<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1999
REGISTRATION NO. 333-71997
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 3
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 of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
</TABLE>
3220 TILLMAN DRIVE, SUITE 300
BENSALEM, PENNSYLVANIA 19020
(215) 633-5100
(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.
3220 TILLMAN DRIVE, SUITE 300
BENSALEM, PENNSYLVANIA 19020
(215) 633-5100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
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
</TABLE>
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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PRICE PER UNIT(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
common stock, par value $.01 per share 5,750,000 $20.00 $115,000,000 $11,828
</TABLE>
(1) Includes 750,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933.
(3) Represents the incremental registration fee over the registration fee of
$17,904 paid by the registrant with its filing on February 9, 1999 and
$2,238 paid by the registrant with its filing on March 23, 1999.
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, DATED APRIL 15, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
5,000,000 SHARES
[LOGO]
WORLDGATE COMMUNICATIONS, INC.
COMMON STOCK
------------------
This is an initial public offering of shares of common stock of WorldGate
Communications, Inc. No public market currently exists for our common stock. We
estimate that the initial public offering price will be between $18 and $20 per
share.
PROPOSED TRADING SYMBOL:
NASDAQ NATIONAL MARKET SYMBOL--WGAT
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ---------
<S> <C> <C>
Public Offering Price.................................................... $ $
Underwriting Discounts and Commissions................................... $ $
Proceeds to WorldGate.................................................... $ $
</TABLE>
We have granted to the underwriters an option to purchase up to 750,000
additional shares to cover over-allotments.
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.
---------------------
GERARD KLAUER MATTISON & CO., INC.
JEFFERIES & COMPANY, INC.
JANNEY MONTGOMERY SCOTT INC.
Prospectus dated , 1999
<PAGE>
This prospectus includes statistical data regarding our company, 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.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
WHICH IS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS MAY BE USED ONLY WHERE IT
IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY
BE ACCURATE ON THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY
OF THIS PROSPECTUS OR OF ANY SALE OF COMMON STOCK.
DEALER PROSPECTUS DELIVERY OBLIGATION
Until , 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING AND OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
ASSUMES:
- THE UNDERWRITERS DO NOT EXERCISE THEIR OVER-ALLOTMENT OPTION,
- AN OFFERING PRICE OF $19.00 PER SHARE, THE MID-POINT OF THE ASSUMED PRICE
RANGE,
- THE CONVERSION OF ALL OUTSTANDING SHARES OF SERIES A, SERIES B AND SERIES
C PREFERRED STOCK AND ALL OUTSTANDING SHARES OF CLASS B COMMON STOCK INTO
COMMON STOCK, AND
- A 2-FOR-3 STOCK SPLIT TO BE EFFECTED IMMEDIATELY BEFORE THE OFFERING.
THE COMPANY
We provide a new 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,
- 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 enabling viewers to
dynamically link from television programming and advertising to related
Web sites.
We believe this low cost combination of television and the Internet will
help transform advertising, electronic commerce and information delivery for the
consumer mass market. Our service uses a standard cable television box that has
been WORLDGATE enabled and does not require a personal computer or additional
set-top appliance.
The WORLDGATE Service is designed to operate with cable systems using
advanced analog 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 either an advanced analog or
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.
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 CHANNEL
HYPERLINKING capability.
Our executive offices are located at 3220 Tillman Drive, Suite 300,
Bensalem, Pennsylvania 19020. Our telephone number is (215) 633-5100.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......... 5,000,000 shares
Common stock to be
outstanding immediately
after this offering........ 20,658,720 shares
Use of proceeds.............. We will use the net proceeds of this offering to repay
outstanding debt, for capital expenditures and for general
corporate purposes, including working capital and research
and development
Proposed Nasdaq National
Market symbol for our
common stock............... WGAT
</TABLE>
The number of shares of our common stock offered and common stock
outstanding immediately after this offering is based on shares of our common
stock outstanding as of March 31, 1999, excluding 1,557,061 shares of our common
stock subject to outstanding options and warrants and 19,581 shares of our
common stock available for future grants under our stock option plan. If the
underwriters exercise in full the over-allotment option, there will be
21,408,720 shares outstanding.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
(In thousands, except share and per share data)
The following table summarizes our financial data. The data presented in
this table is derived from the "Selected Financial Information" and the
financial statements and notes which are included elsewhere in this prospectus.
You should read those sections for a further explanation of the financial data
summarized here. The pro forma balance sheet data gives effect to the sale of
the series C preferred stock in January and February 1999 for aggregate gross
proceeds of approximately $7.6 million. In addition, the pro forma balance sheet
gives effect to the issuance of notes payable in March 1999 in the face amount
of $6 million which are recorded net of original issue discount of $530,000 and
an additional discount of $1,030,000, representing the value of detachable
warrants issued in connection with this debt. The pro forma as adjusted balance
sheet data also gives effect to this offering and the application of the
estimated net proceeds of approximately $87.6 million. The pro forma net loss
per common share data gives effect to the conversion of all preferred stock
outstanding as of December 31, 1998 into common stock.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------ ------------ -------------
STATEMENT OF OPERATIONS DATA:
Revenues.............................................................. $ 141 $ 1,022
Costs and expenses:
Cost of revenues.................................................. 1,530 9,919
Engineering and development....................................... $ 1,408 6,981 9,684
Sales and marketing............................................... 428 3,623 5,157
General and administrative........................................ 1,093 2,432 3,587
Depreciation and amortization..................................... 22 119
------------ ------------ -------------
Total costs and expenses...................................... 2,929 14,588 28,466
Loss from operations.................................................. (2,929) (14,447) (27,444)
Other income, net..................................................... 8 423 423
Interest expense...................................................... (2) (17) (101)
------------ ------------ -------------
Net loss.............................................................. (2,923) (14,041) (27,122)
Accretion on preferred stock.......................................... (75) (2,436) (6,145)
------------ ------------ -------------
Net loss available to common shareholders............................. $ (2,998) $ (16,477) $ (33,267)
------------ ------------ -------------
------------ ------------ -------------
Historical net loss per common share.................................. $ (0.33) $ (1.81) $ (3.66)
Historical weighted average common shares outstanding................. 9,100,801 9,100,801 9,100,801
Pro forma net loss per common share................................... $ (2.25)
-------------
-------------
Pro forma weighted average common shares outstanding.................. 14,785,714
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-------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------- --------------
BALANCE SHEET DATA:
Cash and cash equivalents and restricted cash....................... $ 368 $ 13,438 $ 94,988
Total assets........................................................ 5,621 18,691 100,241
Total indebtedness.................................................. 1,127 5,567 1,127
Total mandatory redeemable preferred stock.......................... 49,276
Total stockholders' equity (deficit)................................ (52,240) 6,546 92,536(1)
OTHER DATA:
Common shares outstanding........................................... 9,100,801 15,658,720 20,658,720
</TABLE>
- ------------------------
(1) Adjusted to reflect an estimated extraordinary loss of approximately
$1,560,000 on the early extinguishment of notes payable. This loss will be
recognized upon the repayment of the notes payable with a portion of the net
proceeds from this offering. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION
IN THIS PROSPECTUS, BEFORE INVESTING IN OUR COMMON STOCK.
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 and 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 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. For us to make a profit, we need to 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 December 31, 1998 were
approximately $1.2 million, and our aggregate accumulated deficit at December
31, 1998 was approximately $51.3 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.
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. 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 and 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 expand the number of subscribers, and
- the rate of commercialization of the WORLDGATE Service.
We cannot accurately predict the timing and 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.
BECAUSE TELEVISION-BASED INTERNET ACCESS IS NEW, WE CANNOT BE CERTAIN THAT A
MARKET FOR 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 yet been broadly
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,
6
<PAGE>
operating results, and financial condition will be materially and 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 which provide 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 will 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, other resources, name
recognition, compelling content and access to consumers, 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 we use a cable operator's system to offer the WORLDGATE Service to
that cable operator's subscribers, our growth and future success depends
substantially upon our ability to convince cable 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 non-exclusive agreements with cable
operators providing for the commercial launch of the WORLDGATE Service. 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, the WORLDGATE Service will not be offered to their
subscribers. Furthermore, because there are a limited number of cable operators
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 are not successful.
OUR REVENUES WILL DEPEND ON THE MANNER IN WHICH CABLE OPERATORS MARKET AND PRICE
THE WORLDGATE SERVICE
As a result of our dependence on cable operators to provide the WORLDGATE
Service to their subscribers, we 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 may charge to their subscribers for the
WORLDGATE Service, and
- the extent to which cable operators purchase additional WorldGate
equipment to avoid reduction in performance as subscriber demand grows.
Accordingly, our revenues may not meet our expectations if the cable
operators' marketing, pricing and operating strategies are not consistent 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 connection. As such, it is less convenient and
efficient for a subscriber to use the WORLDGATE Service over one-way cable plant
and to date, all
7
<PAGE>
of the cable operators who have agreed to deploy the WORLDGATE Service have done
so only 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
in the near future, if at all. 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 Enterprises, Inc. and Tele-Communications, Inc., whose cable
systems serve more than 26 million U.S. homes or approximately 26% of all U.S.
homes, have entered into a distribution agreement with At Home Corporation. The
distribution agreement with At Home contains 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 some residential
Internet services over their cable plants at data transmission speeds greater
than 128 Kbps. This distribution agreement could be interpreted to preclude or
hinder these cable operators from 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/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, TCI, Comcast, Cox and Cablevision
are stockholders of At Home, and MediaOne Group, Inc. and Time Warner, the
second largest cable company in the United States, 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 are stockholders of cable operators or cable box
manufacturers. We cannot assure you that other companies will not invest in
cable operators and/or cable box manufacturers. As a result, these cable
operators may be reluctant to provide any service, including the WORLDGATE
Service, that provides other Internet services in competition with their
affiliates.
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. Although we believe that we have
developed strong relationships with General Instrument and Scientific-Atlanta,
neither company is required to install our WorldGate technology in its cable
boxes and neither company is prohibited from establishing relationships with any
of our competitors and incorporating our competitors' technologies in 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 WORLDGATE
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.
8
<PAGE>
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 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 in the past and we
expect that these problems will continue. 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 CAN BE COSTLY AND RESULT IN THE
LOSS OF SIGNIFICANT RIGHTS
We are subject to patent litigation which claims that 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. ("AII") filed a complaint against us and
several other defendants alleging that the defendants infringed a patent
assigned to AII.
If the plaintiffs win either lawsuit, we could be precluded from offering the
WORLDGATE Service. 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. 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.
THE ADOPTION 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. No
advertiser or programmer had, as of March 15, 1999, paid us to use our CHANNEL
HYPERLINKING technology, or is 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 meet or achieve either of the above. 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.
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
9
<PAGE>
accounted for approximately 100% of our revenues and in 1998, ten cable
operators accounted for approximately 98% of our revenues. Moreover, in 1998,
Charter and Click!Network accounted for 44% and 10%, respectively, of our
revenues. We cannot assure you that any of these customers will continue to
offer the WORLDGATE Service to their cable subscribers.
WE MAY HAVE LIABILITY FOR INFORMATION RETRIEVED AND 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 as to
their applicability 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 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
things, set licensure, installation and equipment standards for communications
systems. It remains uncertain how these regulations may be applied to Internet
services offered over cable television systems.
It is also anticipated that due to the increasing popularity and use of the
Internet, it 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 MR. 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 accordingly 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.
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 31.5% 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
10
<PAGE>
effect of delaying or preventing a change in control of WorldGate.
YEAR 2000 RISKS MAY ADVERSELY AFFECT WORLDGATE AND THE 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
Year 2000 compliance could be significant.
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.
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.
See "Shares Eligible For Future Sale."
OUR RESULTS CAN MATERIALLY DIFFER 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.
11
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $87.6
million, approximately $100.8 million if the underwriters fully exercise their
over-allotment option, from the sale of our common stock offered by us in this
offering based on an assumed offering price of $19.00 per share. This estimate
is after deducting underwriting discounts and commissions and other fees and
expenses payable by us.
We intend to use approximately $6.0 million of the net proceeds from this
offering to repay the outstanding balance of our notes payable that were issued
to two institutional investors in March 1999. These discounted notes, which bear
a stated interest rate of 12.48%, are due in September 1999 and December 1999
but become due and payable on the closing of this offering. We intend to use
approximately $2.0 million of the net proceeds from this offering for capital
expenditures over the next 18 months and to use the remaining net proceeds from
this offering for working capital and general corporate purposes. 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 although we
have no current plans to do so. 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. We currently anticipate that the
net proceeds received by us from this offering, together with cash generated
from operations and existing cash balances will be sufficient to satisfy our
operating cash needs for at least 18 months from receipt of the proceeds. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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.
12
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998:
- on a historical basis,
- on a pro forma basis to reflect the sale of 697,437 additional shares of
series C preferred stock in January and February 1999 for aggregate gross
proceeds of approximately $7.6 million, and the issuance of notes payable
in March 1999 in the face amount of $6,000,000 which are recorded net of
original issue discount of $530,000 and an additional discount of
$1,030,000, representing the value of detachable warrants issued in
connection with this debt, and
- on a pro forma as adjusted basis to give effect to these sales and
issuance of notes payable and this offering, and the application of the
estimated net proceeds of approximately $87.6 million therefrom. The pro
forma as adjusted basis also reflects an estimated extraordinary loss of
approximately $1,560,000 on the early extinguishment of the notes payable.
See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
This table excludes 641,343 shares of common stock issuable upon exercise of
all stock options outstanding as of December 31, 1998, at exercise prices
between $.75 per share and $4.50 per share, and 311,819 shares of common stock
issuable upon exercise of all outstanding warrants as of December 31, 1998, and
an additional 331,490 shares of common stock issuable upon the exercise of
warrants issued with the notes payable in March 1999. The table does not include
options granted after December 31, 1998. 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>
DECEMBER 31, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Notes payable................................................................ $ 1,111 $ 5,551 $ 1,111
Capital leases............................................................... 16 16 16
Series A Convertible Mandatory Redeemable Preferred Stock, 2,752,111 shares
authorized, issued and outstanding; no shares authorized or outstanding pro
forma and pro forma as adjusted............................................ 16,578
Series B Convertible Mandatory Redeemable Preferred Stock, 3,270,760 shares
authorized, 2,803,031 shares outstanding; no shares authorized or
outstanding pro forma and pro forma as adjusted............................ 23,569
Series C Convertible Mandatory Redeemable Preferred Stock, 3,181,819 shares
authorized actual, 832,277 shares outstanding; no shares authorized or
outstanding pro forma and pro forma as adjusted............................ 9,129
Warrant for Series B Convertible Mandatory Redeemable Preferred Stock........ 881
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, no shares authorized, issued or
outstanding actual; 13,500,000 authorized, no shares outstanding pro
forma and pro forma as adjusted
Class A Common Stock, $.01 par value, 50,000,000 shares authorized, no
shares issued and outstanding; 15,658,720 shares outstanding pro forma;
20,658,720 shares outstanding pro forma as adjusted...................... 157 207
Class B Common Stock, $.01 par value, 27,608,000 authorized, 9,100,801
shares outstanding; no shares outstanding pro forma and pro forma as
adjusted................................................................. 91
Additional paid in capital................................................. 56,809 144,309
Warrant for common stock................................................... 1,911 1,911
Accumulated deficit........................................................ (51,300) (51,300) (52,860)
Deferred compensation...................................................... (1,031) (1,031) (1,031)
--------- ----------- -----------
Total stockholders' equity (deficit)..................................... (52,240) 6,546 92,536
--------- ----------- -----------
Total capitalization......................................................... $ (956) $ 12,113 $ 93,663
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
13
<PAGE>
DILUTION
The pro forma net tangible book value of WorldGate's class A common stock as
of December 31, 1998 was approximately $6,546,000, or $.42 per share. "Pro forma
net tangible book value per share" represents the amount of pro forma total
tangible assets of WorldGate less pro forma total liabilities divided by the
number of shares of common stock outstanding after giving effect to the
conversion of series A, series B and series C preferred stock and the class B
common stock, the sales of the series C preferred stock in January and February
1999, the issuance of notes payable in March 1999 and the stock split. After
giving effect to the sale by WorldGate of 5,000,000 shares of common stock in
this offering, and after deducting the underwriting discount and estimated
offering expenses payable by WorldGate, the pro forma net tangible book value of
WorldGate as of December 31, 1998 would have been approximately $92,536,000 or
$4.48 per share to new investors purchasing our common stock in this offering.
