<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 5, 1999
REGISTRATION NO. 333-87027
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
WORLDGATE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4841 23-2866697
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code No.) Identification
incorporation or organization) No.)
</TABLE>
--------------------------
3190 TREMONT AVENUE, SUITE 100
TREVOSE, PENNSYLVANIA 19053
(215) 354-5100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
--------------------------
RANDALL J. GORT, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
WORLDGATE COMMUNICATIONS, INC.
3190 TREMONT AVENUE, SUITE 100
TREVOSE, PENNSYLVANIA 19053
(215) 354-5100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES OF ALL COMMUNICATIONS TO:
WALTER J. MOSTEK, JR., ESQ. JEFFREY A. STEIN, ESQ.
DRINKER BIDDLE & REATH LLP HALE AND DORR LLP
1000 WESTLAKES DRIVE, SUITE 300 60 STATE STREET
BERWYN, PENNSYLVANIA 19312-2409 BOSTON, MASSACHUSETTS 02109
(610) 993-2200 (617) 526-6000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under The Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION - OCTOBER 5, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
PROSPECTUS
, 1999
[LOGO]
4,100,000 SHARES OF COMMON STOCK
- ----------------------------------------------------------------------
THE COMPANY:
- We provide a television-based Internet service, the WORLDGATE(SM) Service,
that enables cable television subscribers to access the Internet through
their televisions.
- WorldGate Communications, Inc.
3190 Tremont Avenue, Suite 100
Trevose, Pennsylvania 19053
(215) 354-5100
- NASDAQ NATIONAL MARKET SYMBOL: WGAT
THE OFFERING:
- We are offering 3,500,000 of the shares and existing stockholders are
offering 600,000 of the shares.
- The underwriters have an option to purchase an additional 534,550 shares
from us and 80,450 shares from existing stockholders to cover
over-allotments.
- There is an existing trading market for these shares. The reported last
sale price on September 30, 1999 was
$22.88 per share.
- We plan to use the proceeds from this offering for working capital,
capital expenditures and other general corporate purposes. We will not
receive any proceeds from the shares sold by the selling stockholders.
- Closing: , 1999.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
PER SHARE TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to WorldGate:
Proceeds to selling stockholders:
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</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE GERARD KLAUER MATTISON & CO., INC.
JEFFERIES & COMPANY, INC. JANNEY MONTGOMERY SCOTT LLC
<PAGE>
This prospectus includes statistical data regarding WorldGate, the Internet and
the industries in which we compete. This data is based on our records or is
taken or derived from information published or prepared by various sources,
including International Data Corporation, Paul Kagan Associates, Inc., Cahners
Business Information--publishers of Cablevision Blue Book and Jupiter
Communications, providers of market and strategic information for the
information technology industry. Paul Kagan is a stockholder of WorldGate.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 8
Use of Proceeds.................................. 15
Price Range of Common Stock...................... 15
Dividend Policy.................................. 15
Capitalization................................... 16
Selected Financial Information................... 17
Management's Discussion and Analysis of Financial
Condition and Results of Operation............. 19
Business......................................... 27
<CAPTION>
PAGE
<S> <C>
Management....................................... 49
Certain Transactions............................. 55
Principal and Selling Stockholders............... 57
Description of Capital Stock..................... 58
Shares Eligible for Future Sale.................. 61
Underwriting..................................... 64
Legal Matters.................................... 66
Experts.......................................... 66
Additional Information........................... 66
Index to Financial Statements.................... F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY.
WORLDGATE COMMUNICATIONS
WorldGate Communications provides a television-based Internet service, the
WORLDGATE(SM) Service, that enables cable television subscribers to access the
Internet through their televisions. The WORLDGATE Service provides:
- full featured, high speed, easy to use, always connected, low cost
consumer Internet access,
- the ability to access the Internet with a standard cable television box
that has been WORLDGATE enabled, without a phone line, an in-home computer
or a dedicated set-top appliance,
- a centralized computer network design that allows for easy deployment and
set-up, central system management and centrally administered upgrades, and
- a television-based entry point to the Internet that enables viewers to
dynamically link from television programming and advertising to related
Internet content.
The WORLDGATE Service is designed to operate with cable systems using
advanced analog and/or current and future generation digital cable television
set-top boxes. We believe that we are the only company that can currently
provide an Internet television service through both an advanced analog and
digital cable box. We believe this is particularly important to the many cable
operators who are deploying, or will deploy, both types of cable boxes. As of
August 31, 1999, there were approximately 10,000 subscribers to the WORLDGATE
Service. As of the date of this prospectus, seven cable operators are
commercially deploying the WORLDGATE Service and four additional cable operators
have entered into agreements to commercially deploy the WORLDGATE Service.
Our CHANNEL HYPERLINKING(SM) technology integrates the dynamics of the
Internet with television's proven advertiser-sponsored entertainment model. This
technology will enable a viewer watching a television program or advertisement
to link within seconds to a related interactive Web site. We are working with
over 70 television programmers, advertisers, advertising agencies and e-commerce
merchants to develop a centralized database that provides viewers with our
CHANNEL HYPERLINKING capability.
We believe that our low cost combination of television and the Internet will
help transform advertising, electronic commerce and information delivery for the
consumer mass market.
3
<PAGE>
RECENT EVENTS
The following events have occurred since our initial public offering in
April 1999:
- We have received notification from the U.S. Patent and Trademark Office
that two patents covering aspects of the technology listed below have been
allowed:
- our CHANNEL HYPERLINKING technology, and
- our ULTRA-THIN CLIENT(SM) architecture.
- We have entered into deployment agreements with the following four
additional cable operators:
- Comcast Cable Communications, Inc.,
- Bresnan Communications, Inc.,
- Buckeye CableSystem, Inc., and
- The Hunan Multimedia Communications Bureau in the People's Republic of
China.
- We have now entered into trial or deployment agreements with nineteen
cable operators in thirteen countries internationally and with twelve
cable operators in the U.S. Seven of these cable operators are currently
commercially deploying, four of them are planning to commercially deploy
and twenty of them are conducting trials or technical evaluations of the
WORLDGATE Service.
- We have commenced a three-month study with General Motors, Warner Lambert,
Kraft, Sprint and Nielson Media Research to study consumer responses to
various forms of interactive advertising.
- We have demonstrated picture-in-picture capability for our CHANNEL
HYPERLINKING technology on digital cable boxes.
Our executive offices are located at 3190 Tremont Avenue, Suite 100,
Trevose, Pennsylvania 19053. Our telephone number is (215) 354-5100.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C> <C>
Common stock offered by:
WorldGate....................... 3,500,000 shares
Selling stockholders............ 600,000 shares
Total......................... 4,100,000 shares
Common stock outstanding
after this offering............. 24,930,310 shares
For working capital, capital expenditures and other
general corporate purposes, including sales and marketing,
engineering, research and development and international
expansion. We may use a portion of the net proceeds to
acquire or invest in complementary businesses or products
or to obtain the right to use complementary technologies.
We will not receive any proceeds from the sale of shares
Use of proceeds................... of common stock by the selling stockholders.
Nasdaq National Market symbol..... WGAT
</TABLE>
The number of shares of common stock outstanding after this offering is
based on shares outstanding as of September 30, 1999 and excludes:
- 890,627 shares of common stock issuable upon exercise of outstanding
options at September 30, 1999,
- 709,373 shares reserved for future issuance under our stock option plan,
and
- 643,309 shares of common stock subject to warrants.
Generally, unless otherwise indicated, all information in this prospectus
assumes no exercise of the underwriters' over-allotment option.
5
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes our financial data. You should read the data
set forth below together with our "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
--------------------------------- ----------------------
1996 1997 1998 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ -- $ 141 $ 1,022 $ 185 $ 1,290
Costs and expenses:
Cost of revenues................................... -- 1,530 9,919 3,164 5,783
Engineering and development........................ 1,408 6,981 9,684 4,053 4,764
Sales and marketing................................ 428 3,623 5,157 2,557 3,248
General and administrative......................... 1,093 2,432 3,587 1,665 2,580
Depreciation and amortization...................... -- 22 119 50 102
--------- ---------- ---------- ---------- ----------
Total costs and expenses....................... 2,929 14,588 28,466 11,489 16,477
Loss from operations................................... (2,929) (14,447) (27,444) (11,304) (15,187)
Other income, net...................................... 8 423 423 326 1,024
Interest expense....................................... (2) (17) (101) (41) (169)
--------- ---------- ---------- ---------- ----------
Loss before extraordinary item......................... (2,923) (14,041) (27,122) (11,019) (14,332)
Extraordinary item--extinguishment of debt............. -- -- -- -- (1,019)
--------- ---------- ---------- ---------- ----------
Net loss............................................... (2,923) (14,041) (27,122) (11,019) (15,351)
Accretion on preferred stock........................... (75) (2,436) (6,145) (2,819) (2,475)
--------- ---------- ---------- ---------- ----------
Net loss available to common stockholders.............. $ (2,998) $ (16,477) $ (33,267) $ (13,838) $ (17,826)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Historical basic and diluted net loss per common share:
Loss before extraordinary item....................... $ (0.33) $ (1.81) $ (3.66) $ (1.52) $ (1.18)
Extraordinary item................................... -- -- -- -- (.07)
--------- ---------- ---------- ---------- ----------
Net loss........................................... $ (0.33) $ (1.81) $ (3.66) $ (1.52) $ (1.25)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Historical weighted average common shares
outstanding--basic and diluted....................... 9,101 9,101 9,101 9,101 14,235
Pro forma net loss per common share.................... $ (2.25) $ (.99)
---------- ----------
---------- ----------
Pro forma weighted average common shares outstanding... 14,786 17,929
---------- ----------
---------- ----------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, 1999
-----------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short term investments..................................... $ 100,312 $
Total assets............................................................................. 109,771
Long-term obligations, including current portion......................................... 873
Total stockholders' equity............................................................... 102,683
</TABLE>
In reviewing the above data, you should consider the following:
- Pro forma net loss per common share data gives effect to the conversion of
all preferred stock outstanding into common stock as if the conversion
occurred on January 1, 1998 or at the date of original issuance, if later.
- See note 2 of the notes to financial statements for a discussion of the
computation of historical and pro forma basic and diluted net loss per
common share and weighted average common shares outstanding. For purposes
of computing net loss per common share amounts, loss before extraordinary
item and net loss have been reduced by the accretion on preferred stock.
- The Balance Sheet Data for the period ended June 30, 1999 is presented as
adjusted to reflect the sale of shares of common stock offered hereby, at
an assumed offering price of $ per share and the application of the net
proceeds therefrom. See "Use of Proceeds," "Capitalization" and
"Underwriting."
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE BUYING SHARES
IN THIS OFFERING.
WE MAY EXPERIENCE DIFFICULTIES DEVELOPING AND IMPLEMENTING OUR MARKETING AND
BUSINESS PLANS
We began operations in March 1995 and our service was first made
commercially available in the third quarter of 1998. As a result, our operating,
sales and marketing and other strategies are still being developed, and we do
not have a history which may give us or you an indication of how we may respond
to situations presented to us. If we are not successful in implementing our
marketing and business plans on a timely basis or otherwise effectively managing
our development, our business, operating results and financial condition will be
materially adversely affected.
IF WE CONTINUE TO INCUR LOSSES, WE MAY NOT BE ABLE TO FINANCE THE COMMERCIAL
DEPLOYMENT OF THE WORLDGATE SERVICE
We have experienced losses and have had negative cash flow in each quarter
and year since inception, and we expect to continue to operate at a loss for the
foreseeable future. To make a profit, we must increase our revenues and gross
profit margin. If we are not able to do so, our losses may extend beyond the
foreseeable future and we may not be able to finance the commercial deployment,
development and enhancement of the WORLDGATE Service.
Our aggregate revenues from inception to June 30, 1999 were approximately
$2.5 million, and our aggregate accumulated deficit at June 30, 1999 was
approximately $68.8 million. In addition, we currently intend to increase our
operating expenses and capital expenditures in order to continue the commercial
deployment of the WORLDGATE Service. As a result, we expect to experience
substantial additional operating losses and negative cash flow for the
foreseeable future.
BECAUSE TELEVISION-BASED INTERNET ACCESS IS NEW, WE CANNOT BE CERTAIN THAT A
MARKET OR SUSTAINABLE DEMAND FOR THE WORLDGATE SERVICE WILL DEVELOP
The market for television-based Internet access is new and evolving, and no
single technology or approach to providing this access has been widely adopted
by consumers or cable operators. As a result, we cannot guarantee that a market
for television-based Internet access in general, or for the WORLDGATE Service in
particular, will develop or that demand for the WORLDGATE Service will be
sustainable. If the market does not develop, develops more slowly than expected
or becomes saturated with competitors, our business, operating results, and
financial condition will be materially adversely affected.
THE COMPETITIVE MARKET FOR INTERNET ACCESS MAY LIMIT DEMAND OR PRICING FOR THE
WORLDGATE SERVICE
We experience intense competition. Many companies provide Internet access
and other services with functionality similar to those comprising the WORLDGATE
Service. As a result of this competition, demand for the WORLDGATE Service may
suffer, we may be restricted in the pricing we can charge for the WORLDGATE
Service and our business, financial condition and results of operations may be
adversely affected. Competitors provide their services through a variety of
technologies, which are in various stages of implementation and adoption. Many
of our competitors have significantly greater financial, technical, marketing,
distribution, customer support, name recognition, compelling content, access to
consumers and other resources, and more established relationships with cable
operators, advertisers and content and application providers than we have. See
"Business--Competition."
WE MAY NOT SUCCEED IF CABLE OPERATORS DO NOT OFFER THE WORLDGATE SERVICE TO
THEIR SUBSCRIBERS
Because the WORLDGATE Service is made available to cable subscribers through
a cable operator's system, our growth and future success depends substantially
upon our ability to convince cable
8
<PAGE>
operators to offer the WORLDGATE Service to their subscribers. As of the date of
this prospectus, we have only entered into a limited number of agreements with
cable operators providing for the commercial launch of the WORLDGATE Service in
some of the markets served by these cable operators. If cable operators
determine that our service is not viable as a business proposition or if they
determine that the service does not meet their business or operational
expectations or strategies, they will not offer the WORLDGATE Service to their
subscribers. Furthermore, because there are a limited number of cable operators,
as well as consolidation in the industry, and because we expect that cable
operators implementing the WORLDGATE Service will seek references from other
cable operators, we may have a difficult time selling the WORLDGATE Service if
our early trials and commercial deployments are not successful.
OUR REVENUES WILL DEPEND ON THE MANNER IN WHICH CABLE OPERATORS MARKET AND PRICE
THE WORLDGATE SERVICE
We depend on cable operators to provide the WORLDGATE Service to their
subscribers and therefore have limited or no control over a number of important
factors, including:
- the cable operators' advertising or marketing strategy, if any, regarding
their offering of the WORLDGATE Service to their subscribers,
- the monthly fees cable operators charge to their subscribers for the
WORLDGATE Service, and
- the extent to which cable operators purchase additional WorldGate
equipment to avoid reduction in performance if subscriber demand grows.
Our revenues may not meet our expectations if the cable operators'
marketing, pricing and operating strategies are inconsistent with our business
model.
THE MARKET FOR THE WORLDGATE SERVICE WILL BE ADVERSELY AFFECTED IF CABLE
OPERATORS DO NOT CONTINUE TO UPGRADE THEIR SYSTEM INFRASTRUCTURES TO SUPPORT
TWO-WAY DATA TRANSMISSIONS
The adoption of the WORLDGATE Service is dependent upon continued investment
by cable operators to upgrade their infrastructures to support two-way data
transmissions. It is uncertain whether cable operators will upgrade their
infrastructures and the failure of cable operators to complete these upgrades in
a timely and satisfactory manner would adversely affect the market for the
WORLDGATE Service.
Although the WORLDGATE Service can operate over one-way cable plant that is
only capable of transmitting programming to subscribers, it can do so only in
conjunction with a telephone line. As such, it is less convenient and efficient
for a subscriber to use the WORLDGATE Service over one-way cable plant and, to
date, the majority of cable operators who are deploying the WORLDGATE Service
have done so over two-way cable plants that are capable of transmitting
information from the cable operator's facility to the subscribers and vice
versa. We cannot assure you that cable operators will upgrade their cable plant
to two-way plant or that they will do so in a timely and satisfactory manner. In
the event that they do not do so, our business, financial condition and results
of operations could be materially adversely affected.
CABLE OPERATORS MAY BE CONTRACTUALLY LIMITED IN THEIR ABILITY TO OFFER THE
WORLDGATE SERVICE
We are aware that some cable operators, such as Cablevision, Comcast
Corporation, Cox Communications, Inc. and AT&T Corporation, whose cable systems
serve more than 26 million U.S. homes, or at least 26% of all U.S. homes, have
entered into distribution agreements with At Home Corporation. These agreements
contain exclusivity provisions that purport to prohibit these cable operators
from conducting or participating in any business in the United States that
involves the provision of residential Internet services over their cable plants
at data transmission speeds greater than 128 Kbps. These agreements could be
interpreted to preclude or hinder these cable operators from
9
<PAGE>
offering the WORLDGATE Service to their subscribers at speeds in excess of 128
Kbps. If cable operators are unwilling or unable to offer the WORLDGATE Service
to subscribers in these cable systems, our business, financial condition and
results of operations would be materially adversely affected.
CABLE OPERATORS AND CABLE BOX MANUFACTURERS MAY NOT OFFER THE WORLDGATE SERVICE
BECAUSE THEY MAY HAVE POTENTIAL CONFLICTS OF INTEREST
Some cable operators and cable box manufacturers are stockholders of other
companies that provide Internet services. To the extent that these cable
operators elect not to offer the WORLDGATE Service because of these
affiliations, our business, financial condition and results of operations could
be materially adversely affected. For example, AT&T, Comcast, Cox and
Cablevision are stockholders of At Home; and MediaOne Group, Inc. (which has
agreed to be acquired by AT&T) and Time Warner have established their own
cable-based Internet service, called Road Runner, with proprietary content
featuring various Time Warner publications and services. Also, some companies
that provide Internet services, such as Microsoft Corporation, are stockholders
of cable operators or cable box manufacturers. We cannot assure you that there
will not be other investments among providers of Internet services, cable
operators and/or cable box manufacturers. As a result, these cable operators and
cable box manufacturers may be reluctant to provide any service, including the
WORLDGATE Service, or to otherwise work with any entity that provides other
Internet services in competition with their affiliates.
ONLY CABLE TELEVISION SUBSCRIBERS WHO UTILIZE A CABLE SET-TOP BOX CAN RECEIVE
THE WORLDGATE SERVICE
For cable television subscribers to receive the WORLDGATE Service, they must
have a cable set-top box that can be WorldGate enabled. Currently, many cable
television subscribers receive their cable television service through the cable
line directly into their televisions, without a set-top box.
We cannot assure you that cable operators serving these subscribers will
elect to provide them with set-top boxes for the purpose of offering the
WORLDGATE Service, or that these customers will choose to utilize a set-top box
in order to receive the WORLDGATE Service.
WE CANNOT OFFER THE WORLDGATE SERVICE IF CABLE BOX MANUFACTURERS DO NOT
INCORPORATE OUR TECHNOLOGY INTO THEIR CABLE BOXES
In order to access the WORLDGATE Service, a consumer needs a WorldGate
enabled digital or advanced analog cable box. Neither General Instrument nor
Scientific-Atlanta is required to install our technology in its cable boxes and
neither company is prohibited from establishing relationships with any of our
competitors and incorporating our competitors' technologies into their cable
boxes. In addition, our technology must be certified by General Instrument and
Scientific-Atlanta for each model of cable box before cable operators are
willing to deploy them to their subscribers, and, although we have certification
for some models, we cannot assure you that our technology will be certified for
other models on a timely basis, if at all.
Additionally, because General Instrument and Scientific-Atlanta are the two
largest suppliers of cable boxes, their decision not to install our technology
in their cable boxes or to develop similar technology with our competitors would
have a material adverse effect on our future success. Both General Instrument
and Scientific-Atlanta have joined us in promoting the WORLDGATE Service and if
either company severed this relationship with us, we would lose a valuable sales
and marketing resource.
WE ARE SUBJECT TO CAPACITY CONSTRAINTS AND SYSTEM FAILURES
Due to the limited deployment of the WORLDGATE Service, the ability of our
service to accommodate a substantial number of users is not yet known. We cannot
assure you that we will be able to provide high quality performance and high
transaction speeds as the number of subscribers grows or their usage
10
<PAGE>
increases. In addition, as subscriber penetration grows it may be necessary for
cable operators to purchase additional equipment, and we cannot assure you that
they will do so.
The performance of the WORLDGATE Service is also subject to reduction in
performance and interruption from human errors, telecommunication failures,
computer viruses and similar events. Any of these problems in our systems or
those of cable operators could result in reduced subscriber demand. We have
experienced performance reduction and service interruptions from time to time in
the past and we expect that these problems will continue from time to time. Our
failure to provide uninterrupted service at a level of performance acceptable to
subscribers would have a material adverse effect on our business, financial
condition and results of operations.
PENDING INTELLECTUAL PROPERTY CLAIMS AGAINST US COULD BE COSTLY AND RESULT IN
THE LOSS OF SIGNIFICANT RIGHTS
We are subject to patent litigation that claims we are infringing other
parties' intellectual property rights.
- Interactive Channel Technologies, Inc. and SMI Holdings, Inc.,
subsidiaries of Source Media, Inc., filed a complaint against us alleging
that we infringed patents issued to Source Media.
- Advanced Interactive, Inc. filed a complaint against us and several other
defendants alleging that the defendants infringed a patent assigned to
Advanced Interactive.
If the plaintiffs win either lawsuit, we could be precluded from offering
the WORLDGATE Service. We cannot assure you that licenses to any of the
technologies owned by the plaintiffs in these lawsuits would be available to us
on commercially reasonable terms, if at all. Irrespective of the validity or the
successful assertion of these claims, they could result in significant costs and
diversion of management time and resources. This would have a material adverse
effect on our business, financial condition and results of operations.
THE SUCCESS OF OUR CHANNEL HYPERLINKING TECHNOLOGY WILL BE ADVERSELY AFFECTED IF
ADVERTISERS AND TELEVISION PROGRAMMERS DO NOT PROVIDE US WITH NECESSARY
CONTENT
Our future growth and long-term success depends substantially on our ability
to convince advertisers and television programmers to use our CHANNEL
HYPERLINKING technology with their advertisements and television programs. As of
June 30, 1999, no advertiser or programmer had paid us to use our CHANNEL
HYPERLINKING technology, or was obligated to use our CHANNEL HYPERLINKING
technology in their advertisements or programs. We believe that the adoption of
the CHANNEL HYPERLINKING technology is substantially dependent on:
- our service meeting advertisers' and programmers' business or operational
expectations or strategies, and
- us achieving a significant number of subscribers to the WORLDGATE Service.
We cannot assure you that we will achieve either of the above goals. If we
fail to incorporate our CHANNEL HYPERLINKING technology in a substantial number
of advertisements and programs, our business, operating results and financial
condition could be materially adversely affected.
RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR SERVICES OBSOLETE
The market for consumer Internet access services and online content is
characterized by rapid technological developments, frequent new product
introductions and evolving industry standards. The nature of the market for
these products and services and their rapid evolution requires that we
continually improve the performance, features and reliability of the WORLDGATE
Service, particularly in response to competitive offerings. We may not be
successful in responding quickly, cost-effectively and
11
<PAGE>
adequately to these developments. There may be a time-limited market opportunity
for the WORLDGATE Service, and we may not be successful in achieving widespread
acceptance of the WORLDGATE Service before competitors offer products and
services with speed and performance similar to, or better than, our current
offerings.
THE LOSS OF ANY ONE OF OUR LARGEST CUSTOMERS COULD ADVERSELY AFFECT OUR REVENUES
AND FUTURE PROSPECTS
We have in the past derived, and expect in the future to derive, a
significant portion of our revenues from a limited number of customers. In the
event that any of these customers cease to offer the WORLDGATE Service, or if
any of these customers do not give a positive reference on the WORLDGATE Service
to other prospective customers, our business, operating results and financial
condition could be materially adversely affected. In 1997, three cable operators
accounted for approximately 100% of our revenues, in 1998, ten cable operators
accounted for approximately 98% of our revenues, and for the six-month period
ended June 30, 1999, nine cable operators accounted for 88% of our revenues.
Moreover, in 1998, Charter and Click!Network accounted for 44% and 10%,
respectively, of our revenues, and for the six months ended June 30, 1999,
Charter, Click!Network and Hunan Multimedia accounted for 50%, 13% and 11%,
respectively, of our revenues. We cannot assure you that any of these customers
will continue to offer the WORLDGATE Service to their cable subscribers.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO MANY UNCERTAINTIES
A key component of our strategy is the expansion of the WORLDGATE Service
into international markets. We have limited experience in developing localized
versions of our service and in developing relationships with international cable
system operators. We may not be successful in expanding our service offerings
into foreign markets. In addition to the uncertainty regarding our ability to
generate revenues from foreign operations and expand our international presence,
there are certain risks inherent in doing business on an international level,
such as:
- difficulties in collecting accounts receivable and longer collection
periods,
- regulatory requirements, including the regulation of Internet access,
- export and import restrictions, including tariffs and other trade
barriers,
- difficulties in staffing and managing foreign operations,
- political instability, and
- fluctuations in currency exchange rates.
Any of these factors could materially adversely affect the success of our
current and future international operations.
WE MAY HAVE LIABILITY FOR INFORMATION RETRIEVED OR REPLICATED ON THE INTERNET
Claims for negligence, copyright or trademark infringement or other legal
theories could be made against us because information can be downloaded and
redistributed by users of the WORLDGATE Service. Copyright and trademark laws
are evolving both domestically and internationally and we are uncertain how they
apply to the WORLDGATE Service. The imposition of liability for information
carried by us would have a material adverse effect on our business, operating
results and financial condition.
WE MAY HAVE LIABILITY FOR E-COMMERCE TRANSACTIONS
As part of our business, we are seeking to enter into agreements with
content providers, advertisers and e-commerce merchants under which we will
receive a share of revenue from the purchase of goods and services by users of
the WORLDGATE Service. These arrangements may expose us to additional legal
risks and uncertainties, including potential liabilities to consumers of these
products
12
<PAGE>
and services. Our insurance may not cover potential claims of this type or may
not be adequate to indemnify us for all liability that may be imposed.
WE COULD BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION WHICH AFFECTS OUR
ABILITY TO OFFER OUR SERVICE OR WHICH AFFECTS DEMAND FOR OUR SERVICE
We are subject to varying degrees of federal, state, local and foreign
regulations as well as laws enacted by the U.S. Congress and other governments.
The Federal Communications Commission has established regulations that, among
other things, set licensing, access, installation and equipment standards for
communications systems. We are uncertain how these regulations may be applied to
Internet services offered over cable television systems.
We also anticipate that due to its increasing popularity and use, the
Internet will be subject to increased attention and regulation. These laws and
regulations may regulate issues such as user privacy, defamation, network
access, pricing, taxation, content, quality of products and services and
intellectual property ownership and infringement. These laws and regulations
could expose us to liability, materially increase our cost of providing our
service, and decrease the growth and acceptance of the Internet in general and
access to the Internet over cable systems.
OUR BUSINESS WOULD SUFFER IF WE WERE TO LOSE THE SERVICES OF HAL M. KRISBERGH OR
OTHER KEY PERSONNEL
Our success depends in significant part upon the continued service of our
key technical, sales and senior management personnel, particularly Mr.
Krisbergh, who has significant relevant experience in the cable television
industry. No officer or employee of WorldGate is bound by an employment
agreement, and any officer or employee of WorldGate could terminate his or her
relationship with us at any time. Our future success will also depend on our
ability to attract, train, retain and motivate highly qualified senior
management, technical, marketing and sales personnel. Because competition for
these personnel is intense, we cannot assure you that we will be able to do so.
YEAR 2000 RISKS MAY ADVERSELY AFFECT WORLDGATE AND DEMAND FOR THE WORLDGATE
SERVICE
Year 2000 problems experienced by us or any third parties could materially
adversely affect our business. Additionally, demand for the WORLDGATE Service
would suffer if the Internet experiences serious disruptions arising from the
Year 2000 problem. We cannot guarantee you that our own systems will be Year
2000 compliant in a timely manner, that any of our participating sellers, such
as cable operators, or other Web site vendors will be Year 2000 compliant in a
timely manner, or that there will not be problems with technology systems
working together. We also cannot guarantee that the Internet generally, and the
WORLDGATE Service specifically, will continue without serious disruptions
arising from the Year 2000 problem. Given the pervasive nature of the Year 2000
problem, we cannot guarantee that disruptions in other industries and market
segments will not adversely affect our business. Moreover, the costs related to
achieving Year 2000 compliance could be significant.
YOUR ABILITY TO INFLUENCE THE OUTCOME OF STOCKHOLDER VOTES MAY BE LIMITED BY THE
SIGNIFICANT OWNERSHIP INTEREST OF OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER
After the completion of this offering, Hal M. Krisbergh will beneficially
own approximately 25.2% of the outstanding common stock. Mr. Krisbergh will have
the voting power to exercise substantial control over the election of our entire
board of directors and all votes on matters requiring stockholder approval. This
concentration of ownership may also have the effect of delaying or preventing a
change in control of WorldGate.
