney with the law firm of Sommer &
Barnard, P.C., Indianapolis, Indiana, from 1978 to 1993.
J. ROBERT COLLINS, PH.D., has been a director of the Company since
October 1995. Dr. Collins has been a principal in the corporate finance group of
Dillon Gage, Inc., Dallas, Texas, since January 2000, and has been a
Distinguished Lecturer in Entrepreneurship at Texas A&M University - Commerce
since September 1999. Dr. Collins was Corporate Vice President, Strategic
Planning and Development, of E-Systems, Inc., a Raytheon Company (defense
systems), Dallas, Texas, from 1993 to 1998. Prior thereto, he held the following
positions with E-Systems, Inc.: Vice President, Business Development, from 1991
to 1993; Product Line Vice President from 1985 to 1991; Program Director,
Program Manager and System Engineer, from 1978 to 1985.
All directors hold office until the next annual meeting of shareholders
or until their successors are elected and qualified. Executive officers serve at
the discretion of the Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on a review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the last fiscal year, its officers, directors and greater
than ten percent beneficial owners complied with applicable Section 16(a) filing
requirements.
50
<PAGE> 51
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by,
or paid to the Company's Chief Executive Officer and the four most highly
compensated Executive Officers other than the CEO (collectively, the "Named
Executive Officers") for all services rendered in all capacities to the Company
and its subsidiaries during the fiscal years ended December 31, 1999, 1998 and
1997.
51
<PAGE> 52
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------------------- -------------
Other Securities All
Name and Annual Underlying Other
Principal Position Year Salary Bonus Compensation Options/SARs(2) Compensation(3)
------------------ ---- ------ ----- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
David E. Deeds 1999 $ 292,000 $ 0 $ 0(4) 0 $ 2,381
Chief Executive Officer 1998 290,000 0 3,906(4) 1,100,000 3,833
1997 290,000 0 7,180(4) 0 1,534
Peter M. White 1999 195,058(5) 0 18,653(6) 1,050,000 2,771
President and 1998 151,612 0 0 150,000 7,395
and Chief Operating Officer 1997 129,985 0 0 150,000 927
Kenneth D. Swenson 1999 204,000 0 0 60,000 2,976
Executive Vice President, Chief 1998 200,000 0 0 550,000 3,022
Financial Officer and Treasurer 1997 200,000 0 0 75,000(7) 2,212
Douglas J. Reich 1999 154,000 0 0 60,000 3,292
Senior Vice President, 1998 150,000 0 0 125,000 3,400
General Counsel and Secretary 1997 150,000 0 0 122,000(8) 2,087
Joseph A. Meza 1999 83,308 0 0 10,000 1,928
Vice President 1998 33,173(9) 0 0 45,000 1,992
Human Resources
</TABLE>
- -----------------------------------------
(1) Pursuant to the Rules of the Securities and Exchange Commission,
certain columns otherwise required by the table have been omitted where
no compensation has been awarded to, earned by, or paid to any of the
Named Executive Officers required to be reported in that column in any
fiscal year covered by the table.
(2) Amounts shown represent the number of non-qualified stock options,
without tandem stock appreciation rights, granted each year.
(3) Amounts shown represent the Company's contribution to the Amended WAVO
Corporation Profit Sharing Plan and Trust ("401(k) Plan") and the
taxable benefit of excess group term life insurance for the benefit of
such persons.
(4) This amount represents lease fees paid by the Company for a car used by
Mr. Deeds for business purposes.
(5) Mr. White became President of the Company in July 1999. His annualized
compensation for 1999 was $250,000.
(6) This amount represents relocation costs paid by the Company for Mr.
White
(7) Includes 25,000 shares underlying a 1995 option grant repriced in 1997.
(8) Includes 12,000 shares underlying a 1995 option grant and 100,000
shares underlying a 1996 option grant, which were repriced in 1997.
(9) Mr. Meza became an employee of the Company in August 1998. His
annualized compensation for 1998 was $75,000.
52
<PAGE> 53
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
<TABLE>
<CAPTION>
Number of Percentage of
Securities Total Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in Price Expiration Grant Date
Name Granted(1) Fiscal 1999 (per share) Date Present Value(2)
---- --------- ----------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
David E. Deeds 0 0 %
Peter M. White 500,000(3) 21.6 % $ 4.00 July 26, 2009 1,935,767
250,000(4) 10.8 % 10.00 July 26, 2009 1,192,034
250,000(4) 10.8 % 10.00 July 26, 2009 1,192,034
50,000(6) 2.2 % 4.00 Oct. 20, 2009 189,043
Kenneth D. Swenson 10,000(5) .4 % 4.00 Aug. 20, 2004 34,721
50,000(6) 2.2 % 4.00 Oct. 20, 2009 189,043
Douglas J. Reich 10,000(5) .4 % 4.00 Aug. 20, 2004 34,721
50,000(6) 2.2 % 4.00 Oct. 20, 2009 189,043
Joseph A. Meza 10,000(5) .4 % 4.00 Aug. 20, 2004 34,721
</TABLE>
- --------------------------
(1) Amounts shown represent the number of non-qualified stock options,
without tandem stock appreciation rights ("SARs"), granted in 1999.
Payment must be made in full upon exercise in cash or, with the consent
of the Compensation/Incentive Plan Committee, in Common Shares of the
Company. With the consent of the Compensation/Incentive Plan Committee,
the option holder may elect to have Common Shares issuable upon
exercise of options withheld by the Company to pay withholding taxes
due.
(2) Grant date present value is based on the Black-Scholes option pricing
model. The estimated values under the model are based on arbitrary
assumptions as to variables, such as stock price volatility, projected
future dividend yield and interest rates. The estimated values use the
following significant assumptions: volatility was 84%; dividend yield
equals 0%; risk-free interest rates (yield to maturity of 30-year
Treasury note at grant date) range from 5.98% to 6.26%. The actual
value, if any, an executive may realize will depend on the excess of
the stock price over the exercise price on the date the option is
exercised. There is no assurance that the value realized by an
executive will be at or near the value estimated using the
Black-Scholes model.
(3) These options are presently exercisable as to 166,667 shares.
(4) These options are exercisable commencing on the earlier of (i) July 26,
2007, or (ii) the date certain performance objectives are met.
