<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number: 0-24858
-------
WAVO CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 86-0491428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3131 E. CAMELBACK ROAD, SUITE 320, PHOENIX, AZ 85016
(602) 952-5500
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to the filing
requirements for the past 90 days.
Yes X No
--------- -------
The number of shares outstanding of the Registrant's common stock, as of
November 3, 2000:
COMMON SHARES, NO PAR VALUE: 47,728,931 SHARES
<PAGE> 2
WAVO CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Three and nine months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WAVO Corporation
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 546,910 $ 11,496,888
Accounts receivable 2,414,582 4,256,546
Inventories 1,474,997 1,783,742
Prepaid expenses and other 1,026,342 1,215,580
------------ ------------
Total current assets 5,462,831 18,752,756
Property and equipment, net 5,756,616 5,671,675
Goodwill, net 2,391,263 4,325,714
Intangibles, net 8,083,194 13,096,816
Deposits and other assets 573,894 577,837
------------ ------------
Total assets $ 22,267,798 $ 42,424,798
============ ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,667,407 $ 899,099
Deferred revenue 951,351 2,217,020
Accrued expenses 2,179,915 2,502,379
Bank credit lines 1,160,905 1,713,451
Current portion of long-term debt 1,925,591 1,117,160
------------ ------------
Total current liabilities 8,885,169 8,449,109
------------ ------------
Long-term debt, less current portion 30,830 1,055,793
Other non-current liabilities 386,076 1,338,141
Minority interest -- (411,675)
Series D preferred shares 931,344 12,120,305
Redeemable common shares 1,400,000 --
Shareholders' equity 10,634,379 19,873,125
------------ ------------
Total liabilities and shareholders'
equity $ 22,267,798 $ 42,424,798
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
WAVO Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Internet media delivery and
syndication $ 483,272 $ -- $ 1,385,659 $ --
Other media delivery 3,554,569 5,009,584 11,577,474 16,729,013
------------ ------------ ------------ ------------
Total revenues 4,037,841 5,009,584 12,963,133 16,729,013
Cost of revenues 2,071,338 2,765,657 6,594,025 8,876,662
------------ ------------ ------------ ------------
Gross margin 1,966,503 2,243,927 6,369,108 7,852,351
Operating expenses:
Research and development 2,874,730 3,035,452 8,915,116 9,145,296
Sales and marketing 2,611,679 3,084,316 9,655,945 10,030,215
General and administrative 1,409,270 1,423,230 4,531,300 4,372,681
Amortization 339,978 432,375 1,102,639 1,244,394
Special charges 2,987,967 -- 4,960,876 --
------------ ------------ ------------ ------------
10,223,624 7,975,373 29,165,876 24,792,586
------------ ------------ ------------ ------------
Loss from operations (8,257,121) (5,731,446) (22,796,768) (16,940,235)
Other (income) expense:
Interest expense 103,779 56,382 331,317 156,185
Interest income (54,234) (63,969) (377,538) (403,151)
Gain on sale of business -- -- (1,544,924) --
Other 16,728 (9,715) (14,813) 2,445
Minority interest -- -- (451,403) --
------------ ------------ ------------ ------------
66,273 (17,302) (2,057,361) (244,521)
------------ ------------ ------------ ------------
Net loss $ (8,323,394) $ (5,714,144) $(20,739,407) $(16,695,714)
============ ============ ============ ============
Less: Preferred stock dividends 488,797 138,039 2,822,486 414,117
------------ ------------ ------------ ------------
Net loss after preferred stock dividends $ (8,812,191) $ (5,852,183) $(23,561,893) $(17,109,831)
============ ============ ============ ============
Basic and dilutive net loss per common
share after preferred stock dividends $ (0.20) $ (0.20) $ (0.68) $ (0.60)
============ ============ ============ ============
Number of shares used in per share
calculations 43,397,396 28,924,230 34,575,789 28,721,093
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
WAVO Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
----------------------------
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(20,739,407) $(16,695,714)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 3,770,569 3,200,558
Loss on disposal of assets 25,610 366
Gain on sale of a business (1,544,924) --
Provision for doubtful accounts 45,000 105,000
Special charge 4,960,876 --
Minority interest (151,403) --
Changes in operating assets and
liabilities 2,770,849 1,957,299
------------ ------------
Net cash used in operating activities (10,862,830) (11,432,491)
INVESTING ACTIVITIES:
Purchase of property and equipment (2,208,014) (2,704,613)