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<PAGE>
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS COULD DISCOURAGE UNWANTED
TAKEOVER ATTEMPTS AND COULD REDUCE THE OPPORTUNITY FOR STOCKHOLDERS TO GET A
PREMIUM FOR THEIR SHARES
We are subject to Delaware laws and to provisions of our certificate of
incorporation and by-laws that could have the effect of delaying, deterring or
preventing a change in control of WorldGate. As a result, our management could
attempt to utilize these laws and provisions to discourage or reject unsolicited
bids to acquire us, including bids that would have paid stockholders a premium
over the then current market price of their shares.
WE MAY BE UNABLE TO OBTAIN NECESSARY ADDITIONAL CAPITAL TO FUND OPERATIONS IN
THE FUTURE
To date, we have funded operations primarily through private sales of equity
securities and through our initial public offering of common stock in April
1999. If we are unable to obtain additional financing on terms acceptable to us
as needed, our business, operating results and financial condition would be
materially adversely affected. Our capital requirements in the future will
depend on numerous factors, including:
- the rate of acceptance of the WORLDGATE Service by cable operators, cable
subscribers, advertisers, television programmers, e-commerce companies and
Internet content providers,
- our ability to maintain and increase the number of subscribers, and
- the rate of commercialization of the WORLDGATE Service.
We cannot predict the timing or amount of our capital requirements. Any
additional equity financing, if available, may be dilutive to our stockholders,
and debt financing, if available, may involve significant restrictions on our
financing and operating activities.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD LOWER OUR STOCK PRICE
The market price for our common stock could drop as a result of sales of a
large number of our presently outstanding shares after this offering, or the
perception that these sales could occur. These factors also could make it more
difficult for us to raise funds through future offerings of our common stock. We
have filed, on September 13, 1999, a shelf registration statement (Registration
No. 333-87029) under the Securities Act for 331,490 shares of common stock
issuable upon exercise of the warrants sold in connection with the issuance of
our $6.0 million discounted notes in March 1999. This shelf registration
statement may include additional shares of common stock owned by certain
stockholders who have exercised their piggyback registration rights. See "Shares
Eligible For Future Sale."
OUR RESULTS MAY DIFFER MATERIALLY FROM THOSE FORECASTED OR EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS
This prospectus contains forward-looking statements that are not historical
facts, but rather are based on our current expectations, estimates and
projections about WorldGate's industry and our beliefs and assumptions. Words
such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to some risks, uncertainties and other factors, many of which are beyond
our control, are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements.
These risks and uncertainties are described in "Risk Factors" and elsewhere in
this prospectus. We caution you not to place undue reliance on these
forward-looking statements, which reflect our management's view only as of the
date of this prospectus. We are not obligated to update these statements or
publicly release the result of any revisions to them to reflect events or
circumstances after the date of this prospectus or to reflect the occurrence of
unanticipated events.
14
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $
million, or approximately $ million if the underwriters fully exercise
their over-allotment option, from the sale of common stock offered by us in this
offering based on an assumed offering price of $ per share. This estimate is
after deducting underwriting discounts and commissions and other fees and
expenses payable by us. We will not receive any proceeds from the sale of our
common stock by the selling stockholders.
We intend to use the net proceeds from this offering for working capital,
capital expenditures and other general corporate purposes, including sales and
marketing, engineering, research and development and international expansion. We
may use a portion of the net proceeds to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
The amounts and the timing of any such use may vary significantly depending upon
a number of factors, including our revenue growth, asset growth, cash flow and
acquisition activities. Pending such uses, the net proceeds of this offering
will be invested in short-term, investment-grade, interest-bearing securities.
Assuming that there is no significant change in our business, we anticipate that
the net proceeds received by us from this offering, together with existing cash
balances, will be sufficient to satisfy our operating cash needs for at least 24
months from receipt of the proceeds. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "WGAT" since our initial public offering on April 15, 1999. Prior to such
time, there was no public market for our common stock. The following table sets
forth, for the periods indicated, the high and low closing sale prices per share
of our common stock as reported on Nasdaq for each quarter since our stock has
been publicly traded.
<TABLE>
<CAPTION>
1999 HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Second Quarter (from April 15, 1999)........................................................... $ 51.25 $ 23.75
Third Quarter.................................................................................. 51.31 21.25
</TABLE>
On September 30, 1999, the reported last sale price of our common stock on
Nasdaq was $22.88 per share.
As of September 30, 1999, we had approximately 333 stockholders of record of
our common stock.
DIVIDEND POLICY
We have never paid nor declared any cash dividends. We currently intend to
retain future earnings, if any, for use in our business, and, therefore, we do
not anticipate paying or declaring any cash dividends in the foreseeable future.
The payment of future dividends, if any, will depend, among other things, on our
results of operations, cash flows and financial condition and on such other
factors as the board of directors may, in its discretion, consider relevant.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- on a historical basis, and
- on an as adjusted basis to give effect to this offering and the
application of net proceeds of approximately $ million.
This table excludes 895,965 shares of common stock issuable upon exercise of
all stock options outstanding as of June 30, 1999, at exercise prices between
$0.75 per share and $27.00 per share, and 643,309 shares of common stock
issuable upon exercise of all outstanding warrants as of June 30, 1999. The
table also does not include options granted after June 30, 1999. You should read
the following information in conjunction with our financial statements and the
related notes thereto and the other financial information included elsewhere in
this prospectus. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
AT JUNE 30, 1999
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
(IN THOUSANDS)
Cash and cash equivalents and short term investments..................................... $ 100,312 $
---------- -----------
---------- -----------
Notes payable............................................................................ $ 859 $ 859
Capital leases........................................................................... 14 14
Stockholders' equity:
Preferred stock, $.01 par value, 13,500,000 authorized, no shares outstanding.......... --
Common stock, $.01 par value, 50,000,000 shares authorized, 21,424,513 shares
outstanding, actual, and 24,924,513 shares as adjusted............................... 214
Additional paid in capital............................................................. 170,518
Warrant for common stock............................................................... 1,911 1,911
Accumulated deficit.................................................................... (68,786) (68,786)
Unearned stock-based compensation...................................................... (1,174) (1,174)
---------- -----------
Total stockholders' equity........................................................... 102,683
---------- -----------
Total capitalization..................................................................... $ 103,556 $
---------- -----------
---------- -----------
</TABLE>
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<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information for each of the three years in
the period ended December 31, 1998, and as of December 31, 1997 and 1998 are
derived from our financial statements included in this prospectus, which have
been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected financial information for the six months ended June 30, 1998 and 1999
and as of June 30, 1999 were derived from unaudited financial information, which
in our opinion, contain all normal recurring adjustments necessary for a fair
presentation of this information. The selected financial information for the six
months ended June 30, 1999 may not be indicative of the results for the entire
year. You should read the following information in conjunction with our
financial statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus. The data as of December 31, 1995 and 1996 and for the period ended
December 31, 1995 are derived from financial data not included in this
prospectus. The pro forma net loss per common share data gives effect to the
conversion of all preferred stock outstanding into common stock as if the
conversion occurred on January 1, 1998 or at the date of issuance, if later.
<TABLE>
<CAPTION>
MARCH 21,
1995
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------------------------ ------------------------
1995 1996 1997 1998 1998 1999
------------- ---------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ -- $ -- $ 141 $ 1,022 $ 185 $ 1,290
Costs and expenses:
Cost of revenues..................... -- -- 1,530 9,919 3,164 5,783
Engineering and development.......... 149 1,408 6,981 9,684 4,053 4,764
Sales and marketing.................. -- 428 3,623 5,157 2,557 3,248
General and administrative........... -- 1,093 2,432 3,587 1,665 2,580
Depreciation and amortization........ -- -- 22 119 50 102
----- ---------- ---------- ------------ ---------- ------------
Total costs and expenses......... 149 2,929 14,588 28,466 11,489 16,477
Loss from operations..................... (149) (2,929) (14,447) (27,444) (11,304) (15,187)
Other income, net........................ -- 8 423 423 326 1,024
Interest expense......................... -- (2) (17) (101) (41) (169)
----- ---------- ---------- ------------ ---------- ------------
Loss before extraordinary item........... (149) (2,923) (14,041) (27,122) (11,019) (14,332)
Extraordinary item--extinguishment of
debt................................... -- -- -- -- -- (1,019)
----- ---------- ---------- ------------ ---------- ------------
Net loss................................. (149) (2,923) (14,041) (27,122) (11,019) (15,351)
Accretion on preferred stock............. -- (75) (2,436) (6,145) (2,819) (2,475)
----- ---------- ---------- ------------ ---------- ------------
Net loss available to common
stockholders........................... $ (149) $ (2,998) $ (16,477) $ (33,267) $ (13,838) $ (17,826)
----- ---------- ---------- ------------ ---------- ------------
----- ---------- ---------- ------------ ---------- ------------
Historical basic and diluted net loss per
common share: (1)
Loss before extraordinary item....... $ (0.33) $ (1.81) $ (3.66) $ (1.52) $ (1.18)
Extraordinary item................... (.07)
---------- ---------- ------------ ---------- ------------
Net loss........................... $ (0.33) $ (1.81) $ (3.66) $ (1.52) $ (1.25)
---------- ---------- ------------ ---------- ------------
---------- ---------- ------------ ---------- ------------
Historical weighted average common stock
outstanding--basic and diluted......... 9,100,801 9,100,801 9,100,801 9,100,801 14,235,304
Pro forma net loss per common share...... $ (2.25) $ (.99)
------------ ------------
------------ ------------
Pro forma weighted average common shares
outstanding............................ 14,785,714 17,929,396
------------ ------------
------------ ------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
------------------------------------------------------ JUNE 30,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents, restricted cash and
short term equivalents.......................... $ 32 $ 7,574 $ 17,318 $ 368 $ 100,312
Total assets...................................... 32 7,583 18,412 5,621 109,771
Long-term obligations, including current
portion......................................... -- -- 591 1,127 873
Total mandatory redeemable preferred stock........ 8,571 34,366 49,276 --
Warrant for mandatory redeemable preferred
stock........................................... -- -- 881 881 --
Total stockholders' equity (deficit).............. 32 (1,451) (19,177) (52,240) 102,683
OTHER DATA:
Common shares outstanding......................... -- 9,100,801 9,100,801 9,100,801 21,424,513
</TABLE>
- ------------------------
(1) For purposes of computing net loss per common share amounts, loss before
extraordinary item and net loss have been reduced by the accretion on
preferred stock.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
We commenced operations on March 21, 1995. Since inception, all of our
activities have involved developing the WORLDGATE Service and conducting tests
and trials of our service with cable operators throughout the world. We are
engaged in joint engineering and sales and marketing activities with General
Instrument and Scientific-Atlanta. These relationships began in 1996 with
product development for some hardware components of our WorldGate platform.
We first announced the WORLDGATE Service in May 1996 and first demonstrated
an operational system in December 1996. Tests at corporate locations of major
cable operators began in the third quarter of 1997 and consumer field trials
began in September 1997. We have entered into deployment agreements with eleven
cable operators that collectively, with their affiliates, have approximately 15
million system subscribers. Currently, these cable operators are offering or
plan to offer the WORLDGATE Service in markets that collectively serve
approximately 1.5 million subscribers. See "Business--WorldGate Commercial
Deployments."
CURRENT COMMERCIAL DEPLOYMENTS:
- - Cable Bahamas, Ltd.,
- - Charter Communications,
- - Click!Network,
- - Hunan Multimedia Communications Bureau,
- - Massillon Cable,
- - Prestige Cable, and
- - Telefonica Multimedia.
PLANNED COMMERCIAL DEPLOYMENTS:
- - Bresnan Communications,
- - Buckeye CableSystem,
- - Comcast Cable Communications, and
- - TVCable.
Generally, these agreements provide that these cable operators will offer
the WORLDGATE Service in some or all of their major cities of operation. These
cable operators are in various stages of planning for and commercially offering
our service. Those cable operators planning to offer the WORLDGATE Service are
in various stages of developing marketing and sales strategies and evaluating
their technology. The WORLDGATE Service is also in various stages of testing by
cable operators whose cable systems serve approximately 30 million subscribers.
See "Business--WorldGate Trials," and "Risk Factors--We cannot offer the
WORLDGATE Service if cable box manufacturers do not incorporate our technology
into their cable boxes."
We have minimal revenues to date and have incurred operating losses, net
losses and negative operating cash flow each month since our inception. At June
30, 1999, we had an accumulated deficit of approximately $68.8 million. We have
funded our operations since inception through private placements of preferred
stock, capital contributions from stockholders, a line of credit and our initial
public offering of common stock in April 1999. See "--Liquidity and Capital
Resources." We currently intend to further increase our operating expenses and
capital expenditures in order to continue the development and enhancement of the
WORLDGATE Service and to expand the commercial deployment of the WORLDGATE
Service.
REVENUES
SYSTEM SALES. In the near term we anticipate that a majority of our
revenues will be derived from cable operators who purchase our headend
equipment. We derive revenues from the sale to cable operators of cable headend
equipment, including computer systems, data encoders and demodulators and other
equipment manufactured by third parties. The price of the cable headend systems,
including
19
<PAGE>
installation and training, is expected to depend on the number of subscribers
supported. We also sell to cable operators wireless keyboards, designed
specifically for the WORLDGATE Service, for consumers who want the convenience
of a keyboard for e-mail and other applications. When we provide cable headend
and other equipment to cable operators that are testing the WORLDGATE Service,
we recognize revenue when the products are shipped and accepted by the customer.
Acceptance takes place after commitments are received from the customer.
SUBSCRIPTION AND OTHER SERVICES. Generally, we earn monthly fees from cable
operators based upon the number of WORLDGATE Service subscribers. Currently, the
WORLDGATE Service may be offered to cable operators for monthly subscriber fees
payable to us based upon a metered standard, which includes a flat monthly fee
and additional access charges for use after a threshold, e.g. two hours, of
service time, or an un-metered standard, which provides for a fixed charge not
dependent on usage time. We cannot accurately predict the level of the
subscription fees that we will actually receive from cable operators that offer
the WORLDGATE Service because contracts with only a limited number of cable
operators are currently in place.
OTHER REVENUES. In the future, as the number of WorldGate subscribers
grows, we also expect to generate other revenues that we will share on a basis
which we will negotiate with cable operators. These may include revenues from:
- advertisers who:
- purchase banner or sponsorship advertisements,
- pay a fee based on the number of clicks on the advertisements, or
- pay a fee based on viewers' use of our CHANNEL HYPERLINKING feature, and
- merchants who share a portion of their revenues derived from customers
who:
- use our CHANNEL HYPERLINKING technology, or
- click through from the WORLDGATE Service.
COST OF REVENUES
Cost of revenues includes the cost of:
- system hardware, wireless keyboards and the other components of the
WORLDGATE Service which are manufactured by third parties,
- assembly, installation and testing of the WorldGate components,
- training of cable operator personnel, and
- documentation, customer support and other production costs.
We expect that cost of revenues will also include the costs of operating our
CHANNEL HYPERLINKING technology.
In 1997, 1998 and the six months ended June 30, 1999, we incurred product
costs for systems being installed as trial systems. We expect to continue to
incur costs for trial systems throughout the remainder of 1999 and into 2000. We
recognize revenue from the sale of headend and other equipment used in trial
systems when the products are shipped and accepted by the customer. The
materials portion of cost of equipment is held in inventory until revenue is
realized from the sale.
We currently bear the manufacturing responsibility for, and the cost of,
feature expansion modules installed within some of General Instrument's and
Scientific-Atlanta's current advanced analog cable
20
<PAGE>
boxes. Once installed, these modules enable the WORLDGATE Service on such cable
boxes. The incremental cost per cable box of this module is currently
approximately $50, but we expect this cost to decrease with further cost
reduction activities and volume production. We expect to bear the manufacturing
responsibility for and the cost of incorporating our WorldGate technology into
these cable boxes. Once the incremental cost to cable box manufacturers for
incorporating our WorldGate technology into their cable boxes becomes nominal,
however, we believe that General Instrument and Scientific-Atlanta may assume
the manufacturing responsibility and cost. See "Risk Factors--We cannot offer
the WORLDGATE Service if cable box manufacturers do not incorporate our
technology into their cable boxes."
The WORLDGATE Service can also operate on current models of General
Instrument's and Scientific-Atlanta's digital cable boxes and some models of
Scientific-Atlanta's advanced analog cable boxes that can be activated through a
centrally-administered software download; therefore, we do not expect to incur
any manufacturing cost for these boxes.
ENGINEERING AND DEVELOPMENT EXPENSES
Engineering and development expenses consist of personnel costs, including
salaries, benefits and bonuses, travel and other personnel-related expenses of
employees and consultants engaged in ongoing development projects, and,
additionally, prototype expenses related to the design, development, testing and
enhancement of the WORLDGATE Service. We believe that continued investment in
engineering and development is critical to attaining our strategic product
initiatives and cost reduction objectives. As a result, we expect that these
expenses will increase significantly in the future.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses consist principally of the costs of
marketing the WORLDGATE Service, including our CHANNEL HYPERLINKING technology,
to cable operators, television programmers and advertisers. These include
employee salaries, bonuses and benefits, travel expenses, trade show fees,
consulting fees and costs to promote the WORLDGATE Service to them. These
expenses may also include the costs of materials for direct mailings, brochures,
targeted advertising and promotional campaigns. We expect that the actual costs
of delivering these marketing materials and advertisements to consumers will be
paid by the cable operators. We expect that sales and marketing expenses will
continue to increase as commercial deployment of the WORLDGATE Service expands
worldwide.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses consist primarily of personnel costs
including salaries, benefits, bonuses and related costs for management, finance
and accounting, legal and other professional services. We expect general and
administrative expenses to increase as we add personnel and incur additional
costs related to the growth of our business and operations and to reflect the
costs of operating as a public company.
RESULTS OF OPERATIONS
Since inception, we have engaged principally in the development of the
WORLDGATE Service. Accordingly, our historical results of operations are not
indicative of and should not be relied upon as an indicator of our future
performance.
SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Revenues increased from $185,000 for the six months ended June 30, 1998 to
$1.3 million for the six months ended June 30, 1999. Substantially all revenues
are attributable to the increase in the number of system sales and wireless
keyboard sales in connection with commercial deployments of the
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<PAGE>
WORLDGATE Service. At June 30, 1998, there was one commercial deployment and no
participating subscribers. At June 30, 1999, there were ten commercial
deployments by six cable operators with approximately 7,300 cable customers
subscribing to the WORLDGATE Service. For the six months ended June 30, 1999,
revenues consisted of $1.2 million of headend, keyboard and related product
deliveries and $45,000 from subscriber fees.
Cost of revenues consists primarily of product costs related to initial
trials, commercial deployments and WorldGate modules to be incorporated into the
set-top boxes. Cost of revenues for the six months ended June 30, 1999 were $5.8
million, or approximately 448% of revenues, compared to the cost of revenues of
$3.2 million, or approximately 1710% of revenues, for the six months ended June
30, 1998. This reduction in cost of revenues as a percent of revenues is
primarily attributable to production economies of scale.
Engineering and development expenses primarily consist of the cost of
design, programming, testing, documentation and support of our hardware,
software and services. Engineering and development costs were $4.8 million for
the six months ended June 30, 1999, an increase of approximately 17% when
compared to $4.1 million for the six months ended June 30, 1998. We anticipate
continued increases in staff and expenditures for new and enhanced products,
software and services.
Sales and marketing costs consist primarily of compensation, attendance at
conferences and trade shows, travel costs necessary to cover a domestic and
international customer market base, promotions and other marketing programs
substantially related to initial trial installations and commercial deployments.
For the six months ended June 30, 1999 sales and marketing expenses were $3.2
million. This resulted in an increase of approximately 27% when compared to
sales and marketing expenses of $2.6 million for the six months ended June 30,
1998. The increase was primarily the result of additional trade show costs of
$377,000, together with increases in marketing and promotional expenditures. We
anticipate that these expenditures will continue to increase with the
anticipated growth in the number of new, and the expansion of existing,
commercial deployments. Increased expenditures are also anticipated for
advertising and other trade promotional activities.
General and administrative expenses consist primarily of expenditures for
administration, office and facility operations, finance and general management
activities, including legal, accounting and other professional fees. General and
administrative expenses were $2.6 million for the six months ended June 30,
1999, an increase of approximately 55% when compared to $1.7 million for the
same period in 1998. The increase in 1999 included a $273,000 placement fee for
financing obtained in March 1999, $184,000 of additional deferred compensation
expense related to options previously granted, moving costs of $237,000
associated with our relocation to larger facilities in June 1999, and $160,000
of additional legal and insurance costs. We anticipate that general and
administrative expenses will continue to increase as we hire additional
personnel and incur additional costs related to being a public company, such as
expenses related to directors' and officers' insurance, investor relations
programs and increased professional fees.
Interest and other income and interest expense consist of interest earned on
cash and cash equivalents and short-term investments, and interest expense on
equipment financing and short-term debt. Interest and other income increased
from $326,000 for the six months ended June 30, 1998 to $1.0 million for the six
months ended June 30, 1999. During the first six months of 1998 we earned
interest from the proceeds of a $19.9 million private placement that closed on
January 23, 1998. In comparison, during the six months ended June 30, 1999, we
earned interest on an average cash balance of approximately $42.0 million and
incurred interest expense related to a $6.0 million financing and $1.1 million
equipment financing facility.
As a result of the early extinguishment in April 1999 of notes issued by us
in March 1999, we recognized a loss of $1.0 million primarily related to the
remaining unamortized debt discount balance.
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We have incurred net operating losses since inception and accordingly had no
income taxes due and have not recorded any income tax benefit for those losses.
1998 VERSUS 1997
Our revenues increased to $1.0 million in 1998, as compared to $141,000 in
1997. The increase in our revenues reflects an increase in the number of system
sales and wireless keyboard sales in connection with the initial commercial
deployment of the WORLDGATE Service. The WORLDGATE Service was first made
available to cable subscribers in 1998. As of December 31, 1998, there were
approximately 1,200 WORLDGATE Service subscribers as compared to none as of
December 31, 1997.
Our cost of revenues for 1998 were $9.9 million as compared to $1.5 million
in 1997. This increase of $8.4 million is due to the increased number of trials
and deployment systems installed in 1998. These costs reflect direct costs and
the additional hardware, software and installation costs incurred for customer
trials and field system deployments.
Our engineering and development expenses increased to $9.7 million in 1998,
as compared to $7.0 million in 1997. Due to the initial commercial deployment of
the WORLDGATE Service, the increase in the number of trials and the on-going
product development, testing and enhancement of the WORLDGATE Service, we
increased the number of engineering and development personnel in 1998. In 1998,
personnel costs increased by $900,000, and engineering equipment, licenses,
certifications and support costs increased by $1.8 million. Engineering
equipment costs in 1998 include $2.0 million of development expenditures paid to
two non-controlling stockholders under existing contracts.
Our sales and marketing expenses increased to $5.2 million in 1998, as
compared to $3.6 million in 1997. These expenses represent the cost of
introducing the WORLDGATE Service to the cable television industry, and for the
marketing expenditures incurred as a result of the expansion of our initial
commercial deployment and the increased number of initial trials with cable
operators. These expenses include expenditures for advertising, trade shows,
promotional materials, consultants and general sales and marketing overhead.
Personnel costs increased by $600,000, and marketing expenditures increased by
$1.0 million in 1998.
Our general and administrative expenses increased to $3.6 million in 1998,
as compared to $2.4 million in 1997. The increase is attributable primarily to
additional personnel and related overhead costs to support our growth, including
the initial commercial deployment and the increased number of trials. In 1998,
personnel costs increased by $550,000 and other related overhead expenditures
increased by $650,000.
We have not provided for or paid any federal or state income taxes. As of
December 31, 1998, we had net operating loss carryforwards of approximately
$38.5 million available to offset future income subject to income taxes. We
believe that our ability to utilize our net operating loss carryforwards will be
subject to annual limitations as a result of our initial public offering.
1997 VERSUS 1996
Our revenues for 1997 were $141,000 which consisted entirely of the sale of
headend systems shipped during the year. We had no revenues in 1996.
Our cost of revenues for 1997 was $1.5 million. There were no product costs
for 1996. These costs reflect direct costs as well as the additional hardware,
software and installation costs incurred for customer trials and field system
deployments.
Our engineering and development expenses increased to $7.0 million in 1997,
as compared to $1.4 million in 1996. The increase in these costs is primarily
due to the hiring of additional engineering and development personnel in
connection with our ongoing development and enhancement of the
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WORLDGATE Service. Our 1997 personnel costs increased by $3.9 million, and
engineering equipment and support expenditures increased by $1.7 million.
Our sales and marketing expenses increased to $3.6 million in 1997, as
compared to $428,000 in 1996. The primary items contributing to the increase in
sales and marketing expense were the hiring of additional personnel and
promotional expenditures and trade show expenses related to the introduction of
the WORLDGATE Service to the cable television industry. In 1997, personnel costs
increased by $1.3 million and other expenses, including promotional and trade
show costs, increased by $1.9 million.
Our general and administrative expenses increased to $2.4 million in 1997,
as compared to $1.1 million in 1996, primarily as a result of the hiring of
additional personnel and increased facilities costs, legal expenses and other
consulting costs necessary to support our engineering and development and sales
and marketing efforts. In 1997, personnel costs increased by $930,000, and
facility, legal, consulting and other support costs increased by $420,000.
LIQUIDITY AND CAPITAL RESOURCES
In April 1999, we completed our initial public offering. Net proceeds to us
were approximately $111.2 million, including the net proceeds we received from
the underwriters in connection with their exercise of the over-allotment option
granted to them in our initial public offering. Prior to our initial public
offering, we derived substantially all of our operating capital from private
placements of preferred stock, a $1.1 million capital contribution from our
chief executive officer, a $2.0 million line of credit and the issuance of $6.0
million face-amount of our discounted notes in March 1999.
Net cash provided by financing activities in the years ended December 31,
1996, 1997 and 1998 and the six-months ended June 30, 1998 and 1999 was
approximately $9.2 million, $22.6 million, $9.3 million, $930,000 and $118.5
million, respectively. The cash provided by financing activities was primarily
related to the issuance of preferred stock of approximately $8.5 million, $23.4
million, $9.3 million, $142,000 and $7.7 million in 1996, 1997, 1998 and the
six-months ended June 30, 1998 and 1999, respectively, and our initial public
offering for the six-months ended June 30, 1999. Additionally, we established a
$1.0 million line of credit in 1997, which was increased to $2.0 million in June
1998. As of December 31, 1998, approximately $1.6 million of this line had been
utilized, $500,000 had been repaid and an additional $400,000 was available for
borrowing. At December 31, 1998, the weighted average interest rate of the
borrowings was 8.89% per annum. These borrowings mature on various dates through
2001.
At December 31, 1997 and 1998 and at June 30, 1999, we had an accumulated
deficit of approximately $19.2 million, $51.3 million, and $68.8 million,
respectively. At December 31, 1997 and 1998 and at June 30, 1999, we had cash
and cash equivalents, restricted cash and short term investments of
approximately $17.3 million, $368,000 and $100.3 million, respectively.
Net cash used in operations in the years ended December 31, 1996, 1997 and
1998 and the six-months ended June 30, 1998 and 1999 was approximately $1.7
million, $12.6 million, $25.7 million, $11.5 million and $18.0 million,
respectively. The net cash used for operations during these periods was
primarily for funding engineering and development and inventory. Under existing
engineering development contracts with two non-controlling stockholders, we
anticipate that these expenditures will be approximately $2.0 million in 1999.
Capital expenditures for the acquisition of office equipment, computer systems
and equipment for engineering and manufacturing operations were approximately
$0, $249,000, $533,000, $459,000 and $608,000 for the years ended December 31,
1996, 1997 and 1998 and the six-months ended June 30, 1998 and 1999,
respectively.
As of June 30, 1999, our primary source of liquidity consisted of cash and
debt instruments that are highly liquid, are of high quality investment grade
and predominantly have maturities less than one year. We intend to make such
funds readily available for operating purposes. We may use cash to
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acquire or license technology, products or businesses related to our current
business. We anticipate that we will continue to experience significant growth
in our operating expenses and that our operating expenses will be a material use
of our cash resources.
Assuming that there is no significant change in our business, we believe
that the proceeds from our initial public offering and the proceeds from this
offering will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 24 months. We may require
additional funds to support our working capital requirements or for other
purposes and may seek to raise additional funds through public or private equity
financing, bank debt financing, or from other sources. There can be no assurance
that this capital will be available on terms acceptable to us, if at all.
SUBSCRIBERS; LIMITED NUMBER OF CUSTOMERS
As of August 31, 1999, the number of WorldGate subscribers has increased to
approximately 10,000 from approximately 7,300 subscribers as of June 30, 1999.