(5) These options are presently exercisable.
(6) These options are exercisable commencing on October 20, 2000.
53
<PAGE> 54
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/SARs
Fiscal Year End(1) at Fiscal Year End
---------------------------------- ----------------------------------
Shares
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David E. Deeds 0 $ 0 1,300,000 0 $ 0 $ 0
Peter M. White 0 0 284,034 916,666 0 0
Kenneth D. Swenson 0 0 735,000 50,000 0 0
Douglas J. Reich 0 0 207,000 50,000 0 0
Joseph A. Meza 0 0 41,667 13,333 0 0
</TABLE>
- ----------------------------------
(1) No SARs were outstanding at December 31, 1999.
COMPENSATION OF DIRECTORS
The Company pays each non-employee director an annual retainer of
$10,000, plus $1,000 per Board meeting and $750 per Board Committee meeting held
on a date separate from a Board meeting. The Company also reimburses directors
for their expenses incurred in attending Board meetings. Pursuant to the 1995
Non-employee Director Stock Plan, non-employee directors of the Company are each
granted an option immediately following each annual meeting of shareholders of
the Company, which option may be exercised to purchase 10,000 Common Shares of
the Company, at a purchase price equal to 100% of the market price of such
shares on the date of grant. Such stock options are exercisable for a five-year
period commencing six months after the date of grant. In accordance with the
provisions of such Plan, on May 25, 1999, Glenn Scolnik and J. Robert Collins
were each granted an option to purchase 10,000 Common Shares of the Company,
exercisable at the price of $7.40 per share during the period commencing on
November 25, 1999, and expiring on November 25, 2004.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Collins and Scolnik are members of the Compensation/Incentive
Plan Committee of the Board of Directors of the Company. The
Compensation/Incentive Plan Committee reviews matters relating to compensation
of the executive officers of the Company and makes recommendations thereon to
the Board of Directors. In addition, the Compensation/Incentive Plan Committee
determines Incentive Plan awards for executive officers of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Shares as of March 10, 2000, of (i)
each person known by the
54
<PAGE> 55
Company to beneficially own 5% or more of the outstanding Common Shares, (ii)
each current director and nominee for director of the Company, (iii) each Named
Executive Officer of the Company, and (iv) all current directors and executive
officers as a group. Such information is based upon information furnished by
each such person and is correct to the best knowledge of the Company. In certain
cases, shares required under rules of the Securities and Exchange Commission to
be shown as beneficially owned are shares as to which the indicated person holds
only rights to acquire within 60 days through the exercise of stock options or
otherwise. Unless otherwise stated, the indicated persons have sole voting and
investment power with respect to the shares listed. Except as otherwise
indicated below, the address for each holder of more than 5% of the Company's
outstanding Common Shares is the principal office of the Company. The indicated
percentages are based upon the number of Common Shares of the Company
outstanding as of March 10, 2000, plus, where applicable, the number of shares
that the indicated person or group had a right to acquire within 60 days of such
date.
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME OF SHARES OWNED
---- --------- -----
<S> <C> <C>
David E. Deeds 4,964,861(1) 16.0%
Peter M. White 284,034(2) 1.0%
Kenneth D. Swenson 735,200(3) 2.5%
Douglas J. Reich 207,000(4) 0.7%
Joseph A. Meza 41,667(5) 0.1%
Glenn Scolnik 110,000(6) 0.4%
J. Robert Collins 85,000(7) 0.3%
All Officers and Directors as a group
(7 persons) 6,427,762(8) 19.8%
</TABLE>
------------------------------
(1) Includes 501,963 Common Shares issuable upon conversion of Series 1994
Preferred Shares and options to purchase 1,300,000 Common Shares.
(2) Includes options to purchase 284,034 Common Shares.
(3) 200 of these shares are held by his spouse. Includes options to
purchase 735,000 Common Shares.
(4) Includes options to purchase 207,000 Common Shares.
(5) Includes options to purchase 41,667 Common Shares.
(6) 25,000 of these shares are jointly held with his spouse. Includes
options to purchase 85,000 Common Shares.
(7) Includes options to purchase 85,000 Common Shares.
(8) Includes options to purchase a total of 2,737,701 Common Shares, and
501,963 Common Shares issuable upon conversion of Series 1994 Preferred
Shares.
55
<PAGE> 56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David E. Deeds, the Company's Chairman, Chief Executive Officer, owns
501,963 shares of the Company's Series 1994 Preferred Shares. The Series 1994
Preferred Shares have a stated value of $11.00 per share, and are convertible at
any time into Common Shares equal to the aggregate value of the Series 1994
Preferred Shares divided by the conversion price, as defined, which was
initially set at $11.00 per share and is subject to adjustment in certain
circumstances. The Series 1994 Preferred Shares are non-voting and accrue
cumulative dividends at the rate of 10% per annum, payable when, and if,
declared by the Board of Directors of the Company. The Company's Board of
Directors approved the declaration of a 10% per annum cash dividend upon the
Series 1994 Preferred Shares, payable as of April 28, 1999, and October 28,
1999. Pursuant to such dividend declarations, the Company paid or accrued a
total of $552,162 in dividends on Mr. Deeds' Series 1994 Preferred Shares during
the fiscal year ended December 31, 1999.
In 1999, the Company paid a total of $388,600 to an entity owned by Mr.
Deeds in connection with the Company's rental of certain equipment from such
entity.
During 1999, the Company purchased $250,000 of common stock for cash,
and $250,000 of common stock for future services from a company controlled by a
relative of the Company's President.
56
<PAGE> 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THE REPORT:
(1) CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are
included in Item 8.
Report of Independent Auditors on Consolidated Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations -- Years Ended December
31, 1999, 1998 and 1997
Consolidated Statements of Changes in Preferred Stock and
Shareholders' Equity -- Years Ended December 31, 1999, 1998
and 1997
Consolidated Statements of Cash Flows -- Years Ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable, or
the required information is shown in the consolidated
financial statements or notes thereto.
