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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-80221
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PROSPECTUS
AUGUST 18, 1999
LOGO
4,750,000 SHARES OF COMMON STOCK
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WINK COMMUNICATIONS:
- - We provide a complete end-to-end system for low-cost electronic commerce on
television.
TRADING SYMBOL & MARKET:
- - WINK/Nasdaq National Market
THE OFFERING:
- - We are offering 4,550,000 shares of our common stock and existing stockholders
are offering 200,000 shares.
- - The underwriters have an option to purchase an additional 712,500 shares from
Wink to cover over-allotments.
- - This is the initial public offering of our common stock.
- - Closing: August 24, 1999.
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Per Share Total
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Public offering price: $16.00 $76,000,000
Underwriting fees: 1.12 5,320,000
Proceeds to Wink: 14.88 67,704,000
Proceeds to the selling stockholders: 14.88 2,976,000
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE DEUTSCHE BANC ALEX. BROWN
BEAR, STEARNS & CO. INC.
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[INSIDE COVER PAGE]
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................... 1
Risk Factors.......................... 5
Forward-Looking Statements............ 12
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
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Business.............................. 28
Management............................ 40
Certain Transactions.................. 50
Principal and Selling Stockholders.... 55
Description of Capital Stock.......... 58
Shares Eligible for Future Sale....... 61
Underwriting.......................... 63
Legal Matters......................... 66
Experts............................... 66
Additional Information................ 66
Index to Consolidated Financial
Statements.......................... F-1
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully.
WINK COMMUNICATIONS
Wink Communications provides a complete end-to-end system for low-cost
electronic commerce on television. Our system, Wink Enhanced Broadcasting,
allows advertisers, merchants and broadcast and cable networks to create
interactive enhancements to traditional television advertisements and programs.
With a click of their remote control during an enhanced program or
advertisement, viewers can purchase merchandise, or request product samples,
coupons or catalogues. Similarly, viewers can use Wink to access program-related
information, such as news, sports and weather, participate in votes and polls,
and play along with gameshows.
Our business plan is to derive the primary portion of our future revenues
from transaction fees charged to advertisers and merchants for each purchase
order or other request for information. Several national advertisers have agreed
to create and air Wink-enhanced advertisements. In order to encourage these and
other advertisers and merchants to use Wink, our immediate goal is to maximize
the presence of Wink Enhanced Broadcasting in television households. To this
end, we have established relationships with, and licensed our technology to, 60
key participants from many segments of the television industry. For example:
- the four largest broadcast networks and 16 cable networks have agreed to
air Wink-enhanced programming and advertising;
- five of the six largest cable operators in the United States have agreed
to distribute Wink-enhanced programming and advertising in some of their
local markets, and the largest direct broadcast satellite operator in the
United States, DIRECTV, has agreed to distribute Wink-enhanced
programming and advertising nationwide;
- Microsoft Corporation has agreed to develop, market and distribute
Wink-enhanced programming and advertising on Microsoft's television
platforms; and
- several of the leading set-top box and television manufacturers have
agreed to incorporate Wink's technology into their products.
A number of key strategic and financial investors have invested in Wink,
including set-top box and television manufacturers, such as General Instrument,
Scientific Atlanta and Toshiba, as well as Microsoft, GE Capital, Vulcan
Ventures (controlled by Paul Allen) and Hughes Electronics Corporation, the
parent of DIRECTV.
We began the roll-out of our service in the United States in June 1998, and
we currently serve viewers in select cable markets in California, Connecticut,
Illinois, Missouri and Tennessee. In addition, Wink Enhanced Broadcasting has
been offered by Wink licensees in Japan since October 1996.
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MARKET OPPORTUNITY
Television is one of the most pervasive communications media in society
today. As a result, television advertising is considered to be one of the most
effective methods of building brand recognition and general consumer awareness
of products and services. Despite the fact that traditional television
broadcasting, cable and direct broadcast satellite television systems do not
provide an integrated means for viewers to respond to programs and
advertisements, the Direct Marketing Association estimates approximately $91
billion of goods and services were purchased through direct response television
programming and advertising in 1998. Many advanced analog and digital set-top
boxes and television sets already in consumers' homes can provide a platform for
interactive television. We believe that an opportunity exists for a simple,
immediate, inexpensive and automated method of responding to direct response
advertising on television.
BUSINESS STRATEGY
Our objective is to capitalize on the pervasiveness and popularity of
television to create a mass market medium for sales lead generation and
electronic commerce by:
- increasing the presence of Wink Enhanced Broadcasting in television
households by promoting the deployment of Wink software to set-top boxes
already in consumers' homes and promoting the deployment of new
Wink-enabled set-top boxes and television sets;
- offering viewers a free, easy-to-use, entertaining and informative
interactive television experience;
- expanding the availability of Wink-enhanced direct response offers by
working with our broadcast and cable network partners to enlist
advertisers to add Wink enhancements to their television advertisements;
and
- benefiting multiple participants in the television industry by offering
new opportunities for generating revenue and cost savings while
preserving traditional revenue streams and customer relationships.
Our success will depend upon the broad acceptance of the concept of
enhanced broadcasting by industry participants. To date, we have derived
substantially all of our revenue from license and engineering fees and charter
advertising fees. We have not derived any revenue from viewer response
activities.
Wink was incorporated in California in October 1994 and reincorporated in
Delaware in August 1999. Our principal executive office is located at 1001
Marina Village Parkway, Alameda, California 94501 and our telephone number is
(510) 337-2950.
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THE OFFERING
Common stock offered by:
Wink........................... 4,550,000 shares
Selling stockholders........... 200,000 shares
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Total..................... 4,750,000 shares
Common stock to be outstanding after
this offering....................... 29,025,646 shares
Use of proceeds..................... For working capital and other general
corporate purposes, including expansion
of our sales and marketing efforts, our
research and development activities and
our viewer response system, the Wink
Response Network. We will not receive
any proceeds from the shares sold by
the selling stockholders. See "Use of
Proceeds."
Nasdaq National Market symbol....... WINK
The number of shares of common stock to be outstanding after this offering
is based on:
- shares outstanding as of June 30, 1999; plus
- 1,260,000 shares of convertible preferred stock issued in July 1999;
plus
- 863,200 shares of common stock which are expected to be issued on
exercise of warrants that expire upon completion of this offering.
The above number excludes:
- 4,069,314 shares of common stock issuable upon exercise of outstanding
options at June 30, 1999;
- 3,000,000 shares reserved for future issuance under our employee stock
plans after this offering; and
- an aggregate of 1,692,500 shares of common stock subject to warrants
that are expected to remain outstanding after this offering.
See "Capitalization," "Management -- Employee Benefit Plans" and Notes 2,
7, 8 and 9 of Notes to Consolidated Financial Statements.
Generally, unless otherwise indicated, all information in this prospectus:
- gives effect to the conversion of all outstanding convertible
preferred stock to common stock upon the closing of the offering,
including the convertible preferred stock issued in July 1999;
- gives effect to our reincorporation in Delaware, which was completed
in August 1999; and
- assumes no exercise of the underwriters' over-allotment option.
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SUMMARY CONSOLIDATED AND PRO FORMA FINANCIAL DATA
The following table summarizes the consolidated financial data for our
business. You should read the data set forth below together with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and related Notes included
elsewhere in this prospectus.
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SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
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1995 1996 1997 1998 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................... $ 100 $ 348 $ 619 $ 517 $ 290 $ 620
Operating expenses..................... 2,320 6,484 10,275 15,212 6,383 11,360
Loss from operations................... (2,220) (6,136) (9,656) (14,695) (6,093) (10,740)
Net loss............................... (2,148) (5,884) (9,166) (14,036) (5,777) (9,201)
======= ======= ======= ======== ======= ========
Net loss per share:
Basic and diluted.................... $ (0.37) $ (0.91) $ (1.25) $ (1.57) $ (0.66) $ (0.92)
======= ======= ======= ======== ======= ========
Weighted average shares.............. 5,860 6,432 7,337 8,954 8,695 9,965
Pro forma net loss per share:
Basic and diluted.................... $ (0.92) $ (0.52)
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Weighted average shares.............. 15,198 17,832
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AT JUNE 30, 1999
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ACTUAL PRO FORMA
(IN THOUSANDS) AS ADJUSTED
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CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......... $73,456 $79,111 $145,965
Working capital........................................... 55,432 76,207 143,061
Total assets.............................................. 76,717 82,372 149,226
Convertible promissory note -- related party.............. 15,120 -- --
Long-term obligations, less current portion............... 140 140 140
Total stockholders' equity................................ 57,392 78,167 145,021
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In reviewing the above data, you should consider the following:
- - Operating expenses include non-cash charges for stock compensation and warrant
amortization totaling $283,000, $4,000, $455,000, $1,256,000, $622,000 and
$2,952,000 for the years ended December 31, 1995, 1996, 1997 and 1998, and for
the six months ended June 30, 1998 and 1999, respectively. See Notes 2, 7, 8
and 10 of Notes to Consolidated Financial Statements.
- - See Note 2 of Notes to Consolidated Financial Statements for a discussion of
the computation of historical and pro forma basic and diluted net loss per
share and weighted average shares outstanding. Share information for all
periods presented has been retroactively adjusted to reflect a 10-for-1 split
of common stock and preferred stock in July 1995.