"Dilution per share" represents the difference between the initial public
offering price per share of our common stock, at an assumed initial public
offering price of $19.00 per share, and the pro forma as adjusted net tangible
book value per share of WorldGate as of December 31, 1998 after giving effect to
this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................................... $ 19.00
Pro forma net tangible book value per share as of December 31, 1998........ $ .42
Increase per share attributable to new investors........................... 4.06
---------
Pro forma as adjusted net tangible book value per share after this
offering................................................................... 4.48
---------
Dilution per share to new investors.......................................... $ 14.52
---------
---------
</TABLE>
The following table summarizes, as of December 31, 1998, on the pro forma
basis described above, the difference between the total consideration paid and
the average price per share paid by our existing stockholders and the new
investors purchasing shares of common stock in this offering (before deducting
underwriting discounts and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders....................... 15,658,720 75.8% $ 48,752,075 33.9% $ 3.11
New Stockholders............................ 5,000,000 24.2% 95,000,000 66.1% $ 19.00
------------ ----- -------------- -----
Total................................... 20,658,720 100.0% $ 143,752,075 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
The foregoing tables exclude all outstanding options and warrants. As of
December 31, 1998, there were outstanding warrants to purchase an aggregate of
311,819 shares of common stock and options to purchase an aggregate of 641,343
shares of common stock (108,750 of which were exercisable at December 31, 1998)
at a weighted average exercise price of $3.00 per share, and WorldGate had an
additional 291,990 shares of common stock available for future grants and other
issuances under its stock option plan. In March 1999, WorldGate issued notes
payable in the face amount of $6 million which are recorded net of original
issue discount of $530,000 and an additional discount of $1,030,000,
representing the value of detachable warrants issued in connection with this
debt. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and notes 7 and 10 of the notes to financial statements
appearing elsewhere in this prospectus. The exercise of outstanding options and
warrants having an exercise price less than the offering price would increase
the dilutive effect to new investors.
14
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information as of December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998 are
derived from our financial statements included in this prospectus, which have
been audited by PricewaterhouseCoopers LLP, independent accountants. 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
balance sheet data gives effect to the sale of the series C preferred stock in
January and February 1999 for aggregate gross proceeds of approximately $7.6
million and the issuance of notes payable in March 1999 in the face amount of $6
million which are recorded net of original issue discount of $530,000 and an
additional discount of $1,030,000, representing the value of detachable warrants
issued in connection with his debt. The pro forma as adjusted balance sheet data
also gives effect to this offering and the application of the estimated net
proceeds of approximately $87.6 million. The pro forma net loss per common share
data gives effect to the conversion of all preferred stock outstanding as of
December 31, 1998 into common stock.
<TABLE>
<CAPTION>
MARCH 21,
1995
(INCEPTION)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------
1995 1996 1997 1998
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ 141 $ 1,022
Costs and expenses:
Cost of revenues...................................... 1,530 9,919
Engineering and development........................... $ 149 $ 1,408 6,981 9,684
Sales and marketing................................... 428 3,623 5,157
General and administrative............................ 1,093 2,432 3,587
Depreciation and amortization......................... 22 119
------ ------------ ------------ -------------
Total costs and expenses.......................... 149 2,929 14,588 28,466
Loss from operations.................................... (149) (2,929) (14,447) (27,444)
Other income, net....................................... 8 423 423
Interest expense........................................ (2) (17) (101)
------ ------------ ------------ -------------
Net loss................................................ (149) (2,923) (14,041) (27,122)
Accretion on preferred stock............................ (75) (2,436) (6,145)
------ ------------ ------------ -------------
Net loss available to common shareholders............... $ (149) $ (2,998) $ (16,477) $ (33,267)
------ ------------ ------------ -------------
------ ------------ ------------ -------------
Historical net loss per common share.................... $ (0.33) $ (1.81) $ (3.66)
Historical weighted average common shares outstanding... 9,100,801 9,100,801 9,100,801
Pro forma net loss per common share..................... $ (2.25)
-------------
-------------
Pro forma weighted average common shares outstanding.... 14,785,714
-------------
-------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, PRO FORMA DECEMBER
--------------------------------------------------- DECEMBER 31, 1998, AS
1995 1996 1997 1998 31, 1998 ADJUSTED
--------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents, restricted
cash and short term investments........ $ 32 $ 7,574 $ 17,318 $ 368 $ 13,438 $ 94,988
Total assets............................. 32 7,583 18,412 5,621 18,691 100,241
Total indebtedness....................... 591 1,127 5,567 1,127
Total mandatory redeemable preferred
stock.................................. 8,571 34,366 49,276 -- --
Total stockholders' equity (deficit)..... 32 (1,451) (19,177) (52,240) 6,546 92,536(1)
OTHER DATA:
Common shares outstanding................ -- 9,100,801 9,100,801 9,100,801 15,658,720 20,658,720
</TABLE>
- ------------------------
(1) Adjusted to reflect an estimated extraordinary loss of approximately
$1,560,000 on the early extinguishment of notes payable. This loss will be
recognized upon the repayment of the notes payable with a portion of the net
proceeds from this offering. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
16
<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 multi-year agreements with cable
operators that collectively have approximately 2.7 million system subscribers
including:
- Cable Bahamas, Ltd.,
- Charter,
- Click!Network,
- Massillon Cable,
- Prestige Cable, and
- TVCable.
Generally, these agreements provide that these cable operators will offer
the WORLDGATE Service in their major cities of operation. These cable operators
are in various stages of planning for and commercially offering our service.
Only Charter and Click!Network have begun to offer the WORLDGATE Service to
their subscribers. The WORLDGATE Service is also in various stages of testing by
cable operators whose cable systems serve approximately 32 million subscribers.
See "Business--WORLDGATE Trials," and "Risk Factors--We depend on cable box
manufacturers to 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
December 31, 1998, we had an accumulated deficit of approximately $51.3 million.
We have funded our operations since inception through private placements of
preferred stock, capital contributions from stockholders and a line of credit.
See "--Liquidity and Capital Resources." We currently intend to 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.
In March 1999, we received gross proceeds of approximately $912,000 and
$4,558,000 through the issuance of $1,000,000 and $5,000,000 of discounted notes
payable with a stated interest rate of 12.48% due in September 1999 and December
1999 respectively. However, these notes become due and payable on the closing of
this offering. In connection with the issuance of these notes payable, the
holders of the notes received warrants to purchase the number of shares of
common stock equal to $5,469,600 divided by the lower of $16.50 and the initial
public offering price at an exercise price equal to the lower of the initial
public offering price and $16.50. Assuming an initial public offering price of
$19.00 per share, these holders may purchase up to 331,490 shares of common
stock. The fair value of the warrants will be accounted for as an additional
discount on the notes. We intend to use approximately $6.0 million of the net
proceeds of this offering to repay the outstanding balance of these notes. We
expect to record an extraordinary loss on the early extinguishment of these
notes payable not to exceed approximately $1,560,000, representing the write-off
of the unamortized discount.
17
<PAGE>
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
computers. 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 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. As of March 16,
1999, we had sold 14,690 keyboards to cable operators. 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. We earn monthly fees from cable operators
based upon the number of WORLDGATE Service subscribers. We offer the WORLDGATE
Service 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
unlimited 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 feature 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 and in 1998, 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. We recognize revenue from the sale of headend
and other equipment used in trial systems when the products are
18
<PAGE>
shipped and accepted by the customer. The materials portion of cost of equipment
is held in inventory until revenue is realized from the sale thereof.
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 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 $60, 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 in 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.
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.
19
<PAGE>
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
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. The
Company believes that its ability to utilize its net operating loss
carryforwards will be subject to annual limitations as a result of this 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 WORLDGATE
Service. Our 1997 personnel costs increased by $3.9 million, and engineering
equipment and support expenditures increased by $1.7 million.
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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
Since inception, we have 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 our $6.0 million face-amount of our discounted notes in March 1999. At
December 31, 1998, the amount of our accumulated deficit was $51.9 million and
cash and cash equivalents were $368,000. At December 31, 1997 and 1996, we had
an accumulated deficit of $19.2 million and $3.1 million respectively, and cash
and cash equivalents of $17.3 million and $7.6 million, respectively.
Our operating activities utilized cash in the amount of approximately $25.7
million, $12.6 million and $1.7 million for the years ended December 31, 1998,
1997 and 1996, respectively. The net cash used for operations during these
periods was primarily for funding engineering and development. Under existing
engineering development contracts with two non-controlling stockholders, it is
anticipated that these expenditures will be approximately $2.8 million in 1999.
Capital expenditures for the acquisition of office equipment, computer systems
and equipment for engineering and manufacturing operations were $533,000,
$249,000 and $0, for the years ended December 31, 1998, 1997 and 1996,
respectively.
Net cash provided by financing activities was approximately $9.3 million,
$22.6 million and $9.2 million for the years ended December 31, 1998, 1997 and
1996, respectively, which related primarily to the issuance of preferred stock
of $9.3 million, $23.4 million and $8.5 million in 1998, 1997 and 1996,
respectively. 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.
In January and February 1999, we raised approximately $7.6 million from the
sale of 697,437 additional shares of series C preferred stock.
We plan to continue to invest in sales and marketing and engineering and
development for the WORLDGATE Service as well as to support our infrastructure.
Additionally, we expect to use a portion of our cash for capital expenditures
and other general corporate purposes. In March 1999, we raised approximately
$5.5 million from the sale of $6.0 million face-amount of our discounted notes.
In connection with this sale, we also issued warrants to purchase the number of
shares of common stock equal to $5,469,600 divided by the lower of $16.50 and
the initial public offering price at an exercise price equal to the lower of
$16.50 and the initial public offering price per share. Assuming an initial
public offering price of $19.00 per share, these holders may purchase up to
331,490 shares of common stock. We believe the net proceeds from this offering,
together with our existing capital resources, including the remaining proceeds
from the series C preferred stock financing and the sale of discounted
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notes payable, and anticipated funds from operations, will satisfy our projected
product development, working capital and capital expenditure requirements for at
least the next 18 months.
LIMITED NUMBER OF CUSTOMERS
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 and in 1998, ten
cable operators accounted for approximately 98% of our revenues. Moreover, in
1998, Charter and Click!Network accounted for 44% and 10%, 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 customers would have a material adverse effect
on us and our financial results.
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 utilize software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year 2000
phenomenon. We are also dependent on cable operators to maintain network
reliability.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services. Based upon the
results of this assessment, we will develop and implement, if necessary, a
remediation plan with respect to any third-party software, computer technology
and services which may fail to be year 2000 compliant. We have assessed our
proprietary software and internal systems and believe them to be year 2000
compliant. We anticipate that our systems, including components thereof provided
by third-party vendors, will be year 2000 compliant by the end of 1999. At this
time, the expenses associated with this assessment and potential remediation
plan cannot be determined. The failure of our software and computing systems and
our third-party vendors to be year 2000 compliant could have a material adverse
effect on us.
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 its 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 the Internet 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 subscribers at rates typically ranging from $4-$12 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
setup, central system management and centrally administered upgrades, and
- a television-based portal for enabling viewers to dynamically link from
television programming and advertising to related Web sites.
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.
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 97 million in 1998 and will grow to over 319 million by the
end of 2002. A 1998 report by Jupiter Communications predicted that online
shopping in the United States alone will grow from approximately $5 billion in
1998 to over $29 billion by 2002.
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 spend 30% of their usage time on 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 45%
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.
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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. 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 $100-$240 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 using 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 56.6 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,
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- require no additional investment in equipment or hardware by the consumer,
and
- 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. This service is currently being offered by cable operators to existing
subscribers. The WORLDGATE Service utilizes a thin-client network architecture
to allow for easy deployment and setup, 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 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 WorldGate's 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 expects to derive revenues from cable operators, e-commerce
merchants and advertisers. WorldGate expects to enhance these revenue
opportunities by implementing the strategies described below.
REVENUE DERIVED FROM CABLE OPERATORS. 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 unlimited 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. In either case, 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
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viewed by a subscriber, so as the number of WorldGate subscribers grows, we
expect our opportunities 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 there is the potential to have 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 fifteen clicks per month related to television networks. This result
was achieved without providing any special promotion of our CHANNEL HYPERLINKING
capabilities. Clicks related to television advertisements are expected to begin
in the second half of 1999 when CHANNEL HYPERLINKING technology for
advertisements is deployed 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 being supplied by her 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 or two-way
infrastructure. Furthermore, the WORLDGATE Service has been designed to be
deployed with relatively low capital costs of $45,000 to $75,000 for a system
covering up to 1,400 WorldGate subscribers. 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 cable modem ready plant. 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, 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, Excite 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, Poppe Tyson, Ogilvy & Mather, Grey Advertising Inc. and True
North Communications Inc. WorldGate is working with these advertisers and
advertising agencies to allow for 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. and MatchLogic, Inc., an
operating unit of Excite. 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 is currently scheduled for the second half of 1999.
WorldGate also intends to provide additional value added services to
advertisers, programmers and cable operators by collecting consumer activity
data. This activity data will be collected and tabulated to statistically
reflect consumer responses to
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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 March 15, 1999:
- General Instrument had invested an aggregate of approximately $5.5 million
and owned 454,716 shares of common stock of WorldGate or approximately
2.9% 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
2.1% 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 search engine is provided by Excite.
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 $4-$12 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 will
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
revenue generating opportunities.
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WORLDGATE COMMERCIAL LAUNCHES
WorldGate has entered into multi-year agreements with six operators of cable
television systems: Cable Bahamas, Charter, Click!Network, Massillon Cable,
Prestige Cable and TVCable, which collectively with their affiliates have
approximately 2.7 million subscribers. Charter, which has been managing and has
publicly announced that it will be combined with Marcus Cable Company L.P.
during 1999 as the result of the purchase of both companies by Paul Allen's
Vulcan Ventures, together with Marcus Cable constitutes the seventh largest U.S.
cable operator, with over 2.4 million subscribers in the United States. Charter
has advised WorldGate that it will offer the WORLDGATE Service to Marcus Cable's
subscribers following this combination. 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 across all of their systems are
based on estimates by Cablevision Blue Book (Fall 1998/Winter 1999), except for
TVCable, which is based on a WorldGate estimate. As of March 29, 1999, 2,645
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>
COMMERCIALLY TERMINATION
TOTAL SYSTEM LAUNCHED DATE OF
CABLE OPERATOR SUBSCRIBERS LOCATIONS PLANNED LAUNCH LOCATIONS AGREEMENT
- ------------------ ------------- ------------------ ------------------------------------- ------------------
<S> <C> <C> <C> <C>
Cable Bahamas 46,000 Bahamas September 2003
Charter 2,414,800 St. Louis, MO; Lanett, AL; Alhambra, CA; Burbank, November 2002
Newtown, CT; CA; Glendale, CA; Long Beach, CA;
Maryville, IL; Riverside, CA; San Luis Obispo, CA;
Logan, UT LaGrange, GA; Newnan, GA; Hickory,
NC; Ft. Worth, TX
Click!Network 3,000 Tacoma, WA November 2005
Massillon Cable 43,800 Massillon, OH November 2003
Prestige Cable 152,500 Cartersville, GA; Westminster, MD; November 2005
Mooresville, NC; Fredericksburg, VA
TVCable 100,000 Quito, Ecuador September 2005
</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.
WORLDGATE TRIALS
The WORLDGATE Service is in various stages of trials on four continents with
a number of cable operators including Comcast, Time Warner and MediaOne, which
are three of the four largest U.S. cable operators. 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 with
WorldGate is approximately 32 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 March 15, 1999.
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The total number of subscribers served by the cable operator across all of
its systems is based on estimates by Cablevision Blue Book (Fall 1998/Winter
1999) for U.S. operators other than SNET and on WorldGate's estimates for SNET
and international operators.
<TABLE>
<CAPTION>
NUMBER OF
TOTAL SYSTEM TRIAL WORLDGATE SYSTEM
CABLE OPERATOR SUBSCRIBERS LOCATION BOXES TYPE
- --------------------------------------------------------- ------------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
UNITED STATES TRIALS:
Ameritech Corporation.................................. 200,000 Chicago, IL(1) Planned Analog
Cable TV of the Kennebunks............................. 8,500 Kennebunk, ME Planned Digital
Comcast (including Jones Intercable)................... 5,387,659 Lower 63 Analog
Merion, PA
Philadelphia,
PA
Torresdale, 4 Digital
PA(1)
MediaOne............................................... 5,107,800 Boulder, CO(1) 4 Analog
SNET Personal Vision, Inc.............................. 22,000 Hartford, CT 37 Analog
Time Warner (includes Time Warner Cable and Time Warner 11,077,500 Orlando, FL 50 Analog
Entertainment-Advance/ Newhouse).....................
INTERNATIONAL TRIALS:
Cablevision/TCI........................................ 825,000 Buenos Aires, Planned Analog
Argentina
Cablevision S.A. de C.V................................ 300,000 Mexico City, Planned Analog
Mexico
Image TV............................................... 24,000 Brazil Planned Analog
Shaw................................................... 1,500,000 Calgary, 1 Digital
Canada(1)
Singapore CableVision.................................. 800,000 Singapore(1) 5 Analog
Skycable............................................... 225,000 Philippines 25 Analog
SuperCable............................................. 52,000 Caracas, 12 Analog
Venezuela(1)
Telefonica Multimedia S.A.C............................ 210,000 Lima, Peru Planned Analog
United International Holdings.......................... 5,253,070 Vienna, 10 Analog
Austria(1),
Santiago, 66 Analog
Chile(1)
Riyadh, Saudi Planned Digital
Arabia(2)
Wellington, Planned Digital
New Zealand
</TABLE>
- ------------------------
(1) Corporate office trial.
