access to online commerce. However, due to the increasing popularity and use of the Internet and other online services, it is possible that a number of laws and regulations may be adopted with respect to the Internet or other online services covering issues such as user privacy, pricing, content, copyrights, distribution and characteristics and quality of products and services. Furthermore, the growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for the Company's products and services and increase the Company's cost of doing business, or otherwise have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Moreover, the applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to the Company's business, or the application of existing laws and regulations to the Internet and other online services could have a material adverse effect on the Company's business, prospects, financial condition and results of operations.
CONSEQUENCES OF FAILURE TO EXCHANGE
The issuance of the Exchange Notes in exchange for the Original Notes pursuant to the Exchange Offer will be made only after timely receipt by the Company of such Original Notes, a properly completed and duly executed Letter of Transmittal and all other required documents. Therefore, holders of Original Notes desiring to tender such Original Notes in exchange for Exchange Notes should allow sufficient time to ensure timely delivery. The Company is under no duty to give notification of defects or irregularities with respect to the tenders of Original Notes for exchange.
Original Notes that are not validly tendered will, following the consummation of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof, and the Company will have no further obligation to provide for the registration under the Securities Act of such Original Notes. In addition, any holder of Original Notes who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Notes may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. To the extent that Original Notes are tendered in the Exchange Offer, the trading market for untendered and tendered but unaccepted Original Notes could be adversely affected. Each broker or dealer that receives Exchange Notes for its own account in exchange for Original Notes where such Exchange Notes were acquired by such broker or dealer as a result of market-making activities or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "The Exchange Offer -- Consequences of Failure to Exchange" and "Plan of Distribution."
LACK OF PUBLIC MARKET
The Exchange Notes are a new issue of securities for which there is currently no active trading market. The Company does not intend to list the Exchange Notes on any national securities exchange or to seek approval for quotation through any automated quotation system. Morgan Stanley has advised the Company that it currently intends to make a market in the Exchange Notes; however, it is not obligated to do so and any market-making activity may be discontinued at any time without notice. Therefore, there can be no assurance that an active trading market for the Exchange Notes will develop or as to the liquidity of or the trading market for the Exchange Notes. If a trading market does not develop, Holders of the Exchange Notes may experience difficulty in reselling the Exchange Notes or may be unable to sell them at all. If a market for the Exchange Notes develops, any such market could cease to continue at any time. If a trading market develops for the Exchange Notes, they may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar securities and other factors, including general economic conditions and the Company's financial condition, performance and prospects.
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USE OF PROCEEDS
The Exchange Offer is being effected to satisfy the Company's obligations under the Original Notes, the Indenture and the Registration Rights Agreement (as defined herein). The Company will not receive any cash proceeds from the Exchange Offer. In consideration of issuing the Exchange Notes in the Exchange Offer, the Company will receive an equal principal amount of Original Notes. Original Notes that are properly tendered in the Exchange Offer and not validly withdrawn will be accepted, canceled and retired and cannot be reissued.
The net proceeds from the sale of the Original Notes was approximately $315.7 million after deducting selling commissions and transaction expenses. The Company used approximately $75.0 million of such proceeds to retire the Senior Loan (as defined herein) and expects to use the remaining net proceeds for general corporate purposes, including working capital to fund anticipated operating losses, the expansion of the Company's core business, investments in new business segments and markets, including the Company's planned sales of music products and international expansion, and capital expenditures. The Company expects, if the opportunity arises, to use an unspecified portion of the net proceeds to acquire or invest in complementary businesses, products and technologies. From time to time, in the ordinary course of business, the Company has and will continue to evaluate potential acquisitions of and investments in such businesses, products or technologies.
On December 23, 1997, the Company borrowed $75.0 million pursuant to a three-year senior secured term loan (the "Senior Loan"). The Senior Loan was secured by a first priority lien on substantially all of the Company's assets. The Company had the option to choose from the following interest rate options: (i) a variable rate adjusted every one, two, three or six months at the Company's option and based on the London Interbank Offered Rate plus 3.50% per annum for the first six months of the Senior Loan and 4.00% thereafter or (ii) a variable rate of interest based on the lender's Base Rate plus 1.50% per annum for the first six months of the Senior Loan and 2.00% thereafter (10.00% at December 31, 1997). As of March 31, 1998, $75.0 million aggregate principal amount was outstanding with respect to the Senior Loan. The Company repaid the Senior Loan in full with a portion of the net proceeds from the Offering on May 8, 1998.