Proceeds from sale of property and
equipment 850 --
Proceeds from sale of a business 3,250,000 --
Purchase of business, net of cash acquired -- (1,483,054)
Other (15,000) (19,500)
------------ ------------
Net cash provided by (used in) investing
activities 1,027,836 (4,207,167)
FINANCING ACTIVITIES:
Issuance of common stock, net 574,894 722,548
Borrowings from bank and other 500,000 1,260,424
Payments on debt and capital lease
obligations (1,227,813) (428,755)
Payment of preferred stock dividends (641,833) (276,080)
Purchase of treasury shares (232,881) (522,878)
Loss on foreign currency translation (13,685) (7,167)
Other (73,666) (84,646)
------------ ------------
Net cash (used in) provided by financing
activities (1,114,984) 663,446
------------ ------------
Net decrease in cash and cash equivalents (10,949,978) (14,976,212)
Cash and cash equivalents at beginning of
period 11,496,888 17,719,042
------------ ------------
Cash and cash equivalents at end of
period $ 546,910 $ 2,742,830
============ ============
Issuance of common stock in connection
with dividend payments on Series D
preferred shares $ 720,919 $ 2,150,000
Accretion of dividends on Series D
preferred shares $ 1,687,447 $ --
</TABLE>
See accompanying notes.
5
<PAGE> 6
WAVO Corporation
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Certain information and footnote disclosures normally
included in financial statements have been condensed or omitted pursuant
to such rules and regulations. These financial statements should be read
in conjunction with the financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. The results of operations for the period ended
September 30, 2000 are not necessarily indicative of the results to be
expected for the entire year.
(2) LIQUIDITY
The Company has funded their operations since inception, primarily through
the private placement of common and preferred stock, public sale of its
Common Stock and from the sale of its product and services. However, the
Company has experienced operating losses and accumulated deficits since
inception. In October 2000 the Company received cash proceeds of
$12,000,000 from the sale of substantially all of the assets utilized in
its satellite and FM content delivery business. The sale of these non-core
assets and underlying business operations will cause the Company's cash
flow used in operations to increase. The Company has taken immediate
action to reduce cash used in operations by making significant reductions
in its operating expenses. The Company believes that in addition to cash
proceeds from the asset sale, it will be required to seek additional
capital in the future to fund operations. Management believes it will be
able to generate the necessary funding for operations and its internal
growth plans through equity offerings, strategic partnerships and through
the sale of other non-core assets.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
09/30/2000 12/31/1999
----------- ----------
<S> <C> <C>
Finished goods $ 436,813 $ 281,922
Work-in-process 507,426 908,089
Raw materials 530,758 593,731
----------- ----------
$ 1,474,997 $1,783,742
=========== ==========
</TABLE>
(4) LINE OF CREDIT AND LONG-TERM DEBT
During the third quarter of 2000, the Company was in default of
certain financial covenants required under its bank credit facilities. The
Company had received a forbearance from the bank related to such covenants
through October 15, 2000, at which time revised financial covenants went
into effect. The Company and the Bank have revised the terms of its
$7,000,000 credit facility, which includes accelerated payments on the
Company's term loan, as well as a $500,000 payment on the term loan. In
conjunction with the modifications the Company issued warrants to purchase
125,666 Common Shares that were priced at $.70 per Common Share. The
revisions adjust the payment terms of the existing term loan resulting in
a payoff over the next eight months and reduces the credit line
collateralized by accounts receivable and inventory from $5,000,000 to
$2,000,000. Subsequent to the end of the quarter, the Company made the
$500,000 payment on the term loan and was in compliance with the revised
covenants required by the bank credit facility. Also, as a result of the
sale of the Company's satellite and FM content delivery business (See
Subsequent event - Note 8), in October 2000, the Company paid $995,000 to
reduce the amount outstanding under its credit line. Additionally, in
September 2000, the Company received a $500,000 Bridge Loan from an
Executive of the Company. The loan was paid off in October 2000.
