<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 MARCH 31, 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 April
30, 2000:
COMMON SHARES, NO PAR VALUE: 29,582,010 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 -
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Three months ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 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 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WAVO Corporation
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------ --------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,227,913 $ 11,496,888
Accounts receivable 2,881,396 4,256,546
Inventories 2,021,033 1,783,742
Prepaid expenses and other 1,807,479 1,215,580
--------------------------------------
Total current assets 16,937,821 18,752,756
Property and equipment, net 5,619,312 5,671,675
Goodwill, net 2,486,280 4,325,714
Intangibles, net 12,777,158 13,096,816
Deposits and other assets 561,958 577,837
--------------------------------------
Total assets $ 38,382,529 $ 42,424,798
======================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,137,982 $ 899,099
Deferred revenue 1,884,509 2,217,020
Accrued expenses 2,575,443 2,502,379
Bank credit lines 1,690,658 1,713,451
Current portion of long-term debt 1,050,156 1,117,160
--------------------------------------
Total current liabilities 8,338,748 8,449,109
--------------------------------------
Long-term debt, less current portion 952,092 1,055,793
Other non-current liabilities 1,277,119 1,338,141
Minority interest (863,078) (411,675)
Series D preferred shares 10,939,107 12,120,305
Total Shareholders' equity 17,738,541 19,873,125
------------------ --------------------
Total liabilities and shareholders' equity $ 38,382,529 $ 42,424,798
================== ====================
</TABLE>
See accompanying notes.
3
<PAGE> 4
WAVO Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 4,414,388 $ 5,678,869
Cost of revenues 2,258,688 2,966,698
------------ ------------
Gross margin 2,155,700 2,712,171
Operating expenses:
Research and development 3,060,281 3,105,637
Sales and marketing 2,811,059 3,254,554
General and administrative 1,499,099 1,525,800
Amortization 385,524 399,194
------------ ------------
7,755,963 8,285,185
------------ ------------
Loss from operations (5,600,263) (5,573,014)
Other (income) expense:
Interest expense 104,210 56,983
Interest income (179,522) (213,094)
Gain on sale of business (1,544,924) --
Other (20,813) 11,668
Minority interest (451,403) --
------------ ------------
(2,092,452) (144,443)
------------ ------------
Net loss $ (3,507,811) $ (5,428,571)
============ ============
Less: Preferred stock dividends 1,193,773 138,039
------------ ------------
Net loss after preferred stock dividends $ (4,701,584) $ (5,566,610)
============ ============
Basic and dilutive net loss per common share
after preferred stock dividends $ (0.16) $ (0.19)
============ ============
Number of shares used in per share
calculations 29,279,253 28,629,978
============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
WAVO Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------
March 31, March 31,
2000 1999
-------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,507,811) $ (5,428,571)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 1,055,989 980,280
Loss on disposal of assets 2,158 -
Gain on sale of a business (1,544,924) -
Provision for doubtful accounts 15,000 60,000
Minority interest in net income (451,403) -
Changes in operating assets and liabilities 706,644 1,512,049
-------------------------------------------
Net cash used in operating activities (3,724,347) (2,876,242)
INVESTING ACTIVITIES:
Purchase of property and equipment (796,153) (1,567,642)
Proceeds from sale of property & equipment - -
Proceeds from sale of a business 3,250,000 -
Purchase of business, net of cash acquired - (49,067)
Other (15,000) (15,000)
-------------------------------------------
Net cash provided by (used in) investing activities 2,438,847 (1,631,709)
FINANCING ACTIVITIES:
Issuance of common stock, net 574,894 589,974
Borrowings from bank and other - 240,000
Payments on debt and capital lease obligations (152,233) (69,290)
Payment of preferred stock dividends (365,753) -
Purchase of treasury shares - (58,566)
Loss on foreign currency translation (2,126) (10,710)
Other (38,257) (54,517)
-------------------------------------------
Net cash provided by financing activities 16,525 636,891
-------------------------------------------
Net decrease in cash and cash equivalents (1,268,975) (3,871,060)
Cash and cash equivalents at beginning of period 11,496,888 17,719,042
-------------------------------------------
Cash and cash equivalents at end of period $ 10,227,913 $ 13,847,982
===========================================
Issuance of common stock in connection with
dividend payments on Series D preferred shares $ 362,466 $ -
Accretion of dividends on Series D preferred shares $ 693,268 $ -
</TABLE>
See accompanying notes.