(3) EXHIBITS
3.1 Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to
the Company's Current Report on Form 8-K, filed on
June 4, 1999)
3.1.1. Articles of Amendment to the Company's Articles of
Incorporation, effective October 1, 1999
(incorporated by reference to Exhibit 3 to the
Company's Current Report on Form 8-K, filed on
October 5, 1999)
3.2 Restated Code of By-Laws of the Company (incorporated
by reference to Exhibit 4.2 to the Company's
Registration Statement No. 33-80343)
4.1 Specimen of Common Share stock certificate
(incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement No. 33-79316)
57
<PAGE> 58
4.2 Article III of the Amended and Restated Articles of
Incorporation of the Company (included in Exhibits
3.1 and 3.1.1)
4.3 Restated Code of By-Laws of the Company (included in
Exhibit 3.2)
10.1 1994 Stock Compensation Plan (incorporated by
reference to Exhibit 10.3 to the Company's
Registration Statement No. 33-79316)
10.2 1995 Incentive Plan (incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement
No. 33-80343)
10.3 1995 Non-employee Director Stock Plan (incorporated
by reference to Exhibit 4.4 to the Company's
Registration Statement No. 33-80343)
10.4 1997 Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997)
10.5 Executive Management Incentive Plan (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1997
10.6 Data Delivery Network Agreement between the Company
and National Datacast, Inc., dated October 15, 1996,
confidential treatment requested as to part
(incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997)
10.7 1998 Employee Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Company's
Registration Statement No. 333-68549)
10.8 Securities Purchase Agreement among the Company, HFTP
Investment, L.L.C., and Leonardo, L.P., dated
September 30, 1999 (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form
8-K, filed on October 5, 1999)
10.9 Employment Agreement between the Company and Peter M.
White, dated July 26, 1999
10.10 Amendment No. 1 to 1997 Incentive Plan, dated March
5, 1999
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
58
<PAGE> 59
(b) REPORTS ON FORM 8-K:
On October 5, 1999, the Company filed a Current Report on Form
8-K, reporting in Item 5 the sale and issuance of 1,500 shares
of its Series D Convertible Preferred Stock and related warrants
in a private placement to institutional investors.
On November 11, 1999, the Company filed a Current Report on Form
8-K, reporting in Item 4 a change in the Company's certifying
accountants.
59
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 2000
By: /s/ David E. Deeds
------------------------------
David E. Deeds, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ David E. Deeds Chairman of the Board and March 29, 2000
- ------------------------------------
David E. Deeds Chief Executive Officer
(Principal Executive Officer)
/s/ Peter M. White President and March 29, 2000
- ------------------------------------
Peter M. White Chief Operating Officer
/s/ Kenneth D. Swenson Executive Vice President March 29, 2000
- ------------------------------------
Kenneth D. Swenson Chief Financial Officer, Treasurer
(Principal Financial Officer and
Principal Accounting Officer) and
Director
/s/ Glenn Scolnik Director March 29, 2000
- ------------------------------------
Glenn Scolnik
/s/ J. Robert Collins Director March 29, 2000
- ------------------------------------
J. Robert Collins
</TABLE>
60
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1
to the Company's Current Report on Form 8-K, filed on June 4, 1999)
3.1.1. Articles of Amendment to the Company's Articles of Incorporation,
effective October 1, 1999 (incorporated by reference to Exhibit 3 to
the Company's Current Report on Form 8-K, filed on October 5, 1999)
3.2 Restated Code of By-Laws of the Company (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement No. 33-80343)
4.1 Specimen of Common Share stock certificate (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement No. 33-79316)
4.2 Article III of the Amended and Restated Articles of Incorporation of the Company (included in Exhibits
3.1 and 3.1.1)
4.3 Restated Code of By-Laws of the Company (included in Exhibit 3.2)
10.1 1994 Stock Compensation Plan (incorporated by reference to Exhibit 10.3 to the Company's Registration
Statement No. 33-79316)
10.2 1995 Incentive Plan (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement
No. 33-80343)
10.3 1995 Non-employee Director Stock Plan (incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement No. 33-80343)
10.4 1997 Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997)
10.5 Executive Management Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997
10.6 Data Delivery Network Agreement between the Company and National Datacast, Inc., dated October 15, 1996,
confidential treatment requested as to part (incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997)
10.7 1998 Employee Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement No. 333-68549)
</TABLE>
61
<PAGE> 62
<TABLE>
<S> <C>
10.8 Securities Purchase Agreement among the Company, HFTP Investment,
L.L.C., and Leonardo, L.P., dated September 30, 1999 (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K,
filed on October 5, 1999)
10.9 Employment Agreement between the Company and Peter M. White, dated July 26, 1999
10.10 Amendment No. 1 to 1997 Incentive Plan, dated March 5, 1999
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
</TABLE>
62
<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made and effective as of the 26th
day of July, 1999, by and among WAVO Corporation, an Indiana corporation
("Company"), and PETER M. WHITE, an individual ("Employee").
R E C I T A L S:
WHEREAS, the Company and Employee desire to enter into this Employment
Agreement.
NOW, THEREFORE, in consideration of the premises, and for other
valuable consideration, the sufficiency of which is hereby acknowledged by each
of the parties hereto, the parties hereby agree as follows:
A G R E E M E N T:
ARTICLE I
DUTIES AND TERM
1.1 Employment. In consideration of their mutual covenants and other
good and valuable consideration, the receipt, adequacy, and sufficiency of which
is hereby acknowledged, the Company agrees to hire Employee, and Employee agrees
to remain in the employ of the Company, upon the terms and conditions herein
provided.
1.2 Position and Responsibilities. Employee shall serve as President of
the Company with such duties and responsibilities as are commensurate with such
position. In addition, Employee shall be appointed and shall serve as Director
of the Company and its subsidiaries. Employee agrees to perform services not
inconsistent with his position, as set forth in the Company's Code of Bylaws and
as shall from time to time be assigned to him by the Board of Directors and the
Chief Executive Officer of the Company. During the period of his employment
hereunder, Employee shall devote substantially all of his business time,
attention, skill and efforts to the faithful and diligent performance of his
duties hereunder. Employee agrees to relocate his permanent residence to the
Phoenix, Arizona metropolitan area no later than March 31, 2000. The Company
acknowledges that Employee is a Director of c2Future.Com, Inc., and agrees that
Employee may become a director of other entities provided that Employee's
acceptance and performance of such directorship duties does not cause Employee
to violate the terms of this Agreement.
