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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
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COMMISSION FILE NUMBER 000-26655
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WINK COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3212322
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 MARINA VILLAGE PARKWAY
ALAMEDA, CALIFORNIA 94501
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 337-2950
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past (90) days. Yes [ ] No [X]
The number of shares of the issuer's Common Stock outstanding as of
October 31, 1999 was 29,991,000
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INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet ........................ 3
Condensed Consolidated Statement of Operations .............. 4
Condensed Consolidated Statement of Cash Flows .............. 5
Notes to Condensed Consolidated Financial Statements ........ 6
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations .............. 7
Risk Factors ................................................ 13
Item 3. Quantitative and Qualitative Disclosures
about Market Risk ........................................... 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 16
Item 2. Changes in Securities ....................................... 16
Item 3. Defaults Upon Senior Securities ............................. 16
Item 4. Submission of Matters to a Vote of Security Holders ...... 17
Item 5. Other Information ........................................... 17
Item 6. Exhibits and Reports on Form 8-K ............................ 17
Signatures ............................................................ 17
</TABLE>
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WINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 100,754 $ 16,892
Short-term investments 49,499 4,441
Accounts receivable - related parties 4 52
Accounts receivable - third parties, net 84 187
Prepaid expenses and other current assets 1,208 301
--------- ---------
Total current assets 151,549 21,873
Property and equipment, net 1,877 1,762
Other assets 344 285
--------- ---------
$ 153,770 $ 23,920
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,103 $ 995
Accrued expenses 1,424 1,243
Deferred revenue - related parties 375 671
Deferred revenue - third parties 993 1,119
Current portion of capital lease obligations 471 402
--------- ---------
Total current liabilities 4,366 4,430
--------- ---------
Capital lease obligations, less current portion -- 365
--------- ---------
Stockholders' equity:
Convertible Preferred Stock, $0.001 par value, issuable
in series; aggregate liquidation amount of $0 and
$45,512 at September 30, 1999 and December 31, 1998,
respectively; 5,000 shares authorized, 0 and
7,806 shares issues and outstanding -- 8
Common Stock, $0.001 par value; 100,000 shares authorized; 29,973
and 10,517 shares issued and outstanding 30 11
Additional paid-in capital 210,495 51,890
Stockholders' notes receivable (2,761) (1,046)
Unearned compensation (10,157) (479)
Accumulated deficit (44,992) (31,259)
Accumulated other comprehensive loss (3,211) --
--------- ---------
Total stockholders' equity 149,404 19,125
--------- ---------
$ 153,770 $ 23,920
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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WINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses - related parties $ 195 $ 57 $ 292 $ 135
Licenses - third parties 174 36 375 149
Services - related parties 100 -- 298
Services - third parties -- 10 124 109
-------- -------- -------- --------
Total revenues 469 103 1,089 393
Costs and expenses:
Costs of services - related parties 100 -- 242 --
Costs of services - third parties -- 80 63 213
Research and development 2,672 1,829 6,832 4,568
Sales and marketing 2,483 1,435 7,565 4,010
General and administrative 1,184 632 3,097 1,568
-------- -------- -------- --------
Total costs and expenses 6,439 3,976 17,799 10,359
-------- -------- -------- --------
Loss from operations (5,970) (3,873) (16,710) (9,996)
Interest and other income 1,458 155 3,048 549
Interest expense (20) (34) (71) (112)
-------- -------- -------- --------
Net loss $ (4,532) $ (3,752) $(13,733) $ (9,529)
======== ======== ======== ========
Net loss per share:
Basic and diluted $ (0.24) $ (0.40) $ (1.06) $ (1.06)
Weighted averages shares outstanding 19,218 9,315 13,005 9,003
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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WINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................ $ (13,733) $ (9,529)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................. 702 485
Stock-based costs and expenses ................................. 4,320 1,005
Changes in assets and liabilities:
Accounts receivable -- related parties ...................... 48 70
Accounts receivable -- third parties ........................ 103 (246)
Prepaid expenses and other current assets ................... (907) (465)
Other assets ................................................ (59) (48)
Accounts payable ............................................ 108 885
Accrued expenses ............................................ 181 (245)
Deferred revenues -- related parties ........................ (296) 1,148
Deferred revenues -- third parties .......................... (126) (991)
--------- ---------
Net cash used in operating activities ................................. (9,659) (7,931)
--------- ---------
Cash flows from investing activities:
Net (purchases) proceeds of short-term investments .................. (48,269) 2,523
Property and equipment purchases .................................... (817) (1,124)
--------- ---------
Net cash used in (provided by) investing activities ................... (49,086) 1,399
--------- ---------
Cash flows from financing activities:
Proceeds from Preferred Stock issuances, net ........................ 44,322 7,710
Proceeds from IPO, net .............................................. 77,261 --
Proceeds from Common Stock issuances ................................ 6,160 2,996
Proceeds from stockholder note receivable ........................... 40 38
Proceeds from issuance of convertible
Promissory note -- related party ................................. 15,120 --
Principal payments on capital lease obligations . ................... (296) (255)
--------- ---------
Net cash provided by financing activities ............................. 142,607 10,489
--------- ---------
Net increase in cash and cash equivalents ............................. 83,862 3,957
Cash and cash equivalents at beginning of period ...................... 16,892 8,530
--------- ---------
Cash and cash equivalents at end of period ............................ $ 100,754 $ 12,487
========= =========
Supplemental cash flow information:
Cash paid for interest .............................................. $ 71 $ 112
========= =========
Supplemental noncash activities:
Common Stock issued for stockholder note ............................ $-- $ 100
========= =========
Repurchase of Common Stock and cancellation of
related stockholder note ............................................ $ 245 $--
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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WINK COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
Wink Communications, Inc. (the "Company") was incorporated in California on
October 7, 1994 and reincorporated in Delaware on August 12, 1999. The Company
offers an enhanced television broadcasting system that adds interactivity and
electronic commerce opportunities to traditional television programming and
advertising.