(2) May be limited to Saudi Arabia domestic content.
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TECHNOLOGY
The WORLDGATE platform is based on a "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 1/30(th) 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.
WORLDGATE'S CHANNEL HYPERLINKING TECHNOLOGY
WorldGate's Channel HyperLinking 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
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<PAGE>
"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 8600 advanced analog cable boxes. 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.
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 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 2.3 million advanced analog
cable boxes already shipped which can be WorldGate enabled with a software
download and an additional 1 million of such boxes which can also be WorldGate
enabled with a software download and installation of additional memory in the
boxes.
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. The WORLDGATE Service over the digital
platform is currently being tested by WorldGate and certain cable operators.
According to Cablevision Blue Book, over two million current generation digital
boxes
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<PAGE>
have been shipped through December 31, 1998. All of these boxes can potentially
be upgraded to support the WORLDGATE Service through a centrally-administered
software download.
Due to its 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, by using telephone return for
communications from the cable box to the cable operator's central facility. 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.
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<PAGE>
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 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 captioned WorldGate Server Hardware & Software depicting four linked
columns of boxes labelled "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 labelled "High Speed
DataLine" to the first column. The boxes in each of the columns are labelled:
"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 labelled "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 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 CHANNEL HYPERLINKING 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 also intends to support picture-in-picture capability to allow Web
pages and television programs to be viewed at the same time. 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
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<PAGE>
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 its 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 intends to provide 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 expects to market itself as a family service, WorldGate intends to
develop a series of television commercials aimed at various demographic market
segments, which will be 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
may include user guides, point-of-purchase displays, low-cost bill stuffers and
a monthly WorldGate news magazine tailored to the subscriber base. To enhance
the potential penetration of the WORLDGATE Service, WorldGate plans to establish
WorldGate 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 weekly industry news publications
such as MultiChannel News 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 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 CHANNEL HYPERLINKING 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.
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<PAGE>
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, Excite 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 expects to work with Nielsen Media,
MatchLogic, 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.
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 Bensalem, 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 Bensalem, 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.
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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 thin-client architecture,
centralized data processing, communications schemes and our CHANNEL HYPERLINKING
technology. 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
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. See "--Legal Proceedings." We are subject to litigation
brought by others claiming that we infringe their intellectual property. See
"--Litigation."
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,
39
<PAGE>
- expenses including:
- investment that may be required for a personal computer and a modem,
- ISP's monthly fees, which WorldGate believes range from $10-22 per month,
- possible telephone access charges, and
- the total number of users that may be simultaneously connected to an ISP.
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. WorldGate believes that these new technologies are expected to
have associated monthly fees in the range of $90-170.
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 $100-$240 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
recently 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 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.
40
<PAGE>
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 an advanced analog or digital cable box, such as that utilized by
the WORLDGATE Service. 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. Discovery and further
action with respect to the alleged infringement has been stayed pending oral
argument on the merits of our counterclaims, which has not yet been scheduled.
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 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.
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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 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 March 31, 1999, we employed 131 full-time employees and had 10
independent contractors. All of our employees and independent contractors are
located in Bensalem, 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 Bensalem, Pennsylvania
with facilities consisting of approximately 30,000 square feet. In the third
quarter of 1999, we intend to relocate our headquarters to Trevose, Pennsylvania
in a leased facility with approximately 72,000 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).................................. 51 Chairman and Chief Executive Officer
Joseph E. Augenbraun................................. 34 Vice President, Engineering
Scott B. Campbell.................................... 52 Vice President, Business Development
David A. Dill........................................ 47 Chief Financial Officer
Randall J. Gort...................................... 49 Vice President, General Counsel and Secretary
Gerard K. Kunkel..................................... 41 Vice President, Strategic Programs
Jae Hea Edward Lee................................... 35 Vice President, Operations
Peter C. Mondics..................................... 45 Vice President, Affiliate Sales and Marketing
Kenneth P. Nimmer.................................... 59 Vice President, Consumer Marketing
David E. Wachob(2)................................... 44 Director, Vice President and General Manager
Thomas G. Baxter..................................... 52 Director
Alan Gerry(1)........................................ 70 Director
Marcia J. Hooper(1).................................. 44 Director
Graham Pattison(2)................................... 48 Director
Ronald A. Walter(2).................................. 56 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.
DAVID A. DILL joined WorldGate in April 1996. From July 1994 to October
1995, Mr. Dill was the Vice President, Finance of General Instrument's
Communications Division. From August 1991 through March 1994, Mr. Dill held
executive positions with International Business Machines Corporation, including
Financial Analysis Director (IBM U.S. Company), Controller (Personal Systems
Business), and Assistant General Manager, Finance and Planning (RISC System/6000
Division). Prior to joining
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IBM, Mr. Dill was Vice President and Controller for the Rolm Company. From
February 1975 to August 1989, Mr. Dill held several other executive positions
with IBM, culminating in his role as Director of Finance, Communications Systems
Group.
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 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 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.
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
44
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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 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.
GRAHAM PATTISON has been a member of WorldGate's board of directors since
August 1998. Mr. Pattison has held executive positions with Motorola for over
ten years and is currently the Vice President and General Manager of new
business ventures in the Internet and Networking Group of Motorola, which
position he has held since August 1998. In his current capacity Mr. Pattison is
responsible for overseeing new market and product development, acquisitions and
alliances across ING's networking businesses. Mr. Pattison previously held the
position of Vice President and General Manager of the Networking Systems
Division of Motorola, which position he held from April 1996. Mr. Pattison has
also served as General Manager for the Europe, Middle East and Africa region of
Motorola's Information Systems Group.
RONALD A. WALTER has been a member of WorldGate's board of directors since
April 1998. Mr. Walter has been a Vice President 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. He is also a partner
with Citicorp's internal Mergers and Acquisition team and its Corporate
Technology Office. 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.
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<PAGE>
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 board meeting he attends in person
and WorldGate has granted to him an option to purchase 10,000 shares of common
stock 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 its
four other most highly compensated executive officers. As of March 16, 1999, the
bonuses listed below had been accrued and reflected in the 1998 results but no
bonus had been paid.
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<PAGE>
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......................................... $ 320,250(1) $ 144,113 -- $ --
Chairman and Chief Executive Officer
David A. Dill............................................ 193,218 67,626 -- --
Chief Financial Officer
Scott B. Campbell........................................ 160,000 48,000 -- --
Vice President, Business Development
Peter C. Mondics......................................... 159,375 47,813 -- --
Vice President, Affiliate Sales and Marketing
David E. Wachob.......................................... 149,450 44,835 -- --
Director, Vice President and General Manager
</TABLE>
- ------------------------
(1) As of March 15, 1999, $66,250 of Mr. Krisbergh's salary had been accrued and
reflected in the 1998 results but had not been paid.
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 initial offering price have been calculated using a price of $19.00
per share, the mid-point of the range of the expected initial public offering
price, less the aggregate exercise price.
AGGREGATE OPTION EXERCISES AND
LAST FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
OPTIONS
NUMBER OF SECURITIES BASED ON
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED THE INITIAL
OPTIONS AT DECEMBER 31, 1998 IN-THE-MONEY OPTIONS OFFERING
SHARES DECEMBER 31, 1998 PRICE
ACQUIRED VALUE ------------------------------ -------------------------- -----------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------ --------------- ------------- ------------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott B.
Campbell........ -- -- 15,000 45,000 $ 78,750 $ 236,250 $ 251,250
Peter C.
Mondics......... -- -- 16,666 50,000 95,309 285,938 286,968
<CAPTION>
NAME UNEXERCISABLE
- ------------------ -------------
<S> <C>
Scott B.
Campbell........ $ 753,750
Peter C.
Mondics......... 860,938
</TABLE>
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<PAGE>
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 March 16, 1999, options for 913,752 shares of common stock
were outstanding and options for an additional 19,581 shares were available for
future grants. Outstanding options are exercisable at prices ranging from $.75
to $16.50 per share. The maximum number of shares of common stock reserved for
the grant or settlement of awards under the stock option plan is 933,333 subject
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 10
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.
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:
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- 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 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, David A. Dill--369,989 shares, Joseph E.
Augenbraun--333,850 shares, Jae Hea E. Lee--333,850 shares, and Randall J.
Gort--259,750 shares. 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.
MANAGEMENT SHAREHOLDERS AGREEMENT. Each of the Management Stockholders who
received shares of our common stock in the merger entered into a Management
Shareholders' Agreement with us (the "Management Agreement") providing for some
voting agreements, restrictions on transfer of our common stock, rights of first
refusal and vesting arrangements.
Pursuant to the Management Agreement, each Management Stockholder and his
transferees are obligated to vote for Mr. Krisbergh's designees to the Board. No
Management Stockholder may transfer his shares, except for:
- transfers to family members and
- transfers of up to five percent of his total shares,
PROVIDED that such transferees agree to be bound by the Management Agreement.
Any Management Stockholder who wishes to sell more than five percent of his
shares must first offer to sell such shares to the other Management Stockholders
on a pro rata basis. The Management Agreement also sets
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forth the vesting arrangements for some of the Management Stockholder's shares,
and provides that any shares that remain unvested at the time of termination of
a Management Stockholder's employment (other than by reason of death) shall be
distributed pro rata to the remaining Management Stockholders and will fully
vest upon such distribution. Unvested shares will be transferred to a Management
Stockholder's estate or heirs in the event of his death.
The Management Agreement automatically terminates upon the consummation of
this offering.
PREFERRED STOCK FINANCINGS. 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 will convert into one and one-third shares of our
common stock, each share of our series B preferred stock will convert into
two-thirds of a share of our common stock and each share of our series C
preferred stock will convert into two-thirds of a share of our common stock.
Each of these series of stock will automatically convert into common stock upon
the closing of this offering.
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 the number of shares of common stock equal to
$5,469,600 divided by the lower of $16.50 and the initial public offering price
at an exercise price equal to the lower of the initial offering price and
$16.50. Assuming an initial public offering price of $19.00 per share, these
holders may purchase up to 331,490 shares of common stock. These notes become
immediately due upon the completion of WorldGate's initial public offering.
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,
- the series A investors, other than Motorola, designated Marcia J. Hooper,
and
- the series B investors designated Ronald A. Walter
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to our board of directors. The material provisions of the stockholders'
agreement will terminate upon the consummation of this offering, 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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PRINCIPAL STOCKHOLDERS
The following table sets forth information as of March 15, 1999 regarding
beneficial ownership of the common stock by the following persons as adjusted to
reflect the sale of the shares offered hereby:
- 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.
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 March 15, 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 such beneficial owners is
3220 Tillman Drive, Suite 300, Bensalem, Pennsylvania 19020.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------- -------------------------
<S> <C> <C> <C> <C>
NUMBER OF NUMBER OF
NAME AND ADDRESS(2) SHARES PERCENTAGE SHARES PERCENTAGE
- -------------------------------------------- ---------- ------------- ---------- -------------
Citicorp.................................... 1,124,442 7.2 1,124,442 5.4%
153 East 53(rd) Street
New York, NY 10043
Hal M. Krisbergh(1)......................... 6,515,686 41.6 6,515,686 31.5
Scott B. Campbell........................... 15,000 * 15,000 *
David A. Dill(2)............................ 369,988 2.4 369,988 1.8
Peter C. Mondics(3)......................... 35,858 * 35,858 *
David E. Wachob............................. 557,897 3.6 557,897 2.7
Alan Gerry.................................. 606,666 3.9 606,666 2.9
Marcia J. Hooper(4)......................... -- * -- *
Ronald A. Walter(5)......................... -- * -- *
Thomas G. Baxter............................ 1,666 * 1,666 *
Graham Pattison(6).......................... -- * -- *
All current directors and executive
officers as a group (15 persons)(7)....... 9,003,969 57.3 9,003,969 43.5
</TABLE>
- ------------------------
* 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 26,666 shares of common stock held by Mr. Dill as custodian for his
two minor children. Mr. Dill disclaims beneficial ownership of the shares
owned by his minor children.
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(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 25,000 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) Does not include 454,666 shares of common stock held by Motorola, Inc. Mr.
Pattison is a vice president of Motorola, Inc.
(7) Includes (a) options to purchase 56,666 shares of common stock and (b)
87,034 shares of common stock owned by family members or affiliates of some
members of the group.
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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,
a form of which is filed as an exhibit to the registration statement of which
this prospectus is a part.
COMMON STOCK
As of March 16, 1999, there were 15,658,720 shares of common stock
outstanding. After giving effect to the issuance of 5,000,000 shares of common
stock offered by WorldGate at an assumed offering price of $19.00 per share,
there will be 20,658,720 shares of common stock outstanding. 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 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. Upon the closing of
this offering, there will be no shares of preferred stock 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,
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- 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 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.
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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.
BYLAWS
Our bylaws 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, 10
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.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock will
develop or be sustained after this offering. 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, 20,658,720 shares of our common stock will
be outstanding based on shares outstanding on March 31, 1999, and assuming no
exercise of options or warrants. Of these shares, the 5,000,000 shares
registered and sold in this 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 15.7
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
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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. The shares of our common stock
outstanding as of the date of this prospectus 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 December 31, 1998, there were outstanding options to purchase an
aggregate of 641,343 shares of our common stock, 108,750 of which were
exercisable at December 31, 1998, at a weighted average exercise price of $3.00
per share, and we had an additional 291,990 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 108,750 shares are subject to lock-up
agreements, which restrict the holders' ability to sell or otherwise dispose of
our common stock acquired upon the exercise of such options. See
"Management--Stock Option Plan."
Following the closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act covering shares of our common
stock subject to outstanding options under the stock option plan and 291,990
shares of our common stock reserved for issuance under the stock option plan.
Based on the number of shares subject to outstanding options at December 31,
1998 and currently reserved for issuance under such plan, such registration
statement would cover approximately 933,333 shares issuable on exercise of the
options of which 108,750 options have vested as of such date.
As of December 31, 1998, there were outstanding warrants to purchase an
aggregate of 311,819 shares of our common stock, all of which are currently
exercisable, at an exercise price of $10.65 per share. The holders of all 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 for 180 days from the date of this prospectus.
LOCK-UP AGREEMENTS
Holders of approximately 15.3 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 Gerard Klauer
Mattison & Co., Inc. 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
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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 180 days after the date of this prospectus.
Beginning 180 days after the date of this prospectus, approximately 15.1
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. Gerard
Klauer Mattison & Co., Inc. 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. Gerard Klauer Mattison & Co., Inc. 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 Gerard Klauer Mattison & Co., Inc., 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 180 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, Dill,
Augenbraun, Lee, Gort, Mondics, 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 15.9 million
shares of common stock, assuming the exercise of all warrants and conversion of
all preferred stock, 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. These holders have waived
their piggyback registration rights with respect to this offering. 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
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 under the Securities Act for all of the shares of
common stock issuable upon exercise of warrants held by holders of WorldGate's
face-value $6.0 million discounted notes issued in March 1999. Assuming an
initial public offering price of $19.00, the holders of these warrants may
purchase up to 331,490 shares of common stock. WorldGate has agreed to file this
registration statement on the first business day after the 150(th) day
immediately following the closing of this offering and to use its best efforts
to cause the registration statement to be declared effective as promptly as
possible. The holders of the piggyback registration rights described above will
have the right to request that their shares be included in that shelf
registration statement.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Gerard Klauer Mattison & Co., Inc., Jefferies & Company, Inc. and Janney
Montgomery Scott Inc. are acting as representatives, have severally, but not
jointly, agreed to purchase from us the following respective number of shares of
common stock:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Gerard Klauer Mattison & Co., Inc..........................................
Jefferies & Company, Inc...................................................
Janney Montgomery Scott Inc................................................
-----------------
5,000,000
-----------------
-----------------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to some conditions precedent, and that the underwriters will be
obligated to purchase all of the shares of common stock offered in this
prospectus (other than those shares covered by the over-allotment option
described below) if any are taken. The underwriting agreement provides that in
the event of a default by an underwriter, in some circumstances the purchase
commitments of non-defaulting underwriters may be increased.
The underwriters propose to offer the shares of common stock to the public
initially at the public offering price set forth on the cover page of this
prospectus and to some dealers at a price that represents a concession not in
excess of $ per share. After the initial offering of the shares of common
stock, the offering price and concession and discount to dealers may be changed
by the representatives of the underwriters.
WorldGate has granted to the underwriters an option exercisable by the
representatives of the underwriters, expiring at the close of business on the
30(th) day after the date of this prospectus, to purchase up to 750,000
additional shares of common stock at the offering price, less underwriting
discounts, all as set forth on the cover page of this prospectus. This option
may be exercised only to cover over-allotments in the sale of the shares of
common stock. To the extent that the option is exercised, each underwriter will
become obligated, subject to some conditions, to purchase a number of additional
shares of the common stock proportionate to each underwriter's initial amount
reflected in the foregoing table.