- - The Consolidated Balance Sheet Data for the period ended June 30, 1999 is
presented on a pro forma basis to reflect the issuance of convertible
preferred stock in July 1999 and the anticipated exercise of warrants that
expire upon completion of this offering. See "Capitalization."
- - The Consolidated Balance Sheet Data for the period ended June 30, 1999 also is
presented as adjusted to reflect the sale of shares of common stock offered
hereby, at an initial public offering price of $16.00 per share and the
application of the net proceeds therefrom. See "Use of Proceeds,"
"Capitalization" and "Underwriting."
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RISK FACTORS
You should carefully consider the risks described below before buying
shares in this offering.
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 June 30, 1999, had an accumulated deficit of $40.5 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. For example, 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
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.
IF TELEVISION VIEWERS DO NOT RESPOND TO WINK ENHANCEMENTS, WE WILL NOT GENERATE
SUFFICIENT REVENUES TO CONDUCT OUR BUSINESS
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 that responding to Wink-enhanced programming and
advertising is too complex or interferes with viewing television; or
- they may be concerned about security or privacy issues relating to the
transmission of their personal information through an electronic medium.
IF ADVERTISERS AND MERCHANTS DO NOT CREATE AND USE WINK-ENHANCED ADVERTISING, WE
WILL NOT GENERATE REVENUES SUFFICIENT TO CONDUCT OUR BUSINESS
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. In
addition, if advertisers and merchants are unwilling to pay on
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a fee-per-transaction basis, we will not be able to execute our business plan,
as it currently exists. To date, we have received no commitments for
advertisements that provide for a fee-per-transaction.
Under our "Charter Advertiser" program, our charter advertisers have agreed
to use only reasonable efforts to add Wink enhancements to a specified number of
their advertisements through various dates in 1999 and 2000. We do not currently
have any commitments for advertising beyond 2000. If we are unable to
successfully negotiate favorable agreements with our charter advertisers and
additional advertisers for periods beyond 1999, our business will suffer.
IF CABLE AND DIRECT BROADCAST SATELLITE SYSTEM OPERATORS DO NOT IMPLEMENT WINK
ENHANCED BROADCASTING, WE WILL BE UNABLE TO DISSEMINATE WINK-ENHANCED
PROGRAMMING AND ADVERTISING TO CONSUMER HOMES
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. Operators typically have numerous potential new services to offer
their subscribers and limited resources with which to implement these services.
They may not offer Wink Enhanced Broadcasting if it is not more attractive than
other available services. Also, because some older model Wink-capable set-top
boxes have insufficient memory capacity to include Wink enhancements without
limiting the operation of existing or contemplated services, operators may be
unwilling to offer the Wink services for these set-top boxes. In addition, Wink
Enhanced Broadcasting responses and purchase requests by cable subscribers can
only be returned to cable operators if the cable operators have deployed systems
that enable transmission on a two-way basis. Cable operators are under no
obligation to deploy systems on a two-way basis. If these operators are unable
or unwilling to deploy systems on a two-way basis, responses to Wink Enhanced
Broadcasting cannot be collected.
Our agreements with cable and direct broadcast satellite system operators
do not ensure that they will deploy Wink Enhanced Broadcasting. Our agreements
with cable system operators are limited and generally set forth only a framework
and pricing for the operators' local cable systems to adopt Wink Enhanced
Broadcasting, should they choose to do so. In many cases, actual deployment of
Wink Enhanced Broadcasting may be subject to additional negotiation and
agreement with each local system. As a result, we cannot predict with any
certainty whether Wink Enhanced Broadcasting will be deployed in any new cable
markets or, if deployed, the timing of the deployment. Similarly, our agreement
with DIRECTV does not require DIRECTV to make Wink Enhanced Broadcasting
available on all models of DIRECTV-compatible set-top boxes, or to any
particular number of households or set-top boxes during the term of the
agreement. In addition, to deploy Wink Enhanced Broadcasting through DIRECTV, we
must enter into separate agreements with the manufacturers of DIRECTV-compatible
set-top boxes. Although we have reached an agreement with the two leading
manufacturers of DIRECTV-compatible set-top boxes, we may not be able to
negotiate agreements with other manufacturers on favorable terms, or at all.
IF BROADCAST AND CABLE NETWORKS DO NOT AIR WINK-ENHANCED ADVERTISEMENTS, WE WILL
NOT GENERATE REVENUES FROM ADVERTISERS AND MERCHANTS
Because Wink enhancements are only available to viewers of networks that
have adopted Wink Enhanced Broadcasting, we must rely upon networks to air
Wink-enhanced advertising and programming in order to execute our business plan.
While we have entered into agreements with 16 cable networks and four broadcast
networks, these agreements generally commit the networks to use only reasonable
efforts to air a specified amount of Wink-enhanced programming and do not
require a
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Wink programming enhancement to be available at all times during this
programming. In addition, NBC's commitment to air Wink-enhanced programming has
expired, although NBC continues to air such programming. Moreover, our
agreements allow the networks to select the programming to be enhanced at their
discretion, and do not require the networks to employ enhanced broadcasting for
all types of programming. Our agreements with networks are short-term (generally
one to eight years) and generally can be terminated after one year. Some
networks can also terminate their agreements with us early upon the occurrence
of certain events, including our failure to achieve specific performance
requirements. The termination of one or more of these agreements, or our failure
to enter into additional agreements and to increase programming commitments
substantially, may prevent us from generating sufficient revenues to conduct our
business.
IF SET-TOP BOX AND TELEVISION MANUFACTURERS DO NOT INCORPORATE OUR SOFTWARE INTO
THEIR PRODUCTS, WE WILL BE UNABLE TO DISSEMINATE WINK-ENHANCED PROGRAMMING AND
ADVERTISING TO CONSUMERS' HOMES
Because Wink programming enhancements can only be viewed with an advanced
analog or digital set-top box or Wink-enabled television set, the success of our
business will depend heavily on the wide-spread availability and use of these
products. Currently, in the United States, there are only a limited number of
Wink-enabled televisions and Wink-enabled set-top boxes deployed. Accordingly,
if set-top box and television manufacturers do not significantly increase the
availability of Wink-enabled set-top boxes and television sets, Wink-enhanced
programming and advertising will not be available to large numbers of consumers.
While we have licensed Wink technology to General Instrument, Scientific
Atlanta and Pioneer for incorporation into their digital and advanced analog
cable set-top boxes and to Thomson Consumer Electronics and Hughes Network
Systems for incorporation into their DIRECTV-compatible set-top boxes, these
agreements do not commit these parties to incorporate our software into their
products. In addition, our existing and future agreements with cable and
DIRECTV-compatible set-top box manufacturers may not result in the production,
marketing, distribution or sale of a significant number of Wink-enabled set-top
boxes. Moreover, any of these agreements may be terminated.
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. See Notes 6 and 9 of Notes to
Consolidated Financial Statements.
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
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Enhanced Broadcasting, including in some cases a per set-top box fee of up to
$3.50. See Note 6 of Notes to Consolidated Financial Statements.
OUR ABILITY TO GENERATE REVENUES WILL SUFFER IF CREATORS OF PROGRAMMING OR
ADVERTISING DO NOT CREATE HIGH-QUALITY CONTENT
In order for Wink to motivate viewers to interact with Wink-enhanced
programming and advertising, creators of programming and advertising must
develop and integrate high-quality Wink Enhanced Broadcasting content. If they
fail to do so, viewers may not respond to Wink-enhanced programming, which would
impair our ability to generate revenue.
THE FAILURE OF THE WINK RESPONSE NETWORK TO PERFORM EFFECTIVELY AND RELIABLY
WILL AFFECT OUR ABILITY TO EARN TRANSACTION FEE REVENUES
An essential part of our strategy is the generation of high volumes of
commercial transaction traffic through the Wink Response Network, in conjunction
with related information systems at broadcast and cable networks, cable and
direct broadcast satellite system operators, advertisers and merchants.
Consequently, the inability by us or our strategic partners, to operate and
maintain the required transaction-processing systems and associated
infrastructure for the Wink Response Network or the subsequent occurrence of
significant system interruptions or errors, would affect our ability to:
- consistently execute viewer response transactions;
- maintain satisfactory levels of customer service; and
- attract and retain strategic relationships in the television industry.
We have only recently begun capturing and routing transaction responses
through the Wink Response Network on a very limited basis. We have no experience
routing large numbers of transactions. We may not be able to accurately predict
and prepare for significant increases in response transactions, if any, or to
effectively implement any necessary system changes, expansion and upgrades in a
timely manner. We may also be required to change or upgrade the Wink Response
Network in order to respond to changes in the information systems used by
advertisers, merchants, networks or cable or direct broadcast satellite system
operators.
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 for interactive television,
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.
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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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
WE FACE COMPETITION FROM A NUMBER OF COMPANIES WHICH MAY BE IN A BETTER POSITION
TO COMPETE IN OUR INDUSTRY
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. See
"Business -- Competition."
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.