In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation of such information.
While the Company believes that the disclosures are adequate to make the
information not misleading, it is suggested that these financial statements be
read in conjunction with the consolidated financial statements and accompanying
notes included in the Company's Registration Statement on Form S-1 filed August
18, 1999, as amended. The results of operations for the interim period ended
September 30, 1999, are not necessarily indicative of results to be expected for
the full year or any other period.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, Wink Japan, Inc. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Short-term investments consist of
commercial paper obligations with original maturities at date of purchase
ranging between three and 12 months. The Company classifies these investments as
available-for-sale and records the instruments at fair value.
NOTE 2 - NET LOSS PER SHARE
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128")
and SEC Staff Accounting Bulletin NO. 98 ("SAB No. 98"). Under the provisions of
SFAS No. 128 and SAB No. 98, basic and diluted net loss per share is computed by
dividing the net loss available to common stockholders for the period by the
weighted average number of common shares outstanding during the period. The
calculation of diluted net loss per share excludes potential common shares if
their effect is anti-dilutive. Potential common shares consist of unvested
restricted common stock, incremental common shares issuable upon the exercise of
stock options, shares issuable upon conversion of Convertible Preferred Stock
and Common shares issuable upon the exercise of warrants to purchase Common
Stock and Convertible Preferred Stock.
The following table sets forth the computation of basic and diluted net loss per
share for the periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Numerator:
Net loss .................................... $ (4,532) $ (3,752) $(13,733) $ (9,529)
======== ======== ======== ========
Denominator:
Weighted average shares ..................... 19,922 10,275 13,658 10,059
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Weighted average unvested common shares
subject to repurchase ..................... (704) (960) (653) (1,056)
Denominator for basic and diluted
Calculation ................................. 19,218 9,315 13,005 9,003
======== ======== ======== ========
Net loss per share:
Basic and diluted ........................... $ (0.24) $ (0.40) $ (1.06) $ (1.06)
======== ======== ======== ========
</TABLE>
NOTE 3 - STOCK WARRANT
In December 1998, the Company granted a warrant to purchase Common Stock to a
cable operator company that is also a holder of Common Stock, as consideration
for the future deployment of Wink-enabled technology to at least 200,000
households. The warrant enables the holder to purchase 250,000 shares of Common
Stock at either $12.00 or $16.00 per share, contingent upon achieving the
deployment criteria and the timing of such achievement. In the event the $12.00
exercise price is earned, the warrant will expire in January 2004. In the event
the $16.00 exercise price is earned, the warrant will expire in January 2005. At
December 31, 1998, the lowest aggregate fair value of the warrant totaled
$1,218,000. At September 30, 1999, the lowest aggregate fair value of the
warrant totaled $9,307,000. This amount will be remeasured at each reporting
date until the deployment of Wink-enabled technology to the specified number of
cable subscribers is achieved. When and if it becomes probable that the
performance criteria will be achieved, the Company will record the then fair
value associated with the units meeting the performance criteria as a charge to
sales and marketing expense.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the change in equity of a company
during a period from transactions and other events and circumstances, excluding
transactions resulting from investments by owners and distributions to owners.
The difference between net income (loss) and comprehensive income (loss) for the
Company is results from unrealized losses on available-for-sale securities.
Comprehensive loss is determined as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Net loss $ (4,532) $ (3,752) $(13,733) $ (9,529)
Unrealized losses on
available-for-sale securities (3,211) -- (3,211) --
-------- -------- -------- --------
Comprehensive loss $ (7,743) $ (3,752) $(16,944) $ (9,529)
======== ======== ======== ========
</TABLE>
NOTE 5 - INITIAL PUBLIC OFFERING
On August 24, 1999, the Company completed its initial public offering of
5,262,500 shares of Common Stock (including the underwriters' overallotment
option) and realized net proceeds of $77.3 million.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this Report on Form 10-Q contains certain trend
analysis and other forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, as
amended. Words such as "anticipate," "believe," "plan," "estimate," "expect,"
"seek," and "intend," and words of similar importance are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and are subject to business and economic risks and uncertainties
that are difficult to predict. Therefore, our actual results of operations may
differ materially from those expressed or forecasted in the forward-looking
statements as a result of a number of factors, including, but not limited to,
those set forth in this discussion under "Risk Factors" and other risks detailed
from time to time in reports filed with the SEC. In addition, factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in our Registration Statement on Form S-1 declared effective August
18, 1999, as amended.