This increase reflects a rate of subscriber growth, if continued, that would
result in a year-end subscriber base that is slightly less than the low end of
analysts' expectations of 36,000 for year end 1999. We believe that this
shortfall is primarily due to delays resulting from third party vendor equipment
unavailability and the time the cable operators are taking to complete any
required infrastructure improvements prior to deploying the WORLDGATE Service.
We do not, however, believe these delays will have a long term impact on the
acceptance of the WORLDGATE Service in the marketplace. Revenues for the third
quarter, which are primarily based on purchases by cable operators of our
equipment for installation at the cable headend rather than fees based upon the
subscriber count, are not expected to be materially affected by the lowered
subscriber count.
We have in the past derived, and will in the future derive, a significant
portion of our revenues from a limited number of customers. In 1997, three cable
operators accounted for approximately 100% of our revenues, in 1998, ten cable
operators accounted for approximately 98% of our revenues, and for the
six-months ended June 30, 1999, nine cable operators accounted for approximately
88% of our revenues. Moreover, in 1998, Charter and Click!Network accounted for
44% and 10%, respectively, of our revenues. For the six months ended June 30,
1999, Charter, Click!Network and Hunan Multimedia accounted for 50%, 13% and
11%, respectively, of our revenues. We cannot assure you that any of these
customers will continue to offer the WORLDGATE Service to their cable
subscribers or that they will continue to be a significant source of revenues,
if at all, for us. The loss of any of these cable operators as a customer would
have a material adverse effect on us and our business, operating results and
financial condition.
YEAR 2000 RISK MAY ADVERSELY AFFECT US
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000.
We use hardware, software and other systems which are either internally
developed or provided by third party vendors. We recognize the need to ensure
that these hardware, software and systems will not be adversely affected by Year
2000 computer program failures. Accordingly, the evaluation of the potential
impact of the Year 2000 issue is an essential and ongoing project. In this
regard we have established procedures for assessing and managing the associated
risks and costs. These procedures involve three general phases: assessment,
remediation and testing. To date, we have contacted all of our major vendors
concerning their Year 2000 compliance and we have received or are in the process
of obtaining written responses or other assurances from them. Communications to
date from these third
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parties indicate that they expect, at this time, to be compliant by the Year
2000, based on their progress to date. We have also assessed and tested our own
internally developed systems and believe them to be Year 2000 compliant. Our
operating systems are Unix based, and because Unix operating systems represent
time as the number of seconds since the 1st of January 1970, instead of a binary
representation of the current year, we believe that these systems are less
likely to be affected by the Year 2000 failures. Based upon our assessment,
remediation and testing procedures performed to date, we do not believe that the
Year 2000 issue will have a material effect on our products, services or
operations. However, notwithstanding these procedures, we may experience
degradation in the performance of our systems, or complete system failure, if
our expectations are not realized or we encounter unforeseen difficulties. Any
performance degradation or system failure, whether of our internal systems or of
the systems of our vendors, likely would have a material adverse effect on our
business, financial condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, we have adopted the provisions of Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income, requiring its components to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The adoption of SFAS No. 130 had no impact on our results
of operations, financial condition or cash flows.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides, among other things, guidance for determining whether computer software
is for internal use and when the cost related to such software should be
expensed as incurred or capitalized and amortized. SOP 98-1 is required to be
applied prospectively. We adopted SOP 98-1 on January 1, 1999 and do not expect
the adoption of SOP 98-1 to have a material effect on our results of operations
and financial condition.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 generally requires costs of start-up activities
to be expensed instead of being capitalized and amortized. We adopted SOP 98-5
on January 1, 1999 and do not expect the adoption of SOP 98-5 to have a material
effect on our results of operations and financial condition.
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BUSINESS
OVERVIEW
WorldGate provides a new television-based Internet service, the WORLDGATE
Service, that delivers Internet access through cable television systems. The
WORLDGATE Service provides:
- high speed, easy to use Internet access without the use of a personal
computer or additional set-top appliance,
- low cost for the subscriber, currently being offered by cable operators to
existing U.S. subscribers at rates typically ranging from $6-$18 per month
for unlimited service,
- full featured Internet functionality and content that can be accessed
within seconds,
- thin-client network architecture that allows for easy deployment and
set-up, central system management and centrally administered upgrades, and
- our CHANNEL HYPERLINKING technology, which enables viewers to dynamically
link from television programming and advertising to related Internet
content.
We believe this combination of television and the Internet will help
transform advertising, e-commerce and information delivery for the consumer mass
market.
We were incorporated in Delaware in 1996 to succeed to the business of our
predecessor, WorldGate Communications, L.L.C., which commenced operations in
March 1995. Our World Wide Web site is www.wgate.com. The information in our Web
site is not incorporated into this prospectus.
RECENT EVENTS
We received the following notifications from the U.S. Patent and Trademark
Office:
- In May 1999, we received notification that all 62 claims of the patent
application for our CHANNEL HYPERLINKING technology had been allowed. The
patent relates to a system and method for providing interactive access to
an information source, such as the Internet, through a networked
distribution system, such as television programming.
- In June 1999, we received notification that all 60 claims of the patent
application for our ULTRA-THIN CLIENT architecture had been allowed. This
patent application relates to a system and method for accessing an
information source without the need for a personal computer, and more
particularly to the access of such information source through the use of
the existing television distribution systems.
We have now entered into trial or deployment agreements with nineteen cable
operators in thirteen countries internationally and with twelve cable operators
in the U.S. Seven of these cable operators are currently commercially deploying,
four of them are planning to commercially deploy and twenty of them are
conducting trials or technical evaluations of the WORLDGATE Service, including
the agreements listed below:
- In June 1999, we entered into an agreement with Comcast Cable
Communications, Inc., the third largest cable operator in the United
States, to begin commercial deployment of the WORLDGATE Service on digital
set-top boxes in a suburb of Philadelphia. The deployment is scheduled to
commence in late 1999.
- In May 1999, we entered into a multi-year agreement with Bresnan
Communications to begin commercial deployment of the WORLDGATE Service on
digital set-top boxes. The deployment is scheduled to commence in late
1999 or early 2000. Bresnan owns and operates cable television systems
that serve approximately 650,000 customers in the United States. Since
entering into the
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agreement with us, Bresnan agreed to be acquired by Charter, one of our
initial customers. After the closing of pending acquisitions, Charter will
be the fourth largest cable operator in the United States.
- In August 1999, we signed a multi-year agreement with Buckeye CableSystem
to begin commercial deployment of the WORLDGATE Service in all twenty-one
communities within its Toledo, Ohio franchise. The deployment is scheduled
to commence in the fourth quarter of 1999.
- In June 1999, we signed an agreement with The Hunan Multimedia
Communications Bureau, a division of the People's Republic of China Hunan
Provincial Telecommunications Authority's Posts and Telecommunications
Administration, to deploy the WORLDGATE Service. We have received an
initial purchase order for Changsha, capital of the Hunan province.
We are currently conducting a three-month study together with General
Motors, Warner Lambert, Kraft, Sprint and Nielson Media Research to explore
consumer response to various forms of interactive advertising. This study is
expected to be completed in the fourth quarter of 1999. In addition, we intend
to conduct a larger field test with multiple cable operators in early 2000.
At the National Cable Trade Association show in June 1999, we demonstrated
our picture-in-picture capabilities for our CHANNEL HYPERLINKING technology
using a digital set-top box. This enhancement allows subscribers to interact
with Internet content while simultaneously watching a program or advertisement.
WORLDGATE MARKET OPPORTUNITY
The Internet is growing rapidly and is emerging as a significant interactive
medium used by millions of people for entertainment, communications, research,
education and e-commerce. IDC estimates that the number of Internet users
worldwide exceeded 142 million in 1998 and will grow to over 502 million by the
end of 2003, and that worldwide consumer e-commerce will grow from approximately
$15 billion in 1998 to over $171 billion by 2003.
Although Internet access has historically required a personal computer, IDC
surveys indicate that U.S. consumers, by a two-to-one margin, would prefer to
receive emerging electronic information and entertainment services through their
television sets, rather than their personal computers. When surveyed by IDC
about their reasons for not purchasing a personal computer, many respondents
indicated that they do not have a need for a personal computer, that they cannot
afford a personal computer and that personal computers are too difficult or
complicated to use. According to an IDC survey of consumers, personal computer
users can spend 30% of their usage time on set-up, maintenance and other problem
fixing activities.
WorldGate believes that a television-based approach to Internet services is
a superior alternative for many consumers. In 1998, according to IDC, only 49%
of U.S. households owned a personal computer, whereas, according to Cablevision
Blue Book, 98% had televisions. WorldGate believes that a television-based
approach offers the following advantages:
- televisions are widely accepted and used by consumers,
- televisions are well suited for sharing information and entertainment,
- the advertiser-sponsored television entertainment model is well accepted,
and
- television programming provides a unique portal opportunity.
IDC forecasts that the cumulative shipments in the United States of Internet
television access devices, including dedicated Internet access set-top boxes and
cable television set-top boxes, will grow from 1 million at the end of 1998 to
almost 24 million by the end of 2002, representing 22% of U.S.
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homes in 2002. The IDC report indicates that based upon the expense, complexity
and obsolescence issues associated with a personal computer, there is an
opportunity for television-based devices to supplement and potentially replace
personal computers as the preferred devices for accessing the Internet.
Set-top appliances, such as those provided by WebTV, have been introduced to
provide Internet access through telephone lines to a television without
requiring a personal computer. Although these access solutions do not require a
personal computer or personal computer expertise, WorldGate believes that this
mode of Internet access may be limited by:
- the need to purchase a dedicated or "single-purpose" set-top appliance
which typically costs approximately $99-$199 and exposes the consumer to
risks of equipment obsolescence,
- monthly subscription fees that may be up to $25 per month in addition to
any telephone access charges,
- the telephone bandwidth and usage constraints of dial-up modems with peak
data transmission speeds of 56 Kbps that may result in significant dial-up
connection times, busy signals and delays, and
- functional limitations such as the inability to support CD-quality audio
and Java-based applications, including instant messaging and chat rooms.
As a result of the shortcomings of telephone-based access, there is an
opportunity to provide Internet television access through a set-top box
connected to a cable television service. WorldGate believes that the cable
infrastructure provides a superior medium for Internet access that eliminates
the major obstacles of telephone access. WorldGate believes that the benefits of
cable-based Internet access include:
- lower cost than telephone-based methods,
- high transmission speed, with a maximum data transmission speed downstream
from the cable operator's central facility to the subscriber of 27 Mbps,
which is almost 500 times faster than a standard 56 Kbps dial up modem,
and
- "always-on" availability providing access within seconds.
A 1998 Kagan report predicted that there would be approximately 220 million
worldwide cable subscribers in 1998 and approximately 261 million worldwide
cable subscribers by the year 2001. In the United States, cable is widely
available, with approximately 96% of homes passed by cable infrastructure in
1998 and approximately 69% of these homes being cable subscribers, according to
Cablevision Blue Book. IDC forecasts that, of all the Internet television access
devices considered by it, cable television set-top boxes are expected to achieve
the highest growth rate through at least 2002.
WorldGate believes that to successfully take advantage of the demand for
cable television-based Internet services in the mass consumer market, the
service should:
- be a relatively low cost solution for cable operators that can be offered
to consumers over existing cable systems regardless of whether they have
been upgraded to allow bi-directional communications between the cable
operator's central facility and the subscriber's cable box, and whether
they are deploying current or future generation digital and advanced
analog cable boxes, with minimal or no use of dedicated video channel
capacity,
- provide low cost, easy to use, high speed Internet access to consumers,
- require no additional investment in equipment or hardware by the consumer,
and
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- be flexible enough to efficiently accommodate ongoing advances in Internet
capabilities, such as CD-quality audio and Java-based applications,
including instant messaging and chat rooms.
WorldGate believes that current Internet access offerings have not addressed
the mass market opportunity due to a failure to satisfy one or more of these
criteria.
WORLDGATE SOLUTION
WorldGate believes that the WORLDGATE Service addresses this mass consumer
market opportunity because it is a low cost, high speed, easy to use Internet
service. The WORLDGATE Service utilizes an ULTRA-THIN CLIENT network
architecture to allow for easy deployment and set-up, central system management
and centrally administered upgrades. In the subscriber home, the WORLDGATE
Service employs only a television, a remote control or WorldGate wireless
keyboard, and a WorldGate capable digital or advanced analog cable box--both of
which types of boxes are currently being deployed by cable operators for
business reasons largely unrelated to Internet access. The WORLDGATE Service
enables users, among other activities, to browse the Web, send and receive
e-mail, participate in chat sessions and shop online. With features such as our
CHANNEL HYPERLINKING technology, the WORLDGATE Service can integrate the
interactivity of the Internet with the television viewing experience. By
enabling low cost Internet access, integrated Internet/television advertising
and e-commerce, WorldGate believes it is pioneering a new mass market.
WORLDGATE BUSINESS MODEL
WorldGate derives revenues from cable operators and expects to derive
revenues from e-commerce merchants and advertisers. WorldGate expects to enhance
these revenue opportunities by implementing the strategies described below.
REVENUE DERIVED FROM CABLE OPERATORS. In most instances, WorldGate sells
its headend server equipment and wireless keyboards to cable operators and
licenses the software for the WORLDGATE Service to cable operators for a monthly
subscriber fee based upon either a metered standard, which includes a flat
monthly rate plus additional access charges for use after a threshold (e.g. two
hours) of service time, or an un-metered standard, which provides service for a
fixed charge not dependent on usage time. WorldGate believes that cable
operators will either offer the WORLDGATE Service to their subscribers as a
premium service, requiring subscribers to pay a separate monthly fee for the
service, or as a part of a package of services in which the subscriber pays a
monthly fee for the entire package. Generally, WorldGate expects to receive
monthly fees from the cable operators based on the total number of subscribers
to the WORLDGATE Service.
REVENUE DERIVED FROM E-COMMERCE MERCHANTS. WorldGate is in the process of
negotiating with companies in the business of selling products and services
online. WorldGate believes that these companies may pay for the opportunity to
promote their businesses through portals by sharing a portion of the revenues
they are paid or by paying a fixed fee per transaction. We intend to make access
to online shopping opportunities both simple and convenient for our subscribers
so that we can participate in the rapid growth forecasted for e-commerce. We
expect to share the revenues derived from e-commerce merchants with cable
operators.
REVENUE DERIVED FROM ADVERTISERS. A 1998 report by Jupiter Communications
predicted that Web advertising in the United States alone will increase from
approximately $1.9 billion in 1998 to approximately $7.7 billion in 2002.
WorldGate has space on its various menu pages that is available for banner
advertising and other promotions. When subscribers click on these banners, they
can be linked quickly to another Web page that gives more detailed information
about the subject of the banner ad. Advertisers typically pay portals based on
the number of times that their ad is displayed on a page viewed by a subscriber,
so as the number of WorldGate subscribers grows, we expect our opportunities
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to derive advertising revenues will also grow. We intend to rely at least in
part on third party firms such as DoubleClick Inc. that are in the business of
providing advertisements to portals. In some cases, we may ourselves directly
contract with advertisers to display their ads, either on a per view basis or
based on a fixed fee to cover the right to display their ad for a period of
time. Information derived from the cable system will permit us to know the
general geographic area in which each of our subscribers lives, and in many
cases we will know zip codes and perhaps more extensive demographic information
regarding our subscribers if they wish to share that information with us. Having
location and other data regarding our subscribers is expected to be valuable
because advertisers typically are willing to pay higher advertising fees if they
can target their ads based on such information. We expect to share the revenues
derived from Web advertising with cable operators.
Our CHANNEL HYPERLINKING technology will provide one button linking from
television and advertising content to a related fully interactive Web site. This
sort of advertising is "self-targeted" because subscribers themselves decide
whether they want to get more information. This is in sharp contrast to
traditional television advertising that typically includes sending messages to
large numbers of viewers on an unsolicited basis. In addition to the value
achieved by self-targeting, the value of our CHANNEL HYPERLINKING technology is
enhanced by both the availability of demographic information and interactivity.
By delivering an interactive experience, we are able to give the subscribers the
opportunity to follow a variety of paths to gain extensive information about the
subject of interest. Perhaps most importantly, the interactivity also allows the
subscribers in many cases to purchase a product or service online. With the
average cable household being exposed to tens of thousands of television
advertisements annually, we believe that there are many opportunities for use of
our CHANNEL HYPERLINKING technology.
Our CHANNEL HYPERLINKING technology business model is based on a revenue
split with our cable operator partners. Revenues to WorldGate are expected to
come from advertisers seeking to engage the WORLDGATE Service subscribers in
some form of interactivity while using our CHANNEL HYPERLINKING technology. The
business model assumes that interactions will be on a pay-for-performance basis
such that advertisers and others will pay us based on the number of "clicks"
that occur. Consumers in an early deployment of the WORLDGATE Service have
averaged eight clicks per month related to television networks. This result was
achieved without providing any special promotion of our CHANNEL HYPERLINKING
capabilities. A study in Massillon, Ohio regarding the use of our CHANNEL
HYPERLINKING technology for advertisements has begun, although no meaningful
revenue is expected to be derived from this service in 1999.
BUSINESS STRATEGY
WorldGate's objective is to transform advertising, commerce and information
delivery for the consumer mass market through its combination of television with
the Internet. The principal elements of WorldGate's business strategy are the
following:
PROVIDE COMPELLING VALUE FOR END-USERS. While many companies are focused
primarily on increasing the speed of Internet access, WorldGate is focused on
significantly expanding the availability of the Internet to a broader set of
consumers and providing these consumers with an enriched Internet experience, in
addition to offering high speed access. WorldGate designed the WORLDGATE Service
to operate on the widely available existing cable television systems, to be an
inexpensive alternative to other forms of Internet television access and to be
easy for the consumers to use. In contrast to other television-based services,
such as those offered by WebTV, which currently requires the purchase of a
dedicated set-top appliance, the WORLDGATE Service does not require consumers to
purchase or install any in-home equipment. To use the WORLDGATE Service, a
consumer needs only her existing television, a WorldGate enabled digital or
advanced analog cable box and a wireless remote or keyboard, with all but the
television typically supplied by the cable operator. In addition, WorldGate's
CHANNEL
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HYPERLINKING technology has been designed to offer consumers easy, fast and
interactive access to content which is associated with a television program or
advertisement they are viewing.
PROVIDE COMPELLING VALUE FOR CABLE OPERATORS. WorldGate believes that cable
operators assess the viability of an investment in a new service by considering
the cost of initial investment in equipment, service reliability, overall
operating and maintenance expenses and the incremental revenue that can be
generated by such service. The WORLDGATE Service can be offered to cable
subscribers through the cable operators' existing one-way infrastructure using a
telephone line or two-way infrastructure. Furthermore, the WORLDGATE Service has
been designed to be deployed with low capital costs for headend equipment as low
as $25 to $40 per WorldGate subscriber. These systems are also designed to be
efficiently upgraded as the operator's infrastructure is improved through the
deployment of new generation cable boxes or the deployment of cable modem ready
plant, i.e. a cable plant that has been upgraded to improve the original
transmission quality to permit the use of cable modems, and easily expanded as
the number of subscribers grows. There is, however, no need for any costly
upgrades to make the plant cable modem ready. Accordingly, the WORLDGATE Service
can provide cable operators with the opportunity for immediate incremental
revenue streams from subscriber fees and sharing of advertising and online
transaction fees. Additionally, the WORLDGATE Service for the advanced analog
cable box typically does not require the use of channel bandwidth. As a result
of the advantages offered by its solution, WorldGate believes that it will be
able to successfully market the WORLDGATE Service to cable operators.
PROVIDE COMPELLING VALUE FOR PROGRAMMERS, ADVERTISERS, ADVERTISING AGENCIES
AND E-COMMERCE MERCHANTS. Through our CHANNEL HYPERLINKING technology,
programmers and advertisers may enhance their television content with related
Internet materials by providing their viewers with the ability to interact in
real-time with their television programming or advertising. For example, a
television viewer watching a commercial could link immediately to that
advertiser's Web site to find more information about the product or to place an
order. By giving viewers this ability, WorldGate believes that the value of the
program or advertisement to the television programmers or advertisers is
increased, and that as a result, programmers and advertisers will be able to
increase their revenues.
WorldGate has established relationships with many providers of content for
the WORLDGATE Service including programmers such as CNN, QVC, C-SPAN, The
Weather Channel, Showtime, E! Entertainment Network, Lifetime, Arts &
Entertainment, HGTV and CourtTV. Similarly, WorldGate has established
relationships with Internet and other information content or service providers
such as Citicorp, DoubleClick!, and Zip2. The WORLDGATE Service provides them
with an opportunity to broaden their offerings by taking advantage of the
dynamic capabilities of the Internet linked with cable television's broad
subscriber base. The television-based nature of the WORLDGATE Service provides a
natural portal for interaction between the consumer and programming and other
content providers.
WorldGate is also working with advertisers and advertising agencies such as
General Motors, Sprint, Warner Lambert, Kraft, Erikson, Grey Advertising Inc.
and True North Communications Inc. WorldGate is collaborating with these
advertisers and advertising agencies to enable interactive links by television
consumers with the products and/or services being advertised on the television.
WorldGate has also established a committee (the North American CHANNEL
HYPERLINKING Organization or "NACHO") which includes representatives from many
of these content providers, advertisers and advertising agencies as well as
advertising service providers such as Nielsen Media Research Inc. The NACHO
advisory board is developing standards and policies for WorldGate's CHANNEL
HYPERLINKING technology as well as assisting in its promotion. WorldGate
believes that its CHANNEL HYPERLINKING technology, along with the participation
of its CHANNEL HYPERLINKING providers and the NACHO advisory board, will
facilitate an enriched interactive experience for users of the WORLDGATE
Service. Initial field tests of the CHANNEL HYPERLINKING technology in
advertisements are currently underway in Massillon, Ohio. In addition, WorldGate
intends to conduct a larger field test with multiple cable operators in early
2000. WorldGate also intends to provide additional value added services to
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advertisers, programmers and cable operators by collecting consumer activity
data. This activity data will be collected and tabulated to statistically
reflect consumer responses to interactive advertisements and programming,
television viewing habits and Internet "surfing" habits. WorldGate intends to
ensure a WORLDGATE Service subscriber's privacy by not providing personally
identifiable data unless authorized by the subscriber.
AGGRESSIVELY PENETRATE GLOBAL MARKETS. WorldGate believes that the market
for the WORLDGATE Service is global and is seeking to deploy its systems with
additional cable operators in the United States, Canada, China, Europe, Latin
America and Southeast Asia. The WORLDGATE Service is currently being tested by
cable operators on four continents. WorldGate is working with third parties to
provide local content directories and user interfaces in multiple languages for
the WORLDGATE Service as the demand arises.
CREATE BRAND EQUITY. WorldGate intends to create an identity for its
INTERNET TV OVER CABLE(SM) service under the "WorldGate" brand. In this regard
WorldGate is already a registered service mark in the United States and
applications have been filed in many other countries. WorldGate believes that
the creation of a brand identity among cable subscribers is important to its
strategy to become the preferred provider of cable Internet television services
to the cable television industry, advertisers, programmers and e-commerce
companies. By creating consumer awareness of the WORLDGATE Service, WorldGate
believes it will drive penetration in its geographic markets worldwide and
increase the pace at which cable operators, advertisers, programmers and
e-commerce companies recognize the economic and service benefits of the
WORLDGATE Service.
MAINTAIN AND LEVERAGE TECHNOLOGY POSITION. WorldGate believes that it has
established a competitive advantage through its technology position. Development
of the WORLDGATE Service has required in excess of three years of intensive
engineering and development efforts and the combination of significant expertise
in two historically separate industries, cable and the Internet. WorldGate's
engineering personnel, who came from established industry participants such as
General Instrument and Hitachi, Ltd., have been able to solve challenges
involved in delivering real-time Internet access over existing cable
infrastructure. WorldGate believes that it is currently the only company to have
developed, and commercially deployed, the capability to offer bi-directional
transmissions and real-time communications between the cable box and the cable
operator's central facility without requiring the use of cable channel capacity.
WorldGate intends to maintain its technology leadership by continuing to enhance
the performance and functionality of the WORLDGATE Service, and by aggressively
seeking to protect its intellectual property.
LEVERAGE EXISTING RELATIONSHIPS WITH GENERAL INSTRUMENT AND
SCIENTIFIC-ATLANTA. WorldGate has strategic relationships with General
Instrument and Scientific-Atlanta, the world's two largest suppliers of cable
boxes. Both companies have participated in the joint development, including
testing and implementation, of WorldGate's technology. WorldGate's technology
has been incorporated into versions of their advanced analog cable boxes and is
being tested on their digital cable boxes. In addition, both General Instrument
and Scientific-Atlanta are stockholders of WorldGate and have joined WorldGate
in promoting the WORLDGATE Service in the press, at trade shows and conferences
and through joint sales and marketing presentations worldwide.
As of September 30, 1999:
- General Instrument had invested an aggregate of approximately $5.5 million
and owned 454,716 shares of common stock of WorldGate or approximately
2.1% of the total outstanding shares, and
- Scientific-Atlanta had invested an aggregate of approximately $3.5 million
and owned 333,505 shares of common stock of WorldGate or approximately
1.6% of the outstanding shares.
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THE WORLDGATE SERVICE
OVERVIEW OF THE WORLDGATE SERVICE. WorldGate is the developer of the
WORLDGATE Service, an Internet television service that enables:
- cable operators to offer subscribers low cost, easy to use, high speed
Internet access, and
- television programmers and advertisers to link their programs and
advertisements with a fully interactive Web site.
Upon accessing the WORLDGATE Service, the user is provided with a main menu
screen offering several options, including Web browsing and e-mail. The main
menu screen also provides options for viewing informative content such as an
electronic television program guide, news, weather, sports and community
activities. Depending on the option selected, the consumer is connected to the
desired content or a secondary menu screen providing additional options.
WorldGate has designed both its navigational menu screens and e-mail service to
be simple and user-friendly.
The WORLDGATE Service uses a standard cable television box that has been
WorldGate enabled and does not require a personal computer or additional set-top
appliance. Furthermore, the WORLDGATE Service can co-exist with alternative
methods of Internet access, which may share the same cable operator network and
application infrastructure it employs.
The advanced e-mail service option provides additional features, such as
e-mail address list management, folders for archiving received and sent e-mail,
support for attachments of which ones that can be displayed are identified and
presented in such a fashion that the user can view them, support for forwarding
and carbon copying additional mail recipients, and allowing a subscriber to
establish and manage multiple mail box addresses for each member of the
subscriber's household. The "My Town" icon on WorldGate's main menu screen
provides local directories and community guides. This feature offers users a
directory of local school activities, restaurants, government resources and
related community information. Zip2 currently provides this information on
behalf of WorldGate. Also, from the WorldGate home page subscribers receive the
current local weather that is updated every hour. The Weather Channel currently
provides this weather information. With a few key strokes the subscriber can
receive a five day forecast, or check the weather for any other location in the
United States.
From the Web section, subscribers can access our "Web Directories" that
provide subscribers with national references to advertisers and links that are
organized by category such as travel, sports, finance and shopping. WorldGate
can update this information to reflect the changing dynamics of the Web.
"Networks on the Web" allows subscribers to view our CHANNEL HYPERLINKING
technology partners and any currently available information that is provided by
television programmers. "Bookmarks" allows subscribers to save their favorite
sites for easier access. Subscribers can also review and edit their list of
favorite sites.
Subscribers can easily go to any site or search the Web by simply entering a
phrase or Web address into the WORLDGATE Service. The WorldGate technology
determines if the user has entered a valid Web address or a search phrase and
then links to the appropriate Web site.
The WORLDGATE Service allows subscribers to administer their household
accounts online. The household administrator can add new accounts, change the
parental control (content filtering), change passwords and change the first and
last names of the individual users on the service. Up to six users are allowed
for each household. The WORLDGATE Service provides the ability to filter the
sites being viewed by the subscriber on a subscriber and household basis.
WorldGate currently uses Spyglass, Inc.'s SurfWatch filtering technology to
offer subscribers the ability to restrict viewing of Web content in categories
ranging from sexually explicit, violent and gambling to drugs and alcohol. In
addition we
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offer a filtering system that uses a special list in order to ensure more
restrictive content filtering suitable for children using the service.
Cable operators offer the WORLDGATE Service to their subscribers at rates
typically ranging from $6-$18 per month or at a promotional rate for a nominal
or no fee during an introductory period for unlimited service. In all current
installations, this rate includes the use of an optional wireless keyboard.
WorldGate does not preclude the cable operators from charging an extra fee for
the use of the keyboard. WorldGate receives a portion of the monthly fee based
on negotiations with the cable operators.
CHANNEL HYPERLINKING TECHNOLOGY. WorldGate's innovative CHANNEL
HYPERLINKING technology is designed to allow a user to dynamically link directly
from a television program or advertisement being viewed to related Internet
sites with the push of a button on a standard remote control or optional
wireless keyboard. The WorldGate subscriber does not have to enter or even know
the associated Internet address. For example, while watching The Weather
Channel, a subscriber can directly access a Web page providing local weather
forecasts. Advertising, promotion, transaction and information services are
examples of the types of related programming links that may be enabled through
the CHANNEL HYPERLINKING technology. Our CHANNEL HYPERLINKING technology is
designed to enable applications such as simulcast information on the sports
program being viewed.