WE ARE DEPENDENT ON THE SERVICE OF OUR CHIEF EXECUTIVE OFFICER, AS WELL AS OUR
TECHNICAL PERSONNEL
Our future success and performance is substantially dependent on the
continued services and performance of our senior management and other key
personnel, especially our chief executive officer. Our performance also depends
on our ability to retain and motivate our officers and key employees. The loss
of the services of any of our executive officers or other key employees could
materially adversely affect our business. We do not have long-term employment
agreements with any of our key personnel. Our future success also depends on our
ability to identify, attract, hire, train, retain and motivate other highly
qualified technical, managerial, sales, marketing and customer service
personnel. Competition for such personnel, especially software programmers and
film engineers, is particularly intense in the San Francisco bay area.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH COULD IMPAIR OUR
ABILITY TO COMPETE
Because our ability to compete is dependent in part upon our internally
developed, proprietary intellectual property, our competitive position will
suffer if we do not adequately protect our intellectual property rights. We rely
on patent, trademark, trade secret and copyright law, as well as
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confidentiality procedures and licensing arrangements to establish and protect
these rights. Despite these precautions, a third party could copy or otherwise
obtain and use our products or technology without authorization, or develop
similar technology independently through reverse engineering or other means.
Litigation may be necessary in the future to enforce our intellectual property
rights. Such litigation could result in substantial costs and diversion of
resources.
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE MAY NOT BE ABLE TO MAINTAIN THE SECURITY OF VIEWER TRANSACTION RESPONSES,
WHICH COULD ADVERSELY AFFECT OUR REPUTATION AND ABILITY TO ATTRACT VIEWER
RESPONSES
A significant barrier to communications and commerce through Wink Enhanced
Broadcasting is the need for secure transmission of confidential information,
such as credit card numbers, over public networks. A party who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our operations. We may be required to expend significant
capital and other resources to protect against these security breaches or to
alleviate problems caused by these breaches. We intend to rely on third parties
for call center operators and data center processing under confidentiality
agreements, and we have no direct control over the confidentiality or security
practices of these parties. Negligent or hostile actions by third parties or
other events or developments may result in a compromise or breach of our current
or future systems designed to protect customer transaction data. Any such
compromise of security could materially adversely affect our reputation and
ability to attract viewer responses and may expose us to a risk of loss or
litigation and potential liability. Moreover, concerns over the security of
communications and commerce through enhanced broadcasting may inhibit the growth
of enhanced broadcasting, especially as a means of conducting commercial
transactions.
10
<PAGE> 14
GOVERNMENT REGULATIONS MAY ADVERSELY AFFECT OUR ABILITY TO BROADLY TRANSMIT WINK
ENHANCED BROADCASTING AND CAPTURE MARKETING DATA
Governmental regulation of the telecommunications, media, broadcast and
cable television industries may adversely affect the ability of Wink and other
market participants to transmit Wink Enhanced Broadcasting. In addition, future
legislation or regulatory requirements regarding privacy issues could be enacted
to require notification to users that captured data may be used by marketing
entities to target product promotion and advertising to that user.
OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS WILL BE ABLE TO
CONTROL SIGNIFICANT CORPORATE MATTERS AS A RESULT OF THEIR CONCENTRATED
OWNERSHIP OF WINK COMMON STOCK
Our current directors, executive officers and principal stockholders and
their affiliates will beneficially own approximately 30.9% of the outstanding
common stock of Wink upon completion of this offering, based on shares
outstanding as of June 30, 1999, plus shares of convertible preferred stock
issued in July 1999 and shares that are expected to be issued upon exercise of
warrants that expire upon completion of this offering. If the underwriters'
over-allotment option is exercised in full, these persons will own 30.2%. Thus,
the directors, executive officers and principal stockholders may be able to
control all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in
control of Wink. See "Principal and Selling Stockholders" and "Description of
Capital Stock."
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE
The market price of our common stock could decline as a result of sales of
a large number of shares in the market after this offering or the perception
that such sales could occur. These factors also could make it more difficult for
us to raise funds through future offerings of common stock.
There will be 29,025,646 shares of common stock outstanding immediately
after this offering. The 4,750,000 shares sold in this offering will immediately
be transferable without restriction in the public market, unless these shares
are held by affiliates. Also, an additional 83,750 shares will become eligible
for sale on the date of this prospectus or within 180 days after the date of
this prospectus. The holders of the remaining 24,191,896 shares are subject to
agreements with the underwriters or us that restrict their ability to transfer
their stock for 180 days after the date of this prospectus without consent of
the underwriters or us. After these agreements expire, 17,993,805 of those
shares will be eligible for sale in the public market. See "Shares Eligible for
Future Sale."
WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS
Our management may spend most of the proceeds from this offering in ways
with which the stockholders may not agree. The majority of the net proceeds of
this offering are not allocated for specific uses other than working capital and
general corporate purposes. We cannot assure that the proceeds will be invested
to yield a favorable return. See "Use of Proceeds."
11
<PAGE> 15
ANTITAKEOVER PROVISIONS OF OUR CHARTER DOCUMENTS MAY AFFECT OUR STOCK PRICE AND
INHIBIT A CHANGE OF CONTROL DESIRED BY SOME STOCKHOLDERS
There are provisions in our charter documents, such as the elimination of
stockholders' ability to take actions by written consent and limitations on
stockholders' ability to raise matters at a meeting of stockholders without
giving advance notice, that may delay or prevent a change in control or
management. In addition, our Certificate of Incorporation authorizes the Board
of Directors to issue preferred stock and to fix its rights and without any
approval of the stockholders. The issuance of preferred stock, could make it
more difficult for a third party to acquire a majority of the outstanding voting
stock of Wink, thereby delaying, deferring or preventing a change in control of
Wink. Furthermore, preferred stock may be given other rights, including economic
rights senior to the common stock, that affect the market value of our common
stock. See "Description of Capital Stock -- Antitakeover Effects of Delaware Law
and Certain Provisions of Wink's Certificate of Incorporation and Bylaws."
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements regarding whether and
the extent to which Wink Enhanced Broadcasting will be adopted by industry
participants, and plans for the introduction of new products and services. We
use words such as "anticipates," "believes," "plans," "expects," "future,"
"intends" and similar expressions to identify such forward-looking statements.
This prospectus also contains forward-looking statements attributed to certain
third parties relating to their estimates regarding the growth of advanced
analog and digital set-top box use, increases in spending on direct response
television advertising and the growth of electronic commerce. You should not
place undue reliance on these forward-looking statements, which apply only as of
the date of this prospectus. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described under the caption "Risk Factors" and
elsewhere in this prospectus.
12
<PAGE> 16
USE OF PROCEEDS
The net proceeds we will receive from our sale of 4,550,000 shares of
common stock offered hereby are estimated to be approximately $66,854,000. This
is based on an initial public offering price of $16.00 per share and after
deducting underwriting fees and expenses payable by us. We will receive
additional net proceeds of up to approximately $10,602,000 if the underwriters
exercise their over-allotment option. We will not receive any proceeds from the
sale of shares by the selling stockholders.
We intend to use the net proceeds of this offering for working capital and
other general corporate purposes, including expansion of our sales and marketing
efforts, research and development activities, and our viewer response network,
the Wink Response Network. If necessary, we may also use a portion of the net
proceeds of this offering to fund revenue guarantees to industry participants.
The amounts actually expended by us for these purposes will depend upon a number
of factors, including future revenue growth, the amount of cash generated by our
operations and the progress of our efforts to establish Wink Enhanced
Broadcasting as a television standard. We may also use a portion of the proceeds
to acquire or invest in businesses, products or technologies that are
complementary to Wink's, although there are no current commitments regarding any
such acquisitions or investments.
Pending such uses, we intend to invest the net proceeds from this offering
in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
do not currently anticipate paying any cash dividends on our common stock in the
foreseeable future and we intend to retain any future earnings for use in the
expansion of our business and for general corporate purposes.
13
<PAGE> 17
CAPITALIZATION
The following table sets forth our actual, pro forma and as adjusted
capitalization as of June 30, 1999. Our pro forma capitalization gives effect
to:
- the issuance of 1,260,000 shares of convertible preferred stock in
exchange for cancellation of indebtedness in July 1999 and the
anticipated issuance of 863,200 shares of common stock upon exercise of
warrants that expire upon completion of this offering; and
- the conversion of all outstanding shares of preferred stock into
12,764,333 shares of common stock and certain amendments to our
certificate of incorporation effected after June 30, 1999.
Our as adjusted capitalization gives effect to:
- the issuance and sale of 4,550,000 shares of common stock offered by us
in this offering; and
- the application of the estimated net proceeds from the sale of our common
stock based on an initial public offering price of $16.00 per share and
after deducting estimated underwriting fees and other offering expenses.
<TABLE>
<CAPTION>
AT JUNE 30, 1999
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalent and short-term investments............ $ 73,456 $ 79,111 $145,965
======== ======== ========
Convertible promissory note -- related party................ $ 15,120 $ -- $ --
======== ======== ========
Capital lease obligations, less current portion............. $ 140 $ 140 $ 140
-------- -------- --------
Stockholders' equity
Convertible preferred stock, $0.001 par value: issuable in
series; 13,001,250 shares authorized actual, 5,000,000
pro forma and as adjusted; 11,504,333 shares issued and
outstanding actual, none pro forma and as adjusted..... 12 -- --
Common stock, $0.001 par value: 35,000,000 shares
authorized actual, 100,000,000 pro forma and as
adjusted; 10,848,113 shares issued and outstanding
actual, 24,475,646 pro forma, 29,025,646 as adjusted... 11 25 29
Additional paid-in capital................................ 109,918 130,691 197,541
Stockholder notes receivable.............................. (2,801) (2,801) (2,801)
Unearned compensation..................................... (9,288) (9,288) (9,288)
Accumulated deficit....................................... (40,460) (40,460) (40,460)
-------- -------- --------
Total stockholders' equity............................. 57,392 78,167 145,021
-------- -------- --------
Total capitalization.............................. $ 57,532 $ 78,307 $145,161
======== ======== ========
</TABLE>
Outstanding shares in the above table excludes:
- 4,069,314 shares of common stock issuable upon exercise of outstanding
options at June 30, 1999, at a weighted average exercise price of $5.22
per share;
- 3,000,000 shares reserved for future issuance under our employee stock
plans after this offering; and
- 1,692,500 shares of common stock subject to warrants that are expected to
remain outstanding after the offering, at a weighted average exercise
price of $9.73 per share.