1.3 Term. The term of Employee's employment under this Agreement shall
commence on July 26, 1999 and shall continue, unless sooner terminated pursuant
to Article
63
<PAGE> 2
III hereof, until July 26, 2001.
ARTICLE II
COMPENSATION
For all services rendered by Employee in any capacity during his
employment under this Agreement, the Company shall compensate Employee as
follows:
2.1 Base Salary. The Company shall pay to Employee an annual base
salary of not less than $250,000 (the "Base Salary") during the term hereof,
payable in equal installments in accordance with the Company's general salary
payment policies then in effect. The Base Salary may, at the discretion of the
Company's Board of Directors or the Chief Executive Officer, be increased at
such times and in such amounts as they shall determine.
2.2 Benefit Plans. Employee shall be afforded benefits (i.e., paid time
off, 401(k) Plan, health insurance and other group benefits) similar to those
afforded to other Executive Officers of the Company. Nothing herein shall
restrict the Company's ability to terminate or modify any benefit plan or
arrangement.
2.3 Expenses. The Company shall pay for or reimburse Employee for all
ordinary and necessary business expenses incurred or paid by Employee in
furtherance of the Company's business, subject to and in accordance with the
Company's policies and procedures of general application and applicable tax
laws.
2.4 Moving Expenses. The Company shall pay for or reimburse Employee
for all ordinary and necessary expenses incurred or paid by Employee which are
directly related to the move of Employee, his family and household, from the
Dallas, Texas metropolitan area, to the Phoenix, Arizona metropolitan area,
including a relocation service, subject to the reasonable approval of such
expenses by the Company's Chief Executive Officer.
2.5 Stock Options.
(a) The Company shall grant to Employee an option under the 1997
Incentive Plan to purchase 500,000 Common Shares of WAVO Corporation at the
purchase price of $4.00 per share, exercisable as to 166,667 shares commencing
on August 3, 1999, as to an additional 166,667 shares commencing on July 26,
2000, and as to an additional 166,666 shares commencing on July 26, 2001. The
option shall expire on July 26, 2009, unless earlier terminated or cancelled
pursuant to the terms of the Plan.
(b) The Company shall grant to Employee an option under the 1997
Incentive Plan to purchase 250,000 Common Shares of the Company at the purchase
price of $10.00 per share, which option shall vest and become exercisable on the
earlier of (i) the date on which the
64
<PAGE> 3
closing sale price of WAVO's Common Shares is at least $15.00 per share for any
20 trading days in any 3 month period, commencing on July 26, 1999 and ending on
July 26, 2001, or (ii) July 26, 2007. The option shall expire on July 26, 2009,
unless earlier terminated or cancelled pursuant to the terms of the Plan.
65
<PAGE> 4
(c) The Company shall grant to Employee an option under the 1997
Incentive Plan to purchase 250,000 Common Shares of the Company at the purchase
price of $10.00 per share, which option shall vest and become exercisable on the
earlier of (i) the date on which the closing sale price of WAVO's Common Shares
is at least $25.00 per share for any 20 trading days in any 3 month period,
commencing on July 26, 1999 and ending on July 26, 2002, or (ii) July 26, 2007.
The option shall expire on July 26, 2009, unless earlier terminated or cancelled
pursuant to the terms of the Plan.
ARTICLE III
TERMINATION OF EMPLOYMENT
3.1 Termination for Cause. The Company shall have the right to
terminate Employee for Cause ("Cause") if the Board of Directors or Chief
Executive Officer of Company determines, in its or his reasonable discretion,
that any of the following events have occurred:
(a) Employee refuses to perform his duties hereunder, engages in gross
misconduct, gross negligence, or otherwise materially breaches this Agreement;
(b) Employee refuses or fails to comply with any reasonable and lawful
directive of the Company's Board of Directors or Chief Executive Officer;
(c) Employee engages in conduct involving fraud, dishonesty,
embezzlement, theft or conduct that is detrimental to the Company or that could
reasonably be expected to have a material adverse impact on the standing or
reputation of the Company;
(d) Employee is convicted of committing a felony or crime involving
moral turpitude; or
(e) Employee breaches his Covenant Not to Compete as provided in
Article IV of this Agreement, or any other similar obligation to the Company
imposed by law.
The Company shall provide written notice of a termination for Cause hereunder
and, with respect to a purported violation of subsection (a), (b) or (c) above
that is curable in such time period, shall afford Employee an opportunity to
cure or disprove the purported violation for the thirty-day period following
such notice. Upon a termination for Cause, Employee shall be entitled to receive
only such compensation and benefits as are due Employee through the effective
date of such termination.
3.2 Termination Upon Employee's Voluntary Resignation. In the event
Employee
66
<PAGE> 5
voluntarily resigns his employment with the Company for good cause ("Good
Cause") which, for purposes of this Agreement, shall mean (A) a material
reduction in Employee's duties, responsibilities or title for other than Cause
as defined in Section 3.1 hereof, or (B) the appointment or election of a Chief
Executive Officer of the Company other than David E. Deeds or Employee, Employee
shall be entitled to continue to receive his salary pursuant to Section 2.1
hereof; however, Employee shall not be deemed an employee of the Company under
the 1997 Incentive Plan following such determination. Should Employee attain
alternative employment during the period between the date of such termination
and July 26, 2001, the Company's obligations under Section 2.1 will be reduced
by the amount of Employee's compensation from his new employer.
In the event Employee voluntarily resigns his employment with the Company for
other than Good Cause, Employee shall be entitled to receive only such
compensation and benefits as are due Employee through the effective date of such
resignation.
3.3 Termination Upon Death of Employee. If during the term of this
Agreement Employee dies, then this Agreement shall terminate and the Company
shall pay to the estate of Employee only the compensation and benefits
(including any life insurance benefits provided to Employee' estate under the
Company's standard policies as in effect) due Employee through the date of his
death.