There have been several instances where programmers have referred television
viewers to related Internet sites. For example, Showtime, ESPN and NBC, among
others, have encouraged viewers to use their personal computers to access Web
sites related to the content of their sporting event programs, including the
Olympics. WorldGate believes that easier and quicker access to the Internet
through the capabilities provided by CHANNEL HYPERLINKING technology may promote
a new category of cross-programming opportunities.
WorldGate's CHANNEL HYPERLINKING technology can also be used to enhance the
functionality of information sources such as electronic program guides. Although
program guides currently offer limited television program and advertising
information, such information and their utility can be significantly improved
through the use of Web-based content and the ability to perform transactions
online. Because such guides are considered by many to be essential when hundreds
of channels are available, such as is the case with digital platforms, and
because the guides will likely be accessed many times each day, WorldGate
believes that CHANNEL HYPERLINKING enhancements to program guides may represent
a significant source of revenue.
To realize the economic benefits of CHANNEL HYPERLINKING, WorldGate,
programmers, advertisers and advertising agencies have begun to coordinate
implementation of the WORLDGATE Service. In addition, cable operators will need
to achieve significant penetration rates of the WORLDGATE Service to provide an
attractive target audience for programmers and advertisers to focus on
developing the CHANNEL HYPERLINKING service. WorldGate believes that CHANNEL
HYPERLINKING may enhance the value of television programming and advertising,
increase related on-line transactions and potentially lead to related revenue
generating opportunities associated with advertising and on-line transactions.
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WORLDGATE COMMERCIAL DEPLOYMENTS
WorldGate has entered into deployment agreements with eleven operators of
cable television systems: Bresnan Communications, Buckeye CableSystem, Cable
Bahamas, Charter Communications, Click!Network, Comcast Cable Communications,
Hunan Multimedia Communications Bureau, Massillon Cable, Prestige Cable, TVCable
and Telefonica Multimedia, which collectively with their affiliates have
approximately 15 million subscribers. Set forth below is a table summarizing the
current status of these commercial launches. The total number of subscribers
served by the cable operator and its affiliates, including all announced
acquisitions, across all of their systems is based on data provided by the
operator, estimates by Cablevision Blue Book (Summer/Fall 1999), or in the case
of international operators, WorldGate estimates. As of August 31, 1999,
approximately 10,000 homes subscribed to the WORLDGATE Service and service fees
are paid or payable to WorldGate for these subscribers in accordance with the
terms of WorldGate's agreements with the cable operators.
<TABLE>
<CAPTION>
TOTAL COMMERCIALLY TERMINATION
SYSTEM DEPLOYED PLANNED DEPLOYMENT DATE
CABLE OPERATOR SUBSCRIBERS LOCATIONS LOCATIONS OF AGREEMENT
- ----------------------------- ----------- ------------------- ------------------------------- ---------------
<S> <C> <C> <C> <C>
Bresnan Communications 644,000 Marshall, MN April 2002
Rochester, MN
St. Cloud, MN
Winona, MN
Buckeye CableSystem 130,000 Toledo, OH July 2004
Cable Bahamas 46,000 Bahamas September 2003
Charter Communications 5,500,000 San Luis Obispo, CA Lanett, AL November 2002
Newtown, CT Alhambra, CA
Newnan, GA Burbank, CA
Maryville, IL Long Beach, CA
St. Louis, MO Riverside, CA
Logan, UT Wilamantic, CT
LaGrange, GA
Worcester, MA
Hickory, NC
Ft. Worth, TX
Click!Network 6,000 Tacoma, WA November 2005
Comcast Cable Communications 8,000,000 Willow Grove, PA September 2000
Hunan Multimedia 430,000 Changsha, Hunan Hengyang, Hunan June 2002
Communications Bureau Province, People's Province
Republic of China
Massillon Cable 43,800 Massillon, OH November 2003
Prestige Cable 157,500 Mooresville, NC November 2005
Telefonica Multimedia S.A.C. 230,000 Lima, Peru March 2004
TVCable 100,000 Quito, Ecuador September 2005
Guayaquil, Ecuador
</TABLE>
Cable Bahamas is currently operational; however, they are awaiting licensure
from the government of Bahamas to provide the WORLDGATE Service and there can be
no assurance that the license will be obtained. In the event that Cable Bahamas
is unable to obtain the necessary license, it may no longer be able to offer the
WORLDGATE Service.
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WORLDGATE TRIALS AND TECHNICAL EVALUATIONS
The WORLDGATE Service is in various stages of trials or technical
evaluations on four continents with a number of cable operators including Time
Warner, the second largest U.S. cable operator, and Cox, the fifth largest U.S.
cable operator. Trials typically start with cable boxes connected to a headend
server system installed at a cable operator's corporate office location for
technical evaluation. Trials are of varying duration and complexity.
The total subscriber base of cable operators currently in trials and planned
trials with WorldGate is approximately 26 million. There can be no assurance
that the current or planned trials will be successful or will lead to commercial
deployment of the WORLDGATE Service by these cable operators. Set forth below is
a table summarizing the current trials and planned trials of the WORLDGATE
Service as of September 1, 1999.
The total number of subscribers served by the cable operator and its
affiliates, including all announced acquisitions, across all of its systems is
based on data provided by the operator or estimates by Cablevision Blue Book
(Summer/Fall 1999) for U.S. operators other than SNET and on WorldGate's
estimates for SNET and international operators.
<TABLE>
<CAPTION>
TOTAL SYSTEM NUMBER OF SYSTEM
CABLE OPERATOR SUBSCRIBERS LOCATION WORLDGATE BOXES TYPE
- ----------------------------------------- ------------ ---------------------------- ---------------- ---------
<S> <C> <C> <C> <C>
UNITED STATES:
Ameritech Corporation.................. 200,000 Chicago, IL (1) Planned Analog
Cable TV of the Kennebunks............. 8,500 Kennebunk, ME Planned Digital
Cox Cable Communications............... 6,000,000 Atlanta, GA (1) Planned Digital
SNET Personal Vision................... 22,000 Hartford, CT 37 Analog
Time Warner............................ 12,600,000 Orlando, FL 50 Analog
(includes Time Warner Cable and Time
Warner Entertainment-Advance/
Newhouse)
INTERNATIONAL:
Cablevision/TCI........................ 825,000 Argentina Planned Analog
Cablevision S.A. de C.V................ 300,000 Mexico Planned Analog
Image TV............................... 30,000 Brazil Planned Analog
INC, DCS, DNC, BCN, YSC and NIC........ 150,000 South Korea Planned Digital
Retecal................................ 40,000 Spain 17 Analog
Singapore CableVision.................. 160,000 Singapore (1) 5 Analog
Skycable............................... 225,000 Philippines 25 Analog
Telecable.............................. 17,000 Spain Planned Analog
Toya................................... 100,000 Poland Planned Analog
United International Holdings.......... 5,253,070 New Zealand Planned Digital
</TABLE>
- ------------------------
(1) Corporate office technical evaluations.
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TECHNOLOGY
The WorldGate platform is based on our "ULTRA-THIN CLIENT architecture,"
which allows substantially all client-related processing to be performed at the
cable headend. The WorldGate platform is comprised of three components:
- servers located at the cable headend,
- a WorldGate enabled digital or advanced analog cable box, and
- a remote control and/or optional wireless infrared keyboard.
CABLE HEADEND; CHANNEL HYPERLINKING. There are two servers located at the
cable headend. One server manages all information traveling to and from this
server to the Internet. This server also manages individual Internet sessions,
processes data for presentation on the television screen and manages the Web
browsing client. The second server manages real-time communications from the
cable headend to a subscriber's cable box. This server acts as a bi-directional
router for data on a cable network. These servers:
- are based on a multi-processor architecture,
- can be accessed remotely by WorldGate for performance monitoring and
software upgrades, and
- are configured so that typical full screen refresh time on:
- an analog platform is five seconds or less, and
- a digital platform is as low as 1/30th of a second.
General Web surfing is provided by our browser technology using high
performance server headend systems. The WORLDGATE Service browser currently
supports HTML Version 3.2, HTTP Version 1.0 and 1.1, HTML Frames, Image formats
such as GIF Animations, JPEG and XBM formats. To WorldGate's knowledge,
WorldGate is the only company that supports a full Java implementation offering
on a set-top platform. Java is used for such applications as chat and instant
messaging. The WorldGate platform supports JavaScript that is compatible with
Microsoft and Netscape browsers.
One feature of the WORLDGATE Service is our CHANNEL HYPERLINKING technology.
When a cable television subscriber makes a CHANNEL HYPERLINKING request, the
subscriber's cable box sends a signal to the cable headend indicating the
channel and program information of the program the subscriber is viewing. This
information is then matched with the corresponding Web address for the program
which has been stored at a cable headend database. Afterwards, the subscriber is
linked to the corresponding Web site for full Internet interactivity. This
entire process occurs within seconds.
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[figure]
[WORLDGATE'S CHANNEL HYPERLINKING TECHNOLOGY]
[WorldGate's CHANNEL HYPERLINKING technology provides a flexible and
instantaneous solution for interactive television and advertising. WorldGate's
CHANNEL HYPERLINKING Center is the brain of the system, managing data flow to
the WorldGate affiliate cable systems and gathering usage data to create a
valuable reporting infrastructure for advertisers, product marketers, television
networks, and cable operators.]
[figure depicting five horizontal boxes. The first box is labeled "Advertisers
and Ad Agencies" and contains two smaller boxes including the following text:
"Advertising ID codes are added to master video tapes before distribution," and
"The matching Web address is associated with the Advertising ID in WorldGate's
software and sent to the CHANNEL HYPERLINKING Center." The first box has a
one-way arrow to the second box that is labeled "Broadcast and Cable TV Network
Uplink Centers." The second box contains two smaller boxes including the
following text: "Advertising ID codes travel with the broadcast advertising
signals over satellites" and "Television schedules are sent to the CHANNEL
HYPERLINKING Center by networks in advance of broadcast." The third box is
labeled WorldGate's CHANNEL HYPERLINKING Center and has a smaller box with
"Advertising ID codes are collected from all networks and sent to local cable TV
Headends" and a cylinder with "Master Database for all CHANNEL HYPERLINKING"
included. The fourth box is labeled "Cable TV Headend" and has a smaller box
with "Local cable affiliates receive data from CHANNEL HYPERLINKING Center and a
cylinder with "Local Database for National and Local Channel HyperLinks"
included. The fourth box is linked with a one-way arrow and text reading "cable
to the home" and "cable from the home" to the fifth box. The fifth box is
labeled "Analog or Digital Cable Subscriber's Home" and contains two smaller
boxes with the following text: "An on-screen prompt can be displayed for
advertising ID codes or programs that have interactive content" and "When the
consumers click remote controls to go interactive, the headend computer system
retrieves the appropriate Web pages to be displayed." The second box is
connected to the third box and the third box is connected to the fourth box by
pictures of satellite dishes and satellites.]
CABLE BOX. We believe that we are the only company providing a
television-based Internet service for both advanced analog and digital cable
boxes. This is particularly important for cable operators deploying both types
of cable boxes. WorldGate has developed technology that allows WorldGate enabled
advanced analog cable boxes to display the graphics and to provide real-time
communications necessary for the WORLDGATE Service. The WorldGate technology is
currently incorporated in an additional feature expansion module that must be
installed within General Instrument's and some models of Scientific-Atlanta's
existing advanced analog cable boxes. The WORLDGATE Service currently operates
on modified versions of the General Instrument CFT 2200 and the
Scientific-Atlanta 8610 advanced analog cable boxes. In addition, existing
models of General Instrument's and Scientific-Atlanta's digital cable boxes, as
well as Scientific-Atlanta's 8600X advanced analog cable box, can be used to
provide the WORLDGATE Service with a software download. The software download
can be done remotely.
The advanced analog WorldGate platform makes use of the vertical blanking
interval to transmit its data in conjunction with regular television signals.
The vertical blanking interval is part of a television signal that is not used
for the television program. By using the vertical blanking interval, WorldGate
does not interfere with the television signal and does not require additional
bandwidth to provide the WORLDGATE Service. To provide the WORLDGATE Service,
WorldGate uses as few as five of the typically 20 to 50 television channels with
vertical blanking intervals that are available. More capacity for the WORLDGATE
Service can be provided by use of the vertical blanking interval in these
additional channels.
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With the advanced analog platform, WorldGate supports data transmission
rates of up to 128 Kbps downstream from the cable operator's central facility to
the subscriber's cable box and 14 Kbps or 20 Kbps upstream from the cable box to
the cable operator's central facility. Because only keystrokes are being sent
upstream, WorldGate believes that the upstream data transmission rate is
adequate to transmit such data. The WORLDGATE Service for the advanced analog
platform supports:
- up to 65,000 colors on modified versions of General Instrument's CFT 2200
and Scientific-Atlanta's 8610 advanced analog boxes, and
- 16 colors on the Scientific-Atlanta 8600X advanced analog cable boxes.
WorldGate believes that there are currently over 5 million advanced analog
cable boxes already shipped which can be WorldGate enabled with a software
download, but about half of these boxes require installation of additional
memory in the boxes prior to the software download.
The WorldGate digital platform uses MPEG2 technology to provide transmission
speeds of up to 27 Mbps downstream from the cable operator's central facility to
the cable box and 256 Kbps upstream from the cable box to the cable operator's
central facility. As with the advanced analog cable box, WorldGate believes that
the relatively slower upstream speed does not decrease performance of the
WORLDGATE Service. Unlike high bandwidth requirements for the downstream path
for large data transfers such as Web pages, the upstream path generally is used
for small data transfers, such as keystrokes, and does not require large
bandwidth capacity. WorldGate's digital platform provides up to 16 million
colors and will operate on the following models of digital boxes: GI DCT1000,
1200 and 2000 and WorldGate expects to operate on the GI DCT5000 and
Scientific-Atlanta's Explorer 2000 advanced digital cable boxes. The DCT 5000
and Explorer 2000 advanced digital boxes will also support our
picture-in-picture capabilities, allowing both the WORLDGATE Service and
television programming or advertising to be displayed at the same time. The
WORLDGATE Service over the digital platform is scheduled for deployment by
Bresnan and Comcast and is currently being tested by WorldGate and certain other
cable operators. According to Cablevision Blue Book (Summer/Fall 1999), over
four million of these digital boxes will have been shipped through December 31,
1999. All of these boxes can potentially be upgraded to support the WORLDGATE
Service through a centrally-administered software download.
Due to our ULTRA-THIN CLIENT/server architecture, WorldGate believes that
the WORLDGATE Service can be deployed on future generation digital boxes with
minimal development by WorldGate and minimal transition cost to cable operators
offering the WORLDGATE Service on the current-generation digital platform.
In addition to operating on two-way cable systems that allow bi-directional
transmissions and communications between the cable box and the cable operator's
central facility, the WorldGate platform is capable of operating over a one-way
cable system that allows transmissions and communications only from the cable
operator's central facility to the cable box. It is estimated that at least 55%
of U.S. cable homes are currently connected to one-way cable systems. On a
one-way cable system, it is possible to transmit data from the cable headend to
the subscriber using the one-way cable system but there is no available return
path. For these one-way systems, WorldGate can use the telephone system for the
return path. The response time of the WORLDGATE Service over two-way and one-way
cable plant would be similar for most functions except for slower responses over
one-way cable plant, during login and use of our CHANNEL HYPERLINKING
technology. WorldGate also believes that the slower speed for the telephone
system return path is not a problem for subscribers because of the generally low
bandwidth requirements for the return path.
WIRELESS CABLE REMOTE CONTROL AND OPTIONAL KEYBOARD. To access and input
data on the WORLDGATE Service, cable television subscribers can use either a
standard remote control provided with their advanced analog or digital cable
boxes, or optionally, an infrared wireless keyboard that may be
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provided as part of the WORLDGATE Service. WorldGate has designed this optional
keyboard to provide a full size keypad, pointing device and function keys
customized for our WORLDGATE Service, such as a CHANNEL HYPERLINKING key.
WorldGate expects cable operators to buy keyboards from WorldGate directly and
make them available to subscribers as part of the WORLDGATE Service package.
Cable operators may provide the optional keyboard to subscribers at no or
minimal monthly cost, or allow subscribers to purchase the keyboard.
[figure]
[WORLDGATE SERVER--HARDWARE & SOFTWARE]
[figure captioned WorldGate Server Hardware & Software depicting four linked
columns of boxes labeled "System Server," "Application Servers," "Multi-User
Client" and "Communications Manager." To the left of the first column is a
depiction of an Internet Web page connected by a line labeled "High Speed
DataLine" to the first column. The boxes in each of the columns are labeled:
"Billing," "Subscriber Data Base" and "Network Management--Network Monitoring of
Headend Equipment;" "Cluster Management," "E-Mail," "Web-based TV Listings" and
"CHANNEL HYPERLINKING Database;" "Session Manager--Manager Simultaneous Customer
Sessions," "Browser" and "Display Manager-- Formats and Encodes Browser Display
and "Data Inserter Sends Web Pages to Cable Customer" and "Data Demodulator
Receives Keystrokes from Cable Customer." To the right of the last column is a
depiction of a home television screen connected by a line labeled "Cable
Network" to the last column.]
SECURITY
The WORLDGATE Service uses a standard encryption protocol known as Secured
Sockets Layer to encrypt data. When a WorldGate session is initiated, the
WorldGate enabled cable box will send a log-in request to the WorldGate headend
server. The server then creates a unique master key. The master key will be
comprised of two keys: one key is known as the public key, which is used only
for encryption, and the second key is known as the private key, which is used
only for decryption. Only the public key will be transmitted back to the cable
box. The cable box then chooses two random 128 bit numbers, the session keys,
and encrypts them with the public portion of the master key before sending the
encrypted session keys back to the server. The server receives the encrypted
session keys and decrypts them with the private portion of its master key. As a
result, both the server and the cable box have available a pair of unique
session keys which may be used to encrypt and decrypt messages and thereby
communicate securely for that particular session.
ENGINEERING AND DEVELOPMENT
To date, engineering and development have been a significant focus of
WorldGate. Development of the WORLDGATE Service has required combining technical
experience and knowledge from two
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historically separate industries, the Internet and cable, as well as three years
of intensive efforts. The principal elements of WorldGate's engineering and
development activities are as follows:
CHANNEL HYPERLINKING. WorldGate has been developing and will continue to
develop the systems and hardware necessary to establish a centralized CHANNEL
HYPERLINKING control facility to enable advertisers to provide data necessary to
implement our CHANNEL HYPERLINKING technology on a large scale.
FEATURE ENHANCEMENTS. WorldGate intends to continue to expand features of
the system to integrate newly developed Web features, accessories and tools.
WorldGate has demonstrated picture-in-picture capability to allow Web pages and
television programs to be viewed at the same time and plans to support this
capability on the DCT 5000 and Explorer 2000 advanced digital cable boxes, and
to develop system enhancements to support the picture-in-picture capability on
other digital cable boxes. WorldGate also intends to develop system enhancements
that will enable consumers to listen to CD-quality audio while browsing the Web.
WorldGate is currently working to allow attachment of a printer to the WORLDGATE
Service.
To implement its engineering and development strategy, WorldGate has
assembled an engineering team from established industry players, such as General
Instrument and Hitachi, with strong backgrounds in real-time data communications
hardware and software, digital video, client-server software, Unix operating
systems, computer networking, circuit design and cable headend design.
SALES AND MARKETING
SALES. WorldGate utilizes its direct sales force and senior management,
including its Chief Executive Officer, to market the WORLDGATE Service. These
individuals work closely with the General Instrument and Scientific-Atlanta
sales forces to promote the WORLDGATE Service in the press, at trade shows and
conferences and through joint sales and marketing presentations worldwide.
Because WorldGate expects that the roll-out of WorldGate's service will in many
cases be tied to the introduction of new cable box deployments, it will remain
important and advantageous to WorldGate to have an integrated sales effort with
the major cable box manufacturers. WorldGate believes that its relationship with
these large industry sales forces will continue to provide efficient leads for
high volume sales. Currently, nine employees are dedicated to the sales efforts,
including our Senior Vice President of Sales and Marketing, the Vice President
and General Manager, and the Vice President, Affiliate Sales and Marketing.
MARKETING. WorldGate's marketing strategy is directed at four primary
constituencies: consumers, cable operators, programming content providers and
advertisers. To reach consumers, WorldGate provides cable operators with
promotional content for the WORLDGATE Service including local cable television
commercial spots and insertions for monthly cable billings, in addition to
utilizing the cable operators' extensive sales networks. Because WorldGate
markets itself as a family service, WorldGate has developed a series of
television commercials aimed at various demographic market segments, which are
customized for specific cable companies. In addition, WorldGate plans to develop
a training tape for customer service representatives to teach them how to sell
the WORLDGATE Service and how to answer commonly asked questions. WorldGate also
plans to create longer form commercials to sell the WORLDGATE Service over cable
television and ten-minute tutorial tapes to teach consumers how to use the
WORLDGATE Service. Standard print media for consumers include user guides,
point-of-purchase displays and low-cost bill stuffers. A monthly WorldGate news
magazine tailored to the subscriber base is also planned. To enhance the
potential penetration of the WORLDGATE Service, WorldGate is establishing its
name as a known trade and consumer brand.
To reach cable operators, WorldGate has focused its marketing efforts mainly
on trade advertising and promotions, which includes demonstrations at industry
conferences and print advertising in major
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weekly industry news publications such as MultiChannel News, Broadcasting and
Cable, CED and Cable World. WorldGate has made substantial investments in trade
show booths for cable shows such as the National Cable Television Association
Cable Show and The Western Show, and also plans to continue to share booths with
General Instrument and Scientific-Atlanta at various upcoming trade shows.
To reach programming content providers, WorldGate has developed an
aggressive program to establish distribution arrangements with various content
providers to develop content particularly suited to the WORLDGATE Service.
Through WorldGate's distribution of such content packages as part of the
WORLDGATE Service, these providers are offered access to a pervasive medium in
which television programming can be enriched by Internet materials, and in which
consumers can experience real-time, interaction with the programming. The
television-based nature of the WORLDGATE Service provides a natural portal for
interaction between the consumer and the programming offered by these content
providers.
WorldGate has established a team to market the WORLDGATE Service, including
the opportunities created by a television-based portal to the Internet, to
television programmers, advertisers and other content providers. WorldGate's
marketing efforts to television networks have focused primarily on cable
television networks and secondarily on the broadcast networks. We believe that
national cable television networks may have some advantages over broadcast
networks in providing our CHANNEL HYPERLINKING technology for their programming
because they do not have to contend with programming provided by numerous
affiliated local stations. Rather, just a few network feeds cover the entire
nation. We believe that our CHANNEL HYPERLINKING technology can turn the cable
television network of national programming into targeted, personalized
interactive content with very little effort on the part of television networks.
WorldGate sees value in partnering with television networks because
WorldGate believes that consumers will see value in interacting with their
favorite television programming.
WorldGate has developed a strategy to establish partnerships with television
programming content partners through distribution agreements. These distribution
agreements generally provide that our partner will provide link information and
Internet-based content particularly suited to the WORLDGATE Service and our
CHANNEL HYPERLINKING technology.
WorldGate believes that Internet and other information or service content
providers such as Citicorp and Zip2 can broaden their customer base by taking
advantage of our television-based WORLDGATE Service. The television-based nature
of the WORLDGATE Service provides a natural portal for interaction between the
consumer and the programming and other content offered by these content
providers.
WorldGate's marketing team also works with advertisers and advertising
agencies. We believe that interactive television advertising will grow
significantly in the future. WorldGate promotes the WORLDGATE Service for
television advertising directly to advertisers and top national and global
advertising agencies. In addition, WorldGate promotes the WORLDGATE Service
through the American Association of Advertising Agencies, whose members are
composed of the leading advertising agencies in the United States, and the
Association of National Advertisers, whose members are composed of advertisers.
WorldGate expects to provide value to advertisers and advertising agencies by
providing interactivity between broadcast television advertising and related
Internet content. Our CHANNEL HYPERLINKING technology is expected to combine
broad viewership of broadcast advertising with the immediacy and targeted nature
of direct marketing. During 1999, WorldGate has been working with Nielsen Media,
cable operators, television networks, advertisers and their advertising agencies
to complete a marketing study which will measure the effectiveness and value of
our CHANNEL HYPERLINKING technology for both interactive programming and
interactive advertising.
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CUSTOMER SERVICE AND SUPPORT
WorldGate has developed and maintains a sales support and customer service
network infrastructure to enable it to respond to cable operator and consumer
issues. WorldGate believes that most sales support and customer service requests
can be handled by WorldGate personnel via the telephone or the Internet.
Accordingly, WorldGate has set up a 24-hour and toll free telephone help-line to
assist cable operators having technical problems with WorldGate's software or
hardware. WorldGate also plans to monitor each cable headend system utilizing
the WORLDGATE Service in an effort to detect system problems before they become
apparent to consumers, and to remotely download software updates as needed from
its principal offices in Trevose, Pennsylvania. To assist domestic consumers
subscribing to the WORLDGATE Service, electronic on-line help is available 24
hours a day from any of the WORLDGATE Service screens. Additionally, WorldGate
intends to provide consumers with access to a telephonic help-line offering
pre-recorded answers to frequently asked questions for a nominal charge.
SYSTEM INTEGRATION
WorldGate utilizes contract manufacturing for substantially all of the major
hardware components and licenses technology necessary to provide the WORLDGATE
Service, thereby allowing WorldGate to focus resources on sales and marketing
and engineering and development related to the WORLDGATE Service. WorldGate does
not manufacture, nor does it have the capability to manufacture, any of the
components of the equipment used in providing the WORLDGATE Service. Rather,
WorldGate's internal manufacturing operations consist primarily of assembly of
prototypes, test engineering, materials purchasing, integration of equipment
components and inspection and quality control, all of which are performed at its
facilities in Trevose, Pennsylvania. Although WorldGate has not experienced any
material difficulties in obtaining supplies or manufactured products, any
termination of the license of the technology used on the WorldGate platform or
any reduction or interruption in supply or manufacturing from these third-party
contractors would adversely affect its ability to deliver its products.
INTELLECTUAL PROPERTY
We regard our technology as proprietary, and we rely on a combination of
patents, copyrights, trademarks, trade secret laws, contractual restrictions,
restrictions on disclosure and other methods to establish and protect our
technology and proprietary rights and information. We have filed patent
applications in the United States and internationally covering aspects of our
real-time, two-way interactive systems, including our ULTRA-THIN CLIENT
architecture, centralized data processing, communications schemes and our
CHANNEL HYPERLINKING technology. The patent application for our ULTRA-THIN
CLIENT architecture relates to a system and method for accessing an information
source without the need for a personal computer, and more particularly to the
access of such information source through the use of the existing television
distribution systems. In June 1999, we received notification from the U.S.
Patent and Trademark Office that all 60 claims of the patent application for our
ULTRA-THIN CLIENT architecture had been allowed. The patent application for our
CHANNEL HYPERLINKING technology relates to a system and method for providing
interactive access to an information source, such as the Internet, through a
networked distribution system, such as television programming. In May 1999, we
received notification that all 62 claims of the patent application for our
CHANNEL HYPERLINKING technology had been allowed. Although we have already
received a notice of allowance on these two pending applications, we cannot
assure you that any patent will issue from these applications or that, if
issued, any claims allowed will be sufficiently broad to protect our technology.
In addition, we cannot assure you that any patents that may be issued will not
be challenged, invalidated or circumvented, or that any rights granted to us
would provide us with proprietary protection. The failure of any patents to
protect our technology may make it easier for our
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competitors to offer technology equivalent or superior to our technology. We
also generally enter into confidentiality agreements with our employees and
consultants, and when possible, customers, partners and others to control access
to and distribution of our documentation and other proprietary information.
Despite these precautions, a third party may copy or otherwise obtain and use
our products, services or technology without authorization, or develop similar
technology independently. In addition, effective patent, copyright, trademark
and trade secret protection depends on the various forms of liability for
infringement. Legislators both domestically and internationally are grappling
with these issues, and the case law in this area is not fully developed.
Moreover, protection may be unavailable or limited particularly in some foreign
countries, and the global nature of the Internet makes it virtually impossible
to control the ultimate destination of our content offerings. Policing
unauthorized use of our content offerings is difficult. There can be no
assurance that the steps taken by us will prevent misappropriation or
infringement of our technology. In addition, litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade secrets
or to determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, financial condition and
results of operations. We are subject to litigation brought by others claiming
that we infringe their intellectual property. See "--Legal Proceedings."
COMPETITION
The market for consumer Internet services is extremely competitive, and
WorldGate expects that competition will intensify in the future. Access to the
Internet is currently available through several methods including:
- telephone access through a personal computer,
- telephone access through a television,
- cable access through a personal computer, and
- cable access through a television.
While these various methods of Internet access and types of services offered
may be construed as competitive, they may also be complementary. Household
members may prefer to use different methods of Internet service/access based on
availability and their intended business or leisure use. WorldGate is working
with some of the companies described below to find ways to combine their product
and service offerings with those of WorldGate.