See "Management -- Employee Benefit Plans" and Notes 2, 7, 8 and 10 of Notes to
Consolidated Financial Statements.
14
<PAGE> 18
DILUTION
As of June 30, 1999, our pro forma net tangible book value was $78,167,000
or $3.19 per share. Pro forma net tangible book value per share represents the
amount of our total tangible assets reduced by the amount of our total
liabilities divided by the pro forma number of shares of common stock
outstanding after giving effect to the conversion of all outstanding preferred
stock into common stock upon the completion of this offering. After giving
effect to the issuance and sale of the shares of common stock offered in this
offering at an initial public offering price of $16.00 per share (after
deducting estimated underwriting fees and other offering expenses payable by
us), our adjusted pro forma net tangible book value as of June 30, 1999, would
have been $145,021,000 or $5.00 per share. This represents an immediate increase
in the pro forma net tangible book value of $1.81 per share to existing
stockholders and an immediate dilution of $11.00 per share to new investors. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $16.00
Pro forma net tangible book value per share before the
offering............................................... $3.19
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 1.81
-----
Adjusted pro forma net tangible book value per share after
the offering.............................................. 5.00
------
Dilution per share to new investors......................... $11.00
======
</TABLE>
The following table summarizes, as of June 30, 1999, the difference between
the existing stockholders and the purchasers of shares of common stock in this
offering (at an initial public offering price of $16.00 per share) with respect
to the number of shares of common stock purchased from us, the total
consideration paid and the average price paid per share.
<TABLE>
<CAPTION>
AVERAGE
PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER SHARE
--------------------- ----------------------- ---------
NUMBER PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 24,475,646 84.3% $116,771,000 61.6% $ 4.77
New investors................ 4,550,000 15.7 72,800,000 38.4 16.00
---------- ----- ------------ -----
Total.............. 29,025,646 100.0% $189,571,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
after June 30, 1999 and no exercise of those warrants that will remain
outstanding after this offering. As of June 30, 1999, we had outstanding:
- options to purchase 4,069,314 shares of common stock at a weighted
average exercise price of $5.22 per share; and
- warrants to purchase 1,692,500 shares of common stock that are expected
to remain outstanding after this offering, at a weighted average exercise
price of $9.73 per share.
In addition, we have reserved 3,000,000 additional shares for future
issuance under our employee stock plans after this offering. To the extent that
any of these options or warrants are exercised, there will be further dilution
to new investors. See "Management -- Employee Benefit Plans" and Notes 2, 7, 8
and 9 of Notes to Consolidated Financial Statements.
The tables on this page give effect to the issuance of 1,260,000 shares of
convertible preferred stock in July 1999 and the anticipated issuance of 863,200
shares of common stock upon exercise of warrants that expire upon completion of
this offering.
The second table on this page does not, however, give effect to sales of
shares by the selling stockholders. Sales by the selling stockholders in this
offering will reduce the number of shares held by existing stockholders to
24,275,646 shares, or 83.6% of the shares outstanding, and will increase the
number of shares held by new investors to 4,750,000 shares, or 16.4% of the
shares outstanding.
15
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements and notes
thereto and other financial information included elsewhere in this prospectus.
The consolidated statement of operations data set forth below for the years
ended December 31, 1996, 1997 and 1998 and the consolidated balance sheet data
as of December 31, 1997 and 1998 are derived from, and are qualified by
reference to, our audited Consolidated Financial Statements included elsewhere
in this prospectus. The consolidated statement of operations data for the period
from October 7, 1994 (inception) through December 31, 1994 and for the year
ended December 31, 1995 and the consolidated balance sheet data as of December
31, 1994, 1995 and 1996 are derived from audited Consolidated Financial
Statements, which are not included in this prospectus. The consolidated
statement of operations data for the six months ended June 30, 1998 and 1999 and
the consolidated balance sheet data as of June 30, 1999 are derived from
unaudited Consolidated Financial Statements included in this prospectus, which
have been prepared on the same basis as the audited Consolidated Financial
Statements and, in the opinion of management, include all adjustments
(consisting of normal recurring adjustments) necessary for fair presentation of
such information. Historical results are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
OCTOBER 7,
1994
(INCEPTION)
THROUGH SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31, JUNE 30,
------------ -------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Licenses -- related parties....... $ -- $ -- $ -- $ 384 $ 174 $ 78 $ 97
Licenses -- third parties......... -- -- -- -- 224 113 201
Services -- related parties....... -- 100 155 148 -- -- 198
Services -- third parties......... -- -- 193 87 119 99 124
------ ------- ------- ------- -------- ------- --------
Total revenues............. -- 100 348 619 517 290 620
------ ------- ------- ------- -------- ------- --------
Costs and expenses(a):
Cost of services -- related
parties......................... -- 98 323 162 -- -- 142
Cost of services -- third
parties......................... -- -- 235 376 513 133 63
Research and development.......... 4 851 2,595 4,384 6,549 2,739 4,160
Sales and marketing............... 10 899 2,263 3,510 5,578 2,576 5,082
General and administrative........ 11 472 1,068 1,843 2,572 935 1,913
------ ------- ------- ------- -------- ------- --------
Total costs and expenses... 25 2,320 6,484 10,275 15,212 6,383 11,360
------ ------- ------- ------- -------- ------- --------
Loss from operations................ (25) (2,220) (6,136) (9,656) (14,695) (6,093) (10,740)
Interest and other income........... -- 72 279 684 813 394 1,590
Interest expense.................... -- -- (27) (194) (154) (78) (51)
------ ------- ------- ------- -------- ------- --------
Net loss............................ $ (25) $(2,148) $(5,884) $(9,166) $(14,036) $(5,777) $ (9,201)
====== ======= ======= ======= ======== ======= ========
Net loss per share(b):
Basic and diluted................. $(0.01) $ (0.37) $ (0.91) $ (1.25) $ (1.57) $ (0.66) $ (0.92)
====== ======= ======= ======= ======== ======= ========
Weighted average shares........... 5,100 5,860 6,432 7,337 8,954 8,695 9,965
Pro forma net loss per share(b):
Basic and diluted................. $ (0.92) $ (0.52)
======== ========
Weighted average shares........... 15,198 17,832
</TABLE>
16
<PAGE> 20
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
------------------------------------------ -----------
1994 1995 1996 1997 1998
(IN THOUSANDS) 1999
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $184 $2,909 $4,157 $ 8,530 $16,892 $44,794
Short-term investments............................... -- -- -- 5,452 4,441 28,662
Working capital...................................... (83) 2,218 2,886 11,367 17,443 55,432
Total assets......................................... 260 3,317 5,642 15,629 23,920 76,717
Convertible promissory note -- related parties....... -- -- -- -- -- 15,120
Long-term obligations, less current portion.......... -- -- 1,114 767 365 140
Stockholders' equity (deficit)....................... (9) 2,530 3,135 11,925 19,125 57,392
</TABLE>
- ---------------
(a) Costs and expenses include non-cash charges for stock compensation and
warrant amortization totaling $--, $283,000, $4,000, $455,000, $1,256,000,
$622,000 and $2,952,000 for the period from October 7, 1994 (Inception)
through December 31, 1994, for the years ended December 31, 1995, 1996, 1997
and 1998, and for the six months ended June 30, 1998 and 1999, respectively.
See Notes 2, 7, 8 and 10 of Notes to Consolidated Financial Statements.
(b) See Note 2 of Notes to Consolidated Financial Statements for a discussion of
the computation of historical and pro forma basic and diluted net loss per
share and weighted average shares outstanding. Share information for all
periods presented has been retroactively adjusted to reflect a 10-for-1
split of common stock and preferred stock in July 1995.
17
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with, and is qualified in its entirety
by reference to, our Consolidated Financial Statements and the related Notes
thereto appearing elsewhere in this prospectus. This discussion contains
forward-looking statements relating to future events and our future financial
performance, each of which involves risks and uncertainties. These events and
our actual results could differ materially from those described in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Risk Factors," "Business" and elsewhere in
this prospectus.
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 June 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, we do 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 June 1999 provide
18
<PAGE> 22
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.
We have incurred net losses since inception and, at June 30, 1999, had an
accumulated deficit of approximately $40.5 million. We may never achieve
favorable operating results or profitability. See "Risk Factors -- We have a
history of losses and expect future losses." In addition, our future quarterly
operating results may fluctuate significantly due to a number of factors, many
of which are outside of our control. See "Risk Factors -- 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" and "Risk Factors -- Our limited operating history
and the emerging market for interactive television make our future financial
results unpredictable."
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, cost of merchandise sold directly by
Wink through dedicated interactive channels 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. We expect 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.