(5) SPECIAL CHARGE
In the third quarter of 2000, the Company recorded a non-cash
special charge of $2,988,000, which primarily consisted of intangible
costs associated with the Virgin JamCast service. The Company decided to
discontinue the retail operations of the Virgin JamCast service and to
focus on the licensing of the JamCast technology.
6
<PAGE> 7
(6) CONTRACT LIABILITY
The Company has a Data Delivery Network Agreement (the "Network
Agreement") with National Datacast, Inc. ("NDI") whereby NDI provides
nationwide data broadcast coverage. The Company originally used this
broadcast technology with its WaveTop service. The Company determined this
service was not part of its future strategic focus and WaveTop was
discontinued in late 1999. Since that time, the Company has been in
discussions with several other parties that have expressed interest in
using this unique broadcast technology and related network service. On
September 11, 2000, the Company and NDI entered into an amendment to
restructure the Network Agreement. The amendment reduced the cash amount
payable to NDI from $4,400,000 due through March 2002 to cash payments of
$2,000,000 payable through April 2001 and provided for the issuance in
September 2000 to NDI 1,722,018 shares of the Company's common stock
valued at $1,400,000. If NDI does not realize at least $1,400,000 from the
sale of all of these shares, the Company has agreed to deliver a
promissory note to NDI for the difference payable in three equal
installments, commencing 30 days after the issuance of the promissory
note. The value of these shares has been recorded as redeemable common
shares and has been classified outside of Stockholders' Equity on the
accompanying balance sheet. If NDI realizes more than $1,400,000 from the
sale of these shares, it is entitled to retain up to $350,000 of any
additional proceeds and then return any unsold shares or excess proceeds
to the Company. If the Company fails to have an effective registration
statement in place within 120 days subsequent to the issuance of the
shares, the Company is obligated to repurchase the shares for $1,400,000.
At September 30, 2000, the difference between the recorded value of
$1,400,000 and the market value was immaterial. Additionally, if the
Company elects to use the data delivery network to transmit data in the
future, or elects to renew the agreement for a further five year term, the
Company will be required to make all payments due to NDI under the terms
of the original Network Agreement. In the event the Company chooses not to
utilize this broadcast technology and related national network service in
the future or does not agree to allow a third-party to utilize such
technology and related service, the Company may record a one-time charge.
The one-time charge would have totaled approximately $2,200,000 as of
September 30, 2000.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivatives and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives), and for hedging activities. The FASB recently issued
SFAS No. 137 and 138, which defers the effective date and amends portions
of SFAS No. 133. SFAS No. 133 will be effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company is currently
evaluating SFAS No. 133 and does not believe it will have a material
effect on the Company's financial statements.
(8) SUBSEQUENT EVENT
On October 11, 2000 , the Company completed its previously announced
sale of its satellite and FM content delivery assets to Cidera, Inc.
("Cidera") for a purchase price of $12,000,000 in cash, 285,731 shares of
Cidera's common stock which was valued at $2,500,000 at the time of this
transaction, and the assumption of approximately $490,000 of liabilities.
The Company will record a gain of over $2,000,0000 related to the sale of
these assets. The assets sold to Cidera constituted approximately 33% of
the Company's total assets and accounted for approximately 71% and 27% of
the Company's total revenue and operating expense, respectively, on a
consolidated basis as of and for the fiscal year ended December 31, 1999,
and approximately 53%, 76% and 14% of such amounts as of and for the nine
months ended September 30, 2000.
