-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GbMf5AZ9anq8ShXUk8KPe2hyqGku9E68/6FApVhdtbaa0F+F7xaHih79tTbWCQdS 1AakIBdWoNNxI8zvu954vg== 0001047469-99-021209.txt : 19990518 0001047469-99-021209.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-021209 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUDIO HIGHWAY-COM CENTRAL INDEX KEY: 0001030108 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 770377306 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-14697 FILM NUMBER: 99628015 BUSINESS ADDRESS: STREET 1: 20600 MARIANI AVE STREET 2: 408-255-5301 CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4082555301 MAIL ADDRESS: STREET 1: 20600 MARIANI AVENUE CITY: CUPERTINO STATE: CA ZIP: 95014 10QSB 1 10QSB - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-QSB (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, 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 1-14697 ------------------------ AUDIOHIGHWAY.COM (Exact Name of small business issuer as Specified in its Charter) CALIFORNIA (State or other jurisdiction of 77-0377306 incorporation or organization) (IRS Employer Identification No.) 20600 MARIANI AVE. CUPERTINO, CA 95014 (Address of principal executive offices) (Zip Code) (408) 255-5301 (Registrant's telephone number, including area code) ------------------------ 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 Act of 1934 during the preceding 12 months (or for such shorter periods 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 the number of shares outstanding of each of the issuer's classes of common stock of the latest practicable date. CLASS OUTSTANDING AT MARCH 31, 1999 - ------------------------------ ------------------------------- Shares of Common Stock, no par value 4,835,191 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I--FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS AUDIOHIGHWAY.COM CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents........................................................... $ 21,422 $ 13,007 Accounts receivable................................................................. 243 80 Other assets........................................................................ 155 47 ----------- ------------ Total current assets.............................................................. 21,820 13,134 Property and equipment, net........................................................... 485 333 Other assets, net..................................................................... 875 0 ----------- ------------ $ 23,180 $ 13,467 ----------- ------------ ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long term debt................................................ $ 1,072 $ 952 Accounts payable.................................................................... 1,021 1,128 Accrued expenses and other current liabilities...................................... 342 204 ----------- ------------ Total current liabilities......................................................... 2,435 2,284 Long term debt........................................................................ 153 376 Stockholders' equity Preferred Stock, no par value; 5,000,000 shares authorized; none outstanding........ 0 0 Common Stock, no par value; 50,000,000 shares authorized; 5,372,000 shares outstanding at March 31, 1999 and 4,103,000 shares outstanding at December 31, 1998.............................................................................. 31,171 19,130 Additional paid-in capital.......................................................... 4,194 4,194 Accumulated deficit................................................................. (14,773) (12,517) ----------- ------------ Total stockholders' equity........................................................ 20,592 10,807 ----------- ------------ $ 23,180 $ 13,467 ----------- ------------ ----------- ------------
See notes to Condensed Financial Statements 2 ITEM 1: FINANCIAL STATEMENTS (CONTINUED) AUDIOHIGHWAY.COM CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 1999 MARCH 31, 1998 ------------------- ------------------- (UNAUDITED) (UNAUDITED) Net revenues............................................................ $ 165 $ 42 Costs and expenses: Operating and development............................................. 698 207 Sales and marketing................................................... 942 338 General and administrative............................................ 361 61 ------- ------ Total cost and expenses............................................. 2,001 606 Loss from operations.................................................... (1,836) (564) Other income (expenses): Interest expense...................................................... (418) (136) Other................................................................. (2) 0 ------- ------ Net loss............................................................ $ (2,256) $ (700) ------- ------ ------- ------ Basic and diluted net loss per share.................................... $ (0.49) $ (0.70) Shares used in computing basic and diluted net loss per share........... 4,627 1,004
See Notes to Condensed Financial Statements 3 ITEM 1: FINANCIAL STATEMENTS (CONTINUED) AUDIOHIGHWAY.COM CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 1999 MARCH 31, 1998 ------------------- --------------------- (UNAUDITED) (UNAUDITED) Net cash used in operating activities................................... $ (1,769) $ (385) -------- ----- Cash flows from investing activities: Acquisition of property and equipment................................. (166) (14) Acquisition of business............................................... (200) 0 -------- ----- Net cash used in investing activities............................... (366) (14) Cash flows from financing activities: Proceeds from (repayment of) long term debt........................... (1,491) 419 Proceeds from issuance of common stock................................ 12,041 0 -------- ----- Net cash provided by financing activities........................... 10,550 419 -------- ----- Net change in cash and cash equivalents........................... 8,415 20 Cash and cash equivalents at beginning of period........................ 13,007 5 -------- ----- Cash and cash equivalents at end of period.............................. $ 21,422 $ 25 -------- ----- -------- -----