3.4 Termination Upon Disability of Employee. If during the term of this
Agreement Employee is unable to perform the services required of Employee
pursuant to this Agreement with or without reasonable accommodation for a
continuous period of ninety (90) days due to disability or incapacity by reason
of any physical or mental illness, then the Company shall have the right to
terminate this Agreement at the end of such ninety-day period by giving written
notice to Employee. Employee shall be entitled to receive only his normal
compensation and benefits through the date of his termination; provided,
Employee shall be entitled to receive any disability insurance benefits for
which he is then eligible under Company sponsored disability insurance policies.
3.5 Termination By The Company Other than for Cause, Death, Disability
or Voluntary Resignation. The Company shall have the right to terminate
Employee's employment other than for Cause, death, disability or voluntary
resignation upon thirty (30) days prior written notice to Employee. In the event
the Company elects to terminate Employee for any reason other than for Cause,
death, disability or voluntary resignation of Employee, the Company shall
continue to pay to Employee his salary pursuant to Section 2.1 hereof. Should
Employee attain alternative employment during the period between the date of
termination and July 26, 2001, the Company's obligations under this Section 3.5
will be reduced by the amount of Employee's compensation from his new employer.
3.6 Vesting of Options upon Termination. If this Agreement is
terminated pursuant to the operation of Sections 3.2, 3.3, 3.4 or 3.5, then all
unvested options previously granted to Employee (except the options set forth in
Section 2.6(b) and (c)) shall immediately vest and
67
<PAGE> 6
become exercisable in full.
68
<PAGE> 7
ARTICLE IV
RESTRICTIVE COVENANTS
4.1 Confidential Information. Employee hereby agrees and acknowledges
that the following ideas, information and materials in written, oral, magnetic,
photographic, optical or other form and whether now existing or developed or
created during the period of Employee's employment or engagement with the
Company (the "Confidential Information") are proprietary to the Company and are
highly sensitive in nature: (1) customer lists and customer information as
compiled by the Company, including customer orders, product usage, product
volumes, pricing, customer technology, sale and contract terms and conditions,
contract expirations, and other compiled customer information; (2) the Company's
internal practices and procedures; (3) the Company's financial condition and
financial results of operation to the extent not generally available to the
public; (4) supply of materials information, including sources and costs; (5)
information relating to designs, formulas, developmental or experimental work,
know-how, products, processes, computer programs, source codes, databases,
designs, schematics, inventions, creations, original works of authorship, or
other subject matter related to the Company's research and development,
strategic planning, manufacturing, engineering, purchasing, finance, marketing,
promotion, distribution, and selling activities, whether now existing, or
acquired, developed, or made available anytime in the future to the Company; (6)
all information which Employee has a reasonable basis to consider confidential
or which is treated by the Company as confidential; and (7) any and all
information having independent economic value to the Company that is not
generally known to, and not readily ascertainable by proper means by, persons
who can obtain economic value from its disclosure or use. Employee acknowledges
that such information is Confidential Information whether disclosed to or
learned by Employee or originated by Employee during employment by the Company.
In the event that information is not clearly and obviously publicly available,
all information about the Company shall be presumed to be confidential.
4.2 General Knowledge. The general skills and experience gained by
Employee during Employee's employment or engagement by the Company, and
information publicly available or generally known within the industries or
trades in which the Company competes, are not considered Confidential
Information. Following the Non-Competition Period (as defined in Section 4.7),
Employee is not restricted from working with a person or entity which has
independently developed information or materials similar to the Confidential
Information, but in such a circumstance, Employee agrees not to disclose the
fact that any similarity exists between the Confidential Information and the
independently developed information and materials, and Employee understands that
such similarity does not excuse Employee from the non-disclosure and other
obligations in this Agreement.
4.3 Employee's Obligations as to Confidential Information and
Materials. During Employee's employment or engagement by the Company, Employee
will have access to the Confidential Information and will occupy a position of
trust and confidence with respect to the Confidential Information and the
Company's affairs and business. Employee agrees to take the
69
<PAGE> 8
following steps to preserve the confidential and proprietary nature of the
Confidential Information:
(a) Non-Disclosure. During and after Employee's employment or
engagement by the Company, Employee will not use, disclose or otherwise permit
any person or entity access to any of the Confidential Information other than as
required in the performance of Employee's duties with the Company. Employee
understands that Employee is not allowed to sell, license, market or otherwise
exploit any products or services (including software or firmware in any form)
which embody in whole or in part any Confidential Information.
(b) Prevent Disclosure. Employee will take all reasonable
precautions to prevent disclosure of the Confidential Information to
unauthorized persons or entities.
(c) Abide by the Company's Restrictions. Employee will treat
as confidential and proprietary any information or materials from outside the
Company which the Company is obligated to treat as confidential or proprietary,
in accordance with the Company's reasonable instructions to Employee.
(d) Return All Materials. Upon termination of Employee's
employment or engagement by the Company for any reason whatsoever, Employee will
deliver to the Company all tangible materials embodying the Confidential
Information, including any documentation, records, listings, notes, data,
sketches, drawings, memoranda, models, accounts, reference materials, samples,
machine-readable media and equipment which in any way relate to the Confidential
Information, and Employee agrees not to retain any copies of any of the above
materials.
4.4 Inform Subsequent Employers. Employee covenants and agrees that,
for a period of twelve (12) months following termination of the Non-Competition
Period, prior to accepting subsequent employment with an employer engaged in
substantially the same line of work as the Company, Employee shall: (a) inform
any such subsequent employer in writing that this Agreement exists; and (b)
provide the Company with a copy of such writing.