The following unaudited pro forma information presents the results
of the Company for the three and nine month periods ended September 30,
2000 and 1999, respectively as if the sale of satellite and FM content
delivery assets had been sold to Cidera on January 1, 2000 and 1999,
respectively. The pro forma data are not necessarily indicative of the
financial results which would actually have been reported had the
transactions been consummated at the date mentioned above or which may be
reported in the future.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(In thousands except per share data) 2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 1,184 $ 1,598 $ 3,820 $ 5,337
Net loss $(8,511) $(5,735) $(21,454) $(17,449)
Less: Preferred stock dividends $ 489 $ 138 $ 2,882 $ 414
Net loss after preferred stock dividends $(9,000) $(5,873) $(24,227) $(17,863)
Basic and dilutive net loss per common share
after preferred stock dividends $ (0.20) $ (0.20) $ (0.70) $ (0.62)
</TABLE>
7
<PAGE> 8
(9) SEGMENT INFORMATION
During the nine month period ended September 30, 2000, the Company
had two reportable segments: Business Products and Services that focused
on the business marketplace; and Consumer Products, which focused on the
consumer market. Revenues for Business Products and Services are derived
from media delivery and syndication services, that generate volume-based
fees, content subscription and delivery fees and revenues from the sale or
rental of communication systems. Media Delivery and syndication services
generate revenues primarily through the Company's MediaXpress product and
wireless transmission services. The consumer product revenues are
generated primarily from e-commerce and advertising associated with the
Virgin JamCast service that is provided by JamCast.com, Inc. ("JamCast"),a
joint venture between the Company (75% ownership) and Virgin Entertainment
Group ("Virgin Entertainment") (25% ownership). In October 2000, the
Company decided to discontinue the retail operations of the Virgin JamCast
service and to focus on the licensing of the JamCast technology and as a
result of this decision, the Company has written off $3,000,000 in assets
related to Virgin JamCast. Accordingly, the Company and Virgin
Entertainment are currently in discussions to determine the ultimate
resolution of the jointly owned JamCast.com.
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. The Company's reportable
segments are business units that offer different products and have no
intersegment sales or transfers.
8
<PAGE> 9
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Business
Three Months Ended September 30, 2000 Consumer Products and Other Total
Products Services
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 10,007 $ 4,027,834 $ -- $ 4,037,841
Interest revenue -- -- 54,234 54,234
Interest and other expense 16,985 (372) 103,894 120,507
Depreciation and amortization expense 177,638 507,704 651,799 1,337,141
Segment profit (loss) (4,473,955) (2,128,910) (1,720,529) (8,323,394)
Segment assets -- 12,375,645 9,892,153 22,267,798
Expenditures for long-lived assets 26,019 166,185 12,543 204,747
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Business
Three Months Ended September 30, 1999 Consumer Products and Other Total
Products Services
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ -- $ 5,009,584 $ -- $ 5,009,584
Interest revenue 939 617 62,413 63,969
Interest and other expense (306) (4,565) 51,538 46,667
Depreciation and amortization expense 100,022 1,004,902 39,428 1,144,352
Segment profit (loss) (1,493,694) (2,626,466) (1,593,984) (5,714,144)
Segment assets 1,179,145 31,478,102 5,090,136 37,747,383
Expenditures for long-lived assets 29,084 246,470 65,783 341,337
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Business
Nine Months Ended September 30, 2000 Consumer Products and Other Total
Products Services
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ -- $ 12,963,133 $ -- $ 12,963,133
Interest revenue -- -- 377,538 377,538
Interest and other expense 16,985 (22,122) 321,641 316,504
Gain on sale of business -- 1,544,924 -- 1,544,924
Depreciation and amortization expense 500,726 1,687,665 1,582,178 3,770,569
Segment profit (loss) (8,687,727) (7,148,306) (4,903,374) (20,739,407)
Segment assets -- 12,375,645 9,892,153 22,267,798
Expenditures for long-lived assets 132,497 1,701,668 373,849 2,208,014
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Business
Nine Months Ended September 30, 1999 Consumer Products and Other Total
Products Services
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ -- $ 16,729,013 $ -- $ 16,729,013
Interest revenue 939 8,754 393,458 403,151
Interest and other expense 68 13,770 144,792 158,630
Depreciation and amortization expense 318,459 2,782,111 99,988 3,200,558
Segment profit (loss) (5,109,768) (6,875,089) (4,710,857) (16,695,714)
Segment assets 1,179,145 31,478,102 5,090,136 37,747,383
Expenditures for long-lived assets 69,952 2,317,554 317,107 2,704,613
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
WAVO Corporation (the "Company") is in the business of moving media. As an
industry leading media delivery and syndication company, 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 and wireless
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.