See Notes to Condensed Financial Statements 4 ITEM 1: FINANCIAL STATEMENTS (CONTINUED) AUDIOHIGHWAY.COM NOTES TO CONDENSED FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1--THE COMPANY AND BASIS OF PRESENTATION audiohighway.com (the "Company") is a global Internet media company that offers a library of pre-recorded audio content via the World Wide Web (the "Web"). The accompanying unaudited condensed financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. These financial statements should be read in conjunction with the financial statements and related notes incorporated by reference in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998. Certain prior period amounts have been reclassified to conform to current period presentation. NOTE 2--ACQUISITION OF MASS MUSIC Effective January 1, 1999, the Company completed the acquisition of substantially all the assets of Mass Music, Inc., which markets and sells music products through its Internet site. The acquisition was accounted for as a purchase in accordance with APB Opinion No. 16. Under the purchase method of accounting, the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition. Results of operations for Mass Music have been included with those of the Company for periods subsequent to the date of acquisition. The total purchase price of the acquisition was $1,000,000, $200,000 in cash and a payable in the amount of $800,000. In April 1999, the Company converted the payable into 36,478 shares of the Company's Common Stock. The purchase price was allocated to the assets acquired based on their estimated fair values as follows: Customer lists.................................................. $ 873,516 Software operating systems...................................... 102,000 Other........................................................... 24,484 --------- $1,000,000 --------- ---------
Customer lists and other intangible assets will be amortized on a straight line basis over a period of two years. Amortization expense for the quarter ended March 31, 1999 was $125,000. NOTE 3--EARNINGS (LOSS) PER SHARE Earnings (loss) per share is based on the weighted average number of common and equivalent shares outstanding during the period. Basic net earnings (loss) per share is computed by dividing the net earnings (loss) by the number of weighted average common shares outstanding. Diluted earnings per share reflects potential dilution from outstanding stock options and warrants using the treasury stock method and convertible debt using the if-converted method. Equivalent shares are excluded from the diluted earnings per share calculation in loss periods. NOTE 4--REDEMPTION OF COMMON STOCK PURCHASE WARRANTS In January 1999, the conditions for redemption set forth in the Common Stock Purchase Warrants issued as part of the Company's December 1998 IPO were satisfied and the Company redeemed its outstanding public warrants as of February 22, 1999. As a result, a total of approximately 1,269,000 5 warrants were exercised, which resulted in gross proceeds to the Company of approximately $12,374,000. The Company paid approximately $315,000 to holders of Warrants who chose not to redeem during the 30-day redemption period. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information that the Company's management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition for two three month periods ended March 31, 1999 and 1998. The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Report on Form 10-QSB and in conjunction with the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998. Some of the information in this Report contains forward-looking statements which involve substantial risks and uncertainties. These statements can be identified by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words. Investors should read statements that contain these or similar words carefully because they (1) discuss our expectations about the Company's future performance; (2) contain projections of the Company's future operating results or of the Company's future financial condition; (3) state other "forward-looking" information. The Company believes it is important to communicate its expectations to its investors. There may be events in the future, however, that the Company is not accurately able to predict or over which it has no control. The risk factors discussed in "Business Risks," later in this Report, as well as any cautionary language in this Report, provide examples of risks, uncertainties and events that may cause the Company's actual results to differ materially from the expectations described in the forward-looking statements. Additional risks will be described from time to time in the Company's other filings with the SEC. Investors should be aware that the occurrence of any of the events described in the risk factors and elsewhere in this Report and in the Company's other periodic SEC filings could have a material and adverse effect on its business, results of operations and financial condition. GENERAL The Company offers a proprietary information and entertainment service that enables its users to download and play back selected audio content from the Internet (the "AudioCast System"). The AudioCast System consists of (i) proprietary client/server software developed by the Company that is specifically adapted to transmit audio data over the Internet, (ii) proprietary application software, known as AudioWiz, which is provided free of charge to the customer and which allows him or her to download and play back audio selections and (iii) a growing library of audio content that ranges from audio books to sports updates and music. The Company believes that what differentiates the AudioCast System from other Internet-based information services is its focus on audio content versus text, the downloading of audio content as digital files available for later use and its emphasis on portability. The Company's system provides users with a simple, easy to use method of selecting a diverse range of audio content from a single Web site and the ability to listen to such programming in almost any environment. During the period from the Company's inception in June 1994 until November 1997, the Company had no revenues and its operating activities related primarily to the research and development efforts and initial planning and development of the Company's Web site and operations. During 1997, the Company generated minimal revenues from Web-based advertising, and the Company's operating activities related to the continued development of its proprietary software, building market awareness and the launch and continued enhancement of its Web site. Throughout the Company's existence, it has expended significant resources in the research and development of its technology and the aggregation of content by obtaining Internet broadcasting rights to audio programming. 