TELEPHONE ACCESS THROUGH A PERSONAL COMPUTER. Currently, the majority of
Internet users utilize a personal computer and a modem to access the Internet
over a telephone line through a connection to an Internet service provider
("ISP") such as America Online, Earthlink or MindSpring. WorldGate believes that
this mode of Internet access may be limited by:
- the complexity, maintenance and obsolescence issues usually associated
with a personal computer,
- bandwidth constraints of using dial-up modems with peak data transmission
speeds of 56 Kbps that may result in significant dial-up connection times
and delays, and
- expenses including:
- investment that may be required for a personal computer and a modem,
- ISP's monthly fees, which WorldGate believes generally range from
$10-$22 per month,
- possible telephone access charges, and
- the total number of users that may be simultaneously connected to an
ISP.
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Recent advancements within telephone systems may mitigate some of the above
factors. Integrated Services Digital Network ("ISDN") technology enables a peak
data transmission speed of 128 Kbps between the user and the ISP over specially
conditioned telephone lines. Although ISDN technology has been available for
several years, WorldGate believes that it has not been widely deployed due
primarily to its relatively high costs. Asymmetric Digital Subscriber Line
("ADSL") technology is currently the most common implementation of Digital
Subscriber Line ("xDSL") technology. ADSL enables peak data transmission speeds
of 8.4 Mbps downstream from the ISP to the user and 640 Kbps upstream from the
user to the ISP. Bell Atlantic and America Online, Inc. have announced an
agreement to provide high-speed DSL access as a premium upgrade to AOL
subscribers in Bell Atlantic's service area, as the technology becomes available
in major markets. The DSL upgrade is expected to cost AOL subscribers about an
extra $20 per month, bringing the cost of the service (about $40) in line with
cable modem service. The most recent announcement is AOL's agreement with GTE,
which gives AOL access to GTE's ADSL lines, expected to reach 4 million
households in 17 states by the end of this year. AOL plans to upgrade customers
for an additional $20 per month. AOL has signed similar agreements with
Ameritech and SBC Communications.
In addition to telephone based access, satellite based access may be an
alternative. Satellite-delivered approaches such as direct broadcast satellite
("DBS") currently provide a peak data transmission speed of approximately 400
Kbps downstream and rely on dial-up modems and the telephone network for
upstream transmission ("telephone return"). In addition to the telephone
limitations discussed above, these approaches have limitations on the ability to
expand their services due to the necessity of dividing a finite amount of
satellite bandwidth among subscribers in a broad geographic area. Other wireless
offerings rely on ground-based radios instead of satellites. These offerings
include multichannel multipoint distribution service ("MMDS") and local
multipoint distribution service ("LMDS"), which are one-way and two-way
high-bandwidth wireless digital broadcasting systems, respectively. MMDS and
LMDS are not yet widely available, require unobstructed "line-of-sight"
transmission paths and may require additional radio frequency spectrum
allocations, an entirely new distribution infrastructure and new equipment,
including specialized radio modems.
TELEPHONE ACCESS THROUGH A TELEVISION. Set-top appliances, such as those
provided by WebTV, have been introduced to provide Internet access through
telephone lines to a television without requiring a personal computer.
Additional offerings for this type of service have recently been announced by
Net Channel, the assets of which have been acquired by America Online, as well
as other set-top appliance manufacturers such as American Interactive Media, The
Thomson Corporation, Teknema and Mitsubishi Electronics America, Inc. Although
such access solutions do not require a personal computer or personal computer
expertise, WorldGate believes that this mode of Internet access may be limited
by:
- the need to purchase a dedicated or "single-purpose" set-top appliance
which typically costs approximately $99-$199 and exposes the consumer to
risks of equipment obsolescence,
- the telephone bandwidth constraints discussed above,
- monthly subscription fees that may be up to $25 per month in addition to
any telephone access charges, and
- functional limitations such as the inability to support CD-quality audio
and Java-based applications, including instant messaging and chat rooms.
CABLE ACCESS THROUGH A PERSONAL COMPUTER. In order to leverage the
broadband infrastructure of cable television systems, several services have been
launched to provide high-speed Internet access and content to cable subscribers
with personal computers. Companies in this segment include At Home and Road
Runner. WorldGate believes that subscribers to these services require a separate
high-speed cable
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modem with an installation cost of approximately $40-$100 and that additional
costs are also incurred for monthly subscription fees and cable access charges
in the range of $30-$40. These high-speed cable modems, while generally
providing higher speed Internet access than dial-up access, typically require
extensive and costly cable network upgrades.
CABLE ACCESS THROUGH A TELEVISION. Various companies are attempting to
provide Internet access to cable television consumers through a set-top
appliance connected to a television. In some instances this appliance may be a
dedicated unit, such as is currently utilized by ICTV and the Interactive
Channel, or a cable converter box, such as that utilized by the WORLDGATE
Service and Liberate. Generally, these solutions are cable-based and do not use
the telephone infrastructure. Accordingly, these solutions generally overcome
the bandwidth constraints typically associated with the telephone
infrastructure. The use, however, of a dedicated unit adds incremental costs
which are not present when the service is offered directly over a cable box.
Furthermore, analog-based services such as that currently offered by ICTV
require the use of one dedicated full video channel for the downstream path for
each user, which is less attractive to cable operators since such channel(s) can
no longer be used for television programming or other revenue generating
services. The WORLDGATE Service's analog platform, however, does not require a
dedicated video channel as a result of the use of the vertical blanking interval
for the downstream path. See "--Technology." Cable operators offering the
WORLDGATE Service on a digital platform will need to provide a dedicated video
channel, but it will alone support the expected usage of hundreds of WORLDGATE
Service subscribers.
Companies such as Wink and Intel broadcast supplementary text and/or
graphics information which is displayed on televisions to enhance the television
viewing experience. Typically, these systems are one-way unless a telephone and
modem is available for the return path. It is also possible for these systems to
use the pay per view polling mechanism to retrieve limited data from the
subscriber.
WorldGate believes that there are many factors which can affect success
within this market. Key factors include:
- transmission speed,
- ease-of-use,
- price,
- reliability of service,
- ease of access,
- obsolescence,
- content quality,
- quality of presentation,
- timeliness of content,
- customer support,
- brand recognition,
- operating experience,
- revenue sharing, and
- with respect to advertisers, the number of users, duration and frequency
of visits and user demographics.
LEGAL PROCEEDINGS
On May 11, 1998, Interactive Channel Technologies, Inc. and SMI Holdings,
Inc., subsidiaries of Source Media, Inc. ("Source"), filed a complaint against
us in the United States District Court for the District of Delaware, alleging
that the WORLDGATE Service infringes patents issued to Source. The complaint
seeks injunctive relief, as well as monetary damages and attorney fees. In our
answer filed on June 22, 1998, we have denied these allegations and further
asserted that the patents in suit were invalid. In addition we have filed
multiple counterclaims against Source asserting that Source misappropriated our
confidential information and trade secrets, and intentionally and tortiously
interfered with our existing and prospective business relationships, which
counterclaims Source has subsequently moved to dismiss. Source's motion was
subsequently denied and discovery is now proceeding.
On October 6, 1998, Advanced Interactive, Inc. ("AII") filed a complaint in
the United States District Court for the Northern District of Illinois, Eastern
Division, against Matsushita Electric Corporation, Matsushita Electric
Industrial Co. Ltd., Sharp Electronics, Corp., Sharp Corp., Interactive
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Channel Technologies, Thomson Consumer Electronics, Toshiba Consumer Products,
Inc., Toshiba America, Inc., Toshiba Corporation, General Instrument
Corporation, Scientific-Atlanta, Inc., ATI Technologies, Inc., ADS Technologies
Inc., Gateway 2000, Inc., STB Systems, Inc., Hauppauge Computer Works, Inc.,
WebTV Networks, Inc. and us, alleging that each of the above companies infringed
a patent issued to AII. The complaint seeks monetary damages and attorney fees.
In our answer filed on December 2, 1998, we have denied these allegations and
further asserted that the patent in suit was invalid. Subsequently, the
defendants have filed a joint motion for partial summary adjudication of claim
construction issues which remains pending, and plaintiff has filed a motion for
summary judgment which was denied. Limited discovery is now proceeding.
If the plaintiffs win either of the above lawsuits, we could be precluded
from offering the WORLDGATE Service. We intend to vigorously defend these
matters, but, as with any patent litigation, there can be no assurance that the
plaintiffs will not prevail and obtain damages and, in the event that the
plaintiffs would not accept an ongoing royalty, an injunction could issue in
which case we could be precluded from offering the WORLDGATE Service. From time
to time, others may assert infringement claims against us in the future.
Except as stated above, we are not currently involved in any material legal
proceedings.
EMPLOYEES
As of June 30, 1999, we employed 152 full-time employees and had 14
independent contractors. All of our employees and independent contractors are
located in Trevose, Pennsylvania, except for an aggregate of four sales people
located in Colorado, Florida and Georgia. None of our employees is represented
by a labor union, and we have no collective bargaining agreement. We believe
that our relations with our employees are good.
FACILITIES
Our corporate headquarters is currently located in Trevose, Pennsylvania in
a leased facility consisting of approximately 60,000 square feet. The lease for
this space will expire in June 2009, with an option to extend for an additional
10 years.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------- --- -----------------------------------
<S> <C> <C>
Hal M. Krisbergh(1)................ 52 Chairman and Chief Executive
Officer
Joseph E. Augenbraun............... 35 Vice President, Engineering
Scott B. Campbell.................. 52 Vice President, Business
Development
Randall J. Gort.................... 50 Vice President, General Counsel and
Secretary
Gerard K. Kunkel................... 41 Senior Vice President, Sales and
Marketing
Jae Hea Edward Lee................. 36 Vice President, Operations
Peter C. Mondics................... 46 Vice President, Affiliate Sales and
Marketing
Kenneth P. Nimmer.................. 60 Vice President, Consumer Marketing
Christine K. Van Horne............. 49 Treasurer
David E. Wachob(2)................. 45 Director, Vice President and
General Manager
Thomas G. Baxter................... 53 Director
Alan Gerry(1)...................... 71 Director
Marcia J. Hooper(1)(2)............. 45 Director
Ronald A. Walter(2)................ 57 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
HAL M. KRISBERGH has been with WorldGate since its inception in March 1995.
From September 1981 to September 1994, Mr. Krisbergh was an executive officer of
General Instrument. Mr. Krisbergh served as President of General Instrument's
Communications Division and, for the past 15 years, has been a well-known figure
in the cable industry. He is a recognized leader in the development of
addressable cable boxes, impulse pay-per-view, optoelectronics and digital audio
technologies. In 1991, Mr. Krisbergh received cable television's prestigious
Vanguard award. Prior to joining General Instrument, Mr. Krisbergh was employed
by W. R. Grace & Co., Deloitte & Touche and Raytheon Company.
JOSEPH E. AUGENBRAUN joined WorldGate in August 1995. Mr. Augenbraun is
responsible for the management of the hardware and software teams developing the
WorldGate platform. From August 1992 to August 1995, Mr. Augenbraun was a
researcher for Hitachi's HDTV Advanced Television and Systems Laboratory. From
November 1987 to August 1992, Mr. Augenbraun was on the engineering staff at
Commodore-Amiga Inc, where he served in various capacities including Project
Manager on the Amiga 1500 Computer System and lead designer in ASIC development.
SCOTT B. CAMPBELL joined WorldGate in February 1997. Mr. Campbell was
President of Genesis International Group, a consulting firm to the cable
industry, from November 1993 to February 1997. Before that he was at Home
Shopping Network, where he served in various management and sales positions,
including: from March 1992 to February 1993 as Executive Vice
President/Diversified Marketing and Media Services, from July 1989 to March 1992
as Senior Vice President/Affiliate Relations, and from July 1986 to July 1989 as
Senior Vice President/Marketing and Sales.
RANDALL J. GORT joined WorldGate in August 1997. From July 1995 to August
1997, Mr. Gort was General Counsel, Secretary, and Director of Legal and
Corporate Affairs for Integrated Circuit Systems, Inc. Mr. Gort was in private
practice from August 1994 through June 1995. Prior to that time, he was an
Associate General Counsel for Commodore International Ltd. from May 1987 through
July 1994. Mr. Gort was with Schlumberger Ltd. from October 1982 through early
1987, originally as
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Senior Attorney and then as General Counsel, FACTRON Division. From April 1979
through October 1982, Mr. Gort was Counsel for various divisions of the 3M
Company, including Medical and Surgical Products Divisions, Orthopedic Products
Division, Electro-Mechanical Resources Division and 3M's four Tape divisions.
GERARD K. KUNKEL joined WorldGate in February 1997. Mr. Kunkel is
responsible for domestic sales and marketing as well as the development and
deployment of WorldGate's CHANNEL HYPERLINKING business and technology. From May
1995 to February 1997, Mr. Kunkel was President of Broadband Applications
Development Company. From March 1993 to April 1995, he served as Vice President,
Product Development of StarNet, Inc. From June 1991 to March 1993, Mr. Kunkel
was President of The Kunkel Group. From May 1984 to June 1991, Mr. Kunkel was
Director of Design and Electronic Publishing for PC MAGAZINE. For the period
1977 through 1984, Mr. Kunkel was an award winning art director for various New
York City based magazines.
JAE HEA EDWARD LEE has been with WorldGate since its inception in March
1995. Mr. Lee is responsible for all manufacturing, quality assurance, field
operations and information technology. From October 1991 through January 1995,
Mr. Lee was General Manager and then President of RGB Industries, Inc., a
manufacturing and import/export business. From September 1987 to October 1991,
Mr. Lee was a Design Engineer for General Instrument's Jerrold Division, where
his responsibilities included the development of application specific integrated
circuits and management of the division's engineering local area network.
PETER C. MONDICS has been with WorldGate since March 1996. From January 1994
through February 1996, Mr. Mondics was a principal with New Ventures Business
Planning, a corporation formed to conceptualize, model, create and distribute
new business models for clients seeking entry into the cable operator, phone and
wireless distributed service businesses. From February 1991 to December 1993,
Mr. Mondics was President of NuStar, Inc. and Executive Vice-President of
StarNet, NuStar's parent entity. From February 1987 to January 1991, Mr. Mondics
was Vice-President of NuStar's Network Sales. Mr. Mondics was Eastern Regional
Vice-President of Financial News Network from June 1984 to January 1987 and
Marketing Manager for Home Box Office from May 1981 to May 1984.
KENNETH P. NIMMER has served WorldGate as a consultant since its inception
in March 1995, and became an employee of WorldGate in March 1999. Mr. Nimmer is
responsible for Consumer Marketing and Customer Support. From January 1985 to
March 1997, Mr. Nimmer was an executive at General Instrument where he
co-developed programming enterprises such as Cable Video Store, Cable Catalog
Store, Cine Canal and Movie Choice. Prior to General Instrument, from February
1983 to January 1985, Mr. Nimmer was a co-founder and Senior Vice President and
General Manager of the Nostalgia Network, now known as Good Life Television.
Prior to joining the Nostalgia Network, Mr. Nimmer worked in higher education
for 12 years.
CHRISTINE K. VAN HORNE has been with WorldGate since June 1999. From May
1992 to August 1998, Ms. Van Horne was Assistant Treasurer of Comcast
Corporation, where she was responsible for managing the capital structure of
Comcast's operating subsidiaries. From March 1987 to April 1992, Ms. Van Horne
was Corporate Finance Manager at Comcast. Prior to joining Comcast, Ms. Van
Horne held financial positions with Meritor Financial Group and UGI Corporation.
DAVID E. WACHOB has been with WorldGate since its inception in March 1995.
Between 1991 and 1995, Mr. Wachob was President of Network Resources
Incorporated, an independent consulting company for the cable, cellular,
telecommunications and consumer electronics industries. From June 1988 to
September 1991, Mr. Wachob was Director of Advanced Technologies for General
Instrument where he managed strategic planning, market research, technical
assessment and business development of advanced technologies for the cable
television industry. Mr. Wachob's other positions
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with General Instrument included, from July 1986 to June 1988, Manager of
Product Support Engineering, and from November 1984 to July 1986, Radio
Frequency Systems Engineer.
THOMAS G. BAXTER has been a member of WorldGate's board of directors since
July 1998. Mr. Baxter has been an operating partner in the investment banking
firm of Evercore Partners since June 1998. Mr. Baxter is also a director of
C-SPAN and Dycom Industries, Inc. Prior to his current position Mr. Baxter
served as President of Comcast's cable subsidiary, Comcast Cable Communications,
Inc., the nation's fifth largest cable television operation at that time, from
January 1990 to January 1998. Mr. Baxter was also responsible for the operations
of Comcast's telephone and cable systems in the United Kingdom. Prior to joining
Comcast Mr. Baxter held executive positions with Cablevision Systems Corporation
and Time Warner Entertainment Company, Inc.
ALAN GERRY has been a member of WorldGate's board of directors since April
1997. Mr. Gerry founded Granite Associates, L.P., a private investment company,
and presently serves as its Chairman and Chief Executive Officer. Mr. Gerry was
the founder, and for at least the last 3 years prior to 1996, he was the
Chairman and Chief Executive Officer of Cablevision Industries Corporation, the
eighth largest multiple system operator in the United States, with over 1.3
million subscribers at the time of its merger with Time Warner Inc. in 1996. Mr.
Gerry has been the recipient of numerous awards and citations including the
cable television industry's prestigious Vanguard Award for Distinguished
Leadership, which he received in 1995. Mr. Gerry is a veteran of the U.S. Marine
Corps.
MARCIA J. HOOPER has been a member of WorldGate's board of directors since
April 1997. Ms. Hooper has been a partner with the Information Technology Group
of Advent International Corporation since May 1996. Ms. Hooper is also a
director of Interleaf, Inc., Signal Internet Technologies, Inc., LionBridge
Technology, Inc., PolyMedica Industries, Inc. and Wang Laboratories, Inc. In
July 1994 Ms. Hooper co-founded Viking Capital Group, Inc., a venture firm
focused on early stage investments. From May 1979 to July 1994, Ms. Hooper was
employed as a general partner with Paine Webber/Ampersand Ventures.
RONALD A. WALTER has been a member of WorldGate's board of directors since
April 1998. Mr. Walter is Executive Vice President of CitiGroup Investments,
Inc., and has been a senior officer of Citicorp and Citibank, N.A. since May
1979. He serves as Director of Investments for Citicorp's proprietary long-term
equity investment program and manages the investment program for the assets
supporting Citigroup's employee benefit programs. His previous experience with
Citicorp includes serving as Secretary of Citicorp's Finance Committee, Head of
Strategic Analysis and Chief Financial Officer for the company's equipment
finance and leasing business. Mr. Walter was a member of the Urban Planning
faculty at MIT and was part of the management team responsible for ending the
financial crisis in the City of New York.
BOARD OF DIRECTORS AND COMMITTEES
Each director is elected to hold office until the next annual meeting of
stockholders and until his or her respective successor is elected and qualified.
The board of directors has a compensation and stock option committee (the
"Compensation Committee") which makes recommendations to the board concerning
the compensation and benefits programs for its directors, officers and
employees, including all stock options granted under WorldGate's 1996 stock
option plan. Currently, the Compensation Committee is composed of Messrs.
Krisbergh and Gerry and Ms. Hooper. The board also has an audit committee which
is composed of Mr. Wachob and two outside directors, Mr. Walter and Ms. Hooper.
COMPENSATION OF DIRECTORS
Mr. Baxter and Ms. Hooper are reimbursed for travel and other expenses
related to their service on the board of directors. In addition, WorldGate pays
to Mr. Baxter a stipend of $1,000 for each
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board meeting he attends in person and, on September 16, 1998 and March 17,
1999, WorldGate granted to him options to purchase 6,666 and 3,333 shares of
common stock, respectively, at an average weighted exercise price of $8.50 per
share. These options will vest in four equal annual installments on the
anniversary of the grant date. Other than Mr. Baxter and Ms. Hooper, no other
board member is reimbursed for his or her travel and other expenses or
compensated for his or her service on the board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
With the exception of Mr. Krisbergh, no member of the Compensation Committee
is an officer or employee of WorldGate. Mr. Krisbergh does not, however,
participate in the determination of his own compensation. No executive officer
of WorldGate serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving on the
Compensation Committee.
EMPLOYMENT AGREEMENTS
No employee of WorldGate has entered into an employment agreement with
WorldGate.
BONUS PLAN
WorldGate has established a bonus plan which provides for the payment of
bonuses to executive officers and other employees based upon the performance of
WorldGate, the performance of the business division of which the officer or
employee is a member and the performance of the officer or employee. Under this
plan, WorldGate generally assesses the prior year's performance and makes bonus
payments during the first calendar quarter of each year.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid in
fiscal year 1998 with respect to WorldGate's chief executive officer and our
four other most highly compensated executive officers. The bonuses listed below,
which had been accrued and reflected in the 1998 results, have since been paid.
SUMMARY COMPENSATION TABLE
FISCAL YEAR 1998
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- ------------------------------------------------------------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Hal M. Krisbergh
Chairman and Chief Executive Officer $320,250(1) $144,113 $ -- $ --
David A. Dill (2)
Chief Financial Officer 193,218 67,626 -- --
Scott B. Campbell
Vice President, Business Development 160,000 48,000 -- --
Peter C. Mondics
Vice President, Affiliate Sales and Marketing 159,375 47,813 -- --
David E. Wachob
Director, Vice President and General Manager 149,450 44,835 -- --
</TABLE>
- ------------------------
(1) In 1998, $66,250 of Mr. Krisbergh's salary had been accrued but not paid.
This has since been paid.
(2) In August 1999, Mr. Dill resigned as our chief financial officer and as an
employee of WorldGate. Mr. Dill will continue to serve on a part-time basis
as a member of our financial advisory committee.
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No options were granted to any executive officer named in the Summary
Compensation Table in 1998. Since December 31, 1998, Messrs. Dill, Campbell,
Mondics and Wachob have each been granted options to purchase 13,333 shares of
common stock at an exercise price of $16.50 per share.
The following table sets forth information concerning options exercised
during 1998 and the number and the hypothetical value of unexercised options of
WorldGate held by the executive officers named in the Summary Compensation Table
as of December 31, 1998. This table is presented solely for purposes of
complying with the Commission rules and does not necessarily reflect the amounts
the optionees will actually receive upon any sale of the shares acquired upon
exercise of the options. There was no public market for the common stock as of
December 31, 1998. The values of the unexercised in-the-money options at
December 31, 1998 have been calculated using a price of $7.50 per share, the
fair market value of the common stock as of December 31, 1998, as determined by
the board of directors on the basis of its assessment of WorldGate's prospects,
financial condition and results of operations as of that date, less the
aggregate exercise price. The values of the unexercised in-the-money options
based on the public offering price have been calculated using a price of $22.88
per share, the closing price on September 30, 1999, less the aggregate exercise
price.
AGGREGATE OPTION EXERCISES AND
LAST FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
---------------------------
VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-
SHARES OPTIONS AT MONEY OPTIONS
ACQUIRED DECEMBER 31, 1998 DECEMBER 31, 1998
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Scott B. Campbell -- -- 15,000 45,000 $78,750 $236,250
Peter C. Mondics -- -- 16,666 50,000 95,309 285,938
<CAPTION>
VALUE OF UNEXERCISED IN- THE-
MONEY OPTIONS BASED ON THE
PUBLIC OFFERING PRICE
--------------------------------------------
NAME EXERCISABLE UNEXERCISABLE
- ------------------------------ ------------------ -----------------------
<S> <C> <C>
Scott B. Campbell $309,375 $ 928,125
Peter C. Mondics 351,548 1,054,688
</TABLE>
KEY MAN INSURANCE
WorldGate maintains key man insurance policies in the amounts of $3.0
million on Hal Krisbergh and $1.0 million on David Wachob.
STOCK OPTION PLAN
WorldGate has one stock option plan, the 1996 stock option plan, as amended,
under which, as of June 30, 1999, options for 895,965 shares of common stock
were outstanding and options for an additional 704,035 shares were available for
future grants. Outstanding options are exercisable at prices ranging from $.75
to $27.00 per share. The maximum number of shares of common stock reserved for
the grant or settlement of awards under the stock option plan is 1,600,000,
subject to stockholder approval for an increase of 666,667 shares available
under the stock option plan and to adjustment as provided in the plan in the
event of changes to WorldGate's capital structure, such as stock dividends,
stock splits or other recapitalizations. Generally, outstanding options vest in
equal installments over a four-year period, but in no event may an option be
exercised more than ten years following the date of its grant, subject to
acceleration in the event of some changes of control of WorldGate.
The stock option plan is intended to promote the long term financial
interests and growth of WorldGate by providing employees, officers, directors
and consultants of WorldGate with appropriate incentives and rewards to enter
into and continue in the employ of, or their relationship with, WorldGate. The
stock option plan gives recipients the opportunity to acquire a proprietary
interest in the long-term success of WorldGate and rewards the performance of
individual officers, other employees, consultants and directors in fulfilling
their responsibilities for long-range achievements.
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<PAGE>
The stock option plan provides for the granting of awards to such officers,
other employees, consultants and directors of WorldGate and its affiliates as
the Compensation Committee may select from time to time. If any shares subject
to an award are forfeited, canceled, exchanged or surrendered or if an award
otherwise terminates or expires without a distribution of shares to the holder
of such award, the shares of common stock with respect to such award will, to
the extent of any such forfeiture, cancellation, exchange, surrender,
termination or expiration, again be available for awards under the stock option
plan.
The Compensation Committee has the authority to administer the stock option
plan and to exercise all the powers and authorities either specifically granted
to it under, or necessary or advisable in the administration of, the stock
option plan, including, without limitation, the authority to grant awards; to
determine the persons to whom and the time or times at which awards shall be
granted; to determine the type and number of awards to be granted, the number of
shares of common stock to which an award may relate and the terms, conditions,
restrictions and performance goals relating to any award; to determine whether,
to what extent, and under what circumstances an award may be settled, canceled,
forfeited, exchanged, or surrendered; to make adjustments in the performance
goals in recognition of unusual or non-recurring events affecting WorldGate or
the financial statements of WorldGate (to the extent not inconsistent with
Section 162(m) of the Code, if applicable), or in response to changes in
applicable laws, regulations, or accounting principles; to construe and
interpret the stock option plan and any award; to prescribe, amend and rescind
rules and regulations relating to the stock option plan; to determine the terms
and provisions of agreements evidencing awards; and to make all other
determinations deemed necessary or advisable for the administration of the stock
option plan.
The purchase price per share payable upon the exercise of an option (the
"option exercise price") will be established by the Compensation Committee,
provided, however, that Incentive Stock Options may not have an option exercise
price less than the fair market value of a share of common stock on the date of
grant. The option exercise price is payable by any one of the following methods
or a combination thereof, to the extent permitted by the Compensation Committee:
- in cash or by check or wire transfer,
- subject to the approval of the Compensation Committee, in common stock
owned by the participant for at least six months prior to the date of
exercise and valued at their fair market value on the effective date of
such exercise, or
- subject to the approval of the Compensation Committee, by such other
provision as the Compensation Committee may from time to time authorize.
The board of directors or the Compensation Committee may suspend, revise,
terminate or amend the stock option plan at any time, provided, however, that:
- stockholder approval will be obtained if and to the extent required under
Rule 16b-3 promulgated under the Exchange Act or if and to the extent the
board determines that such approval is required for purposes of satisfying
Section 162(m) or Section 422 of the Code, and
- no such suspension, revision, termination or amendment may, without the
consent of a participant, reduce the participant's rights under any
outstanding award.
Section 162(m) of the Code limits the extent to which remuneration paid to a
chief executive officer or the four other highest compensated executive officers
is deductible by a publicly held corporation when the remuneration for any of
these executive officers exceeds $1,000,000 in a taxable year. When a named
executive officer exercises an option which is not an incentive stock option, or
makes a disqualifying disposition of stock acquired by exercising an incentive
stock option, the
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<PAGE>
executive officer generally recognizes income. WorldGate's deduction with
respect to that income will not be limited to $1,000,000 if the requirements of
Section 162(m) of the Code are met.
CERTAIN TRANSACTIONS
RESTRUCTURING. We were organized in March 1995 as a Pennsylvania limited
liability company (the "LLC"). In December 1996, the LLC was merged with and
into WorldGate as a result of which all assets and liabilities of the LLC were
transferred to us. Pursuant to the merger, the members of the LLC (collectively,
the "Management Stockholders") received an aggregate of 9,100,801 shares of our
common stock in exchange for the cancellation of their membership interests in
the LLC, including the shares of common stock received by the following
management employees: Hal M. Krisbergh-- 6,776,780 shares, David E.
Wachob--608,312 shares, Joseph E. Augenbraun--333,850 shares, Jae Hea E.
Lee--333,850 shares, and Randall J. Gort--259,750 shares. An additional 369,989
shares were received by David A. Dill, the former chief financial officer of
WorldGate, who has since resigned from WorldGate. Of the total shares allocated
to the Management Stockholders, 808,733 shares of our common stock were issued
subject to vesting over a defined period as described further in the "Management
Shareholders' Agreement" discussed below.