The underwriters have informed WorldGate that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
At the request of WorldGate, the underwriters have reserved up to 300,000
shares of common stock offered hereby for sale at the initial public offering
price to employees, officers and directors of WorldGate and to other persons
designated by WorldGate. The number of shares available for sale to the general
public will be reduced to the extent that these persons purchase the reserved
shares. The
59
<PAGE>
underwriters will offer any reserved share not so purchased to the general
public on the same basis as the other shares of common stock offered hereby.
The following table summarizes the compensation to be paid to the
underwriters by WorldGate and the expenses payable by WorldGate.
<TABLE>
<CAPTION>
TOTAL
------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts paid by WorldGate...............................
Expenses payable by WorldGate..........................................
</TABLE>
Each of WorldGate and some of its directors, officers and stockholders have
agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, any
shares of common stock or securities convertible into or exchangeable or
exercisable for any shares of common stock, without the prior written consent of
the representatives of the underwriters and other permitted transfers for a
period of 180 days after the date of this prospectus.
The representatives of the underwriters on behalf of the underwriters may
engage in over-allotment, stabilizing transactions, syndicate covering
transactions, penalty bids and "passive" market making in accordance with
Regulation M under the Securities Exchange Act of 1934. Over-allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of the shares of common stock
in the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the representatives of the
underwriters to reclaim a selling concession from a syndicate member when the
shares of common stock originally sold by these syndicate members are purchased
in a syndicate covering transaction to cover syndicate short positions. In
"passive" market making, market makers in the securities offered hereby who are
underwriters or prospective underwriters may, subject to some limitations, make
bids for or purchases of such securities until the time, if any, at which a
stabilizing bid is made. These stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the common stock to be
higher than it would otherwise be in the absence of these transactions. These
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
WorldGate has agreed to indemnify the underwriters against some liabilities,
including civil liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between WorldGate and the representatives of the underwriters. Among the factors
to be considered in determining the initial public offering price will be the
future prospects of WorldGate and its industry in general, sales, losses and
some other financial and operating information of WorldGate in recent periods,
and the price-sales ratios, market prices of securities and some financial and
operating information of companies engaged in activities similar to those of
WorldGate. The estimated initial public offering price set forth on the cover
page of this prospectus is subject to change as a result of market conditions
and other factors.
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, Philadelphia,
Pennsylvania. Certain legal matters in
60
<PAGE>
connection with this offering are being passed upon for the underwriters by Hale
and Dorr LLP, Boston, Massachusetts.
EXPERTS
The balance sheets as of December 31, 1997 and 1998 and the statements of
operations, stockholders' deficit and redeemable preferred stock and cash flows
for each of the years ended December 31, 1996, 1997 and 1998 included in this
prospectus and the registration statement of which this prospectus is part, have
been included herein in reliance upon the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
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. For further information with respect to WorldGate and
the common stock offered hereby, please reference 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.
61
<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....................................................... F-3
Statements of Operations for the years ended December 31, 1996, 1997 and 1998......................... F-4
Statements of Stockholders' Deficit and Redeemable Preferred Stock for the years ended December 31,
1996, 1997 and 1998................................................................................. F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998......................... F-6
Notes to Financial Statements......................................................................... F-7-F-20
</TABLE>
F-1
<PAGE>
[THIS IS THE REPORT WHICH WILL BE ISSUED UPON THE EFFECTIVENESS OF THE STOCK
SPLIT AS DESCRIBED IN NOTE 10.]
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,
------------------------------------
<S> <C> <C> <C>
PRO FORMA
1997 1998 1998
---------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................................... $4,879,560 $ 127,587 $ 127,587
Restricted cash............................................................. 240,000 240,000
Short-term investments...................................................... 12,438,365
Accounts receivable, trade.................................................. 105,865 572,120 572,120
Inventory................................................................... 619,905 2,736,512 2,736,512
Prepaid and other assets.................................................... 75,968 171,624 171,624
---------- ----------- -----------
Total current assets.................................................... 18,119,663 3,847,843 3,847,843
---------- ----------- -----------
Property and equipment, at cost............................................... 270,862 780,257 780,257
Less: accumulated depreciation and amortization............................. (22,296) (136,866) (136,866)
---------- ----------- -----------
Property and equipment, net............................................. 248,566 643,391 643,391
Deposits and other............................................................ 43,862 1,129,461 1,129,461
---------- ----------- -----------
Total assets............................................................ $18,412,091 $ 5,620,695 $ 5,620,695
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion, notes payable.............................................. $ 182,445 $ 515,798 $ 515,798
Current portion, capital lease.............................................. 3,788 4,210 4,210
Accounts payable............................................................ 647,795 5,166,141 5,166,141
Accrued expenses............................................................ 459,484 128,466 128,466
Accrued compensation and benefits........................................... 644,216 1,282,456 1,282,456
---------- ----------- -----------
Total current liabilities............................................... 1,937,728 7,097,071 7,097,071
Notes payable............................................................... 387,806 595,559 595,559
Capital leases.............................................................. 16,526 11,735 11,735
---------- ----------- -----------
Total liabilities....................................................... 2,342,060 7,704,365 7,704,365
---------- ----------- -----------
Commitments and contingent liabilities
Series A Convertible Mandatory Redeemable Preferred Stock, $.01 par value,
2,752,111 shares authorized and outstanding................................. 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................................... 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....... 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. (15,193,855 shares issued Pro
Forma at December 31, 1998)............................................... 151,939
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 Pro Forma at December 31, 1998)............................. 91,008 91,008
Additional paid-in capital.................................................. 49,215,176
Warrant for Class A Common Stock............................................ 880,582
Accumulated deficit......................................................... (19,165,931) (51,299,874) (51,299,874)
Unearned stock-based compensation........................................... (102,026) (1,031,493) (1,031,493)
---------- ----------- -----------
Total stockholders' equity (deficit).................................... (19,176,949) (52,240,359) (2,083,670)
---------- ----------- -----------
Total liabilities and stockholders' equity (deficit).................... $18,412,091 $ 5,620,695 $ 5,620,695
---------- ----------- -----------
---------- ----------- -----------
</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,
---------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- -------------- --------------
Revenues.......................................................... $ 140,865 $ 1,022,162
------------- -------------- --------------
Costs and expenses:
Cost of revenues................................................ -- 1,529,917 9,918,917
Engineering and development..................................... $ 1,408,441 6,980,680 9,684,448
Sales and marketing............................................. 427,631 3,622,590 5,156,717
General and administrative...................................... 1,092,502 2,432,363 3,587,155
Depreciation and amortization................................... -- 22,296 119,144
------------- -------------- --------------
Total costs and expenses.................................... 2,928,574 14,587,846 28,466,381
------------- -------------- --------------
Loss from operations.............................................. (2,928,574) (14,446,981) (27,444,219)
Interest and other income, net.................................... 8,154 422,743 422,807
Interest expense.................................................. (2,081) (17,110) (100,562)
------------- -------------- --------------
Net loss.................................................... (2,922,501) (14,041,348) (27,121,974)
Accretion on preferred stock...................................... (75,880) (2,435,470) (6,145,105)
------------- -------------- --------------
Net loss available to common stockholders................... $ (2,998,381) $ (16,476,818) $ (33,267,079)
------------- -------------- --------------
------------- -------------- --------------
Pro forma net loss per common share............................... $ (2.25)
--------------
--------------
Pro forma weighted average common shares outstanding.............. 14,785,714
--------------
--------------
</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
--------------------------------------------------------------------------
SERIES A SERIES B SERIES C
------------------------ ------------------------ ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ --------- -----------
<S> <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 of expenses........... 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..............
Deferred compensation..............................
Amortization of deferred compensation..............
Non-employee stock option compensation expense.....
Sale of Preferred Stock, net of expenses........... 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
Deferred compensation..............................
Amortization of deferred compensation..............
Sale of Preferred Stock, net of expenses........... 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
---------- ------------ ---------- ------------ --------- -----------
---------- ------------ ---------- ------------ --------- -----------
<CAPTION>
STOCKHOLDERS' DEFICIT
-----------------------------------------------------------------
WARRANT CLASS B COMMON STOCK
FOR ------------------------------------
REDEEMABLE WORLDGATE, ADDITIONAL
PREFERRED LLC CAPITAL PAID-IN ACCUMULATED
STOCK CONTRIBUTED SHARES AMOUNT CAPITAL DEFICIT
----------- ------------ ----------- --------- ------------ -------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995....................... $ 180,950 $ (149,325)
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 of expenses........... (174,169)
Accretion on Preferred Stock....................... (75,880)
Net loss for the year.............................. (2,922,501)
----------- ------------ ----------- --------- ------------ -------------
BALANCE AT DECEMBER 31, 1996....................... 9,100,801 91,008 1,529,621 (3,071,826)
Warrants issued for services provided.............. $ 880,582
Deferred compensation.............................. 108,875
Amortization of deferred compensation..............
Non-employee stock option compensation expense..... 63,000
Sale of Preferred Stock, net of expenses........... (1,318,783)
Accretion on Preferred Stock....................... (382,713) (2,052,757)
Net loss for the year.............................. (14,041,348)
----------- ------------ ----------- --------- ------------ -------------
BALANCE AT DECEMBER 31, 1997....................... 880,582 9,100,801 91,008 (19,165,931)
Deferred compensation.............................. 1,133,136
Amortization of deferred compensation..............
Sale of Preferred Stock, net of expenses...........
Accretion on Preferred Stock....................... (1,133,136) (5,011,969)
Net loss for the year.............................. (27,121,974)
----------- ------------ ----------- --------- ------------ -------------
BALANCE AT DECEMBER 31, 1998....................... $ 880,582 9,100,801 $ 91,008 $ (51,299,874)
----------- ------------ ----------- --------- ------------ -------------
----------- ------------ ----------- --------- ------------ -------------
<CAPTION>
UNEARNED TOTAL
STOCK-BASED STOCKHOLDERS
COMPENSATION DEFICIT
------------- -------------
BALANCE AT DECEMBER 31, 1995....................... $ 31,625
Cash capital contributions......................... 873,498
Capital contributed for services................... 816,230
Merger of WorldGate Communications, Inc............
Sale of Preferred Stock, net of expenses........... (174,169)
Accretion on Preferred Stock....................... (75,880)
Net loss for the year.............................. (2,922,501)
------------- -------------
BALANCE AT DECEMBER 31, 1996....................... (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 of expenses........... (1,318,783)
Accretion on Preferred Stock....................... (2,435,470)
Net loss for the year.............................. (14,041,348)
------------- -------------
BALANCE AT DECEMBER 31, 1997....................... (102,026) (19,176,949)
Deferred compensation.............................. (1,133,136)
Amortization of deferred compensation.............. 203,669 203,669
Sale of Preferred Stock, net of expenses...........
Accretion on Preferred Stock....................... (6,145,105)
Net loss for the year.............................. (27,121,974)
------------- -------------
BALANCE AT DECEMBER 31, 1998....................... $(1,031,493) $ (52,240,359)
------------- -------------
------------- -------------
</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,
---------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $ (2,922,501) $ (14,041,348) $ (27,121,974)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization............................... -- 22,296 119,144
Amortization of deferred compensation....................... -- 6,849 203,669
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
Changes in operating assets and liabilities:
Accounts receivable....................................... -- (105,865) (466,255)
Inventories............................................... -- (619,905) (2,116,607)
Prepaid and other assets.................................. (9,496) (110,334) (1,181,255)
Accounts payable.......................................... 333,112 314,683 4,518,346
Accrued expenses.......................................... 129,805 329,679 (331,018)
Accrued compensation and benefits......................... -- 644,216 638,240
------------- -------------- --------------
Net cash used in operating activities................... (1,652,850) (12,616,147) (25,722,285)
------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................ -- (248,817) (533,394)
Purchases of short-term investments............................. (5,881,025) (16,443,761) (1,947,716)
Proceeds from maturities of short-term investments.............. -- 9,900,000 14,386,081
Proceeds from sale of equipment................................. -- -- 4,000
Restricted cash................................................. -- -- (240,000)
------------- -------------- --------------
Net cash (used in) provided by investing activities..... (5,881,025) (6,792,578) 11,668,971
------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock....................... 8,495,535 23,359,513 9,297,027
Stock issuance costs............................................ (174,169) (1,318,783) (532,423)
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
Repayments of capital leases and notes payable.................. -- (66,220) (401,053)
------------- -------------- --------------
Net cash provided by financing activities............... 9,194,864 22,595,671 9,301,341
------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents.... 1,660,989 3,186,946 (4,751,973)
Cash and cash equivalents, beginning of period.................... 31,625 1,692,614 4,879,560
------------- -------------- --------------
Cash and cash equivalents, end of period.......................... $ 1,692,614 $ 4,879,560 $ 127,587
------------- -------------- --------------
------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................................... $ 2,081 $ 16,351 $ 96,062
------------- -------------- --------------
------------- -------------- --------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Accretion on preferred stock.................................... $ 75,880 $ 2,435,470 $ 6,145,105
Issuance of warrant for services provided....................... -- 880,582 --
Issuance of stock for services provided......................... 816,230 -- --
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 this public offering, the Company has
a plan to modify its operations to continue its existence through 1999.
UNAUDITED PRO FORMA BALANCE SHEET
The board of directors has authorized the Company to file a Registration
Statement with the Securities and Exchange Commission permitting the Company to
sell shares of Common Stock in an initial public offering ("IPO"). If the IPO is
consummated as presently anticipated, all shares of the Series C Preferred and
Series B Convertible Preferred will automatically convert into an equal number
of Class A Common Stock and Class B Common Shares, respectively, and all shares
of Series A Convertible Preferred Stock will automatically convert into two
shares of Class B Common Stock. All of the outstanding Class B Common Stock will
then convert into Class A Common Stock. The unaudited pro forma balance sheet
reflects the subsequent conversion of Series A, Series B and Series C Preferred
shares into Class A Common Stock as if such conversion had occurred as of
December 31, 1998. The unaudited pro forma balance sheet does not include the
sale of 697,437 shares of Series C Preferred Stock ("Series C Preferred")
(464,958 shares of Class A Common Stock post-split) in January and February 1999
for approximately $7.6 million and the proceeds from the issuance of notes
payable of approximately $5,470,000 with detachable warrants in March 1999 (see
Note 10).
F-7
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
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. Revenue is recognized by the Company
when products are shipped and accepted by the customer.
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.
F-8
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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; 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 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.
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 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 used to compute
basic and diluted net loss per common share for the year ended December 31,
1998. 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 of common stock issuable upon the
exercise of stock options and warrants and upon conversion of
F-11
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
---------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- -------------- --------------
Net loss available to common stockholders..... $ (2,998,381) $ (16,476,818) $ (33,267,079)
Basic and diluted net loss per common share... $ (0.33) $ (1.81) $ (3.66)
------------- -------------- --------------
------------- -------------- --------------
Weighted average shares outstanding-- basic
and diluted................................. 9,100,801 9,100,801 9,100,801
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
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 (CONTINUED)
3. INVENTORIES
Inventories as of December 31, 1997 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ------------
<S> <C> <C>
Raw material........................................................ $ 148,629 $ 991,670
Work-in-progress.................................................... 179,205 16,461
Finished goods...................................................... 292,071 1,728,381
---------- ------------
$ 619,905 $ 2,736,512
---------- ------------
---------- ------------
</TABLE>
Customers held $292,071 and $1,264,051 of the Company's finished goods
inventories at December 31, 1997 and 1998, 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.
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 fair value of the options granted during the year was
$0.615 and $6.54 per option at December 31, 1997 and 1998, respectively.
F-17
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
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
---------
---------
</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.
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.
F-18
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 for the years ended December 31, 1996, 1997 and 1998,
respectively. Accounts receivable amounted to approximately $11,000 and $176,000
at December 31, 1997 and 1998, 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 for the years ended December 31, 1997 and 1998, respectively. 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 as of
December 31, 1997 and 1998, 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
F-19
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
ended December 31, 1998 amounted to approximately $100,000 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 Class A Common Stock, post-split) for $11.00 per
share for approximately $7,600,000. Upon completion of the IPO as presently
anticipated, these shares will convert into shares of Class A Common Stock.
In January 1999, the board of directors approved a 2-for-3 reverse stock
split effective immediately prior the IPO. 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 the number of shares of common stock equal to
$5,469,600 divided by the lower of $16.50 and the initial public offering price
at an exercise price equal to the lower of $16.50 and the initial public
offering price per share. Assuming an initial public offering price of $19.00
per share, these holders may purchase up to 331,490 shares of common stock. 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 become immediately due upon the
completion of the Company's initial public offering.
F-20
<PAGE>
----------------------
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 6
Use of Proceeds............................. 12
Dividend Policy............................. 12
Capitalization.............................. 13
Dilution.................................... 14
Selected Financial Information.............. 15
Management's Discussion and Analysis
of Financial Condition and
Results of Operations..................... 17
Business.................................... 23
Management.................................. 43
Certain Transactions........................ 49
Principal Stockholders...................... 52
Description of Capital Stock................ 54
Shares Eligible for Future Sale............. 56
Underwriting................................ 59
Legal Matters............................... 60
Experts..................................... 61
Additional Information...................... 61
Index to Financial Statements............... F-1
</TABLE>
5,000,000 SHARES
[LOGO]
COMMON STOCK
---------------
PROSPECTUS
---------------
GERARD KLAUER MATTISON & CO., INC.