OVERVIEW
Wink Communications was founded in 1994 and our activities to date have
consisted of:
- developing and adapting our technology for operation in
televisions and advanced analog and digital set-top boxes;
- licensing our Wink Studio authoring tool software to major
broadcast and cable networks, third-party developers and
advertisers to enable them to develop Wink Enhanced
Broadcasting;
- licensing our Wink Server software to broadcast and cable
networks and cable system operators to incorporate Wink
enhancements into their television programming;
- developing the Wink Response Network for collecting and managing
responses to Wink Enhanced Broadcasting;
- marketing the concept of Wink Enhanced Broadcasting and
establishing the Wink brand; and
- establishing relationships with and licensing our technology to
key television industry participants.
Revenues. Through September 30, 1999, our revenues were derived from
license fees relating to the Wink Engine and Wink Studio software, non-recurring
engineering services under agreements to port the Wink Engine software to
various televisions and set-top boxes, charter advertising fees and service fees
relating to software installation and post-installation customer support. We
recognize software license revenues relating to the Wink Engine on a
"sell-through" basis upon notification of shipment of Wink-enabled products by
the original equipment manufacturer. License fees from Wink Studio software are
recognized ratably over the term of the subscription license agreement.
Non-recurring engineering services are recognized using the
percentage-of-completion method, using labor hours as a measure of progress
towards completion. Fees from installation services are recognized as services
are provided, and post-installation customer support fees are recognized ratably
over the term of the support agreement. Fees received in advance of revenue
recognition are included on the balance sheet as deferred revenue.
Our business plan is to derive the primary portion of our future
revenues from the Wink Response Network by charging transaction fees to
advertisers and merchants for each information request or purchase order
obtained from viewers who respond to Wink Enhanced Broadcasting. We may also
derive revenue in the future from sales of products by Wink through our
dedicated interactive channels. As a result, the Company does not expect that
non-recurring engineering services will represent a significant component of
future revenues. The Wink Response Network has been developed and was activated
on a limited basis in the second half of 1998. However, no transaction fee
revenue has been recognized to date. All advertising agreements in place as of
September 30, 1999, provide for a flat fee to be paid to Wink without any per
transaction fees. These fees are recognized ratably over the life of the
agreement, generally one year.
We expect that, in future periods, revenues may also be derived from the
Wink Broadcast Server and Wink Server Studio applications. These applications
are being offered to customers under monthly license fee arrangements with terms
ranging from one to five years, with periodic fee increases based upon changes
in the Consumer Price Index and other events. Revenues derived from such
arrangements will be recognized ratably over the term of the subscription
license agreement.
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We have incurred net losses since inception and, at September 30, 1999,
had an accumulated deficit of approximately $45.0 million.
Cost of Services. Cost of services is composed primarily of direct
engineering labor and materials associated with our arrangements to provide
non-recurring engineering services. In future periods, cost of services is also
expected to include costs of providing installation services, the portion of
transaction fees shared with third parties, and the costs of operating the Wink
Response Network, including processing and telecommunication costs.
Research and Development. Research and development expense includes
costs associated with our engineering and operations departments, including
personnel costs, non-cash charges for stock compensation, allocated
facilities-related expenses and payments to third-party consultants. The Company
expects research and development expense to increase in the future as additional
personnel are hired to support anticipated growth.
Sales and Marketing. Sales and marketing expense includes salaries,
non-cash charges for stock compensation and warrant amortization, consulting
fees, travel-related costs, advertising expenses and allocated
facilities-related expenses associated with our cable sales, consumer marketing
and content departments. In future periods, sales and marketing expense is
expected to increase significantly and to include costs incurred by our customer
service center to register and respond to inquiries from Wink television
viewers, costs of marketing materials, commercial spots and training for the
launch of Wink Enhanced Broadcasting in new cable systems, as well as costs of
sales performance incentives to various consumer electronics retailers to
encourage them to register their customers as Wink users.
General and Administrative. General and administrative expense includes
administrative and executive personnel costs, non-cash charges for stock
compensation, allocated facilities-related expenses and other administrative
costs. We expect general and administrative expense to increase in the future as
additional personnel are hired to support anticipated growth.
Stock-Based Costs and Expenses. Stock-based costs and expenses include
compensation charges associated with the amortization of unearned compensation
related to certain stock option grants, sales of restricted stock to employees,
issuance of common stock to employees for bonuses and warrants granted for
services rendered to Wink.
RESULTS OF OPERATIONS
Since inception, we have been engaged primarily in the development and
licensing of Wink Enhanced Broadcasting. Accordingly, our historical results of
operations are not indicative of and should not be relied upon as an indicator
of future performance.
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES
Total revenues increased 355% to $469,000 for the three months ended
September 30, 1999, compared to $103,000 for the three months ended September
30, 1998. The increase was related primarily to a $100,000 increase in
non-recurring engineering revenue from a related party as certain development
agreements were completed, a $138,000 increase in license revenues from third
parties and a $138,000 increase in license revenues from related parties. During
the three months ended September 30, 1999, transactions with General Instrument,
Scientific Atlanta and Toshiba, related parties, and Matsutshita Electric
accounted for 32%, 16%, 12% and 14% of our total revenues, respectively.