The Company's MediaXpress service, an Internet-driven data delivery
solution, delivers media aggregated from an extensive base of content providers
of more than 1,800 top sources. 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's 75% owned subsidiary, JamCast.com, Inc. ("JamCast"), was
created in September of 1999 in conjunction with the Company's agreement with
Virgin Entertainment Group ("Virgin Entertainment"), to form Virgin JamCast.
Virgin Entertainment has a 25% equity stake in JamCast. Virgin JamCast was
established as an innovative digital music Web portal that used our proprietary
multicast "push" technology to deliver digital music to an Internet-wide
audience. The Company has decided to discontinue the retail operations of the
Virgin JamCast service and to focus on licensing the JamCast technology. The
Company and Virgin Entertainment are currently in discussion to determine the
ultimate resolution regarding the jointly owned JamCast. Accordingly, the
Company recorded a non-cash special charge of $2,988,000 in the third quarter of
2000 that consists primarily of intangible costs.
RECENT DEVELOPMENTS
On October 11, 2000, the Company completed the previously announced sale
of its satellite and FM content delivery assets to Cidera, Inc. ("Cidera") in
exchange for $12,000,000 in cash, $2,500,0000 (285,731 shares) of Cidera's
common stock, and assumption of approximately $490,000 of liabilities. Cidera
also agreed to become a preferred Original Equipment Manufacturer ("OEM") of the
Company's MediaXpress service for Cidera's information provider customers. The
Company will recognize a gain of over $2,000,000 as a result of this
transaction. Prior to the sale, the Company utilized the assets sold to provide
wireless media delivery services and equipment to providers of financial data,
news, and other information. The Company's broadcast networks used 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.
The Company has a Data Delivery Network Agreement (the "Network
Agreement") with National Datacast, Inc. ("NDI") whereby NDI provides nationwide
data broadcast coverage. The Company originally used this broadcast technology
with its WaveTop service. The Company determined this service was not part of
its future strategic focus and WaveTop was discontinued in late 1999. Since that
time, the Company has been in discussions with several other parties that have
expressed interest in using this unique broadcast technology and related network
service. On September 11, 2000, the Company and NDI entered into an amendment of
the Network Agreement. The amendment reduced the cash amount payable to NDI
10
<PAGE> 11
from $4,400,000 due through March 2002 to cash payments of $2,000,000 payable
through April 2001 and provided for the issuance in September 2000 to NDI of
1,722,018 shares of the Company's common stock valued at $1,400,000. If NDI does
not realize at least $1,400,000 from the sale of all of these shares, the
Company has agreed to deliver a promissory note to NDI for the difference
payable in three equal installments, commencing 30 days after the issuance of
the promissory note. The value of these shares has been recorded as redeemable
common shares and has been classified outside of Stockholders' Equity on the
accompanying balance sheet. If NDI realizes more than $1,400,000 from the sale
of these shares, it is entitled to retain up to $350,000 of any additional
proceeds and then return any unsold shares or excess proceeds to the Company. At
September 30, 2000, the difference between the recorded value of $1,400,000 and
the market value was immaterial. Additionally, if the Company elects to use the
data delivery network to transmit data in the future, or elects to renew the
agreement for a further five year term, the Company will be required to make all
payments due to NDI under the terms of the original Network Agreement. In the
event the Company chooses not to utilize this broadcast technology and related
national network service in the future or does not agree to allow a third-party
to utilize such technology and related service, the Company may record a
one-time charge. The one-time charge would have totaled approximately
$2,200,000 as of September 30, 2000.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues
Internet Media Delivery and Syndication revenues are derived primarily
from the following activities related to the Company's core product,
MediaXpress: media delivery and syndication services, content subscription fees,
software sales and setup and delivery fees. Revenues for the three and nine
month periods ended September 30, were $483,000 and $1,386,000, respectively.
The MediaXpress product was not announced until the fourth quarter of 1999.