4.5 Right to Intellectual Property and New Ideas; Assignment.
(a) Any Intellectual Property (as defined below) conceived,
developed, or reduced to practice, or caused to be conceived, developed, or
reduced to practice, by Employee, alone or in conjunction with others, whether
during or after business hours, during the term of Employee' employment with the
Company or within two (2) years of termination (to the extent the Intellectual
Property developed relates to the Intellectual Property of the Company), shall
be deemed to have been made or developed by Employee solely for the benefit of
the Company, shall be held in trust for the exclusive use and benefit of the
Company, and shall be the sole and exclusive property of the Company. Employee
shall not, either during the term of his employment or after termination, use or
disclose to any third
70
<PAGE> 9
party such Intellectual Property, except as expressly authorized by the Company
in writing. "Intellectual Property" shall mean any and all Inventions (as
defined below), Works of Authorship, trademarks, and copyrights conceived,
created, developed, discovered, or reduced to practice during Employee's
employment by the Company (either prior to or after the date of this Agreement)
and that (i) relate directly or indirectly to the business of the Company or to
the actual or demonstrably anticipated research or development of the Company,
(ii) result from or are suggested by any work assigned to or performed by
Employee for the Company; or (iii) are used to develop or improve any of the
Company's equipment, supplies, facilities, products, services, or trade secrets,
whether or not such Intellectual Property is developed entirely on Employee's
own time and with or without use of the Company's property. "Invention(s)" shall
mean any and all discoveries, improvements, ideas, concepts, creative works, and
designs, whether or not in writing or reduced to practice, and whether or not
they are patentable, including but not limited to devices, processes, methods,
formulas, and techniques and know-how.
(b) Employee agrees to make prompt and full disclosure to the
Company of all Intellectual Property described in subparagraph (a) above.
(c) Employee agrees to assign, and does hereby assign, to the
Company all right, title, and interest in and to any such Intellectual Property,
including without limitation, any "moral" rights which Employee may have therein
under any copyright law or other similar law, and further agrees, during the
term of employment and after termination (whether such termination be voluntary
or involuntary), at any time at the Company's request and expense, to review,
execute, acknowledge, and deliver any and all papers necessary to secure legal
protection for the Company therefor in any country in the world, including but
not limited to applications for patents, trademarks, service marks, and
copyrights, and to execute any oath or declaration and verify any document in
connection with carrying out the terms of this Agreement.
(d) In the event the Company is unable for any reason
whatsoever to secure the signature of Employee to any lawful and necessary
documents required to effectuate the provisions of this Agreement, including
those necessary for the assignment of, application for, or prosecution of any
United States or foreign applications for letters patent or copyright, Employee
hereby irrevocably designates and appoints the Company and its duly authorized
officers and agents as agent and attorney in fact, to act for and in Employee'
behalf and stead to execute and file any such application and to do all other
lawfully permitted acts to further the assignment, prosecution, and issuance of
letters patent or copyright thereon with the same legal force and effect as if
executed by Employee. Employee hereby waives and quitclaims to the Company any
and all claims of any nature whatsoever which Employee may now have or may
hereafter have for infringement of any patent or copyright resulting from any
such application.
(e) Employee agrees that any copyrights in work produced by
Employee during the term of his employment with the Company which relate to
past, present or
71
<PAGE> 10
foreseeable business, products, developments, technology or activities of the
Company shall be considered as a "work for hire" or, in the event such works are
deemed as not "works for hire", shall be transferred to the Company, and shall
belong solely to the Company.
4.6 Conflicting Obligations and Rights. Employee agrees to inform the
Company in writing of any apparent conflict between Employee's work for the
Company and (a) any obligations Employee may have to preserve the
confidentiality of another's proprietary information or materials, or (b) any
rights Employee claims to any patents, copyrights, trade secrets, or other
inventions, ideas or similar rights, before performing that work. Otherwise, the
Company may conclude that no such conflict exists and Employee agrees thereafter
to make no such claim against the Company. The Company shall receive such
disclosures in confidence.
4.7 Non-Competition.
(a) Non-competition. By execution of this Agreement, Employee
agrees that during his employment with the Company and for a period of twelve
(12) months following the date of expiration or termination of his employment
hereunder (the "Non-Competition Period") for any reason (whether such
termination shall be voluntary or involuntary), Employee will not, within the
United States (in which territory Employee acknowledges that the Company has
sold or marketed its products or services and conducted its Business (as defined
below) as of the date hereof), directly or indirectly, compete with the Company
by carrying on a business that is substantially similar to the Business.
Employee agrees that the twelve (12) month period referred to in the preceding
sentence shall be extended by the number of days during any such period in which
he is or was engaged in activities constituting a breach of this Section 4.7.
(b) Definition of "Compete". For the purposes of this Section
4.7, the term "compete" shall mean with respect to the Business: (i) managing,
supervising, or otherwise participating in a management or sales capacity; (ii)
calling on, soliciting, taking away, accepting as a client or customer, or
attempting to call on, solicit, take away, or accept as a client or customer,
any individual, partnership, corporation, company, association, or other entity
that was a client or customer of the Company as of, or immediately prior to, the
date hereof; (iii) hiring, soliciting, taking away, or attempting to hire,
solicit, or take away, either on Employee's behalf or on behalf of any other
person or entity, any person serving immediately prior to the date hereof or
during the term hereof as an employee in connection with the Business; or (iv)
entering into or attempting to enter into any business substantially similar to
the Business, either alone or with any individual, partnership, corporation,
company, association, or other entity.
(c) Direct or Indirect Competition. For the purposes of this
Section 4.7, the words "directly or indirectly" as they modify the word
"compete" shall mean: (i) acting as an agent, representative, consultant,
officer, director, member, independent contractor, or
72
<PAGE> 11
employee of any entity or enterprise that is competing (as defined in Section
4.7(b) hereof) with the Business; (ii) participating in any such competing
entity or enterprise as an owner, partner, limited partner, joint venturer,
member, creditor, or stockholder (except as a stockholder holding less than a
one percent (1%) interest in a corporation whose shares are actively traded on a
regional or national securities exchange or in the over-the-counter market); and
(iii) communicating to any such competing entity or enterprise the names or
addresses or any other information concerning any past, present, or identified
prospective client or customer of the Company or any entity having title to the
goodwill of the Company with respect to the Business.
(d) Business. For purposes of this Agreement, the term
"Business" shall mean the business as conducted by the Company and its
subsidiaries and affiliates immediately prior to the date hereof and/or
developed during the term of this Agreement.
73
<PAGE> 12
(e) Acknowledgment. Employee expressly agrees and acknowledges
that:
(i) it will require at least twelve (12) months for
the Company to locate, hire and train an appropriate individual to
perform the functions and duties that Employee is performing hereunder;
(ii) the Company has protected business interests
throughout the United States and that competition with and against such
business interests would be harmful to the Company;
(iii) this covenant not to compete is reasonable as
to time and geographical area and does not place any unreasonable
burden upon him;
(iv) the general public will not be harmed as a
result of enforcement of this covenant not to compete;
(v) his personal legal counsel has reviewed this
covenant not to compete; and
(vi) he understands and hereby agrees to each and
every term and condition of this covenant not to compete.