COSTS AND EXPENSES
Total costs and expenses increased 62% to $6.4 million for the three
months ended September 30, 1999, compared to $4.0 million for the three months
ended September 30, 1998. The increase was primarily a result of increased
non-cash charges for stock compensation and warrant amortization, and additional
operating costs associated with the development, testing and deployment of Wink
Engine software, the Wink Broadcast Server software and the Wink Response
Network, as well as increased research and development expenses, sales and
marketing expenses and general and administrative expenses to support
anticipated future growth. We believe that costs and expenses will continue to
increase as we expand our operations and sales and marketing efforts.
Costs and expenses include non-cash charges for stock compensation and
warrant amortization as follows:
9
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<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Research and development ....... $ 128,000 $ 26,000
Sales and marketing ............ 1,037,000 331,000
General and administrative ..... 203,000 26,000
---------- ----------
$1,368,000 $ 383,000
========== ==========
</TABLE>
Cost of Services. Cost of services increased 25% to $100,000 for the
three months ended September 30, 1999 from $80,000 for the three months ended
September 30, 1998, reflecting the recognition of non-recurring engineering
expenses related to the performance of such services.
Research and Development. Research and development expense increased 46%
to $2.7 million for the three months ended September 30, 1999, from $1.8 million
for the three months ended September 30, 1998, as additional engineering and
operations personnel costs the were incurred to support increased product
deployment activities.
Sales and Marketing. Sales and marketing expense increased 73% to $2.5
million for the three months ended September 30, 1999, from $1.4 million for the
three months ended September 30, 1998. The increase was primarily due to
non-cash charges for stock compensation and warrant amortization totaling $1.0
million. Increased personnel and advertising costs in 1999 also contributed to
the overall increase.
During the three months ended September 30, 1999, the Company granted
fully exercisable warrants to purchase 75,000 shares of Common Stock at $12.00
per share, as incentive for signing definitive software licensing agreements and
to promote the development of Wink-enhanced programming. The fair value of these
warrants on the measurement date totaled $734,000 and was recognized as a sales
and marketing expense, as there the was no remaining performance obligations on
behalf of the holders and no significant license revenues are expected to be
derived from the agreements.
General and Administrative. General and administrative expense increased
87% to $1.2 million for the three months ended September 30, 1999, from $632,000
for the three months ended September 30, 1998. The increase was primarily
related to the hiring of administrative and executive personnel to support
anticipated future growth.
Interest and Other Income, Net of Interest Expense. Net interest and
other income increased 1,088% to $1.4 million for the three months ended
September 30, 1999, from $121,000 for the three months ended September 30, 1998.
This increase was due to interest earned on increases in the average cash and
investment balances as well as lower interest expense associated with borrowings
under the Company's lease financing facility.
Income Taxes. Wink has not generated taxable income since inception and,
as a result, the provision for income taxes consists solely of minimum state
franchise taxes that are included in general and administrative expenses. Based
on a number of factors, including the lack of a history of profits, management
believes that there is sufficient uncertainty regarding the realization of
deferred tax assets such that a full valuation allowance has been provided and
no income tax benefit was recorded during the period.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES
Total revenues increased 177% to $1.1 million for the nine months ended
September 30, 1999, compared to $393,000 for the nine months ended September 30,
1998. The increase was related primarily to a $298,000 increase in non-recurring
engineering revenue from a related party as certain development agreements were
completed, a $226,000 increase in license revenues from third parties and a
$157,000 increase in license revenues from related parties. During the nine
months ended September 30, 1999, transactions with Toshiba and General
Instrument, each a related party, and a subsidiary of Thomson Multimedia SA,
accounted for 30%, 14% and 10% of our total revenues, respectively.
COSTS AND EXPENSES
Total costs and expenses increased 72% to $17.8 million for the nine
months ended September 30, 1999, compared to $10.4 million for the nine months
ended September 30, 1998. The increase was primarily a result of increased
non-cash charges for stock compensation and warrant amortization, and additional
operating costs associated with the development, testing and deployment of Wink
Engine software, the Wink Broadcast Server software and the Wink Response
Network, as the well as increased research and
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development expenses, sales and marketing expenses and general and
administrative expenses to support anticipated future growth. We believe that
costs and expenses will continue to increase as we expand our operations and
sales and marketing efforts.
Costs and expenses include non-cash charges for stock compensation and
warrant amortization as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Research and development......... $ 228,000 $ 121,000
Sales and marketing.............. 3,784,000 752,000
General and administrative....... 308,000 132,000
---------- ----------
$4,320,000 $1,005,000
========== ==========
</TABLE>
Cost of Services. Cost of services increased 43% to $305,000 for the
nine months ended September 30, 1999, from $213,000 for the nine months ended
September 30, 1998, reflecting the recognition of non-recurring engineering
expenses related to the performance of such services.
The change in gross margins from services revenues realized for the nine
months ended September 30, 1999 compared to September 30, 1998 was primarily
attributed to engineering efforts required to meet the terms of individual
non-recurring engineering agreements. Our initial non-recurring engineering
agreements were with related parties and these agreements yielded lower gross
margins than recognized on subsequent non-recurring engineering agreements with
third parties. The Company does not expect that non-recurring engineering fees
will represent a significant component of its future revenues.