JEFFERIES & COMPANY, INC.
JANNEY MONTGOMERY SCOTT INC.
<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............... $ 31,970
NASD filing fee................................................... 12,000
Nasdaq filing fee................................................. 95,000
Printing and engraving expenses................................... 175,000
Legal fees and expenses........................................... 250,000
Accounting fees and expenses...................................... 150,000
Blue Sky fees and expenses (including legal fees)................. 10,000
Transfer agent and registrar fees and expenses.................... 4,000
Miscellaneous..................................................... 72,030
---------
Total............................................................. $ 800,000
---------
---------
</TABLE>
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 bylaws 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 under any insurance or other agreement,
vote of shareholders or disinterested directors or otherwise,
II-1
<PAGE>
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 8 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 the number of shares of common stock equal to $5,469,600 divided
by the lower of $16.50 and the initial public offering price at an
exercise price equal to the lower of the initial public offering price and
$16.50, to two institutional accredited investors. Assuming an initial
public offering price of $19.00 per share, these holders may purchase up
to 331,490 shares of common stock. These sales were exempt from
registration pursuant to Section 4(2) of the Securities Act.
Pursuant to WorldGate's stock option plan, as amended, as of March 16, 1999
WorldGate has granted options to purchase a total of 913,752 shares of class B
common stock to its employees and some other persons during the past three
fiscal years at exercise prices ranging from $0.75 to $16.50 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 By-laws 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 Agreement of Lease dated January 14, 1997 between Glenview Corporate Center and WorldGate, as
amended by First Amendment to Agreement of Lease dated October 24, 1997 between Glenview
Corporate Center and WorldGate.*
10.3 Agreement of Lease dated November 26, 1997 between Glenview Corporate Center and WorldGate.*
10.4 Development Agreement dated October 15, 1998 between WorldGate and Scientific-Atlanta, Inc.*+
10.5 Memorandum of Understanding dated September 2, 1998 between WorldGate and General Instrument
Corporation.*+
10.6 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.*
10.7 Master Agreement dated November 7, 1997 between Charter Communications, Inc. ("Charter") and
WorldGate.*+
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------------------------------
<C> <S>
10.8 Warrant Agreement dated November 7, 1997 between Charter and WorldGate.*
10.9 Affiliation Agreement dated November 7, 1997 between Charter and WorldGate.*+
10.10 Affiliation Agreement dated December 8, 1998 between WorldGate and Prestige Cable, Inc.*+
10.11 Affiliation Agreement dated October 19, 1998 between WorldGate and Massillon CableTV, Inc.*+
10.12 Affiliation Agreement dated September 25, 1998 between WorldGate and TVCable, S.A.*+
10.13 Affiliation Agreement dated December 14, 1998 between WorldGate and City of Tacoma, Tacoma Public
Utilities, d/b/a Click!Network.*+
10.14 Amended and Restated 1996 Stock Option Plan, as further amended by First Amendment to 1996 Stock
Option Plan dated June 12, 1998.*
10.15 Agreement dated June 15, 1998 between WorldGate and Thomas R. Baxter.*
10.16 First Amended and Restated Stockholders' Agreement dated September 2, 1998 among WorldGate and
the stockholders identified therein.*
10.17 Security Agreement dated March 2, 1999 between WorldGate, Strong River Investment, Inc. ("Strong
River") and Ampal American-Israel Corporation ("Ampal").*
10.18 Intellectual Property Security Agreement dated March 2, 1999 between WorldGate, Strong River and
Ampal.*
10.19 Warrant dated March 2, 1999 issued to Ampal by WorldGate.*
10.20 Warrant dated March 2, 1999 issued to Strong River by WorldGate.*
10.21 Senior Secured Promissory Note dated March 2, 1999 in the principal amount of $500,000 issued by
WorldGate in favor of Ampal.*
10.22 Senior Secured Promissory Note dated March 2, 1999 in the principal amount of $2,500,000 issued
by WorldGate in favor of Ampal.*
10.23 Senior Secured Promissory Note dated March 2, 1999 in the principal amount of $500,000 issued by
WorldGate in favor of Strong River.*
10.24 Senior Secured Promissory Note dated March 2, 1999 in the principal amount of $2,500,000 issued
by WorldGate in favor of Strong River.*
10.25 Letter Agreement dated November 14, 1997 between WorldGate and Next Level Systems, Inc.*
10.26 Affiliation Agreement dated September 30, 1998 between WorldGate and Cable Bahamas, LTD.*+
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 on signature page).*
27.1 Financial Data Schedule.#
</TABLE>
- ------------------------
* Filed previously.
# Filed herewith.
+ Confidential Treatment Requested. Portions of these exhibits have been
omitted pursuant to a request for confidential treatment.
II-4
<PAGE>
(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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment no. 3 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Bensalem,
Pennsylvania on April 14, 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. 3 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURES TITLES DATE
- ------------------------------ --------------------------- -------------------
Chairman and Chief
/s/ HAL M. KRISBERGH Executive Officer,
- ------------------------------ Director (Principal April 14, 1999
Hal M. Krisbergh Executive Officer)
/s/ DAVID A. DILL Chief Financial Officer
- ------------------------------ (Principal Financial and April 14, 1999
David A. Dill Accounting Officer)
* Vice President and General
- ------------------------------ Manager, Director April 14, 1999
David E. Wachob
* Director
- ------------------------------ April 14, 1999
Alan Gerry
* Director
- ------------------------------ April 14, 1999
Marcia J. Hooper
* Director
- ------------------------------ April 14, 1999
Ronald A. Walter
* Director
- ------------------------------ April 14, 1999
Thomas G. Baxter
* Director
- ------------------------------ April 14, 1999
Graham Pattison
<TABLE>
<S> <C> <C>
*By: /s/ DAVID A. DILL
--------------------------------------
David A. Dill
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NO.
- ----------------- --------------------------------------------------------------------------------------- -----------
<C> <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 By-laws 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 Agreement of Lease dated January 14, 1997 between Glenview Corporate Center and
WorldGate, as amended by First Amendment to Agreement of Lease dated October 24, 1997
between Glenview Corporate Center and WorldGate.*
10.3 Agreement of Lease dated November 26, 1997 between Glenview Corporate Center and
WorldGate.*
10.4 Development Agreement dated October 15, 1998 between WorldGate and Scientific-Atlanta,
Inc.*+
10.5 Memorandum of Understanding dated September 2, 1998 between WorldGate and General
Instrument Corporation.*+
10.6 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.*
10.7 Master Agreement dated November 7, 1997 between Charter Communications, Inc.
("Charter") and WorldGate.*+
10.8 Warrant Agreement dated November 7, 1997 between Charter and WorldGate.*
10.9 Affiliation Agreement dated November 7, 1997 between Charter and WorldGate.*+
10.10 Affiliation Agreement dated December 8, 1998 between WorldGate and Prestige Cable,
Inc.*+
10.11 Affiliation Agreement dated October 19, 1998 between WorldGate and Massillon CableTV,
Inc.*+
10.12 Affiliation Agreement dated September 25, 1998 between WorldGate and TVCable, S.A.*+
10.13 Affiliation Agreement dated December 14, 1998 between WorldGate and City of Tacoma,
Tacoma Public Utilities, d/b/a Click!Network.*+
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NO.
- ----------------- --------------------------------------------------------------------------------------- -----------
<C> <S> <C>
10.14 Amended and Restated 1996 Stock Option Plan, as further amended by First Amendment to
1996 Stock Option Plan dated June 12, 1998.*
10.15 Agreement dated June 15, 1998 between WorldGate and Thomas R. Baxter.*
10.16 First Amended and Restated Stockholders' Agreement dated September 2, 1998 among
WorldGate and the stockholders identified therein.*
10.17 Security Agreement dated March 2, 1999 between WorldGate, Strong River Investment, Inc.
("Strong River") and Ampal American-Israel Corporation ("Ampal").*
10.18 Intellectual Property Security Agreement dated March 2, 1999 between WorldGate, Strong
River and Ampal.*
10.19 Warrant dated March 2, 1999 issued to Ampal by WorldGate.*
10.20 Warrant dated March 2, 1999 issued to Strong River by WorldGate.*
10.21 Senior Secured Promissory Note dated March 2, 1999 in the principal amount of $500,000
issued by WorldGate in favor of Ampal.*
10.22 Senior Secured Promissory Note dated March 2, 1999 in the principal amount of
$2,500,000 issued by WorldGate in favor of Ampal.*
10.23 Senior Secured Promissory Note dated March 2, 1999 in the principal amount of $500,000
issued by WorldGate in favor of Strong River.*
10.24 Senior Secured Promissory Note dated March 2, 1999 in the principal amount of
$2,500,000 issued by WorldGate in favor of Strong River.*
10.25 Letter Agreement dated November 14, 1997 between WorldGate and Next Level Systems,
Inc.*
10.26 Affiliation Agreement dated September 30, 1998 between WorldGate and Cable Bahamas,
LTD.*+
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 on signature page).*
27.1 Financial Data Schedule.#
</TABLE>
- ------------------------
* Filed previously.
# Filed herewith.
+ Confidential Treatment Requested. Portions of these exhibits have been
omitted pursuant to a request for confidential treatment.
II-8
<PAGE>
Exhibit 1.1
WORLDGATE COMMUNICATIONS, INC.
COMMON STOCK, $.01 PAR VALUE
UNDERWRITING AGREEMENT
....................., 1999
Gerard Klauer Mattison & Co., Inc.
Jefferies & Company, Inc.
Janney Montgomery Scott Inc.
As representative of the several Underwriters
named in Schedule I hereto,
c/o Gerard Klauer Mattison & Co., Inc.
529 Fifth Avenue
New York, New York 10017
Ladies and Gentlemen:
WorldGate Communications, Inc., a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 4,500,000 shares and, at the election of the
Underwriters, up to 675,000 additional shares, of common stock, $.01 par value
per share ("Stock") of the Company. The 4,500,000 shares to be sold by the
Company are herein called the "Firm Shares" and the 675,000 additional shares to
be sold by the Company are herein called the "Optional Shares". The Firm Shares
and the Optional Shares that the Underwriters elect to purchase pursuant to
Section 2 hereof are herein collectively called the "Shares".
As part of the offering contemplated by this Agreement, the
Underwriters have agreed to reserve out of the Shares up to 300,000 Shares, for
sale to certain of the Company's employees, officers and directors and other
parties associated with the Company as designated by the Company (collectively,
the "Directed Participants") as set forth in the Prospectus under the heading
"Underwriting" (the "Directed Share Program"). The Shares to be sold pursuant to
the Directed Share Program (the "Directed Shares") will be sold pursuant to this
Agreement at the public offering price in the jurisdictions designated by the
Company. Any Directed Shares not confirmed for purchase by any Directed
Participants by the end of the business day on which this Agreement is executed
will be offered to the public as set forth in the Prospectus.
1. (a) The Company represents and warrants to, and agrees with,
each of the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-71997)
(the "Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement (as amended through the date hereof) and any
post-effective amendments thereto, each in the form heretofore delivered to you,
and, excluding
<PAGE>
exhibits thereto, to you for each of the other Underwriters, have been declared
effective by the Commission in such form; other than a registration statement,
if any, increasing the size of the offering (a "Rule 462(b) Registration
Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended (the "Act"), which became effective upon filing, no other document with
respect to the Initial Registration Statement has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of the Initial
Registration Statement, any post-effective amendment thereto or the Rule 462(b)
Registration Statement, if any, has been issued and no proceeding for that
purpose has been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed with the
Commission pursuant to Rule 424(a) of the rules and regulations of the
Commission under the Act is hereinafter called a "Preliminary Prospectus"; the
various parts of the Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and
deemed by virtue of Rule 430A under the Act to be part of the Initial
Registration Statement at the time it was declared effective, each as amended at
the time such part of the Initial Registration Statement became effective or
such part of the Rule 462(b) Registration Statement, if any, became or hereafter
becomes effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant to Rule
424(b) under the Act, is hereinafter called the "Prospectus");
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; PROVIDED, HOWEVER, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Gerard Klauer Mattison & Co., Inc. expressly for use
therein;
(iii) The Registration Statement, when it became effective,
conformed, and the Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will conform, in all material respects
to the requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date as to
the Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; PROVIDED, HOWEVER, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in conformity
with information furnished in writing to the Company by an Underwriter through
Gerard Klauer Mattison & Co., Inc. expressly for use therein;
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(iv) Neither the Company nor any of its Subsidiaries has
sustained since the date of the latest audited financial statements included in
the Prospectus any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since the respective
dates as of which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or long-term debt
of the Company or any of its Subsidiaries or any material adverse change, or any
development involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity or results
of operations of the Company and its Subsidiaries, otherwise than as set forth
or contemplated in the Prospectus;
(v) The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good title to all personal property
owned by it, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its Subsidiaries; and,
to the Company's best knowledge, any real property and buildings held under
lease by the Company and its Subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries;
(vi) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is in
good standing in the Commonwealth of Pennsylvania and under the laws of each
other jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no material
liability or disability by reason of the failure to be so qualified in any such
jurisdiction; and each subsidiary of the Company has been duly incorporated and
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation;
(vii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description of the Stock contained in the
Prospectus; and all of the issued shares of capital stock of each subsidiary of
the Company have been duly and validly authorized and issued, are fully paid and
non-assessable and are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equities or claims;
(viii) The Shares have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be duly
and validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
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(ix) The issue and sale of the Shares to be sold by the Company
and the compliance by the Company with all of the provisions of this Agreement
and the consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound or to which any of the property or assets of the Company or any of its
Subsidiaries is subject except to the extent such conflict, breach, violation or
default, individually or in the aggregate, could not reasonably be expected to
have a material adverse effect on the consolidated financial position,
stockholders' equity or results of operations of the Company or on the issue and
sale of the Shares, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its Subsidiaries or any of
their properties; and no consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement, except the registration
under the Act of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the Shares by
the Underwriters;
(x) Neither the Company nor any of its Subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement or instrument to which it is a party or by which it or
any of its properties may be bound;
(xi) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock and the laws and documents referred to therein, are
accurate, complete and fair;
(xii) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any of its
Subsidiaries is a party or of which any property of the Company or any of its
Subsidiaries is the subject which, if determined adversely to the Company or any
of its Subsidiaries, could reasonably be expected to individually or in the
aggregate have a material adverse effect on the current or future consolidated
financial position, stockholders' equity or results of operations of the Company
and its Subsidiaries; and, to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others;
(xiii) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company", or an
entity controlled by an "investment company," as defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act");
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(xiv) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes; and
(xv) PricewaterhouseCoopers LLP, who have certified certain
financial statements of the Company, are independent public accountants as
required by the Act and the rules and regulations of the Commission thereunder.
(xvi) The Company owns, is licensed to use or otherwise possesses
adequate rights to use all material patents, patent rights, inventions, trade
secrete, know-how, trademarks, service marks, trade names, copyrights and other
intellectual property rights described or referred to in the Prospectus as owned
or used by it or which are necessary for the conduct of its business as
described in the Prospectus; and the Company has not received any notice of
(except as described in the Prospectus), and the Company has no knowledge of,
any action on the part of the Company which constitutes an infringement of or
conflict with asserted rights of others with respect to any patents, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names, copyrights or other intellectual property rights;
(xvii) Except as described in the Prospectus, neither the
Company, nor to the best of the Company's knowledge, the Company's directors,
officers or stockholders, is a party to any stockholders' agreement involving
the Company or its capital stock or any other agreement involving buy/sell
arrangements or voting arrangements with respect to the Company's capital stock;
(xviii) The Company has reviewed its operations and that of its
Subsidiaries and has made inquiries of any third parties with which the Company
or any of its Subsidiaries has a material relationship, to evaluate the extent
to which the business or operations of the Company or any of its Subsidiaries
will be affected by the Year 2000 Problem. As a result of such review and such
inquiries, the Company has no reason to believe, and does not believe, that the
Year 2000 Problem will have a material adverse effect on the general affairs,
management, the current or future consolidated financial position, business
prospects, stockholders' equity or results of operations of the Company and its
Subsidiaries, or result in any material loss or interference with the Company's
business or operations. As used herein with respect to the Company or such third
parties, the "Year 2000 Problem" means any material failure of computer hardware
or software to function as effectively with dates or time periods occurring
after December 31, 1999 as with dates or time periods occurring prior to January
1, 2000, whether used in the receipt, transmission, processing, manipulation,
storage retrieval, retransmission or other utilization of data or in the
operation of mechanical or electrical systems of any kind.
(xix) (a) The Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or supplements thereto
will comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share Program,
and (b) no authorization, approval, consent, license, order, registration or
qualification of or with any
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government, governmental instrumentality or court, other than such as have been
obtained, is necessary under the securities laws and regulations of foreign
jurisdictions in which the Directed Shares are offered outside the United
States.