6 The Company's revenues are derived principally from electronic commerce ("e-commerce"), the sale of audio commercials included in its downloaded or streamed audio programming, channel sponsorships and banner advertisements, all on short-term contracts. Advertising revenues are recognized in the period in which the advertisement is delivered, provided that collection of the resulting receivable is probable. For each hour of downloaded content, the Company can distribute up to six minutes of audio commercials. The audio selections, which include audio advertisements, are free of charge to the user. In the first quarter of 1999, the Company began generating revenues from e-commerce. During the first quarter of 1999, the Company acquired substantially all of the assets of Mass Music, Inc., a company engaged in the sale of music CD's and videos through the Web site located at massmusic.com. During the first quarter, the Company also launched "audioshop," the e-commerce portion of the audiohighway.com Web site. Nearly all of the Company's e-commerce revenue during the first quarter of 1999 came from audioshop and sales at massmusic.com. In the future, the Company anticipates that it may generate additional revenue streams through ad-free program charges and charges for premium content and e-commerce. However, the extent and timing of developing such additional revenue sources is not currently known, and there is no assurance that the Company will in fact generate revenues from all or any of these potential sources at any time in the future. The amount of revenue that the Company can generate is directly related to a number of factors, including the volume of advertisers, the rates charged for the various types of advertising, the number of users who visit the Company's Web site and the amount of audio content downloaded or streamed. To date, the Company has generated a minimal amount of advertising revenue, in part due to excess advertisement "inventory" resulting from the fact the Company has attracted more customers than advertisements to match with its audio content. The Company expects to use a significant portion its assets to expand sales and marketing and thereby expects to rapidly expand its advertising inventory. There is no assurance, however, that the Company will successfully increase revenues or achieve profitability. The Company has signed agreements with major media companies to provide a wide selection of audio content such as news, books, self improvement programs, magazine articles, radio and television programs and movie reviews. The Company stores audio content on its Web site and is continually adding content to its audio library. The cost of this content to the Company is, for the most part, directly proportional to the duration of downloaded content. Certain of the content is purchased on a flat fee basis. The Company has incurred significant losses since its inception. As of March 31, 1999, the Company had an accumulated deficit of approximately $14,773,000 and is continuing to operate at a loss. The Company believes that its success will depend largely on its ability to attract users to its Web site, expand e-commerce activity, obtain advertising contracts and secure additional audio content of interest to users. Accordingly, the Company intends to invest heavily in sales and marketing, content acquisition and continued research and development efforts. In view of the rapidly evolving nature of the Company's business and its limited operating history, the Company believes that period-to-period comparisons of its revenues and operating results, including its gross profit margin and operating expenses as a percentage of total net revenues, are not necessarily meaningful and should not be relied upon as indications of future performance. PLAN OF OPERATIONS The Company intends to use the net proceeds of its December 1998 IPO to expand and improve its AudioCast System. The Company expects expenditures to increase very substantially across all expense categories as it seeks to increase its advertising inventory, expand its digital audio content library and upgrade its Web site. The Company expects the most significant expense increases will occur in sales and marketing and research and development. 7 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1998 Net revenues were $165,000 for the three months ended March 31, 1999, an increase of 293% compared to $42,000 for the same period in 1998. The Company launched its Web site in November 1997. Revenues generated in the first quarter of 1998 were primarily from advertising sales. Revenues in the first quarter of 1999 were attributed to increased advertising sales and e-commerce, including revenues generated by the acquisition of Mass Music, Inc. Operating and development expenses were $698,000 for the three months ended March 31, 1999, up 237% from $207,000 for the same period in 1998. This increase was primarily the result of increased payroll expenses associated with increased staffing, data communications expenses, costs to produce and maintain the Company's Web site, use of consulting engineers and amortization of certain of the assets acquired from Mass Music, Inc. The Company employs outside consulting engineers to facilitate a portion of its development effort. Selling and marketing expenses were $942,000 for the three months ended March 31, 1999, up 178% from $338,000 for the same period in 1998. This increase is primarily attributable to the increased payroll expenses associated with additional sales and marketing staff, as well as increased expenses for public relations, investor relations and advertising. The Company expects selling and marketing expenses to continue to increase substantially in future periods as the Company promotes its Web site. General and administrative expenses ("G&A") were $361,000 for the three months ended March 31, 1999, up 492% compared to G&A expenses of $61,000 for the same period in 1998. This increase was primarily the result of increased costs in accounting fees, legal fees and expenses incurred in connection with transactions and public company compliance. The operating loss was $1,836,000 for the three months ended March 31, 1999 compared to an operating loss for the same period in 1998 of $564,000, an increase of approximately 225%. As noted above, the increased loss was primarily the result of increased expenditures. Interest expense increased approximately 207% to $418,000 during the three months ended March 31, 1999 from $136,000 in the same period in 1998. This was primarily the result of amortizing the fair value attributed to warrants issued in connection with outstanding debt over the life of the related debt. The net carrying value of outstanding debt at March 31, 1999 was $1,225,000 compared to $1,328,000 on December 31, 1998. As a result of the factors described above, for the three months ended March 31, 1999, the Company incurred a net loss of $2,256,000 compared to a net loss of $700,000 for the same period in 1998. The Company has no current tax liability and management has determined that the