Cost over-runs on non-recurring engineering service agreements with
related parties and third parties during the nine months ended September 30,
1998, resulted in costs incurred in excess of revenues recognized. At each
reporting period, we record an accrued liability for any estimated loss on
non-recurring engineering services agreements.
Research and Development. Research and development expense increased 50%
to $6.8 million for the nine months ended September 30, 1999, from $4.6 million
for the nine months ended September 30, 1998, as additional engineering and
operations personnel costs were incurred to support increased product deployment
activities.
Sales and Marketing. Sales and marketing expense increased 84% to $7.6
million for the nine months ended September 30, 1999, from $4.0 million for the
nine months ended September 30, 1998. The increase was primarily due to non-cash
charges for stock compensation and warrant amortization totaling $3.8 million.
Increased personnel and advertising costs in 1999 also contributed to the
overall increase.
In May 1999, Wink granted to Microsoft a fully exercisable warrant to
purchase 500,000 shares of common stock at $12.00 per share, subject to
adjustment, in connection with the signing of a 10 year definitive software
distribution agreement. The fair value of this warrant on the measurement date
totaled $4.1 million and was recognized as a component of stockholders' equity
and is being amortized as a sales and marketing expense over the estimated
period of benefit of ten years. During the nine months ended September 30, 1999,
amortization recognized totaled $270,000.
In June 1999, the Company issued an aggregate of 50,000 shares of Common
Stock to employees as incentive bonuses. The fair value of these shares of
Common Stock on the issuance date totaled $600,000 and was recognized as a sales
and marketing expense, as the shares were fully vested on the date of grant.
In July 1999, the Company granted a fully exercisable warrant to
purchase 75,000 shares of Common Stock at $12.00 per share, subject to
adjustment, as incentive for signing a definitive software licensing agreement
and to promote the development of Wink-enabled programming. The fair value of
this warrant on the measurement date totaled $734,000 and was recognized as a
sales and marketing expense during the three months ended September 30, 1999, as
there was no remaining performance obligation on behalf of the holder and no
significant license revenues are expected to be derived from the agreement.
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General and Administrative. General and administrative expense increased
98% to $3.1 million for the nine months ended September 30, 1999, from $1.6
million for the nine months ended September 30, 1998. The increase was primarily
related to the hiring of administrative and executive personnel to support
anticipated future growth. Increased non-cash charges for stock compensation
amortization also contributed to the overall increase.
Interest and Other Income, Net of Interest Expense. Net interest and
other income increased 581% to $3.0 million for the nine months ended September
30, 1999 from $437,000 for the nine months ended September 30, 1998. This
increase was primarily due to interest earned on increases in the average cash
and investment. The increase was also due to the 1999 recognition of other
income totaling $1.0 million resulting from a settlement with a customer for
cancellation of a development and license agreement
Income Taxes. Wink has not generated taxable income since inception and,
as a result, the provision for income taxes consists solely of minimum state
franchise taxes that are included in general and administrative expenses. Based
on a number of factors, including the lack of a history of profits, management
believes that there is sufficient uncertainty regarding the realization of
deferred tax assets such that a full valuation allowance has been provided and
no income tax benefit was recorded during the period.
Liquidity and Capital Resources
Since inception, the Company has financed its activities largely through
the sale of equity securities and through proceeds from capital lease financing.
As of September 30, 1999, we had raised $104.5 million through the sale of the
Company's Preferred Stock. In August 1999, the Company raised net proceeds of
approximately $77.3 million from the initial public offering of Common Stock. We
had approximately $150.3 million of cash, cash equivalents and short-term
investments at September 30, 1999.
Net cash used in operating activities totaled $9.6 million and $7.9
million for the nine months ended September 30, 1999 and 1998, respectively,
primarily as a result of our net losses.
Net cash used in investing activities totaled $49.1 million for the nine
months ended September 30, 1999, and was attributable mainly to the net
purchases of short-term investments totaling $48.3 million and the acquisition
of $817,000 of property and equipment. For the nine months ended September 30,
1998, net cash provided by investing activities was $1.4 million and was
attributable to the net proceeds from short-term investment maturities of $2.5
million, which was partially offset by acquisition of $1.1 million of property
and equipment.
Net cash provided by financing activities for the nine months ended
September 30, 1999 was $142.6 million, consisting primarily of net proceeds from
our initial public offering of common stock of $77.3 million and $44.3 million
from the sale of Series D Convertible Preferred Stock and proceeds totaling
$15.1 million from the issuance of a convertible promissory note to Microsoft.
In July 1999, Microsoft exercised its right to exchange the convertible
promissory note for 1,260,000 shares of our Series D Convertible Preferred
Stock. For the nine months ended September 30, 1998, net cash provided by
financing activities was $10.5 million, consisting primarily of net proceeds
from sales of Series C Convertible Preferred Stock and Common Stock.