19
<PAGE> 23
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.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Total revenues increased 114% to $620,000 for the six months ended June 30,
1999, compared to $290,000 for the six months ended June 30, 1998. The increase
was related primarily to a $198,000 increase in non-recurring engineering
revenue from a related party as certain development agreements were completed
and a $88,000 increase in license revenues from third parties. During the first
six months of 1999, transactions with Toshiba and a subsidiary of Thomson
Multimedia S.A. accounted for 44% and 18% of our total revenues, respectively.
COSTS AND EXPENSES
Total costs and expenses increased 78% to $11.4 million for the six months
ended June 30, 1999, compared to $6.4 million for the six months ended June 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.
Cost of Services. Cost of services increased 54% to $205,000 for the six
months ended June 30, 1999 from $133,000 for the six months ended June 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 56% to
$4.2 million for the six months ended June 30, 1999 from $2.7 million for the
six months ended June 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 96% to $5.1
million for the six months ended June 30, 1999 from $2.6 million for the six
months ended June 30, 1998. The increase was primarily due to non-cash charges
for stock compensation and warrant amortization totaling $2.7 million. Increased
personnel costs in 1999 also contributed to the overall increase.
General and Administrative. General and administrative expense increased
105% to $1.9 million for the six months ended June 30, 1999 from $935,000 for
the six months ended June 30, 1998. The increase was primarily related to the
hiring of administrative and executive personnel to support anticipated future
growth.
Stock-based Costs and Expenses. Stock-based costs and expenses increased
375% to $3.0 million for the six months ended June 30, 1999 from $622,000 for
the six months ended June 30, 1998. The increase was primarily due to the 1999
issuance of warrants to purchase common stock to a broadcast company and to an
affiliate of another broadcast company and to the 1999 issuance of common stock
to employees as an incentive bonus. Unearned compensation at June 30, 1999
totaled $5.3 million,
20
<PAGE> 24
which will be amortized in future periods over the vesting periods of certain
restricted stock and stock options.
During the six months ended June 30, 1999, we granted fully exercisable
warrants to purchase 325,000 shares of common stock at $12.00 per share, subject
to adjustment, 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 $1,980,000 and was recognized as
a sales and marketing expense, as there were no remaining performance
obligations on behalf of the holders and no significant license revenues are
expected to be derived from the agreements.
In May 1999, we 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 will be recognized as a component of stockholders'
equity and will be amortized as a sales and marketing expense over the estimated
period of benefit of ten years. During the six months ended June 30, 1999,
amortization recognized totaled $68,000.
In June 1999, we 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, we 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 consisting 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.
Costs and expenses include non-cash charges for stock compensation and
warrant amortization as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------------
1998 1999
-------- ----------
<S> <C> <C>
Research and development............................. $ 95,000 $ 100,000
Sales and marketing.................................. 422,000 2,747,000
General and administrative........................... 105,000 105,000
-------- ----------
$622,000 $2,952,000
======== ==========
</TABLE>
Interest and Other Income, Net of Interest Expense. Net interest and other
income increased 387% to $1.5 million for the six months ended June 30, 1999
from $316,000 for the six months ended June 30, 1998. The increase was primarily
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. This increase was also 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. We have not generated taxable income since inception and, as
a result, the provision for income taxes consists solely of the California
minimum franchise tax of approximately $1,000 per year, which is included in
general and administrative expenses. At June 30, 1999, we had
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<PAGE> 25
federal and state net operating loss carryforwards of approximately $34.5
million available to reduce future taxable income. Due to a cumulative change of
our ownership of greater than 50% in December 1995, March 1996 and March 1998,
the amount of loss carryforwards that can be utilized to reduce our future
taxable income for federal and state income tax purposes will be limited to
approximately $8.0 million per year. 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.
Net Loss. We have incurred net losses since our inception. The net loss
increased 59% to $9.2 million for the six months ended June 30, 1999 from $5.8
million for the six months ended June 30, 1998. The increase in net loss was due
primarily to significant increases in stock-based costs and expenses from
warrant grants and increases in operating expenses as a result of our efforts to
expand business activities, partially offset by an increase in revenue over the
same period.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
REVENUES
Total revenues were $517,000, $619,000 and $348,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. The decrease of 16% from the
year ended December 31, 1997 to the year ended December 31, 1998 was related
primarily to a decline in non-recurring engineering fees from related parties,
as certain development agreements were completed in 1997, and to a decline in
royalties from Wink Engine software from related parties, resulting from lower
shipments of Wink-enabled television sets. These decreases were partially offset
by an increase in software license fees with third parties totaling $224,000.
During 1998, transactions with Toshiba, Pioneer and a subsidiary of Thomson
Multimedia S.A. each accounted for at least 10% of our total revenues. The
increase of 78% from the year ended December 31, 1996 to the year ended December
31, 1997 was related primarily to Wink Engine royalties earned on shipments by
Toshiba of Wink-enabled televisions, partially offset by a decline in
non-recurring engineering fees, as certain development agreements neared
completion. During 1997, transactions with Toshiba, Scientific-Atlanta and
General Instrument each accounted for at least 10% of our total revenues.
Revenues in 1996 were derived primarily from three development agreements with
Scientific-Atlanta, Pioneer and Matsushita to port the Wink Engine software to
their respective set-top boxes or televisions. During 1996, transactions with
Scientific-Atlanta, Matsushita, Pioneer and General Instrument each accounted
for at least 10% of our total revenues.
COSTS AND EXPENSES
Total costs and expenses were $15.2 million, $10.3 million and $6.5 million
for the years ended December 31, 1998, 1997 and 1996, respectively. The
increases of 48% from the year ended December 31, 1997 to the year ended
December 31, 1998, and 58% from the year ended December 31, 1996 to the year
ended December 31, 1997 were primarily a result of additional operating costs
associated with the development, testing and deployment of the Wink Engine
software, the Wink Broadcast Server software and the Wink Response Network, as
well as substantial sales and marketing expenses. We believe that continued
expansion of our operations and our sales and marketing efforts is critical to
the achievement of our goals. Therefore, we believe that costs and expenses will
continue to increase.
Cost of Services. Cost of services were $513,000, $538,000 and $558,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. The decrease of
5% from the year ended December 31, 1997 to the year ended December 31, 1998 was
due primarily to the completion of various engineering projects during 1998. The
decrease of 4% from the year ended December 31,
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<PAGE> 26
1996 to the year ended December 31, 1997 was due primarily to engineering
projects initiated by us in 1996 and 1995 that neared completion.
Changes in gross margins from services revenues realized during the years
ended December 31, 1998, 1997 and 1996 were 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. We do not
expect that non-recurring engineering fees will represent a significant
component of future revenues.
Cost over-runs on non-recurring engineering service agreements with related
parties and third parties during the years ended December 31, 1998, 1997 and
1996, resulted in costs incurred in excess of revenues recognized. At each
reporting period, we record an accrued liability for the total remaining loss on
non-recurring engineering services agreements that are expected to result in an
overall loss.
Research and Development. Research and development expenses were $6.5
million, $4.4 million and $2.6 million for the years ended December 31, 1998,
1997 and 1996, respectively. The increase of 48% from the year ended December
31, 1997 to the year ended December 31, 1998 was due primarily to additional
engineering and operations personnel costs incurred to support increased product
deployment activities. The increase of 69% from the year ended December 31, 1996
to the year ended December 31, 1997 was due primarily to increased personnel
costs associated with our expanded operations.
Sales and Marketing. Sales and marketing expenses were $5.6 million, $3.5
million and $2.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The increase of 60% from the year ended December 31, 1997 to the
year ended December 31, 1998 was primarily due to resources expended to support
the initial deployment of Wink Enhanced Broadcasting and increases in non-cash
charges for stock compensation and warrant amortization in 1998. The increase of
52% from the year ended December 31, 1996 to the year ended December 31, 1997
was primarily a result of increased personnel, travel-related costs and non-cash
charges for stock compensation and warrant amortization.
General and Administrative. General and administrative expense was $2.6
million, $1.8 million and $1.1 million for the years ended December 31, 1998,
1997, and 1996, respectively. The year-to-year increases of 44% and 66%,
respectively, resulted primarily from recognizing $375,000 of costs in 1998
associated with our planned initial public offering that was postponed in the
second half of 1998 and the hiring of administrative and executive personnel in
1998 and 1997 to begin to position us to achieve our long-term goals.
Stock-based Costs and Expenses. During the years ended December 31, 1998,
1997 and 1996, we recognized non-cash charges for stock compensation and warrant
amortization totaling $1,256,000, $455,000 and $4,000, respectively. These
amounts consist of the amortization of unearned compensation related to certain
stock option grants, sales of restricted stock to employees and warrants granted
for services rendered to Wink.
During the years ended December 31, 1998, 1997 and 1996, we recognized
unearned compensation totaling $600,000, $700,000 and $0, respectively, with
respect to certain stock option grants and sales of restricted stock to
employees. Amortization of unearned compensation totaled $615,000, $215,000 and
$4,000 during the years ended December 31, 1998, 1997 and 1996, respectively.
The remaining unearned compensation at December 31, 1998, totaling $479,000, and
unearned compensation recognized subsequent to December 31, 1998 will be
amortized in future periods over the respective stock and option vesting
periods.