RATIO OF EARNINGS TO FIXED CHARGES
The Company has incurred significant losses since inception, and as of March 31, 1998 had an accumulated deficit of $42.9 million. To date, the Company has not generated earnings sufficient to cover total fixed charges in any of its fiscal years. For the year ended December 31, 1997, and the fiscal quarter ended March 31, 1998, as adjusted for the offering of the Original Notes and application of the net proceeds therefrom, the Company's earnings before fixed charges would have been insufficient to cover fixed charges by $27.6 million and $9.3 million, respectively. See "Risk Factors -- Limited Operating History; Accumulated Deficit; Anticipated Losses" and " -- Unpredictability of Future Revenues; Potential Fluctuations in Quarterly Operating Results; Seasonality" and "Selected Financial Data."
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CAPITALIZATION
The following table sets forth (i) the actual cash and cash equivalents and capitalization of the Company as of March 31, 1998 and (ii) such cash and cash equivalents and capitalization as adjusted for the sale of the Original Notes and application of the net proceeds therefrom.
MARCH 31, 1998
ACTUAL AS ADJUSTED
(in thousands, except share
and per share data)
Cash and cash equivalents $98,600 $339,307
Long-term debt: Senior Discount Notes due 2008 $ -- $325,987
Senior Loan 75,000 --
Other long-term debt, net of current portion(1) 1,702 1,702
Stockholders' equity:
Preferred stock, $0.01 par value per share; 10,000,000
shares authorized; no shares issued and outstanding -- --
Common stock, $0.01 par value per share; 100,000,000 shares
authorized; 48,325,684 shares issued and outstanding, actual and as adjusted(2) 483 483
Additional paid-in capital 63,711 63,711
Deferred compensation (1,493) (1,493)
Accumulated deficit (42,874) (44,922)
Total stockholders' equity 19,827 17,779
Total capitalization $96,529 $345,468
(1) Represents $1,521 under fixed asset financing agreements and $181 of capital
lease obligations.
(2) As adjusted for the Company's 2-for-1 stock split payable June 1, 1998.
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SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and the Company's Annual Report on Form 10-K for the year ended December 31, 1997, which are incorporated by reference herein. See "Incorporation of Documents by Reference." The statement of operations data for the quarter ended March 31, 1998 and the balance sheet data at March 31, 1998, with the exception of the other operating data, are derived from financial statements of the Company, which are included in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, which is incorporated by reference herein. See "Incorporation of Documents by Reference." The statement of operations data for each of the years in the three-year period ended December 31, 1997 and the balance sheet data at December 31, 1997 and 1996, with the exception of the other operating data, are derived from financial statements of the Company, which have been audited by Ernst & Young LLP, independent auditors, and are included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, which is incorporated by reference herein. See "Incorporation of Documents by Reference." The statement of operations data for the period from July 5, 1994 (inception) to December 31, 1994 and the balance sheet data at December 31, 1995 and 1994, with the exception of the other operating data, are derived from the financial statements of the Company which were also audited by Ernst & Young LLP, and which are included in the Company's Registration Statement on Form S-1 (Registration No. 333-23795), dated May 15, 1997. The historical results are not necessarily indicative of future results.
FOR THE PERIOD
THREE FROM
MONTHS JULY 5, 1994
ENDED YEAR ENDED DECEMBER 31, (INCEPTION)
MARCH 31, --------------------------- TO DECEMBER 31,
1998 1997 1996 1995 1994
(unaudited) (in thousands)
STATEMENT OF OPERATIONS DATA: Net sales $87,375 $147,758 $15,746 $511 $ --
Cost of sales 68,054 118,945 12,287 409 --
Gross profit 19,321 28,813 3,459 102 --
Operating expenses: Marketing and sales 19,503 38,964 6,090 200 --
Product development 6,729 12,485 2,313 171 38
General and administrative 1,963 6,573 1,035 35 14
Total operating expenses 28,195 58,022 9,438 406 52
Loss from operations (8,874) (29,209) (5,979) (304) (52)
Interest income 1,640 1,898 202 1 --
Interest expense (2,025) (279) -- -- --
Net loss $ (9,259) $(27,590) $(5,777) $ (303) $ (52)
Basic and diluted loss per share(1) $ (0.20) $ (0.64) $ (0.16) $(0.01) $(0.00)
Shares used in computation of basic and diluted loss per share(1) 46,622 43,302 37,088 28,788 35,460
OTHER OPERATING DATA:
Net cash provided by (used in) operating activities $ (6,555) $3,522 $(1,735) $ (232) $ (24)
Capital expenditures(2) 2,071 11,604 1,214 52 28
EBITDA(3) (5,451) (22,633) (5,491) (284) (47)
Deficiency of earnings available to cover fixed charges(4) (9,259) (27,590) (5,777) (303) (52) |