We have entered into agreements with Microsoft, cable and direct
broadcast satellite system operators and other television industry participants
who support Wink-enhanced programming to share with these entities a portion of
revenues, if any, the Company generates from viewer responses to Wink Enhanced
Broadcasting. These revenue sharing commitments are based upon the level of the
commitment the particular participant has made to support Wink Enhanced
Broadcasting. To date, no transaction fee revenue has been recognized. To the
extent that future transaction fee revenue is generated, we will record the
revenue sharing as a charge to cost of revenues in the period the revenue is
recognized.
For Microsoft and certain cable and direct broadcast satellite system
operators, the Company has also provided a minimum revenue guarantee. We have
also agreed to provide marketing and technical development funds to a number of
cable and direct broadcast satellite system operators, contingent upon the
commercial launch of Wink Enhanced Broadcasting, including in some cases a per
set-top box fee of up to $3.50. If Wink Enhanced Broadcasting fails to generate
sufficient revenue to meet the guaranteed amount per Wink subscriber, we are
obligated to pay the difference between the guaranteed amount and the amount
actually earned. Such revenue guarantees will be recognized in the period
incurred.
We believe that our existing cash, cash equivalents and short-term
investments will be sufficient to meet our currently anticipated business
requirements, including capital expenditures and strategic operating programs,
for at least the next 12 months Thereafter, if any, the Company may need to sell
additional equity or debt securities or obtain additional credit facilities. The
sale of additional
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equity or convertible debt securities may result in additional dilution to our
stockholders. The Company may not be able to raise any such capital on terms
acceptable to us, if at all.
Market Risk Disclosure
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less interest than expected if
interest rates fall. Due in part to these factors, the Company's future
investment income may fall short of expectations due to changes in interest
rates or the Company may suffer losses in principal if forced to sell securities
which have declined in market value due to changes in interest rates.
Year 2000 Compliance
Many existing electronic devices, systems and applications use only two
digits to identify a year in the date field, without considering the impact of
the upcoming change in the century. As a result, such devices, systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the year 2000 and beyond. We rely on certain
devices, systems and applications in operating and monitoring all major aspects
of our business, including financial systems (such as general ledger, accounts
payable and payroll), customer services, infrastructure, networks and
telecommunications equipment. We also rely, directly and indirectly, on external
systems of business enterprises, both domestic and international, for accurate
exchange of data.
We have tested our internally developed information technology and
non-information technology systems. Based on such testing, we believe that such
systems are Year 2000 compliant.
In addition to our internally developed software, we utilize software
and hardware developed by third parties both for our customers and internal
information systems. We have initiated Year 2000 tests with such third parties
to determine Year 2000 compliance. Based upon tests and evaluation of our
primary software and hardware providers, we believe that all of these providers
are in the process of reviewing and implementing their own Year 2000 issue
compliance programs. We will continue to work with these providers to address
the Year 2000 issue and seek assurances from them that their products are Year
2000 compliant.
We have not incurred any significant expenses to date, and we are not
aware of any material costs associated with our anticipated Year 2000 efforts.
However, if we, our providers of hardware and software or our third party
network providers fail to remedy any Year 2000 issues, we could experience a
material loss of revenues that could materially adversely affect our business,
results of operations and financial condition. Furthermore, even if our products
comply with Year 2000 requirements, we believe that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues, as
companies expend significant resources to correct or patch their current systems
to comply with Year 2000 requirements. These expenditures may result in reduced
funds available to purchase or deploy products and systems such as those we
offer, which could have a material adverse affect on our business, operating
results and financial condition.
We have not yet developed a comprehensive contingency plan to address
the issues, which could result from such failure. We are prepared to develop
such a contingency plan if our ongoing assessment indicates areas of significant
exposure.
RISK FACTORS
WE EXPECT TO INCUR SUBSTANTIAL OPERATING AND NET LOSSES
We have a limited operating history, which makes the prediction of
future results difficult. We have incurred significant net losses since
inception and, at September 30, 1999, had an accumulated deficit of $45.0
million. To date, we have recognized minimal revenue, and our ability to
generate revenue is subject to substantial uncertainty. In addition, we
currently intend to incur substantial operating expenses to fund additional
technological development, sales, marketing, transaction processing and general
activities. We expect that our total operating expenses for the year ended
December 31, 1999 will be $20 to $25 million.
OUR LIMITED OPERATING HISTORY AND THE EMERGING MARKET FOR INTERACTIVE TELEVISION
MAKE OUR FUTURE FINANCIAL RESULTS UNPREDICTABLE
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Our future revenue prospects, particularly those derived from viewer
response activities, are subject to a high degree of uncertainty. Currently, we
derive revenue from license fees and engineering fees. In the future, however,
we anticipate that our revenues will depend substantially on the level of viewer
response activity. Our experience with viewer responses is extremely limited. In
addition, our expense levels are based largely on our operating plans and
estimates of future revenue. We may be unable to adjust spending in a timely
manner to compensate for any unexpected shortfall in revenues. As a result, a
shortfall in actual revenues as compared to estimated revenues could have an
immediate material adverse effect on our financial performance.
OUR BUSINESS IS DEPENDENT UPON CONTENT PROVIDERS, DISTRIBUTORS AND CONSUMERS
EMBRACING THE WINK TECHNOLOGY
Since our business plan is premised upon receiving the primary portion
of our revenue directly from advertisers and merchants, our business will suffer
if advertisers and merchants do not create and use Wink-enhanced advertising.