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<PAGE> 27
In June 1997, we granted warrants to purchase an aggregate of 375,000
shares of common stock to a broadcasting company, which is affiliated with one
of our stockholders. The broadcasting company has agreed to use reasonable
efforts to develop and air Wink-enhanced programming over approximately an
18-month period. A warrant to purchase 75,000 of these shares was exercisable on
the grant date and had an estimated fair value of $20,000, which was immediately
recognized as a sales and marketing expense. Vesting of a warrant to purchase
the remaining 300,000 shares was originally contingent upon specified future
performance criteria over an 18-month period. At December 31, 1997, the warrants
had an estimated fair value at the prospective vesting date of $726,000, of
which $220,000 was recognized as a sales and marketing expense during 1997.
Effective February 1, 1998, the agreement with the broadcasting company was
amended to remove all remaining performance vesting criteria, and the warrants
became fully exercisable. The $506,000 difference between the February 1, 1998
estimated fair value of $726,000 and the previously recognized expense is
included in sales and marketing expense over the period in which we received
benefits from the broadcaster's services, which was completed during the year
ended December 31, 1998.
In August 1998, as consideration for consulting services, we granted a
fully exercisable warrant to purchase common stock to a company which is one of
our stockholders. The warrant enables the holder to purchase 25,000 shares of
common stock at $8.00 per share and expires in August 2003. The estimated fair
value of the warrant totaled $135,000 and is included in sales and marketing
expense for the year ended December 31, 1998.
In December 1998, we issued to Vulcan Ventures Incorporated, a stockholder,
warrants to purchase up to an aggregate of 250,000 shares of common stock,
subject to certain exercisability and performance conditions. Any exercise of
the warrants is conditioned upon cable television system operators affiliated
with Vulcan deploying set-top boxes containing Wink Engines to at least 200,000
households between January 1, 1999 and December 31, 2001. Vulcan may exercise
the warrants on or after February 1, 2001 for a number of shares equal to
one-fifth the number of households in which a Wink-enabled set-top box is
deployed by a Vulcan affiliate during calendar 1999, which box remains deployed
for at least one year after deployment. The exercise price for such shares is
$12.00 per share. Vulcan may exercise the warrants on or after February 1, 2002
for an additional number of shares equal to one-fifth the number of households
in which a Wink-enabled set-top box is deployed during calendar 2000, which box
remains deployed for at least one year thereafter, less the number of shares
which became exercisable in 2001, up to the aggregate maximum of 250,000 shares.
The exercise price of such additional shares is $16.00 per share. At December
31, 1998, the lowest aggregate fair value of the warrant totaled $1,218,000. At
June 30, 1999, the lowest aggregate fair value of the warrant totaled
$2,050,000. 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, we will record the then fair value associated with
the units meeting the performance criteria as a charge to sales and marketing
expense.
Costs and expenses include non-cash charges for stock compensation and
warrant amortization as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
------ -------- ----------
<S> <C> <C> <C>
Research and development.................................... $ -- $ 71,000 $ 204,000
Sales and marketing......................................... -- 312,000 846,000
General and administrative.................................. 4,000 72,000 206,000
------ -------- ----------
$4,000 $455,000 $1,256,000
====== ======== ==========
</TABLE>
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<PAGE> 28
Interest and Other Income, Net of Interest Expense. Net interest and other
income was $659,000, $490,000 and $252,000 for the years ended December 31,
1998, 1997 and 1996, respectively. These increases were due to interest earned
on increases in the average cash and investment balances in later years as a
result of the receipt of the proceeds from sales of preferred stock, partially
offset by an increase in interest expense associated with borrowings under the
Company's lease financing facility.
Income Taxes. We have not generated taxable income since inception and, as
a result, the provision for income taxes consists solely of the California
minimum franchise tax of approximately $1,000 per year, which is included in
general and administrative expenses. At December 31, 1998, we had federal and
state net operating loss carryforwards of approximately $27.0 million available
to reduce future taxable income. Due to a cumulative change of ownership of
greater than 50 percent in December 1995, March 1996 and March 1998, the amount
of loss carryforwards that can be utilized to reduce future taxable income for
federal and state income tax purposes will be limited to approximately $8.0
million per year. 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.
Net Loss. We have incurred net losses since inception, including net losses
of $14.0 million, $9.2 million and $5.9 million for the years ended December 31,
1998, 1997, and 1996, respectively. The year-to-year increases in net losses
were due primarily to significant increases in expenses as a result of
additional business activities and stock-based costs and expenses. For the year
ended December 31, 1997, these increases in expenses were partially offset by a
small increase in revenue.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our activities largely through the
private sale of equity securities and through proceeds from capital lease
financing. At June 30, 1999, our principal source of liquidity was from $73.5
million of cash, cash equivalents and short-term investments.
Net cash used in operating activities totaled $6.8 million, $10.9 million,
$7.0 million and $5.3 million for the six months ended June 30, 1999 and the
years ended December 31, 1998, 1997 and 1996, respectively, primarily as a
result of our net losses.
Net cash used in investing activities totaled $24.7 million for the six
months ended June 30, 1999 and was attributable mainly to the net purchases of
short-term investments totaling $24.2 million and the acquisition of $470,000 of
property and equipment. For the year ended December 31, 1998, net cash used in
investing activities was $358,000 and was attributable to the acquisition of
$1.4 million of property and equipment, which was partially offset by $1.0
million of net proceeds from short-term investment maturities. Net cash used in
investing activities was $5.8 million for the year ended December 31, 1997,
attributable primarily to net purchases of short-term investments. Net cash used
in investing activities was $1.3 million for the year ended December 31, 1996,
attributable to the acquisition of property and equipment.
Net cash provided by financing activities for the six months ended June 30,
1999 was $59.4 million, consisting primarily of proceeds totaling $44.3 million
from the sale of Series D preferred stock and proceeds totaling $15.1 million
from the issuance of a convertible promissory note to Microsoft, a related
party. 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 years ended December 31, 1998 and 1997, net cash provided by
financing activities was $19.6 million and $17.2 million, respectively,
consisting primarily of net proceeds from sales of Series C preferred stock and
common stock in each year. Net cash provided by financing activities was $7.9
million for the
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<PAGE> 29
year ended December 31, 1996, due to $6.5 million received as net proceeds from
sales of Series B preferred stock and $1.4 million in proceeds from lease
financing transactions.
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, we generate 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, we have 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. See Notes 6
and 10 of Notes to Consolidated Financial Statements.
We believe that our existing cash, cash equivalents and short-term
investments, together with net proceeds of approximately $66.9 million from the
sale of 4,550,000 shares in this offering will be sufficient to meet our
currently anticipated business requirements, including capital expenditures and
strategic operating programs, for at least the next 12 months. We expect to
spend approximately $20 to $25 million for total operating expenses in the year
ended December 31, 1999, and to use a portion of the proceeds from the offering
to fund these expenses during the remainder of 1999 and thereafter. Thereafter,
if any, we may need to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity or convertible debt
securities may result in additional dilution to our stockholders. We may not be
able to raise any such capital on terms acceptable to us, if at all.
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 initial 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.
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<PAGE> 30
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 materially adversely 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. See "Risk Factors -- 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."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 133, as amended by SFAS 137, is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000, with
earlier application encouraged. The Company does not currently nor does it
intend in the future to use derivative instruments and therefore does not expect
that the adoption of SFAS 133 and SFAS 137 will have any impact on its financial
position or results of operations.
In December 1998, the AICPA issued Statement of Position 98-9,
"Modification of SoP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" ("SoP 98-9"), which is effective for transactions entered into in
fiscal years beginning after March 15, 1999. SoP 98-9 amends SoP 97-2 and
extends the effective date of SoP 98-4, "Deferral of the Effective Date of a
Provision of SoP 97-2, Software Revenue Recognition" ("SoP 98-4"), and provides
additional interpretive guidance. The adoption of SoP 97-2 has not had and the
adoption of SoP 98-4 and SoP 98-9 are not expected to have a material impact on
our future results of operations, financial position or cash flows.
27
<PAGE> 31
BUSINESS
The following discussion of our business contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth under
"Risk Factors" and elsewhere in this prospectus.
OVERVIEW
Wink Communications provides a complete end-to-end system for low-cost
electronic commerce on television. Our system, Wink Enhanced Broadcasting,
allows advertisers, merchants and broadcast and cable networks to create
interactive enhancements to traditional television advertisements and programs.
With a click of their remote control during an enhanced program or
advertisement, viewers can purchase merchandise or request product samples,
coupons or catalogues. Similarly, viewers can use Wink to access program-related
information such as news, sports and weather, participate in votes and polls,
and play along with various games.
Our business plan is to derive the primary portion of our future revenues
from transaction fees charged to advertisers and merchants for each purchase
order or other requests for information. As a result, our principal customers
are expected to be advertisers and merchants. In order for merchants and
advertisers to use Wink, many participants in the television industry must
license our technology and work with us to make Wink Enhanced Broadcasting
possible. We believe that wide acceptance of Wink by major television industry
participants is essential for us to attract merchants and advertisers. We have
established relationships with, and licensed our technology to, 60 key industry
participants from many segments of the television industry. For example:
- the four largest broadcast networks, NBC, ABC, CBS and FOX, and 16 cable
networks have agreed to air Wink-enhanced programming and advertising;
- five of the six largest cable operators in the United States, including
AT&T/TCI, Time Warner Cable, Comcast Cable Communications, Cox
Communications and Charter Communications, have agreed to distribute
Wink-enhanced programming and advertising in some of their local markets;
- the largest direct broadcast satellite operator in the United States,
DIRECTV, has agreed to distribute Wink-enhanced programming and
advertising nationwide and, although the current agreement with DIRECTV
contains no minimum deployment commitments, DIRECTV has announced that it
expects to deploy approximately four million Wink-enabled set-up boxes by
January 1, 2002;
- Microsoft Corporation has agreed to develop, market and distribute
Wink-enhanced programming and advertising on Microsoft's television
platforms;
- several of the leading set-top box and television manufacturers,
including General Instrument, Scientific Atlanta, Pioneer, Toshiba,
Matsushita, Thomson Consumer Electronics and Hughes Network Systems, have
agreed to incorporate Wink's technology into their products; and
- several national advertisers, including AT&T, J. Walter Thompson USA,
Inc. on behalf of Ford Motor Company, The Goodyear Tire & Rubber Company,
Charles Schwab, Levi Strauss, The Clorox Company, Universal Pictures,
General Electric, Wells Fargo and Pfizer have agreed to create and air
Wink-enhanced advertisements.