4.8 Non-Disparagement. During the term of this Agreement and the
Non-Competition Period, neither Employee nor the Company shall disparage the
other, and neither shall disclose to any third party the conditions of
Employee's employment with the Company except as may be required (a) pursuant to
applicable law or regulations, including the rules and regulations of the
Securities and Exchange Commission, (b) to effectuate the provisions of employee
benefit plans or programs and insurance policies, or (c) as may be otherwise
contemplated herein or unless such information becomes publicly available
without fault of the party making such disclosure.
4.9 Remedies. Employee expressly agrees and acknowledges that the
covenants set forth in Sections 4.1 through Section 4.8 are necessary for the
protection of the interests of the Company and its subsidiaries and affiliates
because of the nature and scope of their business and his position with the
Company. Further, Employee acknowledges that any breach of such covenants would
result in irreparable damage to the Company, that money damages will not
sufficiently compensate the Company for its injury caused thereby, and that the
remedy at law for any breach or threatened breach of any of such covenants will
be inadequate. Accordingly, Employee agrees that the Company shall, in addition
to all other available remedies (including without limitation, seeking such
damages as it can show it has sustained by reason of such breach), be entitled
to injunctive relief or specific performance and that, in addition to any money
damages obtained by the Company, Employee may be restrained and enjoined from
any continuing breach of this covenant not to compete without any bond or other
security being
74
<PAGE> 13
required by any court. Employee further acknowledges and agrees that if such
covenants, or any of them, are deemed to be unenforceable and/or the Employee
fails to comply with this Article IV, the Company has no obligation to provide
any compensation or other benefits described in Article II hereof.
4.10 Scope of Article. For purposes of this Article IV, unless the
context otherwise requires, the term "Company" includes WAVO Corporation and its
direct and indirect subsidiaries and affiliates.
ARTICLE V
MISCELLANEOUS
5.1 Arbitration. Any dispute between the parties, whether arising out
of or in connection with this Agreement, shall be determined by arbitration,
which, other than the relief provided in Section 4.9 hereof, shall be the
exclusive remedy of the parties. Any such dispute shall be submitted to and be
resolved in accordance with the rules and regulations of the American
Arbitration Association. The arbitration shall be held in Phoenix, Arizona. The
arbitrators shall state in writing the reasons for the award. The arbitrators
shall award compensatory damages to the prevailing party. The arbitrators shall
have no authority to award consequential or punitive or statutory damages, and
the parties hereby waive any claim to those damages to the fullest extent
allowed by law.
5.2 Severability; Reformation. If any court or arbiter determines that
any of the restrictive covenants in this Agreement, or any part thereof, is or
are invalid or unenforceable, the remainder of the restrictive covenants shall
not thereby be affected and shall be given full effect, without regard to
invalid portions. If any of the provisions of this Agreement should ever be
deemed to exceed the temporal, geographic or occupational limitations permitted
by applicable laws, those provisions shall be and are hereby reformed to the
maximum temporal, geographic or occupational limitations permitted by law. If
the court or arbiter refuses to reform this Agreement as provided above, the
parties hereto agree to modify the provisions held to be unenforceable to
preserve each party's anticipated benefits thereunder.
5.3 Attorneys' Fees. In the event of an action, proceeding or
arbitration to enforce this Agreement, the party prevailing therein shall
recover its or his reasonable attorneys' fees and costs.
5.4 Notices. Any notice, election or communication to be given under
this Agreement shall be in writing and delivered in person, by telecopier,
private courier service, or deposited, certified or registered, in the United
States mail, postage prepaid, addressed as follows:
75
<PAGE> 14
If to the Company: WAVO Corporation
3131 E. Camelback Rd., Suite 320
Phoenix, Arizona 85016
Attn: David E. Deeds, CEO
With a copy to: Douglas J. Reich
General Counsel
WAVO Corporation
3131 E. Camelback Rd., Suite 320
Phoenix, Arizona 85016
If Employee, to him at: Peter M. White
WAVO Corporation
3131 E. Camelback Rd., Suite 320
Phoenix, AZ 85016
or to such other address as the Company or Employee may, from time to time,
designate in writing by notice hereunder. Notices delivered hereunder shall be
deemed to have been duly given: when delivered by hand, if personally delivered;
three (3) business days after being deposited in the mail, postage prepaid, if
delivered by mail; and when receipt is acknowledged, if telecopied or sent by
private courier service.
5.5 Entire Agreement. This Agreement constitutes and embodies the full
and complete understanding and agreement of the parties hereto with respect to
the subject matter hereof and supersedes all prior understandings or agreements,
whether oral or in writing, including the Employment Agreement between Employee
and WavePhore Newscast, Inc., dated May 29, 1997, which hereby is terminated.
5.6 Binding Nature. This Agreement shall be binding upon and inure to
the benefit of the Company and its successors and assigns, and upon Employee and
his heirs and legal representatives.
5.7 Captions; Headings. The captions and paragraph headings included in
this Agreement are for convenience of reference only and do not constitute a
part of this Agreement.
5.8 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which shall constitute one and
the same document.
5.9 Withholding. Employee acknowledges and agrees that payments made to
Employee by the Company pursuant to the terms of this Agreement may be subject
to tax withholding and that the Company may withhold against payments due
Employee any such amounts as well as any other amounts payable by Employee to
the Company.
76
<PAGE> 15
5.10 Release. Receipt of any of the benefits to be provided to Employee
under this Agreement following termination of Employee' employment hereunder
shall be subject to Employee's compliance with any reasonable and lawful
policies or procedures of the Company relating to employee severance including
the execution and delivery by Employee of a release reasonably satisfactory to
the Company of any and all claims that Employee may have against the Company or
any related person, except for the continuing obligations provided herein, and
an agreement that Employee shall not disparage the Company.