realization of its deferred tax assets is not probable. As such, the Company has provided a full valuation allowance against its deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations since inception almost entirely from the sale of equity and debt securities, supplemented with a bank line of credit. In December 1998, it completed its initial public offering of securities, in which it sold an aggregate of 2,530,000 units consisting of Common Stock and redeemable Common Stock Purchase Warrants (the "Units"), at an initial public offering price of $6.50 per Unit. The offering netted the Company approximately $14,052,000 after deducting expenses related to the offering. In January 1999, the conditions for redemption set forth in the Common Stock Purchase Warrants were satisfied and the Company redeemed its outstanding public warrants as of February 22, 1999. As a result, a total of approximately 1,269,000 warrants were exercised, which resulted in gross proceeds to the Company of approximately $12,374,000. The Company paid approximately $315,000 to 8 holders of Warrants who chose not to redeem during the 30-day redemption period. As of March 31, 1999, the Company had cash and cash equivalents of $21,422,000 and working capital of $19,385,000. The Company currently is financing its daily operations primarily through the application of the net proceeds from the IPO and its subsequent warrant call. The Company has issued subordinated convertible promissory notes which bear interest at 8% to 10%, are convertible into Common Stock at rates ranging from $3.00 to $14.39 per share and other non-convertible debt at rates from 8% to 15%. During 1998, the Company converted $2,466,000 of debt and accrued interest of $264,000, including debt converted at the close of the Company's IPO, into 626,384 shares of Common Stock. The remaining debt is all due on or before June 30, 2000. The Company believes that its current financial resources will be sufficient to fund its operations for at least the next 12 months and that, during that period, it will not be necessary for the Company to raise additional funds to meet the expenditures required for operating its business. However, there can be no assurance that presently unforeseen events may result in the Company determining to raise additional funds. The Company will make significant ongoing investments in research and development for future generation products and services. It also expects to have significant expenditures in sales and marketing and further content acquisition in order to attract customers to its Web site. There is no assurance that the Company's analysis of its capital requirements will be accurate, particularly in light of the fact that it is entering a new business in a new market. The Company's future expenditures and capital requirements will depend on a number of factors including the development and implementation of next generation technologies, technological developments on the Internet and the regulatory and competitive environment for Internet based products and services. NET OPERATING LOSS CARRYFORWARDS At December 31, 1998, the Company fully provided against its deferred tax assets. The Company believes sufficient uncertainty exists regarding the realizability of the deferred tax assets such that a full valuation allowance is required. At December 31, 1998, the Company had approximately $10,603,000 of federal net operating loss carryforwards for tax reporting purposes available to offset future taxable income; such carryforwards will expire beginning in 2009. Additionally, the Company has approximately $5,301,000 of California net operating loss carryforwards for tax reporting purposes which will expire beginning in 1999. The Tax Reform Act of 1986 imposes limitations on the use of net operating loss carryforwards if certain stock ownership changes have occurred or could occur in the future. The sale of the Units sold in the Company's December 1998 IPO constituted such a change in ownership and utilization of the Company's net operating loss carryforwards may be limited. YEAR 2000 COMPLIANCE There are issues associated with the programming code in existing computer systems as the Year 2000 approaches. The "Year 2000 problem" is pervasive and complex, as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company has evaluated its current systems, purchased necessary upgrades and believes that its current hardware and software is Year 2000 compliant. Similarly, the Company believes that the products and services it offers to its customers are not affected by the Year 2000 problem. The Company has evaluated the potential impact on it of a Year 2000 problem on the part of its important third party vendors and has found none. The Company plans to continue to evaluate its systems and those of its important vendors in an effort to 9 minimize the effects of a Year 2000 problem. The Company does not anticipate that the Year 2000 problem will have a material impact on its business or operations. BUSINESS RISKS The future operating results of the Company are highly uncertain, and the following factors should be carefully reviewed in addition to the other information contained in this report on Form 10-QSB and in other public disclosures of the Company. HISTORY OF LOSSES AND ANTICIPATION OF FUTURE LOSSES. The Company was incorporated in June 1994 to deliver free, personalized audio via the Internet and was in the development stage until the fourth quarter of 1997. The Company first recognized revenues in November 1997 and has recorded net losses each year since its inception. At March 31, 1999 the Company had an accumulated a deficit of approximately $14,773,000. Accordingly, the Company has a limited operating history on which to base an evaluation of its business and prospects. The Company and its prospects must be considered in light of the early stage of development, particularly companies in new and rapidly evolving markets such as the market for Internet content, electronic commerce ("e-commerce") and advertising. To achieve and sustain profitability, the Company must, among other things, (i) provide diverse content of interest to Internet users, (ii) effectively develop new and maintain existing relationships with advertisers, advertising agencies and content providers, (iii) continue to develop and upgrade its technology and network infrastructure; (iv) respond to competitive developments, (v) successfully introduce enhancements to its existing products and services to address new technology standards and developments on the Internet, and (vi) attract, retain and motivate qualified personnel. The Company's operating results are also dependent on factors outside the control of the Company, such as the availability of desirable content. There