Other Media Delivery revenues include revenues from products which are no longer
part of the strategic direction of the Company, as well as revenues from the
Company's Consumer product, JamCast. Other Media Delivery revenues were
$3,555,000 for the third quarter of 2000 and $5,010,000 for the third quarter of
1999. Other Media Delivery revenues for the nine month periods ended September
30 were $11,577,000 and $16,729,000 for 2000 and 1999, respectively. The decline
in Other Media Delivery revenue is primarily attributed to equipment volume
decreases associated with product lines that are no longer part of the strategic
direction of the Company as well as the sale of the Company's internet
monitoring service, eWatch, Inc. ("eWatch") in January 2000. There were no
significant revenues or cost of revenues relating to the Company's Consumer
Product, Virgin JamCast, that was launched in March 2000.
Cost of Revenues
Cost of revenues consists primarily of costs associated with delivering
media services to customer sites, royalties to information content providers and
costs of computer hardware and software sold to customers. Cost of revenues for
the nine months ended September 30, 2000 and 1999 were $6,594,000 and
$8,877,000, respectively. The decrease in costs for the comparable periods,
correspond to the decrease in revenues for the same periods. Gross margin
percentages were 49% for the first nine months of 2000 and 47% in the same
period of 1999. Margins for the three month periods were 49% and 45% in 2000 and
1999, respectively. The improved margins for both the quarter and nine month
periods are primarily attributable to growth of the Company's higher margin
MediaXpress revenues and reduced FM radio station costs associated with the
delivery of data via the Company's wireless media delivery network.
Research and Development
Research and development expenses for the third quarter of 2000 were down
$161,000 or 5% from the same quarter of 1999, while expenses for the nine month
period in 2000 were down $230,000 or 3% from the same period in 1999. The
decreases are related to a reduced number of personnel and the sale of the
Company's wholly-owned subsidiary, eWatch, Inc. in January of 2000. Product
development expenses consist primarily of design, testing and support of the
Company's existing and developing hardware, software and services.
Sales and Marketing
Sales and Marketing expenses for the third quarter of 2000 were down
$473,000 or 15% from the same quarter of 1999, while expenses for the nine month
period in 2000 were down $374,000 or 4%, as
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compared to the same period in 1999. The decreases are related to a reduced
number of personnel and reduced employee travel as well as the sale of eWatch,
Inc. in January of 2000.
General and Administrative
Third quarter general and administrative expenses in the current year were
consistent with expenses in the third quarter of 1999. Expenses increased
$159,000 for the nine months ended September 30, 2000 from the same period in
1999. The increase is attributed to increased consulting costs.
Amortization
Amortization expense was down 11%, or $142,000 for the first nine months
of 2000, as compared to the same period in 1999. A decrease in amortization
expense which resulted from the reduction of intangible assets included in the
Company's Business Products and Services segment, was offset by increased
Consumer Product amortization relating to the formation of the JamCast.com, Inc.
subsidiary in the fourth quarter of 1999. In September 2000, the Company
recorded a special charge which eliminated the intangible costs related to
JamCast.com. This will reduce future amortization by approximately $95,000 per
quarter.
Special Charges
During the second quarter of 2000, in connection with the Company taking a more
narrow product focus,, it recorded a non-cash special charge of $1,973,000
related to its final determination on how it will conclude one of its non-core
products. This special charge represented the remaining net book value of all
intangibles (primarily developed technology, license agreements and assembled
workforce) related to this non-core product, except for $415,000. The limited
value of intangible assets not charged off is based on the remaining fair value,
determined based on an analysis of the technology that will continue to be
utilized, and employees that continue to work for the Company and the
undiscounted cash flows related thereto.
In October 2000, the Company elected to discontinue the retail music operations
of the Virgin JamCast service effective October 31, 2000 and reposition
JamCast.com to that of a provider of the Company's proprietary multicast
technology to Virgin Entertainment Group and possibly others in the
entertainment industry for use in the distribution of digital media. As a
result, in the third quarter of 2000 the Company recorded a non-cash special
charge of $2,988,000, representing primarily intangible assets associated with
the Virgin JamCast service.