A number of key strategic and financial investors have invested in Wink,
including set-top box and television manufacturers, such as General Instrument,
Scientific Atlanta and Toshiba, as well as
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<PAGE> 32
Microsoft, GE Capital, Vulcan Ventures (controlled by Paul Allen) and Hughes
Electronics Corporation, the parent of DIRECTV.
We began the roll-out of our service in the United States in June 1998, and
we currently serve viewers in select cable markets in California, Connecticut,
Illinois, Missouri and Tennessee. In addition, Wink Enhanced Broadcasting has
been offered by Wink licensees in Japan since October 1996.
MARKET OPPORTUNITY
Television is one of the most pervasive communications media in society
today. According to Nielsen Media Research, there were approximately 99 million
television households in the United States in August 1998. Veronis Suhler &
Associates, a television industry market research consultant, estimates that the
average person in the United States watched approximately 1,560 hours of
television (approximately 4.3 hours per day) in 1998. With recent advances in
technology, new televisions and advanced analog and digital set-top boxes can
provide a platform for interactive television. According to Paul Kagan
Associates, a leading cable industry analysis firm*, in 1998 there were
approximately 30 million cable set-top boxes in use, of which approximately
eight million were advanced analog or digital cable set-top boxes. By 2002, Paul
Kagan Associates expects that the number of advanced analog and digital cable
set-top boxes in use will increase to approximately 33 million.
Television advertising is considered to be one of the most effective
methods of building brand recognition and general consumer awareness of products
and services. According to Veronis Suhler & Associates, the total amount spent
on television advertising in the United States in 1998 was approximately $49
billion. Despite the fact that traditional television broadcasting, cable and
direct broadcast satellite television systems do not provide an integrated means
for viewers to respond to programs and advertisements, the Direct Marketing
Association estimates approximately $91 billion of goods and services were
purchased through direct response television programming and advertising in
1998. The Direct Marketing Association predicts this amount will grow to
approximately $127 billion in 2002. In addition, we believe that electronic
commerce conducted through television viewing devices will benefit from the
rapid growth in internet online shopping, as consumers become more accustomed to
purchasing goods and services electronically. We believe that an opportunity
exists for a simple, immediate, inexpensive and automated method of responding
to direct response advertising on television.
In addition, many advertisers are using television advertisements to
generate requests for product information, which in turn serve as sales leads
for their products and services. Today, most direct response television
purchases and requests for information require a telephone call, which typically
cause advertisers to incur a significant cost per transaction. We believe that
television viewers, advertisers and merchants will respond favorably to a
simple, immediate, inexpensive and automated method for them to participate in
television commerce.
THE WINK EXPERIENCE
The Wink service is free to viewers and easy-to-use which we believe will
encourage broad and frequent usage. Viewers can receive Wink Enhanced
Broadcasting through Wink-enabled televisions and new and existing advanced
analog and digital set-top boxes. Many existing set-top boxes already installed
in consumers' homes can be activated through a remote cable download to receive
Wink
- ---------------
* Paul Kagan of Paul Kagan Associates is a holder of 2,500 shares of our stock.
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Enhanced Broadcasting. To access a Wink enhancement, a television viewer simply
clicks the remote control when the Wink icon appears on the screen. For example,
with a few clicks of the remote control, Wink allows viewers to:
- access additional information about a specific news story from CNN
Headline News;
- respond to an offer for telecommunications services from AT&T;
- access the local weather forecast instantly from The Weather Channel or
find weather forecasts for other cities;
- obtain coupons and product samples from Clorox or a new car brochure from
Ford;
- access real-time game scores on demand or search for statistics relating
to a specific sporting event while watching ESPN;
- subscribe to HBO or Showtime upon seeing an advertisement; or
- enter a virtual shopping mall which offers products for sale through
dedicated interactive channels.
WINK AND THE TELEVISION INDUSTRY
Wink Enhanced Broadcasting is designed to benefit the following
participants in the television industry:
- Viewers. Wink Enhanced Broadcasting offers viewers an easy-to-use,
enhanced television viewing experience. We anticipate that Wink Enhanced
Broadcasting will be offered to viewers for free. Wink Enhanced
Broadcasting allows viewers to obtain a variety of additional content
related to the programming they watch and to request information about or
purchase advertised products. The viewer controls access to these
broadcast enhancements or electronic commerce opportunities through the
viewer's existing remote control.
- Advertisers and Merchants. Wink Enhanced Broadcasting is designed to
allow advertisers and merchants the ability to provide additional
information to viewers, generate sales leads, sell products directly to
viewers and collect detailed market information. In addition, advertisers
and merchants can promote their brands by sponsoring Wink programming
enhancements. We believe that the use of Wink Enhanced Broadcasting will
provide advertisers and merchants a lower-cost alternative for capturing
sales leads and orders than traditional telemarketing methods.
- Broadcast and Cable Networks. We believe that Wink Enhanced Broadcasting
offers networks a new approach to increasing the number of viewers,
viewer loyalty and viewer involvement. As a result, the value of network
advertising space may be increased, allowing networks to charge
advertisers and merchants premiums for airing Wink-enhanced commercials.
The Wink enhancements may also provide opportunities for selling
additional advertising space. In addition, networks can use Wink Enhanced
Broadcasting to offer merchandise to viewers and to promote other
programming on their channels. Moreover, information obtained through the
Wink Response Network can be used by networks to offer advertisers
targeted audience information.
- Cable and Direct Broadcast Satellite System Operators. Wink Enhanced
Broadcasting is designed to offer cable and direct broadcast satellite
system operators an expanded menu of services to provide to their
subscribers, thus helping to attract new subscribers, maintain
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<PAGE> 34
current subscribers and encourage all subscribers to upgrade to premium
services and purchase pay-per-view programming. In addition, in order to
encourage cable and direct broadcast satellite system operators to offer
Wink Enhanced Broadcasting, we have offered to share a portion of the
revenues generated from subscribers' responses to Wink-enhanced
programming, advertising and dedicated interactive channels.
- Set-top Box and Television Set Manufacturers. Wink Enhanced Broadcasting
is designed to offer set-top box and television set manufacturers an
opportunity to enhance their products with increased functionality and to
extend their product lines at a relatively low incremental cost. We
believe Wink Enhanced Broadcasting can assist manufacturers in
encouraging consumers and cable system operators to upgrade to higher
performance devices. In addition, in order to encourage television
manufacturers to incorporate Wink Enhanced Broadcasting into their
products, we have offered to share a portion of the revenues generated
from responses to Wink-enhanced programming and advertising from users of
their devices.
BUSINESS STRATEGY
Our strategy is to capitalize on the pervasiveness and popularity of
television to create a mass market medium for sales lead generation and
electronic commerce. Our strategy to achieve this objective includes the
following key elements:
- Increase the Presence of Wink Enhanced Broadcasting in Television
Households. We intend to promote deployment of Wink-enabled set-top boxes
and televisions and the launch of Wink Enhanced Broadcasting through
these devices. We have entered into and will continue to target licensing
relationships with leading manufacturers of set-top boxes and television
sets. We are working with certain large cable and digital broadcasting
satellite system operators to encourage both the downloading of the Wink
Engine software to Wink-capable set-top boxes already installed in
consumer homes and the deployment of new Wink-capable set-top boxes. We
are also working with Microsoft to enable Microsoft television platforms
to generate and capture Wink viewer responses. Viewers in approximately
40,000 homes receive Wink Enhanced Broadcasting as of the date of this
prospectus. While we anticipate significant growth in the remainder of
1999, we expect Wink-enhanced programming and advertising to be available
to less than 200,000 homes by the end of the year.
- Promote Use by Viewers. We believe that increased development and
broadcasting of Wink-enhanced advertising and programming and other
on-demand information and entertainment services are critical to
attracting viewers to Wink Enhanced Broadcasting. Consequently, we
actively encourage the broadcast and cable networks with whom we have
strategic relationships to air Wink enhancements that offer viewers an
easy-to-use, entertaining and informative interactive television
experience. We also intend to actively encourage usage of Wink Enhanced
Broadcasting through advertising, direct mail and promotions in
collaboration with cable and direct broadcast satellite operators,
equipment manufacturers and broadcast and cable networks.
- Expand Use of Wink-Enhanced Direct Response Offers. We believe that the
simplicity and convenience of the Wink transaction response mechanism
will encourage viewers to respond to Wink-enhanced advertising and
promotions. We intend to work with our broadcast and cable network
partners to encourage advertisers to add Wink enhancements to their
television advertisements. We believe that the low cost of response
collection and the ease with which viewers can respond to Wink-enhanced
advertising will encourage advertisers to complement their television
advertisements with direct response offers. In addition, we believe that
existing direct response television advertisers will utilize Wink to
lower their cost of capturing an order.