can be no assurance that the Company will be successful in addressing these risks and the failure to do so would have a material adverse effect on the Company's business, results of operations and financial condition. Additionally, the limited operating history of the Company makes the prediction of future operating results difficult or impossible, and there can be no assurance that the Company's revenues will increase or even continue at their current level or generate sufficient cash from operations in future periods. The Company expects to continue to incur significant losses on a quarterly and annual basis for the foreseeable future. For these and other reasons, there is no assurance that the Company will ever achieve profitability or, if profitability is achieved, that it can be sustained. LIMITED OPERATING HISTORY; UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company has been out of the development stage only since the fourth quarter of 1997. Because of the Company's limited operating history and the emerging nature of the markets in which it competes, the Company is unable to forecast accurately its revenues. Additionally, the long-term acceptance of Web-based advertising is as yet uncertain. The Company currently intends to increase substantially its operating expenses in order to, among other things, (i) expand its distribution network capacity, (ii) fund increased sales and marketing activities, (iii) acquire additional content, (iv) develop and upgrade technology and (v) purchase equipment for its operations. The Company's expense levels are based, in part, on its expectations with regard to future revenues, and to a large extent such expenses are fixed, particularly in the short term. To the extent the Company is unsuccessful in increasing its revenues, the Company may be unable to appropriately adjust spending in a timely manner to compensate for any unexpected revenue shortfall or will have to reduce its operating expenses, causing it to forego potential revenue generating activities, either of which could cause a material adverse effect in the Company's business, results of operations and financial condition. The Company's quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company's control. Factors that may affect the Company's quarterly operating results include (i) the cost of acquiring and the availability of content, (ii) demand for Internet advertising, (iii) seasonal trends in advertising placements, (iv) the advertising cycles for, or the addition or loss of, individual advertisers, (v) the level of traffic on the Company's Web site, (vi) the 10 amount and timing of capital expenditures and other costs relating to the expansion of the Company's operations, (vii) price competition or pricing changes in Internet advertising, (viii) the level of and seasonal trends in the use of the Internet, (ix) technical difficulties or system downtime, (x) the introduction of new products or services by the Company or its competitors and (xi) general economic conditions and economic conditions specific to the Internet, such as electronic commerce and online media. Any one of these factors could cause the Company's revenues and operating results to vary significantly in the future. In addition, as a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service or marketing decisions or acquisitions that could cause significant declines in the Company's quarterly operating results. DEPENDENCE ON CONTENT PROVIDERS; LICENSE FEES PAYABLE TO CONTENT PROVIDERS. The Company's future success depends in large part upon its ability to obtain rights to and deliver content of sufficient interest to end users over the Internet. The Company does not create its own content. Rather, the Company relies on third party content providers, such as book publishers, news and financial information services and music publishers for the content it makes available to its subscribers. The Company's ability to maintain its existing relationships with such content providers and to build new relationships with additional content providers is critical to the success of its business. Although many of the Company's agreements with third party content providers are for an initial term of one year, with automatic renewal unless cancelled, the content providers may choose to terminate such agreements prior to the expiration of their terms. The Company's inability to secure licenses from content providers or the termination of a significant number of content provider agreements would decrease the availability of content that the Company can offer users. This may result in decreased traffic on the Company's Web site and, as a result, decreased advertising revenue, which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's agreements with most of its content providers are nonexclusive, and many of the Company's competitors offer, or could offer, content that is similar to or the same as that obtained by the Company from such nonexclusive content providers. Such direct competition could have a material adverse effect on the Company's business, results of operations and financial condition. License fees payable to content providers and other licensing agencies may increase as the Company continues to accumulate content and as competition for such content increases. There is no assurance that the Company's content providers and other licensing agencies will enter into prospective agreements with the Company on the same or similar terms as those currently in effect or on terms acceptable to the Company if no agreement is in effect. If the Company is required to pay increased licensing fees, such increased payments could have a material adverse effect on the Company's business, results of operations and financial condition. UNCERTAIN ACCEPTANCE OF THE INTERNET AS AN ADVERTISING MEDIUM. The market for Internet advertising has only recently begun to develop, is rapidly evolving and is characterized by an increasing number of market entrants. As is typical in the case of a new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty. The Company's ability to generate advertising revenue will depend on, among other factors, (i) the continued development of the Internet as an advertising medium, (ii) pricing of advertising on other Web sites, (iii) the amount of traffic on the Company's Web site, (iv) the Company's ability to achieve and demonstrate user demographic characteristics that are attractive to advertisers, (v) the development and expansion of the Company's advertising sales force and (vi) the establishment and maintenance of desirable advertising sales agency relationships. Most potential advertisers and their advertising agencies have only limited experience with the Internet as an advertising medium and have not