Interest Expense and Interest Income
Interest income for the first nine months of 2000 was down slightly from
the same period in 1999, while interest expense increased $175,000 or 112%. The
change in interest income is attributed to a lower cash balance available for
investment. The increase in interest expense reflects increases in bank
borrowings and interest rate increases throughout the comparable periods.
Gain on Sale of Business
In January 2000, 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. The Company received cash proceeds in
excess of $3,000,000 and recorded a $1,545,000 gain with respect to the sale.
Minority Interest
Minority interest for the nine months ended September 30, 2000 represents
the 25% interest in JamCast.com, Inc., held by Virgin Entertainment Group
("Virgin Entertainment"). The Company sold this interest to Virgin Entertainment
in September 1999, in exchange for certain promotional commitments.
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See "Special Charges" for discussion of recent developments regarding
JamCast.com and Virgin Entertainment.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000 and 1999, the Company used
cash in its operations of $10,863,000 and $11,432,000, respectively.
Cash flow provided by investing activities was $1,028,000 in the first
nine months of 2000 while cash used in investing activities was $4,207,000 in
the first nine months of 1999. In January 2000, the Company received cash
proceeds of $3,250,000 from the sale its eWatch business. Purchases of property
and equipment totaled $2,208,000 and $2,705,000 in 2000 and 1999, respectively.
During the first nine months of 1999, the Company also made a $1,483,000
incentive payment in connection with a previous purchase of a business.
Cash used in financing activities was $1,115,000 in the first nine months
of 2000 versus cash provided by financing activities of $663,000 in 1999. In the
first nine months of 2000 and 1999, the Company recorded proceeds of $575,000
and $723,000, respectively, from the issuance of common shares in connection
with the exercise of employee stock options and $500,000 from a Bridge Loan
during the first nine month of 2000. Proceeds in 2000 were offset by the payment
of dividends on Series D Preferred Shares ("Series D Shares") and repayment of
debt. Additional proceeds in 1999 included $1,260,000 borrowed against the
Company's credit facilities. Proceeds in 1999 were partially offset by
repayments of debt of $429,000, treasury share purchases of $523,000 for 50,000
shares of the Company's Common Shares and dividend payments on the Company's
preferred shares.
The Company has funded their operations since inception, primarily
through the private placement of common and preferred stock, public sale of its
Common Stock and from the sale of its product and services. However, the Company
has experienced operating losses and accumulated deficits since inception. In
October 2000 the Company received cash proceeds of $12,000,000 from the sale of
substantially all of the assets utilized in its satellite and FM content
delivery business. The sale of these non-core assets and underlying business
operations will cause the Company's cash flow used in operations to increase.
The Company has taken immediate action to reduce cash used in operations by
making significant reductions in its operating expenses. The Company believes
that in addition to cash proceeds from the asset sale, it will be required to
seek additional capital in the future to fund operations. Management believes it
will be able to generate the necessary funding for operations and its internal
growth plans through equity offerings, strategic partnerships and through the
sale of other non-core assets.
During the third quarter of 2000, the Company was in default of certain
financial covenants required under its bank credit facilities. The Company has
received a forbearance from the bank related to such covenants through October
15, 2000, at which time revised financial covenants went into effect. The
Company and the Bank have revised the terms of its $7,000,000 credit facility,
which includes accelerated payments on the Company's term loan, as well as a
$500,000 payment on the loan. The revisions adjust the payment terms of the
existing term loan resulting in a payoff over the next eight months and reduces
the credit line collateralized by accounts receivable and inventory from
$5,000,000 to $2,000,000. Subsequent to the end of the quarter, the Company made
the $500,000 payment and was in compliance with the revised covenants required
by the bank credit facility. Also, as a result of the sale of the Company's
satellite and FM content delivery business, the Company paid $995,000 to reduce
the amount outstanding on its credit line. Additionally, in September 2000, the
Company received a $500,000 Bridge Loan from an Executive of the Company. The
loan was paid off in October 2000.