PREFERRED STOCK FINANCINGS. Prior to our initial public offering, we have
financed substantially all of our operations to date from private placements of
preferred stock, a capital contribution from stockholders, a $2.0 million line
of credit and the issuance of our $6.0 million face-amount of our discounted
notes. Each share of our series A preferred stock was initially convertible into
two shares of our common stock, each share of our series B preferred stock was
initially convertible into one share of our common stock and each share of our
series C preferred stock was initially convertible to one share of our common
stock, subject to some anti-dilution protections. As a result of the stock
split, each share of our series A preferred stock converted into one and
one-third shares of our common stock, each share of our series B preferred stock
converted into two-thirds of a share of our common stock and each share of our
series C preferred stock converted into two-thirds of a share of our common
stock. Each of these series of stock automatically converted into common stock
upon the closing of our initial public offering in April 1999.
From December 1996 through July 1997, we sold an aggregate of 2,752,111
shares of our series A preferred stock at a purchase price of $4.395 per share
to various investors, including Citicorp, AMP Incorporated, Alan Gerry,
Motorola, funds affiliated with Advent International Corporation, Needham &
Company, Paul Kagan, Scientific-Atlanta and General Instrument (collectively,
the "series A investors").
From November 1997 through January 1998, we sold an aggregate of 2,803,031
shares of our series B preferred stock at a purchase price of $7.10 per share to
various investors, including Citicorp, Needham & Company, H.F. Lenfest, Charter
and Paul Kagan (collectively, the "series B investors").
From September 1998 through February 1999, we sold an aggregate of 1,529,714
shares of our series C preferred stock at a purchase price of $11.00 per share
to various investors, including Citicorp, Needham & Company, General Instrument,
Scientific-Atlanta, Charter, Showtime and XL Capital L.L.C. (collectively, the
"series C investors").
In March 1999, we received proceeds of approximately $912,000 and $4,558,000
through the issuance of $1,000,000 and $5,000,000 of notes payable with a stated
interest rate of 12.48% due September 1999 and December 1999, respectively. In
connection with the issuance of these notes payable, the holders of these notes
received warrants to purchase up to 331,490 shares of common stock at an
exercise price of $16.50 per share. These notes became immediately due, and were
paid, upon the completion of WorldGate's initial public offering.
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<PAGE>
STOCKHOLDERS' AGREEMENT. The series A investors, the series B investors,
series C investors, Messrs. Krisbergh and Wachob, some other management
personnel of WorldGate, WorldGate and other stockholders are parties to a
stockholders' agreement. Pursuant to the stockholders' agreement:
- Hal M. Krisbergh designated David E. Wachob, Alan Gerry and Thomas G.
Baxter,
- Motorola designated Graham Pattison, who has since resigned as a member of
our board of directors in connection with his resignation from Motorola,
- the series A investors, other than Motorola, designated Marcia J. Hooper,
and
- the series B investors designated Ronald A. Walter
to our board of directors. The material provisions of the stockholders'
agreement terminated upon the consummation of our initial public offering in
April 1999, except for the registration rights provided in the stockholder's
agreement. See "Shares Eligible for Future Sale--Registration Rights."
OFFICER LOANS. During the fall of 1996, we borrowed approximately $350,000
from Hal M. Krisbergh in exchange for a seven percent demand note which was
repaid in full out of the proceeds of the initial series A preferred stock
financing.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table contains information as of September 30, 1999 regarding
beneficial ownership of the common stock by the following persons:
- each person who is known to us to own beneficially more than 5% of the
outstanding shares of common stock,
- each director of WorldGate,
- each officer of WorldGate named in the executive compensation table above,
- all directors and executive officers of WorldGate as a group, and
- the selling stockholders.
Unless otherwise indicated below, to our knowledge, all persons listed below
have sole voting and investment power with respect to their shares of common
stock, except to the extent authority is shared by spouses under applicable law.
Beneficial ownership is determined in accordance with the rules of the SEC,
based on factors including voting and investment power with respect to shares,
subject to applicable community property laws. Shares of common stock subject to
options or warrants exercisable within 60 days of September 30, 1999 are deemed
outstanding for the purpose of computing the percentage ownership of the person
holding such options or warrants, but are not deemed outstanding for computing
the percentage ownership of any other person. See "Certain
Transactions--Preferred Stock Financings."
Unless otherwise indicated, the mailing address of the beneficial owners is
3190 Tremont Avenue, Suite 100, Trevose, Pennsylvania 19053.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------- NUMBER OF -------------------------
NUMBER OF SHARES BEING NUMBER OF
NAME OF BENEFICIAL OWNERS SHARES PERCENTAGE OFFERED SHARES PERCENTAGE
- ------------------------------------------------ ------------ ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Citicorp........................................ 1,124,442 5.2% 112,000(7) 1,012,442 4.1%
153 East 53(rd) Street
New York, NY 10043
Hal M. Krisbergh (1)............................ 6,483,686 30.3 200,000 6,283,686 25.2
Joseph E. Augenbraun............................ 295,784 1.4 29,000(7) 266,784 1.1
Scott B. Campbell (2)........................... 30,000 * -- 30,000 *
Randall J. Gort................................. 259,749 1.2 19,550(7) 240,199 1.0
Jae Hea Edward Lee.............................. 298,675 1.4 29,000(7) 269,675 1.1
Peter C. Mondics (3)............................ 44,191 * -- 44,191 *
Kenneth P. Nimmer............................... 23,333 * 2,300 21,033 *
David E. Wachob................................. 557,897 2.6 50,000(7) 507,897 2.0
Thomas G. Baxter................................ 1,666 * -- 1,666 *
Alan Gerry...................................... 606,666 2.8 60,600 546,066 2.2
Marcia J. Hooper (4)............................ -- * -- -- *
Ronald A. Walter (5)............................ -- * -- -- *
NAME OF OTHER SELLING STOCKHOLDERS
Henry and Ellen Mishel.......................... 110,003 * 89,000 21,003 *
Annabel J. Montgomery Revocable Trust........... 1,818 * 1,212 606 *
James W. Montgomery............................. 908 * 605 303 *
Bruce D. Smith.................................. 2,666 * 1,333 1,333 *
Viking Instruments LLC.......................... 13,533 * 5,400 8,133 *
All current directors and executive officers as
a group (14 persons)(6)....................... 8,631,647 40.1 390,450 8,241,197 32.9
</TABLE>
57
<PAGE>
- ------------------------
* Less than 1% of the outstanding Common Stock.
(1) Includes (a) 15,237 shares of common stock held by Mr. Krisbergh as
custodian for his minor child and (b) 15,237 shares of common stock held by
Mr. Krisbergh's wife as custodian for their minor child. Mr. Krisbergh
disclaims beneficial ownership of the shares owned by his minor child.
(2) Includes options to purchase 30,000 shares of common stock.
(3) Includes 2,666 shares of common stock held by Mr. Mondics' minor child,
6,666 shares of common stock held jointly with his wife and options to
purchase 33,333 shares of common stock.
(4) Does not include 379,218 shares of common stock held by funds that are
affiliated with Advent International Corporation as follows: Adtec Limited
Partnership (60,674 shares), Advent Crown Fund, C.V. (60,068 shares),
Digital Media & Communications, L.P. (240,880 shares), and Advent Partners
Limited Partnership (17,596 shares). Ms. Hooper is a partner and an officer
of Advent International Corporation and an officer of several of the Advent
funds, and was originally elected to the Company's Board of Directors as a
representative of the holders of the Series A Preferred Stock. Ms. Hooper
disclaims beneficial ownership of the shares held of record by the Advent
funds.
(5) Does not include 1,124,442 shares of common stock held by Citicorp. Mr.
Walter is a vice president of Citicorp and Citibank, NA.
(6) Includes (a) options to purchase 118,332 shares of common stock and (b)
68,939 shares of common stock owned by family members or affiliates of some
members of the group.
(7) Messrs. Augenbraun, Gort, Lee and Wachob and Citicorp have granted to the
underwriters an option to purchase an additional 1,000, 450, 21,000, 50,000
and 8,000 shares of common stock, respectively, to cover over-allotments, if
any.
DESCRIPTION OF CAPITAL STOCK
WorldGate's authorized capital stock consists of 50,000,000 shares of common
stock, par value $.01 per share, and 13,500,000 shares of preferred stock, par
value $.01 per share. The following summary is qualified in its entirety by
reference to our Amended and Restated Certificate of Incorporation, as amended,
which is filed as an exhibit to the registration statement of which this
prospectus is a part.
COMMON STOCK
As of June 30, 1999, there were 21,424,513 shares of common stock
outstanding. After giving effect to the issuance of 3,500,000 shares of common
stock offered by WorldGate, there will be outstanding 24,924,513 shares of
common stock as of June 30, 1999, and assuming no exercise of options or
warrants. The rights, preferences and privileges of holders of common stock are
subject to, and may be adversely affected by, the rights of holders of shares of
any series of preferred stock which WorldGate may designate and issue in the
future. See "--Preferred Stock."
Holders of common stock are entitled to one vote per share on all matters
submitted to a vote of holders of common stock. The holders of common stock do
not have cumulative voting rights. The election of directors is determined by a
plurality of votes cast, and, except as otherwise required by law, WorldGate's
certificate of incorporation or by-laws, all other matters are determined by a
majority of the votes cast. See "Risk Factors--Your ability to influence the
outcome of stockholder votes may be limited by the significant ownership
interest of our chairman and chief executive officer." The common stock has no
preemptive rights and is not convertible, redeemable or assessable. The holders
of common stock are entitled to receive ratably such dividends, if any, as may
be declared by the board out of legally available funds, subject to any
preferential dividend rights of outstanding preferred stock. Upon any
liquidation, dissolution or winding up of WorldGate, after payment of all debts
and liabilities
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of WorldGate and after payment of any liquidation preferences of then
outstanding preferred stock, the holders of common stock will be entitled to
receive a portion of all remaining assets that are legally available for
distribution.
PREFERRED STOCK
WorldGate, by resolution of the board of directors and without any further
vote or action by the stockholders, has the authority, subject to certain
limitations prescribed by law, to issue from time to time up to an aggregate of
13,500,000 shares of preferred stock in one or more classes or series and to
determine the designation and the number of shares of any class or series as
well as the voting rights, preferences, limitations and special rights, if any,
of the shares of any class or series, including dividend rights, dividend rates,
conversion rights and terms, redemption rights and terms, and liquidation
preferences. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change of control of WorldGate. No shares of preferred
stock are outstanding, and WorldGate currently has no plans to issue any shares
of preferred stock.
LIMITATION ON LIABILITY
WorldGate's certificate of incorporation limits or eliminates the liability
of WorldGate's directors or officers to WorldGate or its stockholders for
monetary damages to the fullest extent permitted by the Delaware General
Corporation Law, as amended (the "DGCL"). The DGCL provides that a director of
WorldGate shall not be personally liable to WorldGate or its stockholders for
monetary damages for a breach of fiduciary duty as a director, except for
liability:
- for any breach of such person's duty of loyalty,
- for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law,
- for the payment of unlawful dividends and some other actions prohibited by
Delaware corporate law, and
- for any transaction resulting in receipt by such person of an improper
personal benefit.
The certificate of incorporation also provides that the directors shall be
entitled to the benefits of all limitations on the liability of directors
generally that now or hereafter become available under the DGCL. The certificate
of incorporation also contains provisions indemnifying WorldGate's directors,
officers and employees to the fullest extent permitted by the DGCL.
WorldGate maintains directors' and officers' liability insurance to provide
its directors and officers with insurance coverage for losses arising from
claims based on breaches of duty, negligence, error and other wrongful acts. See
"Business--Legal Proceedings" for a discussion of pending litigation.
CERTAIN ANTI-TAKEOVER PROVISIONS
The ability of WorldGate's board under WorldGate's certificate of
incorporation to establish the rights of, and to cause WorldGate to issue,
substantial amounts of preferred stock without the need for stockholder
approval, upon such terms and conditions, and having such rights, privileges and
preferences, as WorldGate's board may determine from time to time in the
exercise of its business judgment, may, among other things, be used to create
voting impediments with respect to changes in control of WorldGate or to dilute
the stock ownership of holders of common stock seeking to obtain control of
WorldGate. The rights of the holders of common stock will be subject to, and may
be adversely affected by, any preferred stock that may be issued in the future.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions, financings and other
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<PAGE>
corporate transactions, may have the effect of discouraging, delaying or
preventing a change in control of WorldGate. WorldGate has no present plans to
issue any shares of preferred stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the DGCL prohibits some "business combinations" between a
Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliates or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding voting
shares of a Delaware corporation. For purposes of Section 203, business
combinations are defined broadly to include mergers, consolidations, sales or
other dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation and some transactions that would increase
the interested stockholder's proportionate share ownership in the corporation.
Section 203 prohibits any such business combination for a period of three years
commencing on the date the interested stockholder becomes an interested
stockholder, unless
- the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder becomes an
interested stockholder,
- the interested stockholder acquired at least 85% of the voting stock of
the corporation (other than stock held by directors who are also officers
or by some employee stock plans) in the transaction in which it becomes an
interested stockholder, or
- the business combination is approved by a majority of the board of
directors and by the affirmative vote of two-thirds of the outstanding
voting stock that is not owned by the interested stockholder.
See "Risk Factors--Anti-takeover provisions in our charter documents could
discourage unwanted takeover attempts and could reduce the opportunity for
stockholders to get a premium for their shares."
The DGCL contains provisions enabling a corporation to avoid Section 203's
restrictions if stockholders holding a majority of the corporation's voting
stock approve an amendment to the corporation's certificate of incorporation or
by-laws to avoid the restrictions. WorldGate has not and does not currently
intend to "elect out" of the application of Section 203 of the DGCL.
BY-LAWS
Our by-laws contain provisions that require advance notice to be delivered
to us of any business to be brought by a stockholder before an annual or special
meeting of stockholders and that specify procedures to be followed by
stockholders in nominating persons for election to our board. Generally, the
advance notice provisions require that the stockholder must give written notice
to the Secretary of WorldGate:
- in the case of an annual meeting, not less than 90 days nor more than 120
days before the first anniversary of the preceding year's annual meeting
of stockholders, and
- in the case of a special meeting, not less than 90 days, or, if later, ten
days after the first public announcement of the date of the special
meeting, nor more than 120 days prior to the scheduled date of such
special meeting.
In each case, the notice must set forth specific information regarding the
stockholder and each director nominee or other business proposed by the
stockholder, as applicable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for WorldGate's common stock is American
Stock Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock (including shares
issued upon exercise of outstanding options and warrants) in the public market
after this offering could adversely affect market prices prevailing from time to
time and could impair our ability to raise capital through the sale of our
equity securities.
Upon completion of this offering, 24,924,513 shares of our common stock will
be outstanding based on shares outstanding on June 30, 1999, and assuming no
exercise of options or warrants. Of these shares, the 3,500,000 shares
registered and sold in this offering and the 5,750,000 shares registered and
sold in our initial public offering will be freely tradable without restriction,
except that shares purchased by our "affiliates," as that term is defined in
Rule 144 under the Securities Act, may generally be sold only in compliance with
the limitations of Rule 144. The remaining approximately 13.7 million shares of
our common stock (the "Restricted Shares") were issued and sold by us in private
transactions in reliance upon exemptions from the registration requirements of
the Securities Act and are therefore deemed "restricted securities" as defined
in Rule 144 and may not be sold in the absence of registration under the
Securities Act unless an exemption is available, including an exemption afforded
by Rule 144 or Rule 701. See "Risk Factors--Substantial sales of our common
stock could lower our stock price."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted shares" (as
defined in Rule 144) for at least one year (including the holding period of any
prior owner, except an affiliate) is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of
- one percent of the number of shares of common stock then outstanding, or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the required
filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to some manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been an affiliate at
any time during the three-month period preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume and other limitation or notice provisions of Rule 144.
Rule 144A under the Securities Act provides a non-exclusive safe harbor
exemption from the registration requirements of the Securities Act for specified
resales of restricted securities to some institutional investors. In general,
Rule 144A allows unregistered resales of restricted securities to a "qualified
institutional buyer," which generally includes an entity, acting for its own
account or for the account of other qualified institutional buyers, that in the
aggregate owns or invests on a discretionary basis at least $100 million in
securities of issuers that are not affiliated with the entity, as long as these
securities when issued were not of the same class as securities listed on a
national securities exchange or quoted on Nasdaq. Approximately million
shares of our common stock issued prior to our initial public offering and not
sold in this offering would be eligible for resale under Rule 144A because such
shares, when issued, were not of the same class as any listed or quoted
securities.
STOCK OPTIONS AND WARRANTS
As of June 30, 1999, there were outstanding options to purchase an aggregate
of 895,965 shares of our common stock, 176,203 of which were exercisable at June
30, 1999, at a weighted average exercise price of $2.58 per share, and we had an
additional 704,035 shares of our common stock available for future grant under
the stock option plan. The holders of options which are presently exercisable to
purchase a total of shares are subject to lock-up agreements, which
restrict the holders' ability
61
<PAGE>
to sell or otherwise dispose of our common stock acquired upon the exercise of
such options. See "Management--Stock Option Plan."
Following our initial public offering, we filed a registration statement on
Form S-8 under the Securities Act covering 911,225 shares of our common stock
subject to outstanding options under the stock option plan and 688,775 shares of
our common stock reserved for issuance under the stock option plan.
As of June 30, 1999, there were outstanding warrants to purchase an
aggregate of 643,309 shares of our common stock, all of which are currently
exercisable, at exercise prices ranging from $10.65 to $16.50 per share. The
holders of of these warrants are subject to lock-up agreements that
restrict the holders' ability to sell or otherwise dispose of our common stock
acquired upon the exercise of such warrants until .
LOCK-UP AGREEMENTS
Holders of approximately million shares of our common stock, including
all of our directors and executive officers, have entered into lock-up
agreements under which, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") on behalf of the underwriters and some
other permitted transfers, they have agreed not to offer, sell or otherwise
dispose of any such shares of our common stock, any options or warrants to
acquire shares of our common stock or any securities convertible into shares of
our common stock, or any shares of our common stock issuable upon exercise or
conversion of such securities, owned by them for a period of 90 days after the
date of this prospectus.
Beginning on the 91st day after the date of this prospectus, approximately
million shares will be eligible for sale in the public market, subject to some
timing, manner of sale and volume limitations pursuant to Rule 144. DLJ may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to such lock-up agreements. DLJ currently has no plans
to release any portion of the securities subject to such lock-up agreements.
WorldGate has agreed that it will not, directly or indirectly, without the prior
written consent of DLJ, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option right or
warrant to purchase, or otherwise transfer or dispose of any shares of common
stock, or any securities convertible into or exchangeable for common stock, for
a period of 90 days from the date of this prospectus, except that WorldGate may
grant additional options under the stock option plan or issue shares of common
stock under outstanding options, warrants and convertible securities.
REGISTRATION RIGHTS
Some holders of shares of common stock outstanding prior to the closing of
our initial public offering, including Messrs. Krisbergh, Wachob, Augenbraun,
Lee, Gort and Gerry and Citicorp, as well as some holders of warrants, are
parties to registration rights agreements with us. These registration rights
agreements, which relate to approximately 11.8 million shares of common stock,
assuming the exercise of all warrants, provide for "piggyback" and demand
registration rights. Generally, a "piggyback" registration right allows holders
to include their shares of common stock in registration statements initiated by
WorldGate or other stockholders and a "demand" registration right allows holders
to require WorldGate to file a registration statement to register their shares
of common stock. Some holders of common stock are entitled to unlimited
piggyback registration rights in most registrations by WorldGate of its
securities, provided that the number of shares of common stock being registered
may be cut back by WorldGate's underwriters in such offerings. Additionally,
holders of at least 30% of the common stock entitled to registration rights may
request, on not more that two occasions, that WorldGate use its best efforts to
file a registration statement covering at least 20% of the common stock,
provided that no demand right may be exercised during any period beginning on
62
<PAGE>
the date WorldGate files a registration statement and ending on the earlier of
120 days after the registration statement is declared effective or 180 days
after the filing date of the registration statement. WorldGate will have the
right to delay demand registrations under some circumstances for up to 120 days.
Finally, subject to some limitations, some holders of common stock have two
demand registration rights on Form S-3 at any time WorldGate is eligible to use
Form S-3. These piggyback and demand registration rights may be assigned to any
transferee who acquires at least 20% of the common stock of some holders. By
exercising these registration rights, these holders could cause a significant
number of shares to be registered and sold in the public market. These sales may
have an adverse effect on the market price for the common stock and could impair
WorldGate's ability to raise capital through an offering of its equity
securities.
In addition to the above registration rights, WorldGate has agreed to file a
shelf registration statement (the "Warrant Registration Statement") under the
Securities Act for all of the shares of common stock issuable upon exercise of
the warrants sold in connection with the issuance of our $6.0 million discounted
notes in March 1999. The holders of these warrants may purchase up to 331,490
shares of common stock upon exercise of the warrants. We have filed this
registration statement on September 13, 1999 and we have agreed to use our best
efforts to cause the Warrant Registration Statement to be declared effective as
promptly as possible. The holders of the piggyback registration rights described
in the prior paragraph will have the right to request that their shares be
included in that shelf registration statement.
63
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 1999, the underwriters named below, who are represented by DLJ,
Gerard Klauer Mattison & Co., Inc., Jefferies & Company, Inc. and Janney
Montgomery Scott LLC (the "Representatives"), have severally agreed to purchase
from WorldGate and the selling stockholders the respective number of shares of
common stock set forth opposite their names below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation........................
Gerard Klauer Mattison & Co., Inc..........................................
Jefferies & Company, Inc...................................................
Janney Montgomery Scott LLC................................................
-----------------
Total.................................................................. 4,100,000
-----------------
-----------------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the public offering price set forth on the cover
page of this Prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $
per share. The underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the
initial offering of the common stock, the public offering price and other
selling terms may be changed by the Representatives at any time without notice.
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of 534,550 additional shares of common stock at the
public offering price less underwriting discounts and commissions, and certain
selling stockholders have granted an option to purchase an additonal 80,450
shares of common stock. The underwriters may exercise such option solely to
cover overallotments, if any, made in connection with the offering. To the
extent that the underwriters exercise such option, each underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such underwriter's percentage underwriting
commitment as indicated in the preceding table.
The following table summarizes the compensation to be paid to the
underwriters by WorldGate and the selling stockholders in connection with this
offering. These amounts are shown assuming both
64
<PAGE>
no exercise and full exercise of the underwriters option to purchase additional
shares of our common stock.
<TABLE>
<CAPTION>
FULL
NO EXERCISE EXERCISE
----------- ------------
<S> <C> <C>
WorldGate.......................................................... $ $
Per Share........................................................
Total............................................................
Selling stockholders
Per Share........................................................
Total............................................................
</TABLE>
The expenses payable by WorldGate are estimated to be approximately
$ .
WorldGate and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the underwriters may be
required to make in respect thereof.
Each of WorldGate, its executive officers and directors and certain
stockholders of WorldGate (including the selling stockholders) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock or (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any common stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of common stock, or such other securities, in
cash or otherwise) for a period of 90 days after the date of this prospectus
without the prior written consent of DLJ. In addition, other than a registration
statement covering up to 331,490 shares of common stock issuable upon exercise
of certain warrants and additional shares of common stock owned by certain
stockholders who have exercised their piggyback registration rights, during such
period, WorldGate has also agreed not to file any registration statement with
respect to, and each of its executive officers, directors and certain
stockholders of WorldGate (including the selling stockholders) has agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock without DLJ's prior written consent.
Other than in the United States, no action has been taken by WorldGate, the
selling stockholders or the underwriters that would permit a public offering of
the shares of common stock offered hereby in any jurisdiction where action for
that purpose is required. The shares of common stock offered hereby may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and to observe any
restrictions relating to the offering of the common stock and the distribution
of this prospectus. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any shares of common stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.
The underwriters and dealers may engage in passive market making
transactions in the common stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase shares of common stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
common stock during a specified two month prior period, or 200 shares, whichever
is greater. A passive market maker must
65
<PAGE>
identify passive market making bids as such on the Nasdaq electronic
inter-dealer reporting system. Passive market making may stabilize or maintain
the market price of the common stock above independent market levels.
Underwriters and dealers are not required to engage in passive market making and
may end passive market making activities at any time.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may overallot the offering, creating a syndicate
short position. The underwriters may bid for and purchase shares of common stock
in the open market to cover such syndicate short position or to stabilize the
price of the common stock. These activities may stabilize or maintain the market
price of the common stock above independent market levels. The underwriters are
not required to engage in these activities, and may end any of these activities
at any time.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby
will be passed upon for WorldGate by Drinker Biddle & Reath LLP, Berwyn,
Pennsylvania. Certain legal matters in connection with this offering are being
passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
WorldGate has filed with the SEC a Registration Statement on Form S-1 under
the Securities Act with respect to the shares of common stock offered hereby. As
permitted by the rules and regulations of the SEC, this prospectus, which is a
part of the registration statement, omits some information contained in the
registration statement. WorldGate files annual, quarterly and special reports,
proxy statements and other information with the SEC. For further information
with respect to WorldGate and the common stock offered hereby, please refer to
the registration statement, including its exhibits and schedules. Statements
contained in this prospectus regarding the contents of any agreement or other
document filed with the SEC as an exhibit to the registration statement are not
necessarily complete, and in each instance reference is made to the copy of such
agreement filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference. A copy of the registration
statement, including the exhibits and schedules thereto, may be inspected
without charge at the public reference facilities maintained by the SEC at 450
Fifth Street, N.W., Washington, DC 20549, and copies of all or any part thereof
may be obtained from such office upon payment of the prescribed fees. In
addition, the Commission maintains a Web site at http://www.sec.gov that
contains reports, proxy statements, information statements and other information
regarding WorldGate.
66
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Report of Independent Accountants..................................................................... F-2
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999 (unaudited)......................... F-3
Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and the six months ended
June 30, 1998 and 1999 (unaudited).................................................................. F-4
Statements of Stockholders' Deficit and Redeemable Preferred Stock for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1999 (unaudited).............................. F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and the six months ended
June 30, 1998 and 1999 (unaudited).................................................................. F-6
Notes to Financial Statements......................................................................... F-7-F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
WorldGate Communications, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' deficit and redeemable preferred stock and of cash
flows present fairly, in all material respects, the financial position of
WorldGate Communications, Inc. at December 31, 1997 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 8, 1999, except as to the
information in Note 10, for which the date
is April 15, 1999
F-2
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------- -------------
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,879,560 $ 127,587 $ 14,502,261
Restricted cash........................................... -- 240,000 --
Short-term investments.................................... 12,438,365 -- 85,810,001
Accounts receivable, trade................................ 105,865 572,120 966,193
Inventory................................................. 619,905 2,736,512 4,956,257
Prepaid and other assets.................................. 75,968 171,624 1,259,344
------------ ------------- -------------
Total current assets.................................. 18,119,663 3,847,843 107,494,056
------------ ------------- -------------
Property and equipment, at cost............................. 270,862 780,257 1,388,718
Less: accumulated depreciation and amortization........... (22,296) (136,866) (238,745)
------------ ------------- -------------
Property and equipment, net........................... 248,566 643,391 1,149,973
Deposits and other.......................................... 43,862 1,129,461 1,127,215
------------ ------------- -------------
Total assets.......................................... $ 18,412,091 $ 5,620,695 $ 109,771,244
------------ ------------- -------------
------------ ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion, notes payable............................ $ 182,445 $ 515,798 $ 539,162
Current portion, capital lease............................ 3,788 4,210 4,438
Accounts payable.......................................... 647,795 5,166,141 3,136,748
Accrued expenses.......................................... 459,484 128,466 2,317,386
Accrued compensation and benefits......................... 644,216 1,282,456 760,255
------------ ------------- -------------
Total current liabilities............................. 1,937,728 7,097,071 6,757,989
Notes payable............................................. 387,806 595,559 320,007
Capital leases............................................ 16,526 11,735 9,458
------------ ------------- -------------
Total liabilities..................................... 2,342,060 7,704,365 7,087,454
------------ ------------- -------------
Commitments and contingent liabilities
Series A Convertible Mandatory Redeemable Preferred Stock,
$.01 par value, 2,752,111 shares authorized and
outstanding at December 31, 1998; no shares authorized and
outstanding at June 30, 1999 (unaudited).................. 14,315,448 16,578,165 --
Series B Convertible Mandatory Redeemable Preferred Stock,
$.01 par value, 4,041,641 and 3,270,760 shares authorized,
2,783,031 and 2,803,031 outstanding at December 31, 1997
and 1998; no shares authorized and outstanding at June 30,
1999 (unaudited).......................................... 20,050,950 23,568,947 --
Series C Convertible Mandatory Redeemable Preferred Stock,
$.01 par value, 3,181,819 shares authorized, 832,277
outstanding at December 31, 1998; no shares authorized and
outstanding at June 30, 1999 (unaudited).................. -- 9,128,995 --
Warrant for Series B Convertible Mandatory Redeemable
Preferred Stock........................................... 880,582 880,582 --
Stockholders' equity (deficit):
Class A common stock, $0.01 par value; 50,000,000 shares
authorized, no shares issued at December 31, 1997 and
1998.................................................... -- -- --
Class B common stock, $0.01 par value; 27,608,000 shares
authorized, 9,100,801 shares issued and outstanding at
December 31, 1997 and 1998; no shares issued and
outstanding at June 30, 1999 (unaudited)................ 91,008 91,008 --
Common stock, $0.01 par value, 50,000,000 shares
authorized, no shares issued at December 31, 1997 and
1998; 21,424,513 shares issued and outstanding at June
30, 1999 (unaudited).................................... -- -- 214,245
Additional paid-in capital................................ -- -- 170,517,612
Warrant for Common Stock.................................. -- -- 1,911,332
Accumulated deficit....................................... (19,165,931) (51,299,874) (68,785,765)
Unearned stock-based compensation......................... (102,026) (1,031,493) (1,173,634)
------------ ------------- -------------
Total stockholders' equity (deficit).................. (19,176,949) (52,240,359) 102,683,790
------------ ------------- -------------
Total liabilities and stockholders' equity
(deficit)........................................... $ 18,412,091 $ 5,620,695 $ 109,771,244
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- ---------------------------
1996 1997 1998 1998 1999
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues............................................... $ -- $ 140,865 $ 1,022,162 $ 185,453 $ 1,290,394
----------- ------------ ------------ ------------ ------------
Costs and expenses:
Cost of revenues..................................... -- 1,529,917 9,918,917 3,164,448 5,783,518
Engineering and development.......................... 1,408,441 6,980,680 9,684,448 4,053,164 4,763,886
Sales and marketing.................................. 427,631 3,622,590 5,156,717 2,557,113 3,247,955
General and administrative........................... 1,092,502 2,432,363 3,587,155 1,664,866 2,580,250
Depreciation and amortization........................ -- 22,296 119,144 49,980 101,879
----------- ------------ ------------ ------------ ------------
Total costs and expenses......................... 2,928,574 14,587,846 28,466,381 11,489,571 16,477,488
----------- ------------ ------------ ------------ ------------
Loss from operations................................... (2,928,574) (14,446,981) (27,444,219) (11,304,118) (15,187,094)
Interest and other income, net......................... 8,154 422,743 422,807 326,309 1,023,647
Interest expense....................................... (2,081) (17,110) (100,562) (41,060) (168,643)
----------- ------------ ------------ ------------ ------------
Loss before extraordinary item................... (2,922,501) (14,041,348) (27,121,974) (11,018,869) (14,332,090)
Extraordinary item--extinguishment of debt............. (1,018,922)
Net loss......................................... (2,922,501) (14,041,348) (27,121,974) (11,018,869) (15,351,012)
Accretion on preferred stock........................... (75,880) (2,435,470) (6,145,105) (2,819,357) (2,474,755)
----------- ------------ ------------ ------------ ------------
Net loss available to common stockholders........ $(2,998,381) $(16,476,818) $(33,267,079) $(13,838,226) $(17,825,767)
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
Pro forma net loss per common share.................... $ (2.25) $ (.99)
------------ ------------
------------ ------------
Pro forma weighted average common shares outstanding... 14,785,714 17,929,396
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT AND REDEEMABLE PREFERRED STOCK
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK
--------------------------------------------------------------------------------------
WARRANT
FOR
SERIES A SERIES B SERIES C REDEEMABLE
----------------------- ----------------------- ------------------------ PREFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK
---------- ----------- ---------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1995........................