5.11 Assignment by the Company. Nothing in this Agreement shall
preclude the Company from consolidating or merging into or with, or transferring
all or substantially all of the Company's assets to, another corporation or
entity that assumes this Agreement and all obligations and undertakings of the
Company hereunder. Upon such consolidation, merger or transfer of assets and
assumption, the term "the Company" as used herein shall mean such other
corporation or entity, and this Agreement shall continue in full force and
effect.
5.12 Assignment by Employee. This Agreement, or any right or interest
hereunder, may not be assigned by Employee, his beneficiaries or legal
representatives, without the Company's prior written consent; provided, however,
that nothing in this Section 5.12 shall preclude Employee from designating a
beneficiary to receive any benefit hereunder upon Employee' death, or shall
preclude the executors, administrators or other legal representatives of
Employee or his estate from assigning any right or interest hereunder to the
person or persons entitled to such right or interest.
5.13 Modification. No modification, supplement, amendment or waiver of
this Agreement shall be binding unless executed in writing by all parties
hereto. A waiver of any of the provisions of this Agreement shall be not be
deemed to or constitute a waiver of any other provision hereof, nor shall any
such waiver constitute a continuing waiver unless otherwise expressly provided.
5.14 Governing Law. This Agreement has been executed and delivered in
the State of Arizona, and its validity, interpretation, performance and
enforcement shall be governed by the laws of that state without regard to
conflict of law principles.
5.15 Construction. This Agreement shall be construed fairly as to both
parties and not in favor of or against either party, regardless of which party
prepared this Agreement.
77
<PAGE> 16
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
WAVO CORPORATION,
an Indiana corporation
By: /s/ David E. Deeds
-------------------------------------
David E. Deeds,
Chief Executive Officer
PETER M. WHITE
/s/Peter M .White
----------------------------------
(Emp.Agmnt)
78
<PAGE> 1
EXHIBIT 10.10
AMENDMENT
TO THE
WAVEPHORE, INC. 1997 INCENTIVE PLAN
Effective as of February 10, 1997, WavePhore, Inc. (the "Company")
adopted the WavePhore, Inc. 1997 Stock Incentive Plan (the "Plan"). By this
instrument, the Company desires to amend the Plan to increase the number of
Common Shares of WavePhore available under the Plan.
1. This Amendment shall amend only that Section specified herein and
those Sections not amended hereby shall remain in full force and effect.
2. The second paragraph in Section 3 of the Plan, which sets forth the
number of shares of Common Stock subject to the Plan, is hereby amended and
restated in its entirety as follows:
Subject to adjustment as provided in Section 14 hereof, the
Committee may grant Options, Stand-Alone SARs, shares of Restricted Stock,
shares of Phantom Stock and Stock Bonuses under the Plan with respect to a
number of Common Shares that in the aggregate does not exceed 10,000,000 shares.
The maximum number of Common Shares for which Incentive Awards, including
Incentive Stock Options, may be granted to any one Participant shall not exceed
5,000,000 shares in any one calendar year; and the total of all cash payments to
any one Participant pursuant to the Plan in any calendar year shall not exceed
$5,000,000. The grant of an LSAR, Tandem SAR or Cash Bonus shall not reduce the
number of Common Shares with respect to which Options, Stand-Alone SARs, shares
of Restricted Stock, shares of Phantom Stock or Stock Bonuses may be granted
pursuant to the Plan.
3. This Amendment shall be effective as of March 5, 1999. WavePhore,
Inc. has caused this Amendment to be executed by its duly authorized
representative on the 5th day of March, 1999.
WAVEPHORE, INC.
By /s/David E. Deeds
---------------------------------------
David E. Deeds, Chairman,
Chief Executive Officer and President
79
<PAGE> 1
EXHIBIT 21.1
WAVO CORPORATION
LIST OF SUBSIDIARIES
1. WavePhore Networks, Inc., a Delaware corporation
2. WavePhore Newscast, Inc., a Delaware corporation
3. WavePhore WaveTop, Inc., a Delaware corporation
4. WavePhore Labs, Inc., a New Jersey corporation
5. JamCast.com, Inc., a Delaware corporation
6. 508515 N.B., Inc., a New Brunswick corporation
80
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-13353, No. 333-35455, No. 333-45347, No. 333-39019, No.
333-34127, No. 333-23039, No. 333-70675, No. 333-75941, No. 333-89259, and No.
333-90181) and in the related Prospectuses and in the Registration Statements
(Form S-8 No. 33-80343, No. 333-41491, No. 333-68549, and No. 333-75637)
pertaining to the registration of the 1998 Employee Incentive Plan, the 1997
Incentive Plan, the 1995 Incentive Plan, 1995 Non-employee Director Stock Plan,
1994 Stock Compensation Plan and Misc. Non-Qualified Stock Options of WAVO
Corporation of our report dated January 25, 1999, with respect to the
consolidated financial statements of WAVO Corporation, included in this Annual
Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
- ----------------------
Phoenix, Arizona
March 29, 2000
81
<PAGE> 1
EXHIBIT 23.2
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements Nos.
333-13353, 333-35455, 333-45347, 333-39019, 333-34127, 333-23039, 333-70675,
333-75941, 333-89259, and 333-90181 on Form S-3 and 33-80343, 333-41491,
333-68549, and 333-75637 on Form S-8 of our report dated January 27, 2000,
appearing in this Annual Report on Form 10-K of WAVO Corporation for the year
ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
- -----------------------------
Phoenix, Arizona
March 29, 2000
82
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,497
<SECURITIES> 0
<RECEIVABLES> 4,546
<ALLOWANCES> 289
<INVENTORY> 1,784
<CURRENT-ASSETS> 18,753
<PP&E> 12,585
<DEPRECIATION> 6,913
<TOTAL-ASSETS> 42,425
<CURRENT-LIABILITIES> 8,449
<BONDS> 3,886
17,641
0
<COMMON> 147,367
<OTHER-SE> (133,016)
<TOTAL-LIABILITY-AND-EQUITY> 42,425
<SALES> 22,115
<TOTAL-REVENUES> 22,115
<CGS> 11,481
<TOTAL-COSTS> 11,481
<OTHER-EXPENSES> 42,511
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 258
<INCOME-PRETAX> (31,113)
<INCOME-TAX> 0
<INCOME-CONTINUING> (31,113)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,113)
<EPS-BASIC> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