(xx) The Company has not offered, or caused the Underwriters to
offer, Shares to any person pursuant to the Directed Share Program with the
specific intent to unlawfully influence (a) a customer or supplier of the
Company to alter the customer's or supplier's level or type of business with the
Company, or (b) a trade journalist or publication to write or publish favorable
information about the Company or its products.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company, at a purchase
price per share of $.............., the Firm Shares and (b) in the event and to
the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company, at the purchase price per share set forth in clause
(a) of this Section 2, that portion of the number of Optional Shares as to which
such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction the numerator of which is the maximum number of Optional
Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Company hereby grants to the Underwriters the right to
purchase at their election up to 675,000 Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale upon
the terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder,
in definitive form, and in such authorized denominations and registered in such
names as Gerard Klauer Mattison & Co., Inc. may request upon at least
forty-eight hours' prior notice to the Company shall be delivered by or on
behalf of the Company to Gerard Klauer Mattison & Co., Inc., through the
facilities of the Depository Trust Company ("DTC"), for the account of such
Underwriter, against payment by or on behalf of such Underwriter of the purchase
price therefor by wire transfer of Federal (same-day) funds to the account
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specified by the Company to Gerard Klauer Mattison & Co., Inc. at least
forty-eight hours in advance. The Company will cause the certificates
representing the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery (as defined below) with respect
thereto at the office of DTC or its designated custodian (the "Designated
Office"). The time and date of such delivery and payment shall be, with respect
to the Firm Shares, 9:30 a.m., New York time, on ............., 1999 or such
other time and date as Gerard Klauer Mattison & Co., Inc. and the Company may
agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New
York time, on the date specified by Gerard Klauer Mattison & Co., Inc. in the
written notice given by Gerard Klauer Mattison & Co., Inc. of the Underwriters'
election to purchase such Optional Shares, or such other time and date as Gerard
Klauer Mattison & Co., Inc. and the Company may agree upon in writing. Such time
and date for delivery of the Firm Shares is herein called the "First Time of
Delivery", such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery", and each
such time and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(j) hereof will be delivered at the offices of
Drinker Biddle & Reath LLP, 1000 Westlakes Drive, Berwyn, PA 19312 (the "Closing
Location"), and the Shares will be delivered at the Designated Office, all at
such Time of Delivery. A meeting will be held at the Closing Location at 2:00
p.m., Philadelphia time, on the New York Business Day immediately preceding such
Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York, respectively, are generally
authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you
and to file such Prospectus pursuant to Rule 424(b) under the Act
not later than the Commission's close of business on the second
business day following the execution and delivery of this
Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or
Prospectus prior to the last Time of Delivery which shall be
reasonably disapproved by you promptly after reasonable notice
thereof; to advise you, promptly after it receives notice
thereof, of the time when any amendment to the Registration
Statement has been filed or becomes effective or any supplement
to the Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to advise you, promptly after it
receives notice thereof, of the issuance by the Commission of any
stop order or of any order preventing or suspending the use of
any Preliminary Prospectus or prospectus, of the suspension of
the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the
amending or supplementing of the
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Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order
or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such
qualification, promptly to use its best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take such action as you
may reasonably request to qualify the Shares for offering and
sale under the securities laws of such jurisdictions as you may
request and to comply with such laws so as to permit the
continuance of sales and dealings therein in such jurisdictions
for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New
York Business Day next succeeding the date of this Agreement and
from time to time, to furnish the Underwriters with copies of the
Prospectus in New York City in such quantities as you may
reasonably request, and, if the delivery of a prospectus is
required by law or regulation at any time prior to the expiration
of nine months after the time of issue of the Prospectus in
connection with the offering or sale of the Shares and if at such
time any event shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made when such
Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act, to
notify you and upon your request to prepare and furnish without
charge to each Underwriter and to any dealer in securities as
many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will
correct such statement or omission or effect such compliance, and
in case any Underwriter is required to deliver a prospectus in
connection with sales of any of the Shares at any time nine
months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare
and deliver to such Underwriter as many copies as you may request
of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its securityholders as
soon as practicable, but in any event not later than eighteen
months after the effective date of the Registration Statement (as
defined in Rule 158(c) under the Act), an earnings statement of
the Company and its Subsidiaries (which need not be audited)
complying with Section 11(a) of the Act and the rules and
regulations of the Commission thereunder (including, at the
option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of
the Prospectus, not to offer to sell or solicit an offer to buy,
sell, contract to sell, issue, or otherwise dispose of, except as
provided hereunder,
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any securities of the Company that are substantially similar to
the Shares, including but not limited to any securities that are
convertible into or exchangeable for, or that represent the right
to receive, Stock or any such substantially similar securities
(other than pursuant to employee stock option plans existing on,
or upon the conversion or exchange of convertible or exchangeable
securities outstanding as of, the date of this Agreement),
without your prior written consent. In addition, the Company
agrees that, without the prior written consent of Gerard, Klauer
Mattison & Co., Inc., it will not, during the period ending 180
days after the date of the Prospectus, file or cause to become
effective any registration statement relating to any securities
of the Company, other than the shelf registration statement
registering only the shares issuable upon exercise of warrants
held by holders of the Company's face-value $6.0 million
discounted notes issued in March 1999 and other registration
statements registering only shares under any of the Company's
stock plans or other employee benefit plans;
(f) To furnish to its stockholders as soon as practicable
after the end of each fiscal year an annual report (including a
balance sheet and statements of income, stockholders' equity and
cash flows of the Company and its consolidated subsidiaries
certified by independent public accountants) and, as soon as
practicable after the end of each of the first three quarters of
each fiscal year (beginning with the fiscal quarter ending after
the effective date of the Registration Statement), consolidated
summary financial information of the Company and its subsidiaries
for such quarter in reasonable detail (provided that this
covenant shall terminate at such time as the Company ceases to be
subject to the reporting requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended);
(g) During a period of five years from the effective date
of the Registration Statement, to furnish to you copies of all
reports or other communications (financial or other) furnished to
stockholders, and to deliver to you (i) as soon as they are
publicly available, copies of any reports and financial
statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of
the Company is listed; and (ii) such additional information
concerning the business and financial condition of the Company as
you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the
accounts of the Company and its subsidiaries are consolidated in
reports furnished to its stockholders generally or to the
Commission);
(h) To use the net proceeds received by it from the sale
of the Shares pursuant to this Agreement in the manner specified
in the Prospectus under the caption "Use of Proceeds";
(i) To list for quotation the Shares on the National
Association of Securities Dealers Automated Quotations National
Market System ("NASDAQ");
(j) To file with the Commission such information on Form
10-Q or Form 10-K as may be required by Rule 463 under the Act;
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(k) If the Company elects to rely upon Rule 462(b), to
file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time,
on the date of this Agreement, and at the time of filing either
pay to the Commission the filing fee for the Rule 462(b)
Registration Statement or give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) under the Act;
(l) In connection with the Directed Share Program, to
ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc.
(the "NASD") or the NASD rules from sale, transfer, assignment,
pledge or hypothecation for a period of three months following
the date of the effectiveness of the Registration Statement.
Gerard Klauer Mattison & Co., Inc. will notify the Company as to
which Directed Participants will need to be so restricted. The
Company will direct the transfer agent to place stop transfer
restrictions upon such securities for such period of time.
(m) To comply with all applicable securities and other
applicable laws, rules and regulations in each foreign
jurisdiction in which the Directed Shares are offered in
connection with the Directed Share Program.
6. The Company covenants and agrees with the several Underwriters
that (a) the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or copying,
as appropriate, and distributing any Agreement among Underwriters, this
Agreement, the Blue Sky Memorandum, closing documents (including any
compilations thereof) and any other documents in connection with the offering,
purchase, sale and delivery of the Shares; (iii) all expenses in connection with
the qualification of the Shares for offering and sale under state securities
laws as provided in Section 5(b) hereof, including the reasonable fees and
disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky survey, and all fees and
disbursements of counsel incurred by the Underwriters in connection with the
Directed Share Program and stamp duties, similar taxes or duties or other taxes,
if any, incurred by the Underwriters in connection with the Directed Share
Program; (iv) all fees and expenses in connection with listing the Shares on
NASDAQ; (v) the filing fees incident to, and the reasonable fees and
disbursements of counsel for the Underwriters in connection with, securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Shares; (vi) the cost of preparing stock certificates;
(vii) the cost and charges of any transfer agent or registrar; and (viii) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section. It
is understood, however, that the Company shall bear the cost of any other
matters not directly relating to the sale and purchase of the Shares pursuant to
this Agreement, and that, except as provided in this Section (other than clause
(viii) of the preceding sentence), and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and
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expenses, including the fees of their counsel, stock transfer taxes on resale of
any of the Shares by them, and any advertising expenses connected with any
offers they may make.
7. The obligations of the Underwriters hereunder, as to the
Shares to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and other
statements of the Company herein are, at and as of such Time of Delivery, true
and correct, the condition that the Company shall have performed all of its and
their obligations hereunder theretofore to be performed, and the following
additional conditions:
(a) The Prospectus shall have been filed with the
Commission pursuant to Rule 424(b) within the applicable time
period prescribed for such filing by the rules and regulations
under the Act and in accordance with Section 5(a) hereof; if the
Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement; no stop
order suspending the effectiveness of the Registration Statement
or any part thereof shall have been issued and no proceeding for
that purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your
reasonable satisfaction;
(b) Hale and Dorr LLP, counsel for the Underwriters, shall
have furnished to you such written opinion or opinions (a draft
of each such opinion is attached as Annex II(a) hereto), dated
such Time of Delivery, with respect to the matters covered in
paragraphs (i), (ii), (viii) and (x) of subsection (c) below as
well as such other related matters as you may reasonably request,
and such counsel shall have received such papers and information
as they may reasonably request to enable them to pass upon such
matters;
(c) Drinker Biddle & Reath, LLP, counsel for the Company,
shall have furnished to you their written opinion (a draft of
such opinion is attached as Annex II(b) hereto), dated such Time
of Delivery, in form and substance satisfactory to you, to the
effect that:
(i) The Company has been duly incorporated and
is validly existing as a corporation in good standing under
the laws of the State of Delaware, with all necessary power
and authority to own its properties and conduct its
business as described in the Prospectus;
(ii) The Company has an authorized
capitalization as set forth in the Prospectus, and all of
the issued shares of capital stock of the Company
(including the Shares being delivered at such Time of
Delivery when appropriate certificates representing those
Shares are duly countersigned by the Company's transfer
agent, issued and delivered against payment therefor in
accordance with the terms of this Agreement) have been duly
and validly authorized and issued and are fully paid and
non-assessable; and the Shares conform as to legal matters
in all material respects to the description thereof
contained under the heading "Description of Capital Stock";
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(iii) The Company has been duly qualified as a
foreign corporation for the transaction of business and is
in good standing under the laws of the Commonwealth of
Pennsylvania;
(iv) Each subsidiary of the Company has been
duly incorporated and is validly existing as a corporation
in good standing under the laws of its jurisdiction of
incorporation; and all of the issued shares of capital
stock of each such subsidiary have been duly and validly
authorized and issued, are fully paid and non-assessable,
and are owned directly or indirectly by the Company, free
and clear of perfected security interests or to the best of
such counsel's knowledge other liens, encumbrances, charges
or claims (such counsel being entitled to rely in respect
of the opinion in this clause upon opinions of local
counsel and in respect to matters of fact upon certificates
of officers of the Company or its Subsidiaries, provided
that such counsel shall state that they believe that both
you and they are justified in relying upon such opinions
and certificates);
(v) To the best of such counsel's knowledge
and other than as set forth in the Prospectus, there is no
legal governmental proceeding pending against the Company
or any of its subsidiaries or to which any of the
properties of the Company or any of its subsidiaries is
subject that has caused such counsel to conclude that such
proceeding is required by Item 103 of Regulation S-K to be
described in the Registration Statement; and, to the best
of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
(vi) This Agreement has been duly authorized,
executed and delivered by the Company;
(vii) The issue and sale of the Shares being
delivered at such Time of Delivery to be sold by the
Company and the compliance by the Company with all of the
provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument filed as an exhibit to the
Registration Statement, nor will such action result in any
violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any statute or
any order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction
over the Company or any of its properties;
(viii) No consent, approval, authorization,
order, registration or qualification of or with any such
court or governmental agency or body is required for the
issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement,
except the registration under the Act of the Shares,
12
<PAGE>
and such consents, approvals, authorizations, registrations
or qualifications as may be required under state securities
or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters as to which
such counsel need not express an opinion; and
(ix) Assuming the application of the net
proceeds from the sale of the Shares as described in the
Prospectus under the caption "Use of Proceeds", the Company
is not subject to regulation under the Investment Company
Act of 1940, as amended; and
Such counsel shall also provide its advice that the Registration Statement and
the Prospectus and any further amendments and supplements thereto made by the
Company prior to such Time of Delivery (other than the financial statements and
related schedules therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the Act and
the rules and regulations thereunder; and that (relying as to factual matters to
the extent deemed appropriate by such counsel upon representations and
statements of officers and other representatives of the Company) they have
participated in the preparation of the Registration Statement and the Prospectus
and in conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company, and the
Underwriters' representatives and counsel at which the contents of the
Registration Statement, the Prospectus and related matters were discussed and,
although such counsel has not passed upon or assumed any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, and although such counsel has not
undertaken to verify independently the accuracy or completeness of the
statements in the Registration Statement and the Prospectus, and, therefore,
would not necessarily have become aware of any material misstatement of fact or
omission to state a material fact, on the basis of and subject to the foregoing
such counsel does not believe that as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that, as of its date, the Prospectus or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery (other than the
financial statements and related schedules therein, as to which such counsel
need express no opinion) contained an untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading or
that, as of such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by the Company
prior to such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion) contains an
untrue statement of a material fact or omits to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; and they do not know of any
13
<PAGE>
amendment to the Registration Statement required to be filed or of any contracts
or other documents of a character required to be filed as an exhibit to the
Registration Statement or required to be described in the Registration Statement
or the Prospectus which are not filed or described as required;
(d) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on
the effective date of any post-effective amendment to the
Registration Statement filed subsequent to the date of this
Agreement and also at each Time of Delivery,
PricewaterhouseCoopers LLP shall have furnished to you a letter
or letters, dated the respective dates of delivery thereof, in
form and substance satisfactory to you, to the effect set forth
in Annex I hereto (the executed copy of the letter delivered
prior to the execution of this Agreement is attached as Annex
I(a) hereto and a draft of the form of letter to be delivered on
the effective date of any post-effective amendment to the
Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(e)(i) Neither the Company nor any of its subsidiaries
shall have sustained since the date of the latest audited
financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus,
and (ii) since the respective dates as of which information is
given in the Prospectus there shall not have been any change in
the capital stock or total or long-term indebtedness of the
Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the
general affairs, management, financial position, stockholders'
equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in
Clause (i) or (ii), is in the judgment of the Representatives so
material and adverse as to make it impracticable or inadvisable
to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(f) On or after the date hereof there shall not have
occurred any of the following: (i) a suspension or material
limitation in trading in securities generally on the New York
Stock Exchange or on NASDAQ; (ii) a suspension or material
limitation in trading in the Company's securities on NASDAQ;
(iii) a general moratorium on commercial banking activities
declared by either Federal or New York State authorities; or (iv)
the outbreak or escalation of hostilities involving the United
States or the declaration by the United States of a national
emergency or war, if the effect of any such event specified in
this Clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering
or the delivery of the Shares being delivered at such Time of
Delivery on the terms and in the manner contemplated in the
Prospectus;
(g) The Shares at such Time of Delivery shall have been
duly listed for quotation on NASDAQ;
14
<PAGE>
(h) The Company has obtained and delivered to the
Underwriters executed copies of an agreement from each of the
stockholders of the Company identified in Schedule II hereto,
substantially to the effect set forth in Subsection 1(b)(iv)
hereof in form and substance satisfactory to you;
(i) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of
prospectuses on the New York Business Day next succeeding the
date of this Agreement; and
(j) The Company shall have furnished or caused to be
furnished to you at such Time of Delivery certificates of
officers of the Company satisfactory to you as to the accuracy of
the representations and warranties of the Company herein at and
as of such Time of Delivery, as to the performance by the Company
of all of its obligations hereunder to be performed at or prior
to such Time of Delivery, and as to such other matters as you may
reasonably request, and the Company shall have furnished or
caused to be furnished certificates as to the matters set forth
in subsections (a) and (e) of this Section.
8. (a) (i) The Company will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through Gerard Klauer Mattison & Co., Inc. expressly
for use therein.