5
<PAGE> 6
WAVO Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 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
March 31, 2000 are not necessarily indicative of the results to be expected for
the entire year.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
3/31/00 12/31/99
---------------- ---------------
<S> <C> <C>
Finished Goods $ 177,547 $ 281,922
Work-in-process 634,194 908,089
Raw materials 1,209,292 593,731
--------------- --------------
$ 2,021,033 $ 1,783,742
================ ===============
</TABLE>
(3) 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 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. 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. The Company's reportable segments are business
units that offer different products and have no intersegment sales or transfers.
6
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Consumer Business
Three Months Ended March 31, 2000 Products Products and Other Total
Services
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ - $4,414,388 $ - $4,414,388
Interest revenue - - 179,522 179,522
Interest and other expense - (21,645) 105,042 83,397
Gain on sale of business - 1,544,924 - 1,544,924
Depreciation and amortization expense 160,255 599,323 296,411 1,055,989
Segment profit (loss) (1,805,613) 1,113,046 (2,815,244) (3,507,811)
Segment assets 2,949,958 14,318,197 21,114,374 38,382,529
Expenditures for long-lived assets 42,327 58,300 695,526 796,153
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Consumer Business
Three Months Ended March 31, 1999 Products Products and Other Total
Services
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ - $5,678,869 $ - $5,678,869
Interest revenue - - 213,094 213,094
Interest and other expense - 14,807 53,844 68,651
Depreciation and amortization expense 108,150 842,624 29,506 980,280
Segment profit (loss) (1,889,280) (2,059,205) (1,480,086) (5,428,571)
Segment assets 1,351,794 32,224,966 16,032,265 49,609,025
Expenditures for long-lived assets 20,403 1,473,705 73,534 1,567,642
</TABLE>
7
<PAGE> 8
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. 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 launched the Virgin JamCast service in March
2000.
The Company provides wireless media delivery 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. The wireless media delivery network enables the Company to
service the continental U.S. and the major population centers in Canada.
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 also has developed a vertical blanking interval ("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 - THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenues
Business Products and Services revenues are derived primarily from the
following activities: media delivery and syndication services which generate
volume-based fees, content subscription and delivery fees and revenues from the
sale or rental of communication systems. Revenues for the three months ended
March 31, 2000 and 1999 were $4,414,000 and $5,679,000, respectively. Revenues
for the first quarter of 2000 were down $1,264,000 from the same prior year
quarter. Factors contributing to the revenue decline include the sale of the
Company's internet monitoring service, eWatch, Inc. ("eWatch") in
8
<PAGE> 9
January 2000, and reductions in volume from business products and services which
are outside of the Company's strategic focus. There were no reportable revenues
or cost of revenues relating the Company's Consumer Product which was launched
in March 2000.
Cost of Revenues
Business Products and Services 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 quarters ended March 31, 2000 and 1999
were $2,259,000 and $2,967,000, respectively. The decrease in costs for the
comparable three months, corresponds to the decrease in revenues for the same
periods. Gross margin percentages were 49% for the first quarter of 2000 and 48%
in the first quarter of 1999.
Research and Development
Research and development expenses for the first quarter of 2000 and
1999 were comparable at $3,060,000, and $3,106,000, respectively. 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 decreased $443,000 or 14% for the three
month period ending March 31, 2000 as compared to the same period in 1999.
Expenses were $2,811,000 and $3,255,000, for the respective periods. The
decrease in costs is primarily related to sale of the eWatch business and
reductions in other personnel costs, primarily within the Business Products and
Services sales force.
General and Administrative
General and administrative expenses were comparable for the quarters
ended March 31, 2000 and 1999, decreasing $27,000 or 2%. Expenses in the first
quarter of 2000 were $1,499,000 as compared to $1,526,000 in the first quarter
of 1999.
Amortization
Amortization expense was $386,000 and $399,000 in 2000 and 1999,
respectively. A decrease in amortization expense resulting 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 subsidiary in the fourth quarter of 1999.
Interest Expense and Interest Income
Interest income in the first quarter of 2000 decreased 16% or $34,000
from the first quarter of 1999, while interest expense increased $47,000 or 83%.
The variances in interest income and expense correlate with differences in
average cash balances available for investments and bank borrowings throughout
the two comparable quarters.
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.
9
<PAGE> 10
Minority Interest
Minority interest in the first quarter of 2000 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
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2000 and 1999, the Company used
cash in its operations of $3,724,000 and $2,876,000, respectively.
Cash flow provided by investing activities was $2,439,000 in the first
quarter of 2000 while cash used in investing activities was $1,632,000 in the
first quarter 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 $796,000 and $1,568,000 in 2000 and 1999, respectively.