The Company's Common Stock is currently listed on the Nasdaq National
Market. The Company has received notification from Nasdaq that because the bid
price of the Company's Common Shares has been below $1.00 for more than ninety
days, the Company faces possible delisting from this exchange. The Company has
applied for and has been granted a hearing with Nasdaq. At the hearing the
Company will request an extension of time in order to comply with the common
share bid price requirement. If a delisting occurs, the Common Shares would
trade on the OTC Bulletin Board or in the "pink sheets" maintained by the
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National Quotation Bureau, Inc. This may have the effect of limiting the
Company's ability to raise additional financing.
FORWARD-LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and otherwise in this Report are
forward-looking. These may be identified by the use of forward-looking words or
phrases such as "believe", "expect", "anticipated", "should", "planned",
"estimated" and "potential" among others. These forward-looking statements are
based on the Company's reasonable current expectations. A variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in such
forward-looking statements. The risk and uncertainties that may affect the
operations, performance, development and results of the Company include: the
complexity and uncertainty regarding the development and implementation of high
technology products and services; market acceptance of new products and
services; the introduction of competing products or technologies by other
companies; pricing pressures from competitors and/or customers; rapid changes in
the information services and data delivery industries and markets; the Company's
ability to protect its proprietary information and technology or to obtain
necessary licenses on commercially reasonable terms; the dependence of the
Company's businesses upon a variety of suppliers and vendors; the ability to
maintain computer and telecommunications systems, essential to its business
operations; the integration and assimilation of acquisitions; the Company's
history of losses; the need for future additional financing; the risks and
uncertainties of expansion into various international markets; the ability to
retain key employees; dependence upon strategic alliances or relationships with
other parties; volatility of the Company's Common Share price; the ability of
the Company to maintain the listing of its Common Shares on the Nasdaq Stock
Market; and the adoption of new or change in existing governmental regulations
affecting the Company's business.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk relates primarily to fluctuations in
short-term interest rates. The Company has performed a sensitivity analysis and
determined that based on current economic conditions, changes in short-term
interest rates would not have a material affect on its operating results or
financial condition.
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PART II. OTHER INFORMATION
ITEMS 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
c)
On September 15, 2000, the Company issued 1,722,018 of the Company's
Common Shares, valued at $1,400,000 to National DataCast, Inc. ("NDI") in
connection with an amendment to the terms of the Data Delivery Network
Agreement between the Company and NDI, dated October 15, 1996. The
agreement includes a provision which states that the Company must file a
registration statement on Form S-3 or another appropriate form with the
Securities and Exchange Commission ("SEC"), covering the resale of the
Company's Shares. If the Registration Statement is not declared effective
within ninety days of the initial filing with the SEC, the Company is
immediately obligated to repurchase the shares. The shares were issued
pursuant to the non-public offering exemption from registration in Section
4(2) of the Securities Act of 1933, as amended.
On September 15, 2000, in connection with a modification to the terms of a
loan and security agreement between the Company and a bank, dated October
14, 1997, the Company issued warrants to purchase 125,666 Common Shares
that were valued at $64,000 and expire on September 15, 2005. The exercise
price is $.70 per Common Share. The warrants were issued pursuant to the
non-public offering exemption from registration in Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herein:
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On September 13, 2000, the Company filed a Current Report on Form 8-K,
reporting in Item 5 that the Company had entered into an agreement with Cidera,
Inc., to sell substantially all of the assets of the Company's wholly-owned
subsidiary, WavePhore Networks, Inc.
On October 26, 2000, the Company filed a Current Report on Form 8-K,
reporting in Item 2 the sale of substantially all of the assets of the Company's
wholly-owned subsidiary, WavePhore Networks, Inc. The report included the
following: unaudited pro forma condensed consolidated statements of operations
of the Company for the year ended December 31, 1999 and the six months ended
June 30, 2000 and the unaudited pro forma condensed consolidated balance sheet
at June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAVO Corporation
Date: November 13, 2000 By /s/ Michael J. Coffin
---------------------------------------
Michael J. Coffin
Chief Executive Officer
(Duly Authorized Officer)
Date: November 13, 2000 By /s/ Kenneth D. Swenson
-----------------------------------
Kenneth D. Swenson,
Executive Vice President, Chief Financial
Officer and Treasurer (Principal Financial
and Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
18