historically devoted a significant portion of their advertising expenditures to Web-based advertising. There is no assurance that advertisers or advertising agencies will be persuaded to allocate or continue to allocate portions of their budgets to Web-based advertising or, if so persuaded, that they will find such advertising to be effective for promoting their products and services relative to traditional print and broadcast media. No standards have 11 yet been widely accepted for the measurement of the effectiveness of Web-based advertising, and there can be no assurance that such standards will develop sufficiently to enable Web-based advertising to become a significant advertising medium. Acceptance of the Internet among advertisers and advertising agencies will also depend, to a large extent, on the level of use of the Internet by consumers and upon growth in the commercial use of the Internet. If widespread commercial use of the Internet does not develop, or if the Internet does not develop as an effective and measurable medium for advertising, the Company's business, results of operations and financial condition could be materially adversely affected. MANAGEMENT OF GROWTH. The Company anticipates that significant expansion of its operations will be required in order to address potential market opportunities. The Company expects that it will need to increase its personnel significantly in the near future. The anticipated substantial growth is expected to place a significant strain on its managerial, operational and financial resources and systems. To manage its growth, the Company must implement, improve and effectively use its operational, management, marketing and financial systems and train and manage its employees. There can be no assurance that the Company will be able to manage effectively the expansion of its operations or that the Company's current personnel, systems, procedures and controls will be adequate to support the Company's operations. Any failure of management to manage effectively the Company's growth could have a material adverse effect on the Company's business, results of operations and financial condition. RISK OF SYSTEM FAILURE, DELAYS AND INADEQUACY; SINGLE SITE. The performance, reliability and availability of the Company's Web site and network infrastructure are critical to its reputation and ability to attract and retain users, advertisers and content providers. The Company's network infrastructure is located at a single, leased facility in Cupertino, California. The Company's systems and operations are vulnerable to damage or interruption from fire, flood, earthquakes, power loss, telecommunications failure, Internet breakdowns, break-ins and similar events. The Company does not presently have redundant facilities or systems or a formal disaster recovery plan and does not carry sufficient business interruption insurance to compensate it for losses that may occur. Services based on sophisticated software and computer systems often encounter development delays and the underlying software may contain undetected errors that could cause system failures when introduced. Any system error or failure that causes interruption in availability of content or an increase in response time could result in a loss of potential or existing business services customers, users, advertisers or content providers and, if sustained or repeated, could reduce the attractiveness of the Company's Web site to such entities or individuals. In addition, because the Company's Web advertising revenues are directly related to the number of advertisements delivered by the Company to users, system interruptions that result in the unavailability of the Company's Web site or slower response times for users would reduce the number of advertisements delivered and reduce revenues. A sudden and significant increase in traffic on the Company's Web site could strain the capacity of the software, hardware and telecommunications systems deployed or used by the Company, which could lead to slower response times or system failures. The Company's operations also are, in part, dependent upon receipt of timely feeds from certain of its content providers, and any failure or delay in the transmission or receipt of such feeds, whether due to system failure of the Company, its content providers, satellites or otherwise, could disrupt the Company's operations. The Company is also dependent upon Web browsers, Internet Service Providers ("ISPs") and online service providers ("OSPs") to provide Internet users access to the Company's Web site. Users may experience difficulties accessing or using the Company's Web site due to system failures or delays unrelated to the Company's systems. These difficulties may result in intermittent interruption in programming. Any sustained failure or delay could reduce the attractiveness of the Company's Web site to users, advertisers and content providers. The occurrence of any of the foregoing events could have a material adverse effect on the Company's business, results of operations and financial condition. 12 SECURITY RISKS. Despite the implementation of security measures, the Company's networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems. A party who is able to circumvent security measures could misappropriate proprietary information or cause interruptions in the Company's Internet operations. ISPs and OSPs have in the past experienced, and may in the future experience, interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. The Company may be required to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches. Although the Company intends to continue to implement industry-standard security measures, there can be no assurance that measures implemented by the Company will not be circumvented in the future. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to users accessing the Company's Web sites, which could have a material adverse effect on the Company's business, results of operations and financial condition. DEPENDENCE ON SHORT-TERM ADVERTISING CONTRACTS. A substantial portion of the Company's Web advertising revenues are derived from short-term contracts. Consequently, many of the Company's advertising customers can cease advertising on the Company's Web site quickly and without penalty, thereby increasing the Company's exposure to competitive pressures. There is no assurance that the Company's current advertisers will continue to purchase advertisements or that the Company will be able to secure new advertising contracts from existing or future customers at attractive rates or at all. Any failure of the Company to achieve sufficient advertising revenue could have a material adverse effect on the Company's business, results of operations and financial condition. COMPETITION. The market for e-commerce, information services and entertainment on the Internet and otherwise is highly competitive, and the Company expects that competition will continue to intensify. The Company competes with (i) other Web sites and Internet broadcasters to acquire and provide content to attract users, (ii) online services, other Web site operators and advertising networks, as well as traditional media such as television, radio and print, for a share of advertisers' total advertising budgets (iii) local radio and television stations and national radio and television networks for sales of advertising spots and (iv) other e-commerce enabled Web sites for on-line customers. There is no assurance that the Company will be able to compete successfully or that the competitive pressures faced by the Company, including those described below, will not have a material adverse effect on the Company's business, results of operations and financial condition. The Company also competes with online services, other Web site operators and advertising networks, as well as traditional media such as television, radio and print for a share of advertisers' total advertising budgets. The Company believes that the principal competitive factors for attracting advertisers include the number of users accessing the Company's Web site, the demographics of the Company's users, the Company's ability to deliver focused advertising and interactivity through its Web site and the overall cost-effectiveness and value of advertising offered by the Company. There is intense competition for the sale of advertising on high-traffic Web sites, which has resulted in a wide range of rates quoted by different vendors for a variety of advertising services, making it difficult to project levels of Internet advertising that will be realized generally or by any specific company. Any competition for advertisers among present and future Web sites, as well as competition with other traditional media for advertising placements, could result in significant price competition. The Company believes that the number of companies selling Web-based advertising and the available inventory of advertising space have recently increased substantially. Accordingly, the Company may face increased pricing pressure for the sale of advertisements. Reduction in the Company's Web advertising revenues would have a material adverse effect on the Company's business, results of operations and financial condition. Many of the Company's competitors and potential competitors have greater financial, sales and other resources than the Company. There is no assurance that the Company's business strategy will be successful, or that the Company will gain a market share or customer base that will be sufficient to justify continued operations. 13 PRODUCT DEVELOPMENT AND TECHNOLOGICAL OBSOLESCENCE. The market for Internet information delivery is characterized by extensive research and development and rapid technological change, frequent new product introductions and technological innovation, resulting in short product life cycles, and evolving industry standards. Development by others of new or improved products, processes or technology may render the Company's products and services less competitive or obsolete. The emerging character of these products and services and their rapid evolution will require the Company to effectively use leading technologies, continue to develop its technological expertise, enhance its current services and continue to improve the performance, features and reliability of its network infrastructure. Changes in network infrastructure, transmission and content delivery methods and underlying software platforms and the emergence of new technologies could dramatically change the structure and competitive dynamic of the market for the Company's products and services. There is no assurance that the Company will be successful in responding quickly, cost effectively and sufficiently to these or other such developments. In addition, the widespread adoption of new Internet technologies or standards could require substantial expenditures by the Company to modify or adapt its Web site and services. A failure by the Company to rapidly respond to technological developments could have a material adverse effect on the Company's business, results of operations and financial condition. DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET. Rapid growth in use of and interest in the Internet is a recent phenomenon and there can be no assurance that acceptance and use of the Internet will continue to develop or that a sufficient base of users will emerge to support the Company's business. Because global commerce and on-line exchange of information on the Internet is new and evolving, it is difficult to predict with any assurance whether the Internet will prove to be a viable commercial marketplace. Future revenues of the Company will depend largely on the widespread acceptance and use of the Internet as a source of multimedia information and entertainment and as a vehicle for commerce in goods and services. The Internet may not be accepted as a viable commercial medium for broadcasting multimedia content, if at all, for a number of reasons, including (i) potentially inadequate development of the necessary infrastructure, (ii) inadequate development of enabling technologies, (iii) lack of acceptance of the Internet as a medium for distributing content and (iv) inadequate commercial support for Web-based advertising. To the extent that the Internet continues to experience an increase in users, an increase in frequency of use or an increase in the bandwidth requirements of users, there can be no assurance that the Internet infrastructure will be able to support the demands placed upon it, specifically the demands of delivering high-quality video content. Furthermore, user experiences on the Internet are affected by access speed. The Internet could lose its viability as a commercial medium due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased government regulation. Changes in or insufficient availability of telecommunications services to support the Internet also could result in unacceptable response times and could adversely affect use of the Internet generally and of the Company's Web site in particular. If use of the Internet does not continue to grow or grows more slowly than expected, or if the Internet infrastructure does not effectively support the growth that may occur, the Company's business, results of operations and financial condition could be materially adversely affected. DEPENDENCE UPON KEY PERSONNEL. The Company's success depends, to a significant extent, upon a number of key employees and consultants. The loss of the services of one or more of these