(ii) The Company agrees to indemnify and hold harmless Gerard
Klauer Mattison & Co., Inc. and each person, if any, who controls Gerard Klauer
Mattison & Co., Inc. within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act, from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or investigating
any such action or claim) (a) caused by any untrue statement or alleged untrue
statement of a material fact contained in the prospectus wrapper material
prepared by or with the consent of the Company for distribution in foreign
jurisdictions in connection with the Directed Share Program attached to the
Prospectus or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein, when considered in
15
<PAGE>
conjunction with the Prospectus or any applicable preliminary prospectus, not
misleading; (b) caused by the failure of any Directed Participant to pay for and
accept delivery of the shares which, immediately following the effectiveness of
the Registration Statement, were subject to a properly confirmed agreement to
purchase; or (c) related to, arising out of, or in connection with the Directed
Share Program.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Gerard Klauer
Mattison & Co., Inc. expressly for use therein; and will reimburse the Company
for any legal or other expenses reasonably incurred by the Company in connection
with investigating or defending any such action or claim as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection, except to the extent
it is materially prejudiced as a result thereof. In case any such action shall
be brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party (who shall not, except
with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
16
<PAGE>
Notwithstanding anything contained herein to the contrary, if indemnity may be
sought pursuant to Section 8(a)(ii) hereof in respect of such action or
proceeding, then in addition to such separate firm for the indemnified parties,
the indemnifying party shall be liable for the reasonable fees and expenses of
not more than one separate firm (in addition to any local counsel) for Gerard
Klauer Mattison & Co., Inc. for the defense of any losses, claims, damages and
liabilities arising out of the Directed Share Program, and all persons, if any,
who control Gerard Klauer Mattison & Co., Inc. within the meaning of either
Section 15 of the Act or Section 20 of the Exchange Act.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were determined by
PRO RATA allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from
17
<PAGE>
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be
in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who controls
any Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company (including any
person who, with his or her consent, is named in the Registration Statement as
about to become a director of the Company) and to each person, if any, who
controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the event
that, within the respective prescribed periods, you notify the Company that you
have so arranged for the purchase of such Shares, or the Company notifies you
that it has so arranged for the purchase of such Shares, you or the Company
shall have the right to postpone a Time of Delivery for a period of not more
than seven days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the Company
as provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
Shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the Company
as provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the
18
<PAGE>
aggregate number of all of the Shares to be purchased at such Time of Delivery,
or if the Company shall not exercise the right described in subsection (b) above
to require non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with respect to the Second
Time of Delivery, the obligations of the Underwriters to purchase and of the
Company to sell the Optional Shares) shall thereupon terminate, without
liability on the part of any non-defaulting Underwriter or the Company, except
for the expenses to be borne by the Company and the Underwriters as provided in
Section 6 hereof and the indemnity and contribution agreements in Section 8
hereof; but nothing herein shall relieve a defaulting Underwriter from liability
for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, or the
Company, or any officer or director or controlling person of the Company, and
shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, the Company shall not then be under any liability to any Underwriter
except as provided in Sections 6 and 8 hereof; but, if for any other reason
Shares are not delivered by or on behalf of the Company as provided herein, the
Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
shall then be under no further liability to any Underwriter in respect of the
Shares not so delivered except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of
the Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Gerard Klauer Mattison & Co., Inc. on your behalf as
the representatives.
All statements, requests, notices and agreements hereunder shall
be in writing, and if to the Underwriters shall be delivered or sent by mail,
overnight delivery service, telex or facsimile transmission to you as the
representatives in care of Gerard Klauer Mattison & Co., Inc. at 529 Fifth
Avenue, New York, NY 10017 and if to the Company shall be delivered or sent by
mail, telex or facsimile transmission to the address of the Company set forth in
the Registration Statement, Attention: Secretary; provided, however, that any
notice to an Underwriter pursuant to Section 8 hereof shall be delivered or sent
by mail, overnight delivery service, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire or telex
constituting such Questionnaire, which address will be supplied to the Company
by you on request. Any such statements, requests, notices or agreements shall
take effect upon receipt thereof. In each case a party may change its address
for notice hereunder by a written communication to the other parties hereto.
19
<PAGE>
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters and the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used
herein, the term "business day" shall mean any day when the Commission's office
in Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed to
be an original, but all such counterparts shall together constitute one and the
same instrument.
[remainder of page intentionally left blank]
20
<PAGE>
If the foregoing is in accordance with your understanding, please
sign and return to us one for the Company and each of the Representatives plus
one for each counsel counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of each
of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination, upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
WORLDGATE COMMUNICATIONS, INC.
By:
------------------------------
Name:
Title:
Accepted as of the date hereof
GERARD KLAUER MATTISON & CO., INC.
JEFFERIES & COMPANY, INC.
JANNEY MONTGOMERY SCOTT INC.
By:
-------------------------------------------------------
On behalf of each of the Underwriters
21
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares to be Maximum Option
Purchased Exercised
----------------- ------------------
<S> <C> <C>
UNDERWRITER
Gerard Klauer Mattison & Co., Inc............................
Jefferies & Company, Inc.....................................
Janney Montgomery Scott Inc.
[NAMES OF OTHER UNDERWRITERS]................................
----------------- ------------------
Total........................................................ 4,500,000 675,000
----------------- ------------------
----------------- ------------------
</TABLE>
22
<PAGE>
SCHEDULE II
STOCKHOLDERS SUBJECT TO LOCK-UPS
23
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
WORLDGATE COMMUNICATIONS, INC.
WORLDGATE COMMUNICATIONS, INC., a corporation organized and existing
under and by virtue of the Delaware General Corporation Law (the "Corporation"),
does hereby certify that:
FIRST: The name of the Corporation is
WorldGate Communications, Inc. (hereinafter, the
"Corporation").
SECOND: The address of the Corporation's
registered office in the State of Delaware is Corporation
Trust Center, 1209 Orange Street, Wilmington, DE 19801, in the
county of New Castle. The name of the Corporation's registered
agent at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to
engage in any lawful act or activity for which corporations
may be organized under the DGCL.
FOURTH: The amount of total authorized
capital stock of the Corporation is 63,500,000 shares, divided
into 50,000,000 shares of common stock, par value $.01 per
share ("Common Stock"), and 13,500,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock").
(a) COMMON STOCK.
(i) All outstanding shares of
Common Stock shall be identical and shall entitle the holders
thereof to the same rights and privileges. The holders of
shares of Common Stock shall have no preemptive or
preferential rights of subscription to any shares of any class
of capital stock of the Corporation.
(ii) When, as and if dividends or
distributions are declared on outstanding shares of Common
Stock, whether payable in cash, in property or in securities
of the Corporation, the holders of outstanding shares of
Common Stock shall be entitled to share equally in such
dividends and distributions.
(iii) Upon any liquidation,
dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of outstanding shares of
Common Stock shall be entitled to share equally in the assets
of the Corporation to be distributed among the holders of
shares of Common Stock.
<PAGE>
(iv) The holders of outstanding
shares of Common Stock shall have the right to vote on (or, as
provided by law, take action by consent with respect to) the
election and removal of the directors of the Corporation and
on, and with respect to, all other matters to be voted on or
consented to by the stockholders of the Corporation, and each
holder shall be entitled to one vote for each share of Common
Stock held.
(b) PREFERRED STOCK. The Board of
Directors shall have the authority at any time and from time
to time, by resolution, to divide the Preferred Stock into
classes and into series within any class or classes, and to
determine the designation and the number of shares of any
class or series and the relative rights, powers, preferences,
qualifications, restrictions and limitations of the shares of
any class or series.
FIFTH: In furtherance and not in limitation
of the general powers conferred by the laws of the State of
Delaware, the Board of Directors is expressly authorized to
make, alter or repeal the Bylaws of the Corporation, except as
specifically otherwise provided therein.
SIXTH: A director of the Corporation shall
have no personal liability to the Corporation 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 DGCL, 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
paragraph SIXTH shall apply to or have any effect on the
liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of
such director occurring prior to such amendment or repeal.
SEVENTH: Whenever a compromise or
arrangement is proposed between this Corporation and its
creditors or any class of them and/or between this Corporation
and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on
the application in a summary way of this Corporation or of any
creditor or stockholder thereof or on the application of any
receiver or receivers appointed for this Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or
on the application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation under the
provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or
of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner
as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class
of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to
any compromise or arrangement and to any reorganization of
this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the
-2-
<PAGE>
court to which the said application has been made, be binding
on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders of this Corporation, as
the case may be, and also on this Corporation.
IN WITNESS WHEREOF, WorldGate Communications, Inc. has caused this
Certificate of Amendment to the Amended and Restated Certificate of
Incorporation to be executed by a duly authorized officer as of this ___ day of
April, 1999.
WORLDGATE COMMUNICATIONS, INC.
By:
-------------------------------------
Name:
Title:
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Exhibit 3.2
AMENDED AND RESTATED
BYLAWS
OF
WORLDGATE COMMUNICATIONS, INC.
(A DELAWARE CORPORATION)
ARTICLE 1
OFFICES
Section 1.01. OFFICES. The Corporation may have offices at such
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
Section 2.01. PLACE OF MEETING. Meetings of the stockholders
shall be held at such place, within the State of Delaware or elsewhere, as may
be fixed from time to time by the Board of Directors. If no place is so fixed
for a meeting, it shall be held at the Corporation's then principal executive
office.
Section 2.02. ANNUAL MEETING. The annual meeting of stockholders
shall be held, unless the Board of Directors shall fix some other hour or date
therefor, at 10:00 o'clock A.M. on the last Thursday in May in each year, if not
a legal holiday under the laws of Delaware, and, if a legal holiday, then on the
next succeeding secular day not a legal holiday under the laws of Delaware, at
which the stockholders shall elect by plurality vote a Board of Directors, and
transact such other business as may properly be brought before the meeting,
provided that notice of any such matter to be brought before the meeting by any
stockholder shall have been given to the Corporation as provided in Section 2.09
of these Bylaws.
Section 2.03. NOTICE OF ANNUAL MEETINGS. Written notice of the
annual meeting stating the place, date and hour of the meeting shall be given to
each stockholder entitled to vote at such meeting not less than 10 days nor more
than 60 days before the date of the meeting.
Section 2.04. LIST OF STOCKHOLDERS. The officer who has charge of
the stock ledger of the Corporation shall prepare and make, at least 10 days
before every meeting of stockholders, a complete list of stockholders entitled
to vote at the meeting,
<PAGE>
arranged in alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least 10 days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be so specified in the notice of the meeting, or, if not
so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 2.05. SPECIAL MEETINGS. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by
statute or by the Certificate of Incorporation, may be called by the Chairman of
the Board or the President and shall be called by the President or Secretary at
the request in writing of a majority of the Board of Directors. Such request
shall state the purpose or purposes of the proposed meeting. Business transacted
at any special meeting of stockholders shall be limited to the purposes stated
in the notice, provided that notice of any such matter to be brought before the
meeting by any stockholder shall have been given to the Corporation as provided
in Section 2.09 of these Bylaws.
Section 2.06. NOTICE OF SPECIAL MEETINGS. Written notice of a
special meeting stating the place, date and hour of the meeting and the purpose
or purposes for which the meeting is called, shall be given to each stockholder
entitled to vote at such meeting not less than 10 days nor more than 60 days
before the date of the meeting.
Section 2.07. QUORUM; VOTING. The holders of a majority of the
stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute or by the Certificate of Incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each
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stockholder of record entitled to vote at the meeting. When a quorum is present
at any meeting, except for elections of directors, which shall be decided by
plurality vote, the vote of the holders of a majority of the stock having voting
power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which by express
provision of statute or of the Certificate of Incorporation, a different vote is
required, in which case such express provision shall govern and control the
decision of such question. Unless otherwise provided in the Certificate of
Incorporation, each stockholder shall at every meeting of stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no shares shall be voted
pursuant to a proxy more than three years after the date of the proxy unless the
proxy provides for a longer period.
Section 2.08. ACTION WITHOUT A MEETING. Unless otherwise
restricted by the Certificate of Incorporation, any action required or permitted
to be taken at any annual or special meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing setting forth the action so taken shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted and shall be
delivered to the corporation by delivery to its registered office in the State,
its principal place of business, or an officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to a corporation's registered office shall be by hand or
by certified or registered mail, return receipt requested. Every written consent
shall bear the date of signature of each stockholder who signs the consent and
no written consent shall be effective to take the corporate action referred to
therein unless, within sixty days after the earliest dated consent delivered in
the manner required by this Section to the corporation, written consents signed
by a sufficient number of stockholders to take action are delivered in the
manner required by this Section to the Corporation. Prompt notice of the taking
of the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing and who,
if the action had been taken at a meeting, would have been entitled to notice of
the meeting if the record date for such meeting had been the date that written
consents signed by a sufficient number of stockholders to take the action were
delivered to the Corporation.
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"Section 2.09.NOTICE OF STOCKHOLDER NOMINATIONS AND OTHER
PROPOSED STOCKHOLDER ACTION.
(a) ANNUAL MEETINGS OF STOCKHOLDERS.
(i) Nominations of persons for election as directors and
the proposal of matters to be considered and voted on by the
stockholders at an annual meeting of stockholders may be made
only (A) by or at the direction of the Board of Directors, or (B)
by any stockholder of the Corporation who was a stockholder of
record at the time of giving the notice required by this Section
and who shall be entitled to vote at the meeting (or a duly
authorized proxy therefor) and who complies with the notice
procedures set forth in this Section.
(ii) For nominations or other proposals to be properly
brought before an annual meeting of stockholders by a stockholder
pursuant to paragraph (a)(i) of this Section, the stockholder
must have given timely notice thereof (including the information
required hereby) in writing to the Secretary of the Corporation
and any such proposal must otherwise be a proper matter for
stockholder action. To be timely, a stockholder's notice shall be
delivered to the Secretary at the principal executive offices of
the Corporation not later than the close of business on the 90th
calendar day nor earlier than the close of business on the 120th
calendar day prior to the first anniversary of the preceding
year's annual meeting; provided, however, that in the event that
the date of the annual meeting is more than 30 calendar days
before or more than 60 calendar days after such anniversary date,
notice by the stockholder to be timely must be so delivered not
earlier than the close of business on the 120th calendar day
prior to such annual meeting and not later than the close of
business on the later of the 90th calendar day prior to such
annual meeting or the 10th calendar day following the calendar
day on which public announcement of the date of such meeting is
first made by the Corporation. In no event shall the public
announcement of an adjournment of an annual meeting commence a
new time period for the giving of a stockholder's notice of a
nomination or proposed action as described above. Such
stockholder's notice shall set forth: (A) as to each person whom
the stockholder proposes to nominate for election or reelection
as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies
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for election of directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and Rule 14a-11 thereunder (or any successor provision of law),
including such person's written consent to being named as a
nominee and to serving as a director if elected; (B) as to any
other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such
business of such stockholder and of any of such stockholder's
affiliates (as defined below) and of any person who is the
beneficial owner (as defined below), if any, of such stock; and
(C) as to the stockholder giving the notice and each beneficial
owner, if any, of such stock, the name and address of such
stockholder, as they appear on the Corporation's stock ownership
records, and the name and address of each beneficial owner of
such stock and the class and number of shares of capital stock
the Corporation which are owned of record or beneficially by each
such person.
(iii) Notwithstanding anything in the second sentence of
paragraph (a)(ii) of this Section to the contrary, in the event
that the number of directors to be elected to the Board of
Directors of the Corporation at an annual meeting of stockholders
is increased and there is no public announcement by the
Corporation specifying the increased size of the Board of
Directors at least 100 calendar days prior to the first
anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section shall also be
considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to
the Secretary of the Corporation at the principal executive
offices of the Corporation not later than the close of business
on the 10th calendar day following the day on which such public
announcement is first made by the Corporation.
(b) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of
meeting under Section 2.06 of these Bylaws. Nominations of persons for
election to the Board of Directors at a special meeting of stockholders
at which directors are to be elected pursuant to the Corporation's
notice of meeting may be made only (i)
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by or at the direction of the Board of Directors or (ii) provided that
the Board of Directors has determined that directors shall be elected
at such meeting, by any stockholder of the Corporation who is a
stockholder of record at the time of giving the notice required by this
Section and who shall be entitled to vote at the meeting (or a duly
authorized proxy therefor) and who complies with the notice procedures
set forth in this Section. In the event the Corporation calls a special
meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, for nominations to be properly
brought before the special meeting by a stockholder pursuant to this
paragraph, the stockholder must give notice thereof containing the
information required in the case of a nomination to be made by a
stockholder at an annual meeting of stockholders by paragraph (a)(ii)
of this Section to the Secretary of the Corporation at the principal
executive offices of the Corporation not earlier than the close of
business on the 120th calendar day prior to such special meeting and
not later than the close of business on the later of the 90th calendar
day prior to such special meeting or the 10th calendar day following
the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors
to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time
period for the giving of a stockholder's notice of a nomination as
described above.
(c) GENERAL.
(i) Only such persons who are nominated in accordance with
the procedures set forth in this Section shall be eligible to
serve as directors and only such business shall be conducted at a
meeting of stockholders as shall have been brought before the
meeting in accordance with the procedures set forth in this
Section. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the Chairman of the meeting shall
have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures
set forth in this Section and, if any proposed nomination or
business is not in compliance with this Section, to declare that
such defective proposal or nomination shall be disregarded.