Cash capital contributions....
Capital contributed for
services....................
Merger of WorldGate
Communications, Inc.........
Sale of Preferred Stock, net.. 1,933,000 $ 8,495,535
Accretion on Preferred
Stock....................... 75,880
Net loss for the year.........
---------- ----------- ---------- ----------- ---------- ------------ ----------
BALANCE AT DECEMBER 31,
1996........................ 1,933,000 8,571,415
Warrants issued for services
provided.................... $880,582
Deferred compensation.........
Amortization of deferred
compensation................
Non-employee stock option
compensation expense........
Sale of Preferred Stock, net.. 819,111 3,599,993 2,783,031 $19,759,520
Accretion on Preferred
Stock....................... 2,144,040 291,430
Net loss for the year.........
---------- ----------- ---------- ----------- ---------- ------------ ----------
BALANCE AT DECEMBER 31,
1997........................ 2,752,111 14,315,448 2,783,031 20,050,950 880,582
Deferred compensation.........
Amortization of deferred
compensation................
Sale of Preferred Stock, net.. 20,000 142,000 832,277 $ 8,622,604
Accretion on Preferred
Stock....................... 2,262,717 3,375,997 506,391
Net loss for the year.........
---------- ----------- ---------- ----------- ---------- ------------ ----------
BALANCE AT DECEMBER 31,
1998........................ 2,752,111 $16,578,165 2,803,031 $23,568,947 832,277 $ 9,128,995 $880,582
Warrants issued related to
notes payable...............
Deferred compensation.........
Amortization of deferred
compensation................
Sale of Preferred Stock, net.. 697,437 7,590,958
Accretion on Preferred
Stock....................... 659,960 984,960 829,835
Sale of Common Stock in
Initial Public Offering,
net.........................
Sale of Common Stock in
Overallotment, net..........
Exercise of stock options.....
Conversion of Preferred Stock
to Common Stock............. (2,752,111) (17,238,125) (2,803,031) (24,553,907) (1,529,714) (17,549,788) (880,582)
Conversion of Class B Common
Stock to Common Stock.......
Net loss for the period.......
---------- ----------- ---------- ----------- ---------- ------------ ----------
Balance at June 30, 1999
(unaudited).................
---------- ----------- ---------- ----------- ---------- ------------ ----------
---------- ----------- ---------- ----------- ---------- ------------ ----------
<CAPTION>
STOCKHOLDERS' DEFICIT
-------------------------------------------------------------------------------------------
WORLDGATE, CLASS B COMMON STOCK COMMON STOCK ADDITIONAL WARRANT FOR
LLC CAPITAL ------------------------ ------------------------ PAID-IN COMMON
CONTRIBUTED SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK
----------- ---------- ------------ ---------- ------------ ------------- -----------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31,
1995........................ $ 180,950
Cash capital contributions.... 873,498
Capital contributed for
services.................... 816,230
Merger of WorldGate
Communications, Inc......... (1,870,678) 9,100,801 $ 91,008 $ 1,779,670
Sale of Preferred Stock, net.. (174,169)
Accretion on Preferred
Stock....................... (75,880)
Net loss for the year.........
----------- ---------- ------------ ---------- ------------ ------------- -----------
BALANCE AT DECEMBER 31,
1996........................ 9,100,801 91,008 1,529,621
Warrants issued for services
provided....................
Deferred compensation......... 108,875
Amortization of deferred
compensation................
Non-employee stock option
compensation expense........ 63,000
Sale of Preferred Stock, net.. (1,318,783)
Accretion on Preferred
Stock....................... (382,713)
Net loss for the year.........
----------- ---------- ------------ ---------- ------------ ------------- -----------
BALANCE AT DECEMBER 31,
1997........................ 9,100,801 91,008
Deferred compensation......... 1,133,136
Amortization of deferred
compensation................
Sale of Preferred Stock, net..
Accretion on Preferred
Stock....................... (1,133,136)
Net loss for the year.........
----------- ---------- ------------ ---------- ------------ ------------- -----------
BALANCE AT DECEMBER 31,
1998........................ 9,100,801 $ 91,008
Warrants issued related to
notes payable............... 1,030,750
Deferred compensation......... 339,880
Amortization of deferred
compensation................
Sale of Preferred Stock, net..
Accretion on Preferred
Stock....................... (339,880)
Sale of Common Stock in
Initial Public Offering,
net......................... 5,000,000 50,000 96,558,649
Sale of Common Stock in
Overallotment, net.......... 750,000 7,500 14,640,000
Exercise of stock options..... 15,828 158 42,722
Conversion of Preferred Stock
to Common Stock............. 6,557,884 65,579 59,276,241 880,582
Conversion of Class B Common
Stock to Common Stock....... (9,100,801) (91,008) 9,100,801 91,008
Net loss for the period.......
----------- ---------- ------------ ---------- ------------ ------------- -----------
Balance at June 30, 1999
(unaudited)................. 21,424,513 $ 214,245 $ 170,517,612 $ 1,911,332
----------- ---------- ------------ ---------- ------------ ------------- -----------
----------- ---------- ------------ ---------- ------------ ------------- -----------
<CAPTION>
UNEARNED TOTAL
ACCUMULATED STOCK-BASED STOCKHOLDERS'
DEFICIT COMPENSATION EQUITY (DEFICIT)
------------ ------------ ----------------
BALANCE AT DECEMBER 31,
1995........................ $ (149,325) $ 31,625
Cash capital contributions.... 873,498
Capital contributed for
services.................... 816,230
Merger of WorldGate
Communications, Inc.........
Sale of Preferred Stock, net.. (174,169)
Accretion on Preferred
Stock....................... (75,880)
Net loss for the year......... (2,922,501) (2,922,501)
------------ ------------ ----------------
BALANCE AT DECEMBER 31,
1996........................ (3,071,826) (1,451,197)
Warrants issued for services
provided....................
Deferred compensation......... $ (108,875)
Amortization of deferred
compensation................ 6,849 6,849
Non-employee stock option
compensation expense........ 63,000
Sale of Preferred Stock, net.. (1,318,783)
Accretion on Preferred
Stock....................... (2,052,757) (2,435,470)
Net loss for the year......... (14,041,348) (14,041,348)
------------ ------------ ----------------
BALANCE AT DECEMBER 31,
1997........................ (19,165,931) (102,026) (19,176,949)
Deferred compensation......... (1,133,136)
Amortization of deferred
compensation................ 203,669 203,669
Sale of Preferred Stock, net..
Accretion on Preferred
Stock....................... (5,011,969) (6,145,105)
Net loss for the year......... (27,121,974) (27,121,974)
------------ ------------ ----------------
BALANCE AT DECEMBER 31,
1998........................ $(51,299,874) $(1,031,493) $(52,240,359)
Warrants issued related to
notes payable............... 1,030,750
Deferred compensation......... (339,880)
Amortization of deferred
compensation................ 197,739 197,739
Sale of Preferred Stock, net..
Accretion on Preferred
Stock....................... (2,134,875) (2,474,755)
Sale of Common Stock in
Initial Public Offering,
net......................... 96,608,649
Sale of Common Stock in
Overallotment, net.......... 14,647,500
Exercise of stock options..... 42,880
Conversion of Preferred Stock
to Common Stock............. 60,222,402
Conversion of Class B Common
Stock to Common Stock.......
Net loss for the period....... (15,351,016) (15,351,016)
------------ ------------ ----------------
Balance at June 30, 1999
(unaudited)................. $(68,785,765) $(1,173,634) $102,683,790
------------ ------------ ----------------
------------ ------------ ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- ----------------------------
1996 1997 1998 1998 1999
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(2,922,501) $(14,041,348) $(27,121,974) $(11,018,869) $ (15,351,012)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization............... -- 22,296 119,144 49,980 101,879
Amortization of deferred compensation....... -- 6,849 203,669 71,829 197,736
Non-employee stock option compensation
expense................................... -- 63,000 -- -- --
Stock and warrants issued for services
provided.................................. 816,230 880,582 -- -- --
Loss on sale of equipment................... -- -- 15,425 -- --
Amortization of debt issue discount......... -- -- -- -- 108,531
Extraordinary loss on early extingquishment
of debt................................... -- -- -- -- 1,018,922
Changes in operating assets and liabilities:
Accounts receivable....................... -- (105,865) (466,255) (170,913) (394,073)
Inventories............................... -- (619,905) (2,116,607) (1,530,038) (2,219,744)
Prepaid and other assets.................. (9,496) (110,334) (1,181,255) (273,233) (1,085,474)
Accounts payable.......................... 333,112 314,683 4,518,346 869,104 (2,029,395)
Accrued expenses.......................... 129,805 329,679 (331,018) 529,778 2,188,920
Accrued compensation and benefits......... -- 644,216 638,240 (70,085) (522,200)
----------- ------------ ------------ ------------ -------------
Net cash used in operating activities... (1,652,850) (12,616,147) (25,722,285) (11,542,447) (17,985,910)
----------- ------------ ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ -- (248,817) (533,394) (459,454) (607,736)
Purchases of short-term investments............. (5,881,025) (16,443,761) (1,947,716) (1,947,716) (133,871,330)
Proceeds from maturities of short-term
investments................................... -- 9,900,000 14,386,081 9,889,609 48,061,329
Proceeds from sale of equipment................. -- -- 4,000 -- --
Restricted cash................................. -- -- (240,000) (240,000) 240,000
----------- ------------ ------------ ------------ -------------
Net cash (used in) provided by investing
activities............................ (5,881,025) (6,792,578) 11,668,971 7,242,439 (86,177,737)
----------- ------------ ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock....... 8,495,535 23,359,513 9,297,027 142,000 7,671,807
Proceeds from issuance of common stock.......... -- -- -- -- 120,750,000
Proceeds from exercise of stock options......... -- -- -- -- 42,881
Stock issuance costs............................ (174,169) (1,318,783) (532,423) -- (9,574,000)
Capital contributions........................... 873,498 -- -- -- --
Proceeds from notes payable--shareholder........ 350,000 -- -- -- --
Repayment of notes payable--shareholder......... (350,000) -- -- -- --
Proceeds from notes payable..................... -- 621,161 937,790 918,490 6,000,000
Debt issue costs................................ -- -- -- -- (530,000)
Repayments of capital leases and notes payable.. -- (66,220) (401,053) (129,735) (5,822,367)
----------- ------------ ------------ ------------ -------------
Net cash provided by financing
activities............................ 9,194,864 22,595,671 9,301,341 930,755 118,538,321
----------- ------------ ------------ ------------ -------------
Net increase (decrease) in cash and cash
equivalents........................... 1,660,989 3,186,946 (4,751,973) (3,369,253) 14,374,674
Cash and cash equivalents, beginning of period.... 31,625 1,692,614 4,879,560 4,879,560 127,587
----------- ------------ ------------ ------------ -------------
Cash and cash equivalents, end of period.......... $ 1,692,614 $ 4,879,560 $ 127,587 $ 1,510,307 $ 14,502,261
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 2,081 $ 16,351 $ 96,062 $ 38,484 $ 170,449
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Accretion on preferred stock.................... $ 75,880 $ 2,435,470 $ 6,145,105 $ 2,819,357 $ 2,474,755
Issuance of warrant for services provided....... -- 880,582 -- -- --
Issuance of stock for services provided......... 816,230 -- -- -- --
Issuance of warrant related to notes payable.... -- -- -- -- 1,030,750
Acquisition of property under capital lease..... -- 22,045 -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
WorldGate Communications, Inc. ("WorldGate" or the "Company") provides a new
television based Internet service that delivers the Internet through cable
television systems. The Company was originally organized as a Limited Liability
Company (the "LLC") on March 21, 1995. On December 6, 1996, pursuant to a plan
of merger between WorldGate and the LLC, which was accounted for as a
reorganization of entities under common control, all assets and liabilities of
the LLC were transferred to the Company at book value. As part of the merger,
the Company allocated 9,100,801 shares of common stock to the members of the LLC
and certain key employees who had been granted profit interests. As a result of
the conversion of such profit interests to equity, the Company recognized
$816,230 in compensation expense. From inception through July 1, 1998, the
Company was a development stage enterprise as defined in Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises." The Company operates in a single segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company prepares its financial statements on the accrual basis of
accounting. The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As shown in the financial statements during the year ended December
31, 1998, the Company incurred a loss of $27,121,974 and has an accumulated
deficit of $51,299,874 and cash balance of $367,587. The Company has raised
approximately $7.6 million in preferred stock and approximately $5,470,000 in
notes payable with detachable warrants since December 31, 1998 (See Note 10), is
actively pursuing additional debt or equity financing and has received
non-binding commitments from current and new investors and its chairman to
provide additional funding if and when necessary. If appropriate financing is
not obtained, either privately or through the initial public offering, the
Company has a plan to modify its operations to continue its existence through
1999.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying interim financial statements as of June 30, 1999 and for
the six months ended June 30, 1998 and 1999 are unaudited. The unaudited interim
financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly the
results of the Company's operations and its cash flows for the six months ended
June 30, 1998 and 1999. The financial data and other information disclosed in
these notes to the financial statements related to these periods are unaudited.
The results for the six months ended June 30, 1999, are not necessarily
indicative of the results to be expected for the year ending December 31, 1999.
The Company has provided unaudited footnote information for the interim
periods to the extent such information is substantially different from the
audited periods.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-7
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRICTED CASH
The Company pledged $240,000 as collateral for its corporate credit card
obligations. The amount has been classified as restricted cash on the balance
sheet as of December 31, 1998.
SHORT-TERM INVESTMENTS
The Company considers all investments to be short-term in nature and intends
to hold such investments until maturity. Investments are stated at cost, which
approximates fair market value.
INVENTORIES
Inventories are stated at the lower of cost or market on an average cost
basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is recorded on the
straight-line method over the estimated useful lives of the related assets. The
Company depreciates furniture and fixtures over seven years; office equipment
over five years; and computer equipment over three years. Leasehold improvements
are capitalized and amortized on the straight-line basis over the shorter of
their useful life or the term of the lease. Maintenance and repairs are expensed
as incurred. When the property or equipment is retired or otherwise disposed of,
related costs and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in operations.
The Company reviews assets for impairment whenever events or changes in
circumstances indicate the carrying value of the asset may not be recoverable. A
determination of impairment (if any) is made based on estimates of undiscounted
future cash flows. For the years ended December 31, 1997 and 1998, there have
been no asset impairments.
REVENUE RECOGNITION
The Company derives its revenue principally from the sale of headend units
and other equipment to cable operators and monthly fees from cable operators
based upon the number of WorldGate Service subscribers. Revenue is recognized by
the Company when products are shipped and accepted by the customer. Subscription
revenue is recognized in the month the service is provided.
COST OF REVENUES
Cost of revenues include costs related to the production of hardware,
installation and training as well as costs incurred for the assembly,
installation and testing of trial systems.
ENGINEERING AND DEVELOPMENT COSTS
Engineering and development costs are expensed as incurred.
ADVERTISING COSTS
Advertising costs, included in sales and marketing expense, are expensed in
the period incurred. Advertising expenses were $0, $274,040 and $392,513 for the
years ended December 31, 1996, 1997 and 1998, respectively.
F-8
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
From inception through December 5, 1996, the Company was an LLC under the
Internal Revenue Code, whereby taxes were the responsibility of the individual
members. Accordingly, there was no provision for income taxes in the Company's
statement of operations. Accumulated losses through December 5, 1996 totaled
approximately $2,180,000. The Company began operations as a C Corporation on
December 6, 1996. The Company has incurred losses from operations in the period
from December 6, 1996 through December 31, 1996 and for the years ended December
31, 1997 and 1998 and for the six months ended June 30, 1999; therefore, there
is no provision for income taxes in the Company's statement of operations.
Provision for income taxes is determined based on the asset and liability
method. The asset and liability method provides that deferred tax balances are
recorded based on the difference between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes. Deferred tax
liabilities or assets at the end of each period are determined using the tax
rate enacted under the current tax law. The measurement of net deferred tax
assets is reduced by the amount of any tax benefits that, based on available
evidence, are not expected to be realized, and a corresponding valuation
allowance is established.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and cash equivalents
and short-term investments. The Company has its cash and cash equivalents placed
with high quality, creditworthy financial institutions. The balances at such
institutions at June 30, 1999 and December 31, 1998 and periodically throughout
the year are in excess of federally insured limits. As part of its cash
management process, the Company performs periodic evaluation of the relative
credit standing of these institutions. At December 31, 1997, short-term
investments were composed of mortgage-backed securities issued by U.S.
government agencies. At June 30, 1999, short-term investments were composed of
municipal bonds and notes, commercial securities, money market instruments and
mortgage backed securities issued by U.S. government agencies. The estimated
fair value of the short-term investments at June 30, 1999 approximated cost.
Accounts receivable, trade consists of receivables from cable operators. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral.
F-9
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts receivable from major customers as a percentage of total accounts
receivable were as follows:
<TABLE>
<CAPTION>
CUSTOMER 1997 1998
- -------------------------------------------------- ---- ----
<S> <C> <C>
A............................................. -- 31%
B............................................. -- 17%
C............................................. -- 12%
D............................................. 10% 10%
E............................................. -- 10%
F............................................. -- 10%
G............................................. 47% --
H............................................. 43% 8%
---- ----
100% 98%
---- ----
---- ----
</TABLE>
Sales to major customers, as a percentage of revenues, were as follows for
each of the years ended December 31:
<TABLE>
<CAPTION>
CUSTOMER 1996 1997 1998
- -------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
A............................................. -- 32% 44%
B............................................. -- -- 10%
C............................................. -- 34% --
D............................................. -- 34% --
---- ---- ----
100% 54%
---- ---- ----
---- ---- ----
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable,
debt, capital lease obligations and preferred stock. The book value of cash and
cash equivalents, accounts receivable, and accounts payable is considered to be
representative of their fair value because of their short maturities. The
carrying value of short-term investments approximates their fair value.
Management believes that determining a fair value for the Company's convertible
mandatory redeemable preferred stock is impractical due to the closely-held
nature of these instruments.
VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's growth and future success is substantially dependent upon its
ability to convince cable operators to offer the WORLDGATE Service to their
subscribers. Although a number of large cable operators have begun testing the
WORLDGATE Service, only a limited number have entered into written agreements
with the Company obligating them to offer the service to their subscribers.
The Company is highly reliant on two suppliers of cable boxes. At present
the agreements with these manufacturers do not require them to install the
WORLDGATE technology in their current or next generation cable boxes or prohibit
them from establishing relationships with the Company's
F-10
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
competitors. The Company is working with both manufacturers to develop an
integrated product. These manufacturers have agreed to cooperate with the
Company to certify and market such products.
The Company continues to seek additional capital resources to further the
development of its service, to expand and improve its product line and to fund
its operations.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
Stock-based compensation is recognized using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. Accordingly, compensation
expense for stock options is measured as the excess, if any, of the fair value
of the Company's stock at the date of grant over the amount an individual must
pay to acquire the stock and amortized over the vesting period. All
transactions, with other than employees, in which goods and services are the
consideration received for the issuance of equity instruments, such as stock
options, are expensed based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more reliably
measured. The Company has adopted the disclosure only provisions of Statement of
Accounting Standards No. 123, "Accounting for Stock-Based Compensations" (SFAS
123) (see Note 7).
PRO FORMA NET LOSS PER COMMON SHARE
Pro forma net loss per common share for the year ended December 31, 1998 and
the six months ended June 30, 1999 is computed using the weighted average number
of shares of Class B Common Stock outstanding during the period and gives effect
to the subsequent conversion of Series A, Series B, and Series C Preferred
shares into common stock upon effectiveness of the IPO as if such conversion
occurred on January 1, 1998 or at the date of original issuance, if later. The
resulting pro forma adjustment includes an increase in the weighted average
shares of 5,684,913 and 3,694,092 used to compute basic and diluted net loss per
common share for the year ended December 31, 1998 and the six months ended June
30, 1999, respectively. The calculation of diluted net loss per common share
excludes potential common shares as the effect would be antidilutive. Potential
common shares are composed of shares of common stock issuable upon the exercise
of stock options and warrants.
HISTORICAL NET LOSS PER SHARE
The Company computes net loss per common share in accordance with SFAS No.
128, "Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per
common share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net loss per
common share excludes potential common shares if the effect is antidilutive.
Potential common shares are composed of shares
F-11
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of common stock issuable upon the exercise of stock options and warrants and
upon conversion of Series A, Series B, and Series C Preferred Stock. Net loss
per common share on a historical basis is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss available to common stockholders:
Loss before extraordinary item.................... $(2,922,501) $(14,041,348) $(27,121,974) $(11,018,869) $(14,332,090)
Accretion on preferred stock...................... (75,880) (2,435,470) (6,145,105) (2,819,357) (2,474,755)
----------- ------------ ------------ ------------ ------------
Loss available to common stockholders*............ (2,998,381) (16,476,818) (33,267,079) (13,838,226) (16,806,845)
Extraordinary item - extinguishment of debt....... -- -- -- -- (1,018,922)
----------- ------------ ------------ ------------ ------------
Net loss available to common stockholders*........ $(2,998,381) $(16,476,818) $(33,267,079) $(13,838,226) $(17,825,767)
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
Basic and diluted net loss per common share**:
Weighted average shares outstanding............... 9,100,801 9,100,801 9,100,801 9,100,801 14,235,304
Loss before extraordinary item per share - basic
and diluted***.................................. $ (0.33) $ (1.81) $ (3.66) $ (1.52) $ (1.18)
Extraordinary item - extinguishment of debt....... -- -- -- -- (0.07)
----------- ------------ ------------ ------------ ------------
Net loss per common share - basic and
diluted***...................................... $ (0.33) $ (1.81) $ (3.66) $ (1.52) $ (1.25)
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
</TABLE>
* Net loss available to common stockholders is the same for purposes of
calculating basic and diluted loss per common share.
** Basic and diluted net loss per common share are equal, since common stock
equivalents are not included, as inclusion of such shares would have an
anti-dilutive effect.
*** For purposes of computing net loss per common share amounts, loss before
extraordinary item and net loss have been reduced by the accretion on
preferred stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 98-5 (SOP 98-5), "Reporting on the
Costs of Start-Up Activities." SOP 98-5 generally requires costs of start-up
activities to be expensed instead of being capitalized and amortized and is
required to be adopted no later than Janaury 1, 1999. The Company does not
expect the adoption of SOP 98-5 to have a material effect on its results of
operations and financial condition.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 provides,
among other things, guidance for determining whether computer software is for
internal use and when the cost related to such software should be expensed as
incurred or capitalized and amortized. SOP 98-1 is required to be applied
prospectively and adopted no later than January 1, 1999. The Company does not
expect the adoption of SOP 98-1 to have a material effect on its results of
operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" (SFAS 130), which is effective for years
beginning after December 15, 1997. This statement establishes standards for the
reporting and display of comprehensive income and its components. Comprehensive
income is defined to include all changes in equity during a period except those
resulting from investments by owners and distributions to owners. The Company
adopted SFAS 130 in 1998; however, as of December 31, 1998, there were no
components of comprehensive income for disclosure.
RECLASSIFICATIONS
Certain amounts have been reclassified from previous years to conform with
the 1998 presentation.
F-12
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
3. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ ------------
1997 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Raw material.......................................... $ 148,629 $ 991,670 $ 1,950,890
Work-in-progress...................................... 179,205 16,461 839,634
Finished goods........................................ 292,071 1,728,381 2,165,733
---------- ------------ ------------
$ 619,905 $ 2,736,512 $ 4,956,257
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
Customers held $292,071, $1,264,051 and $1,613,150 of the Company's finished
goods inventories at December 31, 1997 and 1998 and June 30, 1999, respectively,
for use in system trials.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Computer equipment.................................................... $ 50,893 $ 184,502
Office equipment...................................................... 11,299 203,646
Furniture and fixtures................................................ 165,315 323,095
Leasehold improvements................................................ 21,310 46,969
Capital leases:
Equipment........................................................... 22,045 22,045
---------- ----------
270,862 780,257
Less accumulated depreciation and amortization:
Property and equipment.............................................. (18,626) (128,787)
Capital leases...................................................... (3,670) (8,079)
---------- ----------
Property and equipment, net........................................... $ 248,566 $ 643,391
---------- ----------
---------- ----------
</TABLE>
5. FINANCING AGREEMENT
During 1997, the Company entered into a $1,000,000 equipment facility of
which $429,749 remained available at December 31, 1997. During 1998, the amount
of the equipment facility was increased to $2,000,000, of which $419,044
remained available at December 31, 1998. The weighted average interest rate on
the outstanding notes payable borrowings at December 31, 1997 and 1998 was
8.89%.
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ------------
<S> <C> <C>
Notes payable....................................................... $ 570,251 $ 1,111,357
Less: current maturities............................................ 182,445 515,798
---------- ------------
Total long-term debt............................................ $ 387,806 $ 595,559
---------- ------------
---------- ------------
</TABLE>
F-13
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. FINANCING AGREEMENT (CONTINUED)
At December 31, 1998, the installments of the notes payable maturing in each
of the following years were: 1999--$515,798, 2000--$490,521 and 2001--$105,038.
The notes payable are collateralized by certain equipment, furniture and
fixtures.
6. INCOME TAXES
The significant components of deferred tax assets at December 31, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------ -------------
<S> <C> <C>
Federal tax loss carryforward.................................... $ 4,136,503 $ 12,738,420
State tax loss carryforward...................................... 999,000 999,000
Property and equipment........................................... 838,625 1,107,971
Research and experimentation credit.............................. 99,327 173,174
Section 263(A) adjustment........................................ -- 33,819
Officers' compensation........................................... -- 26,891
Compensation on non-qualified stock options...................... -- 99,974
Warrant issuance................................................. 357,428 --
------------ -------------
6,430,883 15,179,249
Less: valuation allowance........................................ (6,430,883) (15,179,249)
------------ -------------
$ -- $ --
------------ -------------
------------ -------------
</TABLE>
A valuation allowance was established against the Company's net deferred tax
asset due to the Company's lack of earnings history and, accordingly, the
uncertainty as to the realizability of the asset.