Additionally, if Wink Enhanced Broadcasting is not broadly accepted by cable and
direct broadcast satellite system operators, our business plan will not succeed.
These operators may choose not to implement Wink Enhanced Broadcasting for a
variety of reasons. Our success will depend heavily upon broad acceptance of
Wink Enhanced Broadcasting by television viewers. If significant numbers of
viewers do not request information or purchase goods and services in response to
Wink-enhanced programming and advertising, advertisers and merchants are likely
to terminate their use of Wink-enhanced advertising or never adopt Wink Enhanced
Broadcasting. Viewers may not react favorably to Wink Enhanced Broadcasting for
various reasons, including they may feel it is too complex or they may be
concerned about security or privacy issues.
WE WILL INCUR SUBSTANTIAL LIABILITY IF WINK ENHANCED BROADCASTING FAILS TO
GENERATE SUFFICIENT REVENUE TO MEET OUR REVENUE GUARANTEES AND OTHER OBLIGATIONS
We have entered into agreements with Microsoft, cable and direct
broadcast satellite system operators and other market participants to share with
these entities a portion of revenues, if any, we generate from viewer responses
to Wink Enhanced Broadcasting. For certain cable and direct broadcast satellite
system operators, we have provided a minimum revenue guarantee if the operator
meets a minimum volume threshold for Wink Engines deployed. These guarantees
range from $2 to $5 per year per Wink-enabled home. In addition, we have made
minimum revenue guarantees to Microsoft ranging from $2 to $4 per year per
Wink-enabled device in which Microsoft controls the operating system,
application environment and content and data services, in exchange for certain
rights to process viewer responses to enhanced television offers. If Wink
Enhanced Broadcasting fails to generate sufficient revenue to meet the
guaranteed amount per Wink subscriber, we are required to pay the difference
between the guaranteed amount and the amount actually earned by the operator or
Microsoft. These liabilities may be substantial.
We have also agreed to provide marketing and technical development funds
to a number of cable and direct broadcast satellite system operators, contingent
upon the commercial launch of Wink Enhanced Broadcasting, including in some
cases a per set-top box fee of up to $3.50.
THE EMERGING NATURE OF THE MARKET FOR INTERACTIVE TELEVISION MAY CREATE
SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS, WHICH COULD RESULT
IN A DECLINE IN THE TRADING PRICE OF OUR COMMON STOCK
Our future quarterly operating results may fluctuate significantly due
to a number of factors related to the emerging market including:
- the amount of transaction-processing activity through the Wink
Response Network;
- the timing and success of infrastructure upgrades necessary to
support deployment by industry participants;
- the timing of the change, if any, in the basis of our
relationships with advertisers and merchants from a fixed flat
fee arrangement to a fee-per-transaction arrangement; and
- the effect of stock-based incentives provided to various
industry participants.
Due to these factors, it is possible that our operating results in one
or more future quarters will fail to meet or exceed the expectations of
securities analysts or investors. In such event, the trading price of our common
stock would likely decline.
WE FACE COMPETITION FROM A NUMBER OF COMPANIES.
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Many of our competitors may be in a better position to produce and
market their services due to their greater financial, technical, manufacturing
and marketing resources. As a result, we may not be able to compete effectively.
Our competitors may also have the support of, or relationships with, important
industry participants which could adversely affect the extent of support these
market participants give to Wink Enhanced Broadcasting.
Current and potential competitors in one or more aspects of our business
include television and other system software companies, interactive television
system providers and multimedia authoring tool providers. We also face
competition from other providers and companies operating in the direct marketing
business, especially operators of toll-free response call centers.
WE NEED TO ADAPT TO TECHNOLOGICAL CHANGE IN A MARKET THAT MAY NEVER FULLY
DEVELOP OR MAY DEVELOP WITH STANDARDS THAT ARE NOT COMPATIBLE WITH OUR
TECHNOLOGY.
The emerging and unsettled market for interactive television will
require that we continually improve the performance, features and reliability of
Wink Enhanced Broadcasting, particularly in response to competitive offerings.
We may not be successful in responding quickly, cost-effectively and adequately
to these developments. The introduction of new technologies or standards for
enhanced broadcasting could render Wink Enhanced Broadcasting obsolete or
unmarketable. In addition, the widespread adoption of new television
technologies or standards, cable-based or otherwise, could require us to make
substantial expenditures to modify or adapt our technology, products, services,
network or business model.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS MAY BE ASSERTED AGAINST US, WHICH
COULD DISRUPT OUR BUSINESS
If third parties assert claims of infringement of their proprietary
rights against us, we will incur significant costs and a diversion of resources
with respect to the defense of these claims. If any claims or actions are
asserted against us, we may seek to obtain a license under a third party's
intellectual property rights. However, a license under such circumstances may
not be available on reasonable terms, if at all.
On August 6, 1998, John L. Berman, an individual, filed suit against us
in the U.S. District Court in the Northern District of California, alleging that
we infringed his patents for an interactive television graphics interface and
for a method and apparatus for applying overlay images. If we fail to defend
these allegations successfully, our business and financial performance may be
adversely affected.