(ii) For purposes of this Section, "affiliate" in respect
of a person shall mean another person who
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controls, is controlled by or is under common control with such
person and the term "beneficially owns" (and variations thereof)
shall have the same meaning as when used in Section 13(d) of the
Exchange Act and Regulation 13D-G thereunder (or any successor
provision of law). For purposes of this Section, "public
announcement" shall mean disclosure in a press release reported
by the Dow Jones News Service, Associated Press or comparable
national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant
to Section 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this
Section, (A) a stockholder shall also be required to comply with
all applicable requirements of the Exchange Act and the rules and
regulations thereunder with respect to the matters set forth in
this Section and nothing contained herein shall constitute a
waiver by the Corporation or any stockholder of compliance
therewith and (B) nothing in this Section shall be deemed to
affect any rights of (I) stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to Rule
14a-8 under the Exchange Act (or any successor provision of law)
or (II) holders of any series of preferred stock to elect
directors in accordance with the provision of an applicable
preferred stock designation.
(d) Notwithstanding the foregoing provisions of this Section, any
common stockholder who, together with its affiliates, owns
shares of common stock entitled to exercise a majority of the
voting power which all outstanding shares of the Corporation
entitled to vote generally in the election of directors are
entitled to exercise in the election of directors may nominate
one or more individuals for election as directors by giving to
the Secretary of the Corporation in writing notice only of the
name and business or residence address of its nominee or
nominees, including each such individual's written consent to
being named as a nominee and to serving as a director if
elected, not later than five days before the day on which the
meeting for the election of directors is scheduled to be held."
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ARTICLE 3
DIRECTORS
Section 3.01. NUMBER AND TERM OF OFFICE. The number of directors
of the Corporation shall be such number as shall be designated from time to time
by resolution of the Board of Directors and initially shall be two. The
directors shall be elected at the annual meeting of the stockholders, except as
provided in Section 3.02 hereof. Each director elected shall hold office for a
term of one year and shall serve until his successor is elected and qualified or
until his earlier death, resignation or removal.
Directors need not be stockholders.
Section 3.02. VACANCIES. Vacancies and newly created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director, and the directors so chosen shall hold
office until the next annual election and until their successors are duly
elected and shall qualify, unless sooner displaced. If there are no directors in
office, then an election of directors may be held in the manner provided by
statute. If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Court of Chancery may, upon application of any stockholder or stockholders
holding at least 10 percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office.
Section 3.03. RESIGNATIONS. Any director may resign at any time
by giving written notice to the Board of Directors, the Chairman of the Board,
if there is one, the President, or the Secretary. Such resignation shall take
effect at the time of receipt thereof or at any later time specified therein;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 3.04. DIRECTION OF MANAGEMENT. The business of the
Corporation shall be managed under the direction of its Board of Directors,
which may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute or by the Certificate of Incorporation or
by these Bylaws directed or required to be exercised or done by the
stockholders.
Section 3.05. PLACE OF MEETINGS. The Board of Directors of the
Corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
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Section 3.06. ANNUAL MEETING. Immediately after each annual
election of directors, the Board of Directors shall meet for the purpose of
organization, election of officers, and the transaction of other business, at
the place where such election of directors was held or, if notice of such
meeting is given, at the place specified in such notice. Notice of such meeting
need not be given. In the absence of a quorum at said meeting, the same may be
held at any other time and place which shall be specified in a notice given as
hereinafter provided for special meetings of the Board of Directors, or as shall
be specified in a written waiver signed by the directors, if any, not attending
and participating in the meeting.
Section 3.07. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board.
Section 3.08. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman of the Board, if there is one, or the
President on 2 days' notice to each director; either personally (including
telephone), or by telecopy addressed as provided in Section 4.01; special
meetings shall be called by the Chairman of the Board, if there is one, or the
President or the Secretary in like manner and on like notice on the written
request of two directors.
Section 3.09. QUORUM; VOTING. At all meetings of the Board, a
majority of the directors shall constitute a quorum for the transaction of
business; and at all meetings of any committee of the Board, a majority of the
members of such committee shall constitute a quorum for the transaction of
business. The act of a majority of the directors present at any meeting of the
Board of Directors or any committee thereof at which there is a quorum present
shall be the act of the Board of Directors or such committee, as the case may
be, except as may be otherwise specifically provided by statute or by the
Certificate of Incorporation. If a quorum shall not be present at any meeting of
the Board of Directors or committee thereof, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 3.10. ACTION WITHOUT A MEETING. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
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Section 3.11. PARTICIPATION IN MEETINGS. One or more directors
may participate in any meeting of the Board or committee thereof by means of
conference telephone or similar communications equipment by which all persons
participating can hear each other.
Section 3.12. COMMITTEES OF DIRECTORS. The Board of Directors may
designate one or more committees, each committee to consist of one or more of
the directors of the Corporation. The Board may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. Any such committee, to the
extent provided in the resolution of the Board of Directors or in these bylaws,
shall have and may exercise all of the powers and authority of the Board of
Directors and may authorize the seal of the Corporation to be affixed to all
papers which may require it, but no such committee shall have the power or
authority in reference to the following matters: (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by the
Delaware General Corporation Law to be submitted to stockholders for approval or
(ii) adopting, amending or repealing any bylaw of the Corporation. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board of Directors. Each committee
shall keep regular minutes of its meetings and report the same to the Board of
Directors when requested.
Section 3.13. COMPENSATION OF DIRECTORS. Each director shall be
entitled to receive such compensation, if any, as may from time to time be fixed
by the Board of Directors. Members of special or standing committees may be
allowed like compensation for attending committee meetings. Directors may also
be reimbursed by the Corporation for all reasonable expenses incurred in
traveling to and from the place of each meeting of the Board or of any such
committee or otherwise incurred in the performance of their duties as directors.
No payment referred to herein shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
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ARTICLE 4
NOTICES
Section 4.01. NOTICES. Whenever, under the provisions of law or
of the Certificate of Incorporation or of these Bylaws, notice is required to be
given to any director or stockholder, such requirement shall not be construed to
necessitate personal notice. Subject to Section 3.08, such notice may in every
instance be effectively given by depositing a writing in a post office or letter
box, in a postpaid, sealed wrapper, or by dispatching a prepaid telegram, cable,
telecopy or telex or by delivering a writing in a sealed wrapper prepaid to a
courier service guaranteeing delivery within 2 business days, in each case
addressed to such director or stockholder, at his address as it appears on the
records of the Corporation in the case of a stockholder and at his business
address (unless he shall have filed a written request with the Secretary that
notices be directed to a different address) in the case of a director. Such
notice shall be deemed to be given at the time it is so dispatched.
Section 4.02. WAIVER OF NOTICE. Whenever, under the provisions of
law or of the Certificate of Incorporation or of these Bylaws, notice is
required to be given, a waiver thereof in writing, signed by the person or
persons entitled to said notice, whether before or after the time of the event
for which notice is to be given, shall be deemed equivalent thereto. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE 5
OFFICERS
Section 5.01. NUMBER. The officers of the Corporation shall be a
Chairman of the Board, a President, a Secretary and a Treasurer, and may also
include one or more Vice Presidents, one or more Assistant Secretaries and
Assistant Treasurers, and such other officers as may be elected by the Board of
Directors. Any number of offices may be held by the same person.
Section 5.02. ELECTION AND TERM OF OFFICE. The officers of the
Corporation shall be elected by the Board of Directors. Officers shall hold
office at the pleasure of the Board.
Section 5.03. REMOVAL. Any officer may be removed at any time by
the Board of Directors. Any vacancy occurring in any office of the Corporation
may be filled by the Board of Directors.
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Section 5.04. CHAIRMAN OF THE BOARD. The Chairman of the Board
shall preside at all meetings of the Board of Directors and shall perform such
other duties, if any, as may be specified by the Board from time to time.
Section 5.05. PRESIDENT. The President shall be the chief
executive officer of the Corporation and shall have overall responsibility for
the management of the business and operations of the Corporation and shall see
that all orders and resolutions of the Board are carried into effect. In the
absence of the Chairman of the Board he shall preside over meetings of the Board
of Directors. In general, he shall perform all duties incident to the office of
President, and such other duties as from time to time may be assigned to him by
the Board.
Section 5.06. VICE PRESIDENTS. The Vice Presidents shall perform
such duties and have such authority as may be specified in these Bylaws or by
the Board of Directors or the President. In the absence or disability of the
President, the Vice Presidents, in order of seniority established by the Board
of Directors or the President, shall perform the duties and exercise the powers
of the President.
Section 5.07. SECRETARY. The Secretary shall attend all meetings
of the Board of Directors and all meetings of the stockholders and record all
the proceedings of the meetings of the stockholders and of the Board of
Directors in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. He shall give, or cause to be given,
notice of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or the President. He shall have custody of the corporate seal of
the Corporation and he, or an Assistant Secretary, shall have authority to affix
the same to any instrument, and when so affixed it may be attested by his
signature or by the signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by his signature.
Section 5.08. ASSISTANT SECRETARIES. The Assistant Secretary or
Secretaries shall, in the absence or disability of the Secretary, perform the
duties and exercise the authority of the Secretary and shall perform such other
duties and have such other authority as the Board of Directors or the President
may from time to time prescribe.
Section 5.09. TREASURER. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books
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belonging to the Corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors or the President or the
Chief Financial Officer, taking proper vouchers for such disbursements, and
shall render to the Board of Directors when the Board so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation.
Section 5.10. ASSISTANT TREASURERS. The Assistant Treasurer or
Treasurers shall, in the absence or disability of the Treasurer, perform the
duties and exercise the authority of the Treasurer and shall perform such other
duties and have such other authority as the Board of Directors may from time to
time prescribe.
ARTICLE 6
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 6.01. INDEMNIFICATION. 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 Corporation, or is or was serving while a director or officer of
the Corporation at the request of the Corporation as a director, officer,
employee, agent, fiduciary or other representative of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
shall be indemnified by the Corporation 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.
Section 6.02. ADVANCES. Any person claiming indemnification
within the scope of Section 6.01 shall be entitled to advances from the
Corporation for payment of the expenses of defending actions against such person
in the manner and to the full extent permissible under Delaware law.
Section 6.03. PROCEDURE. On the request of any person requesting
indemnification under Section 6.01, the Board of Directors 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.
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Section 6.04. OTHER RIGHTS. The indemnification and advancement
of expenses provided by this Article 6 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled 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.
Section 6.05. INSURANCE. The Corporation 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 Corporation or is or was serving at
the request of the Corporation 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 Corporation would have the power to
indemnify him against such liability under the provisions of these Bylaws.
Section 6.06. MODIFICATION. The duties of the Corporation to
indemnify and to advance expenses to a director or officer provided in this
Article 6 shall be in the nature of a contract between the Corporation and each
such director or officer, and no amendment or repeal of any provision of this
Article 6 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.
-14-
<PAGE>
ARTICLE 7
CERTIFICATES OF STOCK
Section 7.01. STOCK CERTIFICATES. Every holder of stock in the
Corporation shall be entitled to have a certificate in the form prescribed by
the Board of Directors signed on behalf of the Corporation by the Chairman of
the Board or the President or a Vice President and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, representing the number of shares owned by him in the Corporation.
Any or all signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if such person were such officer,
transfer agent, or registrar at the date of issue.
Section 7.02. LOST CERTIFICATES. The Board of Directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 7.03. TRANSFERS OF STOCK. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
Section 7.04. FIXING RECORD DATE. The Board of Directors of the
Corporation may fix a record date for the purpose of determining the
stockholders entitled to notice of, or to vote at, any meeting of stockholders
or any adjournment thereof, or to consent to corporate action in writing without
a meeting, or to receive payment of any dividend or other distribution or
allotment of any rights, or to exercise any
-15-
<PAGE>
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action. Such record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors and such record date shall not be (i) in the case of such a meeting of
stockholders, more than 60 nor less than 10 days before the date of the meeting
of stockholders, or (ii) in the case of consents in writing without a meeting,
more than 10 days after the date upon which the resolution fixing the record
date is adopted by the Board of Directors, or (iii) in other cases, more than 60
days prior to the payment or allotment or change, conversion or exchange or
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting unless the Board of Directors fixes a new record date for the adjourned
meeting.
Section 7.05. REGISTERED STOCKHOLDERS. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of stock to receive dividends and to vote as such owner, and shall be
entitled to hold liable for calls and assessments a person registered on its
books as the owner of stock, and shall not be bound to recognize any equitable
or other claim to, or interest in, such stock on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
ARTICLE 8
AMENDMENTS
Section 8.01. AMENDMENTS. These Bylaws may be altered, amended or
repealed, and new Bylaws may be adopted, by the stockholders or by the Board of
Directors at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
Bylaws be contained in the notice of such special meeting.
-16-
<PAGE>
EXHIBIT 5.1
[Drinker Biddle & Reath LLP Letterhead]
April 14, 1999
WorldGate Communications, Inc.
3220 Tillman Drive, Suite 300
Bensalem, Pensylvania 19020
Re: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
As counsel to WorldGate Communications, Inc, (the "Company"), we have
assisted in the preparation of the Company's Registration Statement on Form S-1
(the "Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Securities Act"), covering
(i) 5,000,000 shares (the "Firm Shares") of common stock (the "Common Stock")
which are being sold by the Company and (ii) up to 750,000 shares (the
"Additional Shares" and together with the Firm Shares, the "Shares") of Common
Stock which the underwriters will have an option to purchase from the Company
solely for the purpose of covering over-allotments, if any, pursuant to the
terms of an underwriting agreement (the "Underwriting Agreement"). All of the
Shares will be sold by the underwriters for whom Gerard Klauer Mattison & Co.,
Inc., Jefferies & Company, Inc. and Janney Montgomery Scott Inc. are acting as
representatives (the "Underwriters").
In connection therewith, we have examined the originals or copies,
certified or otherwise identified to our satisfaction, of the Company's
Certificate of Incorporation and By-Laws, each as amended through the date
hereof, minutes and resolutions of its Board of Directors, and such other
documents and corporate records relating to the Company and the Shares as we
have deemed appropriate for the purpose of rendering this opinion. We have
assumed for purposes of this opinion that the 2 for 3 reverse stock split of the
Company's Common Stock approved by the Company's board of directors and
stockholders has become effective with the State of Delaware. We have assumed
the authenticity of all documents submitted to us as originals, the conformity
to the originals of all documents submitted to us as copies and the authenticity
of the originals of all documents submitted to us as copies. We have also
assumed the legal capacity of all natural persons, the genuineness of the
signatures of persons signing all documents in connection with which this
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto other than the Company and the due authorization, execution and
delivery of all documents by the parties thereto other than the Company. As to
any facts material to the opinions expressed herein, we have relied upon the
statements and representations of officers and other representatives of the
Company and others.
<PAGE>
Based upon the foregoing, it is our opinion that, when issued and sold
pursuant to the terms of the Underwriting Agreement, the Shares will be legally
issued, fully paid and nonassessable.
We hereby consent to the reference to our firm in the Registration
Statement under the Prospectus caption "Legal Matters" and to the inclusion of
this opinion as an exhibit to the Registration Statement. In giving this
consent, we do not hereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act or the rules and
regulations of the Securities and Exchange Commission.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
Drinker Biddle & Reath LLP
-2-
<PAGE>
Exhibit 23.1
Consent Of Independent Accountants
We consent to the inclusion in this Registration Statement on Form
S-1 of our report, which will be issued upon the effectiveness of the stock
split as described in Note 10 to the financial statements, dated February 8,
1999 except as to the information in Note 10, for which the date is April 15,
1999, on our audits of the financial statements of Worldgate Communications,
Inc. We also consent to the references to our firm under the captions
"Selected Financial Data" and "Experts."
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 15,1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE BALANCE SHEET AT DECEMBER 31, 1996, 1997 AND 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<CASH> 1,693 4,880 368
<SECURITIES> 5,881 12,438 0
<RECEIVABLES> 0 106 572
<ALLOWANCES> 0 0 0
<INVENTORY> 0 620 2,737
<CURRENT-ASSETS> 7,583 18,120 3,848
<PP&E> 0 271 780
<DEPRECIATION> 0 22 137
<TOTAL-ASSETS> 7,583 18,412 5,621
<CURRENT-LIABILITIES> 463 1,938 7,097
<BONDS> 0 591 1,127
8,571 34,366 49,276
0 0 0
<COMMON> 91 91 91
<OTHER-SE> 1,530 779 (151)
<TOTAL-LIABILITY-AND-EQUITY> 7,583 18,412 5,621
<SALES> 0 141 1,022
<TOTAL-REVENUES> 0 141 1,022
<CGS> 0 0 0
<TOTAL-COSTS> 2,929 14,588 28,466
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 2 17 101
<INCOME-PRETAX> (2,923) (14,041) (27,122)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (2,923) (14,041) (27,122)
<EPS-PRIMARY> (0.33) (1.81) (3.66)
<EPS-DILUTED> (0.33) (1.81) (3.66)
</TABLE>