The Company received net cash from financing activities of $17,000 in
2000 and $637,000 in 1999. In the first quarter of 2000 and 1999, the Company
recorded proceeds of $575,000 and $590,000, respectively, from the issuance of
common shares in connection with the exercise of employee stock options.
Proceeds in 2000 were offset by the payment of dividends on Series D Preferred
Shares ("Series D Shares") and repayment of debt. Monthly principal payments on
an Equipment term loan commenced in March 2000. Additional proceeds in 1999
included $240,000 borrowed against the Company's credit facility. Proceeds in
1999 were partially offset by repayments of debt of $70,000, and treasury share
purchases of $59,000 for 10,000 shares of the Company's Common Shares.
In March 2000, 200 of the Company's 1,500 outstanding Series D Shares,
each with a stated value of $10,000, were converted into 302,528 Common Shares.
Dividends on Series D Shares, due at the end of the first quarter of 2000 were
paid in the form of 72,544 Common Shares. Additionally, 107,748 Common Shares
were issued in conjunction with the exercise of employee stock options.
The Company anticipates it will need additional cash reserves to
support operating activities in the second half of 2000. The Company believes
that it will be able to generate additional funding for operations and its
internal growth plans through equity offerings similar to those it has completed
in the past. In addition, the Company is exploring the sale or another form of
strategic partnership related to its non-core assets which could generate cash
to be used for operations. The Company currently has credit facilities available
totaling $8,000,000. Available credit on these facilities is approximately
$4,300,000 at March 31, 2000.
The Company will continue to evaluate business acquisitions and the
development of strategic partnerships to help accelerate its growth. The pace at
which these acquisitions and strategic partnerships occur will have an impact on
the capital resources of the Company to the extent they are funded with cash and
may cause dilution of existing stockholder interests to the extent they are
funded through equity financings.
FORWARD-LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and otherwise in this Report
are forward-looking. These may be identified by the use of forward-looking words
or phrases such as "believe", "expect", "anticipated", "should", "planned",
"estimated" and "potential" among others. These forward-looking statements are
based on the Company's reasonable current expectations. A variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in such
forward-looking statements. The risk and uncertainties that may affect the
operations, performance, development and results of the Company include: the
complexity and uncertainty regarding the development and implementation of high
technology products and services; market acceptance of new products and
services; the introduction of competing products or technologies by other
companies; pricing pressures from competitors and/or customers; changes in the
information services and data broadcasting
10
<PAGE> 11
industries and markets; the Company's ability to protect its proprietary
information and technology or to obtain necessary licenses on commercially
reasonable terms; the dependence of the Company's businesses upon a variety of
suppliers and vendors; the ability to maintain computer and telecommunications
systems, essential to its business operations; the integration and assimilation
of acquisitions; the need for future additional financing; the risks and
uncertainties of expansion into various international markets; the ability to
retain key employees; dependence upon strategic alliances or relationships with
other parties; volatility of the Company's Common Share price; and the adoption
of new or change in existing governmental regulations affecting the Company's
business.
11
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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.
12
<PAGE> 13
PART II. OTHER INFORMATION
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 February 2, 2000, the Company filed a Current Report on Form 8-K,
reporting in Item 2 the sale of the Company's wholly-owned subsidiary, eWatch,
Inc.
13
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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: May 12, 2000 By /s/ David E. Deeds
---------------------------------------
David E. Deeds,
Chief Executive Officer
(Duly Authorized Officer)
Date: May 12, 2000 By /s/ Kenneth D. Swenson
-----------------------------------------
Kenneth D. Swenson,
Executive Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 10,228
<SECURITIES> 0
<RECEIVABLES> 3,100
<ALLOWANCES> 219
<INVENTORY> 2,021
<CURRENT-ASSETS> 16,938
<PP&E> 12,805
<DEPRECIATION> 7,186
<TOTAL-ASSETS> 38,383
<CURRENT-LIABILITIES> 8,339
<BONDS> 3,693
16,461
0
<COMMON> 153,561
<OTHER-SE> (141,343)
<TOTAL-LIABILITY-AND-EQUITY> 38,383
<SALES> 4,414
<TOTAL-REVENUES> 4,414
<CGS> 2,259
<TOTAL-COSTS> 2,259
<OTHER-EXPENSES> 7,756
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (75)
<INCOME-PRETAX> (3,508)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,508)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,508)
<EPS-BASIC> (.16)
<EPS-DILUTED> (.16)
</TABLE>