OUR COMPUTER SYSTEMS AND SOFTWARE AND THOSE OF OUR SOFTWARE AND HARDWARE
PROVIDERS AND THIRD PARTY NETWORK PROVIDERS MAY NOT BE YEAR 2000 COMPLIANT,
WHICH MAY DISRUPT OUR OPERATIONS
We face risks associated with the fact that many electronic devices,
systems and applications may not recognize calendar dates beginning in the Year
2000. This could result in system failures or miscalculations causing
disruptions of our operations, including a temporary inability to transmit our
enhancements and receive and process viewer responses.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for interest rate changes relates
primarily to its short-term investment portfolio. The Company had no derivative
financial instruments as of September 30, 1999 or December 31, 1998. The Company
invests its marketable securities in accordance with its investment policy and
maintains its portfolio in the form of managed investment accounts comprised of
money market accounts and corporate bonds. The Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents. The primary objective of the Company's portfolio is to maintain
proper liquidity to meet the operating needs of the business. The Company's
policy specifies credit quality standards for the Company's investments and
limits the amount of credit exposure to any single issue, issuer or type of
investment. The maximum maturity of a single issue is six months.
The Company's holdings are subject to interest rate risk and will fall
in value in the event market interest rates increase. If market interest rates
were to increase immediately and uniformly by 50 basis points from levels as of
September 30, 1999, the fair value of the portfolio would decline by an
immaterial amount.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 15, 1999, a suit was filed in the United States District
Court for the Middle District of Florida, Fort Myers Division by Fort Myers
Broadcasting Company claiming certain federal trademark infringements. The
Company believes it has meritorious defenses and plans to vigorously defend
itself.
We believe that the resolution of these matters will not have a material
adverse effect on our consolidated statement of operations or on our cash flows.
ITEM 2. CHANGES IN SECURITIES
On August 18, 1999, the Company commenced the initial public offering
("IPO") of 5,462,500 shares of common stock (including 200,000 shares sold by
existing stockholders and the underwriter's over-allotment option of 712,500
shares) at $16.00 per share pursuant to a registration statement (No. 333-80221)
(the "Initial Registration Statement") and a related registration statement
(333-85531) filed pursuant to Rule 462(b) of the Securities Act. The Initial
Registration Statement was declared effective by the Securities and Exchange
Commission on August 18, 1999. The offering has been terminated and all shares
have been sold. The aggregate gross proceeds from the offering were $84.2
million for the shares sold by the Company and $3.2 million for the shares sold
by the selling stockholders. The managing underwriters for the initial public
offering were Donaldson, Lufkin & Jenrette Securities Corporation, Deutsche Bank
Securities Inc. and Bear, Stearns & Co. Inc.
The Company incurred the following expenses in connection with the
offering: underwriters' discounts and commission of $5,894,000 and approximately
$1.0 million in other expenses, for total expenses of approximately $6,894,000.
After deducting expenses of the offering, the Company received net offering
proceeds of $77.3 million.
In June and July 1999, the Company sold and issued an aggregate of
4,958,333 shares of Series D Convertible Preferred Stock at a price of $12.00
per share to Microsoft Corporation, Hughes Electronics Corporation, General
Instrument Corporation, Goldman Sachs Group, Inc., and GFI Company. Each share
of Series D Convertible Preferred Stock converted into one share of Common Stock
upon the closing of our initial public offering in August 1999. The Company
relied upon the exemptions from registration provided by Section 4(2) under the
Securities Act of 1933, as amended, in the foregoing financing.
The Company has used, and continues to expect to use, the proceeds from
the offering for general corporate purposes, including working capital. A
portion of the proceeds may also be used for the acquisition of businesses that
are complementary to ours. Pending such uses, the Company has invested the net
proceeds of the IPO and Series D Convertible Preferred Stock in interest-bearing
securities that management considers to be credit worthy.
No payments constituted direct or indirect payments to any of the
Company's directors, officers or general partners or their associates, to
persons owning 10% of more of any class of the Company's equity securities, or
to any of the Company's affiliates, [except that approximately $3,500 of
expenses from the offering was paid in connection with certain legal fees
incurred by the two selling stockholders, who are both directors and officers of
the Company.]
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal quarter ended September 30, 1999, we solicited written
consent from our stockholders to approve our reincorporation from California to
Delaware, which was completed in August 1999. We also solicited the written
consent (effective August 19, 1999) for
- Approval of the Company's new 1999 Stock Plan, 1999 Employee
Stock Purchase Plan and 1999 Director Option Plan , and the
reservation of shares of Common Stock for issuance thereunder;
- Approval of the Company's execution of agreements providing for
indemnification of each current and future directors and
executive officers of the Company and certain other persons;
and,
- Approval of the form of Second Amended and Restated Certificate
of Incorporation of Wink Delaware, which was filed following the
completion of the Company's initial public offering of its
Common Stock and the consequent automatic conversion of all the
then outstanding Preferred Stock into Common Stock, pursuant to
which all references to the Company's then outstanding Preferred
Stock was eliminated
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WINK COMMUNICATIONS, INC.
(Registrant)
By: /s/ Howard L. Schrott
-------------------------------------
Chief Financial Officer and Senior
Vice President (Principal Financial
and Accounting Officer)
Date: November 15, 1999
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