At December 31, 1998, the Company had a net operating loss carryforward of
approximately $38,465,000 for federal tax purposes, with $735,000 expiring in
2011, $12,008,000 expiring in 2012 and $25,722,000 expiring in 2018 if not
utilized. The net operating loss carryforward for state tax purposes is
approximately $10,000,000, which will expire in 2009. These carryforwards may be
applied as a reduction to future taxable income of the Company, if any. The
state net operating loss carryforwards are limited by state tax law to a maximum
utilization of $1,000,000 per year. The Company also has research and
experimentation credit carryforwards of approximately $173,000, with $11,500
expiring in 2011, $87,500 expiring in 2012 and $74,000 expiring in 2013. The
Company's ability to utilize its net operating loss carryforwards and credit
carryforwards may be subject to annual limitations as a result of prior or
future changes in ownership and state tax law. The IPO as presently contemplated
will cause such a change.
7. STOCKHOLDERS' DEFICIT
COMMON STOCK
On December 6, 1996, the date of the merger of WorldGate and the LLC, the
Company allocated 9,100,801 shares of common stock to the shareholders in the
LLC and certain key employees, who had been granted profit interests. As a
result of the conversion of such profit interests to equity, the Company
recognized $816,230 in compensation expense. The merger was accounted for as a
reorganization of entities under common control.
F-14
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
On April 27, 1998, the board of directors authorized an amendment to the
Company's Articles of Incorporation creating Class A and Class B Common Stock,
each having 27,608,000 shares authorized. Each outstanding share of common stock
was reclassified as one share of Class B Common Stock. Class A and B Common
Stock have one and five votes per share, respectively.
On July 13, 1998, the board of directors further amended the Articles of
Incorporation to increase the number of authorized shares of Class A Common
Stock to 50,000,000 shares and the number of authorized shares of preferred
stock to 13,500,000 shares.
CONVERTIBLE MANDATORY REDEEMABLE PREFERRED STOCK
The Company has authorized 13,500,000 shares of $0.01 par value preferred
stock of which 2,752,111, 3,270,760 and 3,181,819 shares have been designated as
Series A Convertible Preferred Stock ("Series A Preferred"), Series B
Convertible Preferred Stock ("Series B Preferred") and Series C Convertible
Preferred Stock ("Series C Preferred"), respectively (collectively the
"Preferred Stocks").
In December 1996 the Company sold 1,933,000 shares of Series A Preferred
(2,577,333 shares of Class B Common Stock, post-split) for $4.395 per share for
$8,321,366, net of $174,169 of offering expenses. In 1997, the Company completed
its Series A Preferred sale in which it issued an additional 819,111 shares
(1,092,148 shares of Class B Common Stock, post-split) for $3,400,733, net of
$199,260 of offering expenses.
In December 1997, the Company sold 2,783,031 shares of Series B Preferred
(1,855,354 shares of Class B Common Stock, post-split) at $7.10 per share for
$18,640,017, net of $1,119,503 of offering expenses.
In September through December 1998, the Company sold 832,277 shares of
Series C Preferred (554,851 shares of Class A Common Stock, post-split) for
$11.00 per share for $8,622,604, net of $532,423 of offering expenses. The
Series B and C Preferred provides certain anti-dilutive provisions that may be
triggered by an initial public offering.
All holders of outstanding shares of the Preferred Stocks have the right to
convert their shares into common stock at any time. Each share of Series A
Preferred is initially convertible into two shares of Class B Common Stock and
each share of Series B Preferred and Series C Preferred is initially convertible
into one share of Class B Common Stock and Class A Common Stock, respectively.
Each share of the Preferred Stocks will be automatically converted into shares
of common stock at the then applicable conversion rate and price, upon the
earlier of (1) completion by the Company of a qualified (as defined)
underwritten public offering of common stock or (2) the conversion date selected
by the holders of a majority of the outstanding shares of each Series A, Series
B and Series C Preferred Stock.
The redemption price of the shares corresponds to the original purchase
price of each share plus any declared and unpaid dividends, or if the Company
fails to meet certain financial performance goals, the original purchase price
of each share plus interest at 15% per annum. The Preferred shareholders are
permitted to redeem their shares commencing December 2000 provided that the
Company shall not be required to redeem more than 50% of each of the Preferred
Stocks during the twelve-month period commencing December 2000. The Company is
accreting the mandatory redemption amount, at the rate of 15% compounded per
annum, such that the carrying value of the preferred stock will equate to the
F-15
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
redemption amount at the time of redemption. The difference between the
redemption amount and the fair value of the preferred stock at the date of issue
is being amortized from the date of issuance assuming the preferred stockholders
redeem 50% of their shares in December 2000 and the balance in December 2001.
For the year ended December 31, 2000, the Company may be required to redeem up
to 1,376,056 Series A Preferred shares for $11,618,988, up to 1,401,516 Series B
Preferred shares for $16,757,459 and up to 416,139 Series C Preferred shares for
$7,662,786. At December 31, 2001, the Company may be required to redeem all the
Series A, Series B and Series C Preferred shares for $23,237,976, $33,514,917
and $15,325,572, respectively.
The holders of the Preferred Stocks have voting rights on a converted basis
equivalent to those of common stockholders on most matters. However, the
approval of a majority of the Series A, Series B and Series C Preferred
stockholders is required for certain transactions. The Series A, Series B and
Series C Preferred stockholders fully participate in any dividends declared by
the board of directors of the Company at the rate of $0.35, $0.57 and $0.88,
respectively, per share per annum. These dividends are non-cumulative. No
dividends have been declared through December 31, 1998.
Upon any liquidation, dissolution, or winding up of the Company, liquidation
proceeds will be distributed: (1) first, on a PARI PASSU basis, to the holders
of Series C Preferred at $11.00 per share plus any unpaid dividends, Series B
Preferred at $7.10 per share plus any unpaid dividends and to the holders of
Series A Preferred at $4.395 per share plus any unpaid dividends, (2) second to
the holders of common stock in an amount equal to $2 million and (3) equally
thereafter. The liquidation value of each of the Preferred Stocks at December
31, 1997 and 1998 is equal to the respective carrying amounts on the balance
sheet.
The agreements with the holders of the Preferred Stocks contain certain
provisions which, among other things, restrict borrowings and changes in capital
structure and ownership. Events of noncompliance under these provisions entitle
the holders of these shares to the right of an immediate voluntary redemption.
In January and February 1999, the Series A, Series B and Series C Preferred
stockholders agreed to waive certain rights under their respective stock
agreements.
WARRANTS
In November 1997, the Company issued a warrant to purchase 394,880 shares of
Series B Preferred (263,253 shares of Class B Common Stock, post-split) at $7.10
per share which expires June 30, 2002 to a strategic investor under the terms of
a master affiliation agreement. As a result of the issuance of the warrant, the
Company recorded approximately $881,000 as marketing expense which was the
estimated fair market value of the warrant at that time.
Also, in connection with the Series B Preferred private placement, the
underwriter received warrants to purchase 60,474 and 12,375 shares of Series B
Preferred (40,316 and 8,250 shares of Class B Common Stock, post-split) at $7.10
per share which expire in November and December 2002, respectively.
STOCK OPTION PLAN
In December 1996, the Company adopted the 1996 Stock Option Plan ("1996
Plan"), as amended. This plan provides for the granting of stock options to
officers, directors, employees and consultants. Grants under this plan may
consist of options intended to qualify as incentive stock options ("ISOs"),
F-16
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
or nonqualified stock options that are not intended to so qualify ("NQSOs"). The
option price of any ISO will not be less than the fair market value on the date
the option is granted (110% of fair value in certain instances). The option
price of a NQSO may be greater than, equal to, or less than the fair market
value on the date the option is granted. The 1996 Plan authorizes a maximum of
933,333 shares of common stock.
The Plan is administered by a committee of the board of directors. The
committee determines the term of each option, provided, however, that the
exercise period may not exceed ten years from the date of grant, and for ISOs,
in certain instances, may not exceed five years. The options granted under this
plan vest ratably over a four-year period from the date of grant.
Compensation expense of approximately $109,000 and $1,133,000 is being
recognized, over the four-year vesting period for certain options which were
granted to employees in 1997 and 1998, respectively, at below the estimated fair
market value at the time of grant, to acquire 87,667 and 213,343 shares of
common stock, respectively. Compensation expense of approximately $7,000 and
$204,000 was recognized in 1997 and 1998, respectively. Also, compensation
expense of approximately $63,000 was recognized in 1997 for stock options
granted to non-employees in connection with consulting services provided.
Compensation expense of approximately $340,000 is being recognized over the
four-year vesting period of options which were granted to employees to acquire
39,058 shares of common stock in January 1999 at below the estimated fair market
value at the time of such grants. Compensation expense related to these options
of approximately $42,000 was recognized in the six months ended June 30, 1999.
Compensation expense of approximately $72,000 and $156,000, respectively, was
recognized in the six months ended June 30, 1998 and 1999 that related to
options granted prior to January 1, 1999 at less than the fair market value at
the time of such grants.
If compensation expense had been determined based on the fair value of the
options at the grant dates for those options for which no compensation expense
has been recognized, consistent with the method of SFAS 123, the Company's net
loss and loss per share would have been:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C> <C>
Net loss available to
common stockholders: As reported................... $ (16,476,818) $ (33,267,079)
Pro forma..................... $ (16,493,691) $ (33,343,272)
Net loss per common share:
basic and diluted: As reported................... $ (1.81) $ (3.66)
Pro forma..................... $ (1.81) $ (3.66)
</TABLE>
Such pro forma disclosures may not be representative of future compensation
expense because options vest over several years and additional grants are made
each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes minimum value option valuation model. The following
weighted-average assumptions were used for grants in 1997 and 1998,
respectively: expected volatility of 0% and 0%; risk-free interest rates of 6.2%
and 5.4%; dividend yield of 0% and 0%; and expected lives of 5 and 5.91 years.
The weighted-average
F-17
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
fair value of the options granted during the year was $0.615 and $6.54 per
option at December 31, 1997 and 1998, respectively.
A summary of the Company's stock plan is presented below:
<TABLE>
<CAPTION>
STOCK WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------- -----------------
<S> <C> <C>
Outstanding, December 31, 1996................................... -- --
Granted.......................................................... 435,000 $ 2.26
Exercised........................................................ -- --
Cancelled/forfeited.............................................. -- --
---------
Outstanding, December 31, 1997................................... 435,000 2.26
Granted.......................................................... 219,643 4.50
Exercised........................................................ -- --
Cancelled/forfeited.............................................. (13,300) 3.54
---------
Outstanding, December 31, 1998................................... 641,343 3.00
Granted.......................................................... 315,905 15.26
Excercised....................................................... (15,828) 2.71
Cancelled/forfeited.............................................. (45,455) 3.22
---------
Outstanding, June 30, 1999....................................... 895,965 $ 7.74
---------
---------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING
--------------------------------------- EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
- ------------------------------------------------------ --------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.75--$1.50.......................................... 87,333 7.5 $ 1.245 21,833 $ 1.245
$1.51--$2.25.......................................... 297,000 7.8 2.22 75,667 2.22
$2.26--$4.50.......................................... 257,010 8.9 4.50 11,250 4.50
--------- ----------- ---------- -----------
641,343 8.1 $ 3.00 108,750 $ 2.25
--------- ----------
--------- ----------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In November 1997, the Company approved and adopted an Employee Stock
Purchase Plan (the "ESPP") to provide employees, directors, officers,
consultants or advisors of the Company the ability to purchase Series B
Preferred at $7.10 per share. During 1998, 20,000 shares of Series B Preferred
(13,333 shares of Class B Common Stock, post-split) were sold for $142,000. The
ESPP has been discontinued.
F-18
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
SIGNIFICANT AGREEMENTS
The Company has entered into various agreements in which the Company has
obtained the right to use and distribute licensed software and certain
proprietary technology as incorporated into the WORLDGATE Service until
September 2002 for total minimum subscription fees of $550,000. For the years
ended December 31, 1997 and 1998, approximately $110,000 and $208,000 has been
expensed, respectively. In addition, in one of the agreements, the Company will
be required to pay an annual maintenance service fee of $0.02 per subscriber
over two million subscribers.
LEGAL
The Company is a party to various pending legal actions. The Company does
not expect that the ultimate resolution of pending legal matters in future
periods will have a material effect on its financial position or cash flows, but
it could have a material effect on its results of operations.
LEASES
The Company has entered into operating leases for its office facilities and
certain equipment.
The future minimum rental commitments under capital leases and operating
leases for each fiscal year ended December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
- --------------------------------------------------------------------- --------- ------------
<S> <C> <C>
1999............................................................... $ 5,699 $ 757,000
2000............................................................... 5,699 1,046,000
2001............................................................... 5,699 921,000
2002............................................................... 2,354 891,000
2003............................................................... -- 909,000
Thereafter......................................................... -- 5,301,000
--------- ------------
Total minimum lease payments....................................... 19,451 $ 9,825,000
------------
------------
Less amounts representing interest................................. (3,506)
---------
Present value of net minimum lease payments (including $4,210
currently payable)............................................... $ 15,945
---------
---------
</TABLE>
Total rent expense for operating leases for the years ended December 31,
1997 and 1998 amounted to approximately $299,497 and $554,510, respectively.
9. RELATED PARTY TRANSACTIONS
In 1997, the Company entered into an agreement with a cable operator who is
an investor. Revenues recognized from this investor were approximately $0,
$46,000 and $451,000, and $150,000 and $644,000 for the years ended December 31,
1996, 1997 and 1998, and for the six months ended June 30, 1998 and 1999,
respectively. Accounts receivable amounted to approximately $11,000 and $176,000
and $214,000 at December 31, 1997 and 1998 and June 30, 1999, respectively.
In 1997 and 1998, the Company entered into agreements with four stockholders
to provide the Company with engineering and development support. As a result of
these agreements, the Company has expensed approximately $1,125,000 and
$2,951,000, and $608,000 and $1,718,000 for the years
F-19
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
ended December 31, 1997 and 1998, and for the six months ended June 30, 1998 and
1999, respectively. At December 31, 1998, an additional $2,800,000 of work
remains to be funded and performed under these contracts. Accounts payable
amounted to approximately $93,000 and $41,000 and $82,000 as of December 31,
1997 and 1998 and June 30, 1999, respectively. These stockholders are suppliers
of technology and components for the Company's products and services. The
agreements the Company has with these stockholders provide for licensing of
technology, as well as contracted services, including hardware and software
development, product testing and certification, and the creation and development
of tools and systems to facilitate the Company's engineering efforts. These
agreements do not provide for ongoing royalties, purchase provisions, nor for
any requirement to provide additional funding to the Company. Also revenues
recognized from stockholders who provide engineering and development support,
for the year ended December 31, 1998 and for the six months ended June 30, 1999
amounted to approximately $100,000 and $167,000, respectively, from the sale of
head-end units and other equipment for use in certain facilities.
In 1998, the Company entered into a leasing arrangement for a building,
which will be occupied in 1999, with an entity formed by non-employee investors.
Included in Deposits and other is $1,000,000 related to this lease.
During 1996, the Company borrowed approximately $350,000 from its Chairman.
The note bore interest at 7% and was repaid in December 1996.
10. SUBSEQUENT EVENTS
In January and February 1999, the Company sold 697,437 shares of Series C
Preferred (464,958 shares of Common Stock as converted) for $11.00 per share for
approximately $7,600,000. These shares converted into shares of Common Stock
upon completion of the Company's IPO.
The Company effected a 2-for-3 reverse stock split in April 1999. All common
stock share data have been retroactively adjusted to reflect this change.
In March 1999, the Company received proceeds of $911,600 and $4,558,000
through the issuance of $1,000,000 and $5,000,000 of notes payable with a stated
interest rate of 12.48% due September 1999 and December 1999, respectively. In
connection with the issuance of these notes payable, the holders of the notes
received warrants to purchase up to 331,490 shares of common stock at an
exercise price of $16.50 per share. The fair value of the warrants will be
accounted for as an additional discount of the notes payable which will be
amortized as additional interest expense over the term of the notes. These notes
payable became immediately due, and were paid, upon the completion of the
Company's initial public offering.
In the second quarter of 1999, the Company completed its initial public
offering of 5,750,000 shares of common stock (including the exercise of the
underwriters overallotment option) and received net proceeds of approximately
$111.2 million.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[LOGO]
4,100,000 SHARES OF COMMON STOCK
-------------------
PROSPECTUS
-------------------
DONALDSON, LUFKIN & JENRETTE
GERARD KLAUER MATTISON & CO., INC.
JEFFERIES & COMPANY, INC.
JANNEY MONTGOMERY SCOTT LLC
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by WorldGate in connection
with the issuance and distribution of the securities being offered hereby (other
than underwriting discounts and commissions and underwriters' non-accountable
expense allowance):
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 48,574
NASD filing fee.................................................... 17,973
Nasdaq filing fee.................................................. 17,500
Printing and engraving expenses.................................... *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Blue Sky fees and expenses (including legal fees).................. *
Transfer agent and registrar fees and expenses..................... *
Miscellaneous...................................................... *
---------
Total.............................................................. $ *
---------
---------
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant's certificate of incorporation, as amended, currently states
that a director of the registrant shall have no personal liability to the
registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director except to the extent that Section 102(b)(7) (or any successor
provision) of the Delaware General Corporation Law, as amended from time to
time, expressly provides that the liability of a director may not be eliminated
or limited. No amendment or repeal of this provision shall apply to or have any
effect on the liability or alleged liability of any director of the registrant
for or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
The registrant's by-laws require the registrant to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is or was a director or
officer of the registrant, or is or was serving while a director or officer of
the registrant at its request as a director, officer, employee, agent, fiduciary
or other representative of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines, excise taxes and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding to the full extent permissible under Delaware law. Any person
claiming indemnification as provided in the bylaws shall be entitled to advances
from the registrant for payment of the expenses of defending actions against
such person in the manner and to the full extent permissible under Delaware law.
On the request of any person requesting indemnification under such provisions,
the board of directors of the registrant or a committee thereof shall determine
whether such indemnification is permissible or such determination shall be made
by independent legal counsel if the board or committee so directs or if the
board or committee is not empowered by statute to make such determination. The
indemnification and advancement of expenses provided by the bylaws shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled
II-1
<PAGE>
under any insurance or other agreement, vote of shareholders or disinterested
directors or otherwise, both as to actions in their official capacity and as to
actions in another capacity while holding an office, and shall continue as to a
person who has ceased to be a director or officer and shall inure to the benefit
of the heirs, executors and administrators of such person. The registrant shall
have the power to purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the registrant or is or was
serving at its request as a director, officer, employee, agent, fiduciary or
other representative of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the registrant would have the power to indemnify
him against such liability under the provisions of the bylaws. The duties of the
registrant to indemnify and to advance expenses to a director or officer
provided in the bylaws shall be in the nature of a contract between the
registrant and each such director or officer, and no amendment or repeal of any
such provision of the bylaws shall alter, to the detriment of such director or
officer, the right of such person to the advancement of expenses or
indemnification related to a claim based on an act or failure to act which took
place prior to such amendment, repeal or termination. Delaware law also permits
indemnification in connection with a proceeding brought by or in the right of
the registrant to procure a judgment in its favor. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the registrant pursuant to the foregoing
provisions, the registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in that Securities Act and is therefore unenforceable. The
registrant has directors and officers liability insurance.
The underwriting agreement provides that the underwriters are obligated,
under some circumstances, to indemnify directors, officers and controlling
persons of the registrant against some liabilities, including liabilities under
the Act. Reference is made to Section of the form of underwriting agreement
which will be filed by amendment as Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception, WorldGate has made the following sales of unregistered
securities to employees and various institutional and other accredited
investors:
- On December 4, 1996, WorldGate issued an aggregate of 9,100,801 shares of
class B common stock to various management employees in exchange for the
cancellation of their membership interests in the LLC. This transaction
was exempt from registration pursuant to Section 4(2) of the Securities
Act.
- From December 11, 1996 through July 2, 1997, WorldGate sold an aggregate
of 2,752,111 shares of series A preferred stock at a purchase price of
$4.395 per share to various accredited investors. These sales were exempt
from registration pursuant to Section 4(2) of the Securities Act and Rule
506 of Regulation D thereunder.
- From November 24, 1997 through December 31, 1997, WorldGate sold an
aggregate of 2,783,031 shares of series B preferred stock at a purchase
price of $7.10 per share to various accredited investors. On November 7,
1997, November 24, 1997, December 5, 1997 and December 31, 1997, WorldGate
also issued warrants to purchase an aggregate of 467,729 shares of series
B preferred stock at an exercise price of $7.10 a share to various
institutional accredited investors. These sales were exempt from
registration pursuant to Section 4(2) of the Securities Act and Rule 506
of Regulation D thereunder.
- WorldGate also sold an aggregate of 20,000 shares of series B preferred
stock at a purchase price of $7.10 a share to various employees of
WorldGate pursuant to an Employee Stock Purchase Plan and Agreement dated
January 23, 1998. These sales were exempt from registration pursuant to
Section 4(2) of the Securities Act and Rule 701 thereunder.
II-2
<PAGE>
- From September 2, 1998 through February 8, 1999, WorldGate sold an
aggregate of 1,529,714 shares of series C preferred stock at a purchase
price of $11.00 per share to various accredited investors. These sales
were exempt from registration pursuant to Section 4(2) of the Securities
Act and Rule 506 of Regulation D thereunder.
- On March 2, 1999 WorldGate issued its senior secured promissory notes in
the aggregate principal amount of $6 million and issued warrants to
purchase up to 331,490 shares of common stock. These sales were exempt
from registration pursuant to Section 4(2) of the Securities Act.
Prior to the filing of the Form S-8 on May 20, 1999, pursuant to WorldGate's
stock option plan, as amended, WorldGate has granted options to purchase a total
of 911,225 shares of common stock to its employees and some other persons during
the past three fiscal years at exercise prices ranging from $0.75 to $27.00 per
share. For a more detailed description of WorldGate's stock option plan, see
"Management--Stock Option Plan" in this registration statement. In granting the
options and selling the underlying securities upon exercise of the options,
WorldGate is relying upon exemptions from registration set forth in Rule 701 and
Section 4(2) of the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement. ##
3.1 Form of Amended and Restated Certificate of Incorporation of the Company. *
3.2 Form of Amended and Restated Bylaws of the Company. *
5.1 Opinion of Drinker Biddle & Reath LLP. ##
10.1 Lease Agreement dated October 7, 1998 between WorldGate and Balanced Capital LLC, as amended by First
Amendment to Lease Agreement dated December 7, 1998 between WorldGate and Balanced Capital LLC, as
further amended by Second Amendment to Lease Agreement dated December 17, 1998 between WorldGate and
Balanced Capital LLC. *
10.2 Development Agreement dated October 15, 1998 between WorldGate and Scientific-Atlanta, Inc. *+
10.3 Memorandum of Understanding dated September 2, 1998 between WorldGate and General Instrument
Corporation. *+
10.4 Senior Loan and Security Agreement No. 0098 dated July 15, 1997 between Phoenix Leasing Incorporated and
WorldGate, as amended by Amendment No. 1 to Senior Loan and Security Agreement No. 0098 dated June 18,
1998 between Phoenix Leasing Incorporated and WorldGate. *
10.5 Master Agreement dated November 7, 1997 between Charter Communications, Inc. ("Charter") and WorldGate.
*+
10.6 Warrant Agreement dated November 7, 1997 between Charter and WorldGate. *
10.7 Affiliation Agreement dated November 7, 1997 between Charter and WorldGate. *+
10.8 Amended and Restated 1996 Stock Option Plan, as further amended by First Amendment to 1996 Stock Option
Plan dated June 12, 1998. *
10.9 Agreement dated June 15, 1998 between WorldGate and Thomas R. Baxter. *
10.10 First Amended and Restated Stockholders' Agreement dated September 2, 1998 among WorldGate and the
stockholders identified therein. *
10.11 Warrant dated March 2, 1999 issued to Ampal by WorldGate. *
10.12 Warrant dated March 2, 1999 issued to Strong River by WorldGate. *
10.13 Second Amendment to the 1996 Stock Option Plan, dated , 1999. ##
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
21.1 Subsidiaries of WorldGate. *
23.1 Consent of PricewaterhouseCoopers LLP. **
23.2 Consent of Drinker Biddle & Reath LLP (to be included in Exhibit 5.1). ##
24.1 Power of Attorney (included in signature page). #
27.1 Financial Data Schedule. #
</TABLE>
- ------------------------
# Filed previously.
## To be filed by amendment.
* Incorporated by reference to the exhibits to the Registration Statement on
Form S-1 (No. 333-71997) filed in connection with WorldGate's initial public
offering.
** Filed herewith.
+ A portion of this exhibit has been omitted pursuant to a request for
confidential treatment which has previously been granted by the SEC.
(B) FINANCIAL STATEMENT SCHEDULES
All information for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission is either included in the
financial statements or is not required under the related instructions or is
inapplicable, and therefore has been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) It will provide to the underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment no. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Trevose,
Pennsylvania on October 1, 1999.
WORLDGATE COMMUNICATIONS, INC.
BY: /S/ HAL M. KRISBERGH
-----------------------------------------
Hal M. Krisbergh,
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board and
/s/ HAL M. KRISBERGH Chief Executive Officere
- ------------------------------ (Principal Executive October 1, 1999
Hal M. Krisbergh Officer)
/s/ CHRISTINE K. VAN HORNE Authorized officer
- ------------------------------ (Principal Financial and October 1, 1999
Christine K. Van Horne Accounting Officer)
* Director, Vice President
- ------------------------------ and General Manager October 1, 1999
David E. Wachob
* Director
- ------------------------------ October 1, 1999
Thomas G. Baxter
* Director
- ------------------------------ October 1, 1999
Alan Gerry
* Director
- ------------------------------ October 1, 1999
Marcia J. Hooper
* Director
- ------------------------------ October 1, 1999
Ronald A. Walter
<TABLE>
<S> <C> <C> <C>
*By: /s/ RANDALL J. GORT
-------------------------
Randall J. Gort October 1, 1999
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement. ##
3.1 Form of Amended and Restated Certificate of Incorporation of the Company. *
3.2 Form of Amended and Restated Bylaws of the Company. *
5.1 Opinion of Drinker Biddle & Reath LLP. ##
10.1 Lease Agreement dated October 7, 1998 between WorldGate and Balanced Capital LLC, as amended by
First Amendment to Lease Agreement dated December 7, 1998 between WorldGate and Balanced Capital
LLC, as further amended by Second Amendment to Lease Agreement dated December 17, 1998 between
WorldGate and Balanced Capital LLC. *
10.2 Development Agreement dated October 15, 1998 between WorldGate and Scientific-Atlanta, Inc. *+
10.3 Memorandum of Understanding dated September 2, 1998 between WorldGate and General Instrument
Corporation. *+
10.4 Senior Loan and Security Agreement No. 0098 dated July 15, 1997 between Phoenix Leasing
Incorporated and WorldGate, as amended by Amendment No. 1 to Senior Loan and Security Agreement
No. 0098 dated June 18, 1998 between Phoenix Leasing Incorporated and WorldGate. *
10.5 Master Agreement dated November 7, 1997 between Charter Communications, Inc. ("Charter") and
WorldGate. *+
10.6 Warrant Agreement dated November 7, 1997 between Charter and WorldGate. *
10.7 Affiliation Agreement dated November 7, 1997 between Charter and WorldGate. *+
10.8 Amended and Restated 1996 Stock Option Plan, as further amended by First Amendment to 1996 Stock
Option Plan dated June 12, 1998. *
10.9 Agreement dated June 15, 1998 between WorldGate and Thomas R. Baxter. *
10.10 First Amended and Restated Stockholders' Agreement dated September 2, 1998 among WorldGate and
the stockholders identified therein. *
10.11 Warrant dated March 2, 1999 issued to Ampal by WorldGate. *
10.12 Warrant dated March 2, 1999 issued to Strong River by WorldGate. *
10.13 Second Amendment to the 1996 Stock Option Plan, dated , 1999. ##
21.1 Subsidiaries of WorldGate. *
23.1 Consent of PricewaterhouseCoopers LLP. **
23.2 Consent of Drinker Biddle & Reath LLP (to be included in Exhibit 5.1). ##
24.1 Power of Attorney (included in signature page). #
27.1 Financial Data Schedule. #
</TABLE>
- ------------------------
# Filed previously.
## To be filed by amendment.
* Incorporated by reference to the exhibits to the Registration Statement on
Form S-1 (No. 333-71997) filed in connection with WorldGate's initial public
offering.
** Filed herewith.
+ A portion of this exhibit has been omitted pursuant to a request for
confidential treatment which has previously been granted by the SEC.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 8, 1999, except as to the information in Note 10,
for which the date is April 15, 1999, relating to the financial statements of
WorldGate Communications, Inc., which appears in such Registration Statement.
We also consent to the references to us under the headings "Experts" and
"Selected Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 1, 1999