employees or consultants could have a material adverse effect on the business of the Company. GOVERNMENT REGULATION AND LEGAL UNCERTAINTY. Although there are currently few laws and regulations directly applicable to the Internet, it is likely that new laws and regulations will be adopted in the United States and elsewhere covering issues such as music licensing, broadcast license fees, copyrights, privacy, pricing, sales taxes and characteristics and quality of Internet services. The adoption of restrictive laws or regulations could slow Internet growth or expose the Company to significant liabilities associated with content available on its Web site. The application of existing laws and regulations governing Internet issues such as property ownership, libel and personal privacy is also subject to substantial uncertainty. There can 14 be no assurance that current or new laws and regulations, or the application of existing laws and regulations (including laws and regulations governing issues such as property ownership, content, taxation, defamation and personal injury), will not expose the Company to significant liabilities, significantly slow Internet growth or otherwise cause a material adverse effect on the Company's business, results of operations or financial condition. The Company currently does not collect sales or other taxes with respect to the sale of services or products in states and countries where the Company believes it is not required to do so. Some states and countries have sought to impose sales or other tax obligations on companies that engage in online commerce within their jurisdictions. A successful assertion by one or more states or countries that the Company should collect sales or other taxes on products and services, or remit payment of sales or other taxes for prior periods, could have a material adverse effect on the Company's business, results of operations and financial condition. The Communications Decency Act of 1996 (the "CDA") was enacted in 1996. Although those sections of the CDA that, among other things, proposed to impose criminal penalties on anyone distributing "indecent" material to minors over the Internet were held to be unconstitutional by the U.S. Supreme Court, there can be no assurance that similar laws will not be proposed and adopted. Although the Company does not currently distribute the types of materials that the CDA may have deemed illegal, the nature of such similar legislation and the manner in which it may be interpreted and enforced cannot be fully determined, and legislation similar to the CDA could subject the Company to potential liability, which in turn could have an adverse effect on the Company's business, financial condition and results of operations. Such laws could also damage the growth of the Internet generally and decrease the demand for the Company's products and services, which could adversely affect the Company's business, results of operations and financial condition. POTENTIAL LIABILITY FOR INTERNET CONTENT. As a distributor of Internet content, the Company faces potential liability for negligence, copyright, patent, trademark, defamation, indecency and other claims based on the nature and content of the materials that it makes available to Internet users. Such claims have been brought, and sometimes successfully pressed, against Internet content distributors. In addition, the Company could be exposed to liability with respect to the content or unauthorized duplication or broadcast of content. Although the Company maintains general liability insurance, the Company's insurance may not cover potential claims of this type or may not be adequate to indemnify the Company for all liability that may be imposed. In addition, although the Company generally requires its content providers to indemnify the Company for such liability, such indemnification may be inadequate. Any imposition of liability that is not covered by insurance, is in excess of insurance coverage or is not covered by an indemnification by a content provider could have a material adverse effect on the Company's business, results of operations and financial condition. 15 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. In December 1998, the Company completed its initial public offering of securities, in which it sold an aggregate of 2,530,000 units consisting of Common Stock and redeemable Common Stock Purchase Warrants (the "Units"), at an initial public offering price of $6.50 per Unit. The offering netted the Company approximately $14,052,000 after deducting expenses related to the offering. In January 1999, the conditions for redemption set forth in the Common Stock Purchase Warrants were satisfied and the Company redeemed its outstanding public warrants as of February 22, 1999. As a result, a total of approximately 1,269,000 warrants were exercised, which resulted in additional gross proceeds to the Company of approximately $12,374,000. The Company paid approximately $315,000 to holders of Warrants who chose not to redeem during the 30-day redemption period. Through March 31, 1999, approximately $1,733,000 of the proceeds have been used in sales and administration and approximately $469,000 have been used in research and development. The Company has also used approximately $1,419,000 of the net proceeds to repay debt, approximately $166,000 to acquire capital assets and $200,000 to acquire Mass Music, Inc. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 27.1 Financial Data Schedule (March 31, 1999) 27.2 Financial Data Schedule (March 31, 1998) b. Reports on Form 8-K during the quarter ended March 31, 1999 During the period covered by this report, the Company did not file any reports on Form 8-K. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Audiohighway.com Date: May 17, 1999 By: /s/ NATHAN M. SCHULHOF ----------------------------------------- Nathan M. Schulhof CHIEF EXECUTIVE OFFICER By: /s/ GREG SUTYAK ----------------------------------------- Greg Sutyak CHIEF FINANCIAL OFFICER
17 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 27.1 Financial Data Schedule (March 31, 1999) 27.2 Financial Data Schedule (March 31, 1998)
18 EX-27.1 2 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-QSB OF AUDIOHIGHWAY.COM FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 21,422 0 243 0 0 21,695 485 0 23,180 2,435 153 0 0 31,171 (14,773) 23,180 165 165 0 0 2,001 0 418 (2,256) 0 (2,256) 0 0 0 (2,256) (0.49) (0.49)
EX-27.2 3 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE QUARTERLY REPORT OF FORM 10-QSB OF AUDIOHIGHWAY.COM FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 25 0 4 0 0 29 361 0 466 2,477 275 0 0 2,971 (7,350) 466 42 42 0 0 606 0 136 (700) 0 (700) 0 0 0 (700) (0.70) (0.70)
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