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We intend to introduce interactive shopping services featuring a targeted
selection of products suitable for electronic commerce via television. To
this end, we plan to enter into relationships with merchants to create
dedicated interactive channels that offer viewers the ability to request
product information, coupons, samples and other offers and to purchase
products and services.
- Benefit Multiple Participants in the Television Industry. We believe that
generating economic value for broadcast and cable networks, cable and
direct broadcast satellite system operators, set-top box and television
manufacturers, advertisers and merchants is critical to the success of
Wink Enhanced Broadcasting. Our business model has been designed to
deliver new opportunities for generating revenue and cost savings
directly to these industry participants. In addition, since Wink
enhancements are integrated with existing programming and advertising and
are under the control of the broadcast or cable networks, we believe Wink
Enhanced Broadcasting will not threaten the existing revenue streams and
customer relationships of these industry participants.
- Leverage Industry Relationships. We have formed strategic relationships
with key participants in the television industry. We believe that our
relationships with broadcast and cable networks and cable and direct
broadcast satellite system operators will assist us in attracting
interest from advertisers. Conversely, we believe our relationships with
national advertisers reinforce both the broadcast and cable networks' and
the cable and direct broadcast satellite operators' interest in launching
Wink Enhanced Broadcasting. We also believe our relationships with the
three leading cable set-top box manufacturers in North America will
encourage cable operators to adopt Wink Enhanced Broadcasting. We intend
to seek additional relationships and believe that increasing the breadth
and depth of our existing relationships will facilitate these efforts.
- Promote the Wink Icon and the Wink Brand. We believe that developing and
maintaining a strong brand identity is important to our ability to
attract viewers and obtain and retain key strategic relationships with
industry participants. Our goal is to make the Wink icon and the Wink
brand synonymous with interactive enhanced programming and advertising
that is appealing to viewers and easy to use. In addition to encouraging
content providers, broadcast and cable networks and advertisers to
produce compelling Wink-enhanced programming and advertising, we intend
to build brand recognition and to increase the visibility of the Wink
icon through a variety of marketing and promotional activities, including
targeted pre-deployment televised advertising campaigns to generate a
high level of initial interest, cooperative promotional programming with
cable operators, and advertising campaigns following deployment in
selected regions across a variety of media, including through
Wink-enhanced programming itself.
STRATEGIC RELATIONSHIPS
We believe that development of strategic relationships with television
industry participants is critical to the acceptance of Wink Enhanced
Broadcasting, the promotion of the Wink brand and ultimately the success of our
business model. We are currently focused on developing strategic relationships
in each sector of the television industry. We have initially targeted larger,
established participants in each of the following sectors:
- Advertisers and Merchants. We encourage advertisers to utilize Wink
Enhanced Broadcasting through the advertising sales efforts of our
broadcast and cable network partners. To facilitate this process, we
established a "Charter Advertiser" program in 1998 under which leading
advertisers could obtain a fixed rate quote for all Wink products and
services during a charter period ending in the second half of 1999 in
exchange for a commitment to air a specific
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number of Wink-enhanced advertisements. Wink charter advertisers include
AT&T, J. Walter Thompson USA, Inc. on behalf of Ford Motor Company, The
Goodyear Tire & Rubber Company, Charles Schwab, Levi Strauss, The Clorox
Company, Universal Pictures, General Electric, Pfizer and Wells Fargo. We
expect to add more advertisers through our own sales efforts and those of
our broadcast and cable network partners. We expect that a substantial
portion of our future advertising arrangements will not include
commitments to air a specific number of Wink-enhanced advertisements, may
be short term and cancelable and may involve payment on a
fee-per-transaction basis. We also anticipate offering products from one
or several merchants for sale through Wink dedicated interactive
channels.
- Broadcast and Cable Networks. We have license agreements with all four of
the major broadcast networks and 16 cable networks, which collectively
offer a variety of programming types, including prime time entertainment,
news, sports, weather, movies and music programming. These license
agreements generally range in length from one to eight years and provide
that the networks will air a specific number of hours of Wink-enhanced
programming per week. Wink is the only interactive television company
that has announced agreements with all four major broadcast networks. The
following is a list of networks that are currently airing or have aired
Wink-enhanced programming:
<TABLE>
<CAPTION>
NETWORK TYPES OF PROGRAMMING TYPICAL ENHANCEMENTS
<S> <C> <C>
ABC Entertainment/Sports/Talk Show Facts, Sports, Merchandise
CNN News/Talk Shows Show Facts
CNN Headline News News News Headlines and Stories
Court TV Trials Trial Facts
ESPN* Sports Sports Scoreboards
ESPN2* Sports Sports Scoreboards
NBC Entertainment/Sports/Talk Show Facts, Sports, Merchandise
Nickelodeon/Nick-at-Nite Entertainment Show Facts, Trivia
Showtime Entertainment Polls, Show Facts,
Subscriptions
The Nashville Network Entertainment Music, News, Trivia
TBS Entertainment Games, Show Facts, Trivia
TNT Entertainment Games, Show Facts, Trivia
The Weather Channel News Weather Forecasts
CNBC Financial News Financial Market Statistics
E! Entertainment News, Entertainment News
Variety
Lifetime Entertainment, Show Facts
Documentary
VH-1 Entertainment/Music CD Purchases, Games
</TABLE>
- ---------------
* Our agreements with these networks have expired. The networks currently
continue to air Wink-enhanced programming. We are currently negotiating
renewals of these agreements.
- Cable and Direct Broadcast Satellite System Operators. We focus on
establishing relationships with national cable and direct broadcast
satellite system operators and with local cable operators in order to
transmit the Wink Enhanced Broadcasting signal to viewers. The cable and
direct broadcast satellite system operators with which we have entered
into strategic relationships include DIRECTV, AT&T/TCI, Time Warner
Cable, Comcast Cable Communications, Cox Communications, Charter
Communications Inc., Bresnan Communications Company, Century
Communications Corp. and InterMedia. Our agreements with cable system
operators generally provide a framework and pricing for deployment of
Wink Enhanced Broadcasting by the operators' local systems, although
actual deployments may require us to
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negotiate and enter into additional agreements with each local operator.
In June 1999, we amended our agreement with DIRECTV, whereby DIRECTV
increased their commitment to deploy Wink technology in their direct
broadcast satellite set-top boxes. Although the amendment contains no
minimum deployment levels, DIRECTV has announced that it expects to
deploy approximately four million Wink-enabled set-top boxes by January
1, 2002.
- Cable and Direct Broadcast Satellite Set-Top Box Manufacturers. We have
licensed the Wink software to General Instrument, Pioneer and
Scientific-Atlanta, three of the leading U.S. cable set-top box
manufacturers. While we intend to license our software to other equipment
manufacturers, we believe our relationships with these three companies
are critical to our success in the cable business. General Instrument and
Scientific-Atlanta have licensed Wink technology for incorporation into
certain of their advanced analog and digital set-top boxes, and have each
begun shipment of certain Wink-capable advanced analog and digital
set-top boxes. In addition, Pioneer has begun shipping Wink-enabled
advanced analog cable set-top boxes. The agreement with DIRECTV calls for
DIRECTV to launch Wink enhanced broadcasting to Wink-enabled
DIRECTV-compatible set-top boxes. Recently, we entered into an agreement
with Thomson Consumer Electronics and Hughes Network Systems, the two
largest suppliers of DIRECTV-compatible set-top boxes, and we are
currently negotiating agreements with other manufacturers to incorporate
Wink technology into their DIRECTV-compatible set-top boxes.
- Television Manufacturers. We are developing strategic relationships with
leading worldwide television manufacturers, including Toshiba and
Matsushita. Toshiba recently introduced the first U.S. television models
incorporating Wink technology. In addition, Matsushita and Toshiba have
incorporated Wink technology software in televisions currently marketed
in Japan.
Strategic Relationship with Microsoft. Our relationship with Microsoft
focuses on three areas: development, distribution and marketing.
- Microsoft's operating system and other software for set-top boxes and
televisions that comply with the Advanced Television Enhancement Forum's
proposed Internet-based standard for enhanced television will be modified
to capture viewer responses for processing by the Wink Response Network.
We have agreed to modify all components of Wink Enhanced Broadcasting to
support this standard and these Microsoft television platforms.
- Microsoft has agreed to enable its operating system for set-top boxes and
televisions to use the Wink Response Network to collect, aggregate and
process viewer responses to applications complying with Internet-based
standards delivered as part of video programming and advertising for
set-top boxes and televisions. Wink will be the exclusive provider of
such services for deployments of such devices where Microsoft exclusively
controls the operating system, application environment and content and
data services. Microsoft has also agreed to use efforts to make other
set-top boxes and televisions which use a Microsoft operating system
capable for the Wink Response Network service. Microsoft is not obligated
to use the Wink Response Network for responses other than purchases and
requests for information, or when viewers respond by connecting directly
to an advertiser's website, via e-mail or other similar mechanisms. Wink
has agreed to make Microsoft the exclusive licensor of the Wink Engine,
except for rights previously granted to other customers and with respect
to platforms for which the Wink Engine is already available or under
development and with respect to platforms which do not support
Microsoft's technology. As part of our agreement with Microsoft, we have
agreed to share a portion of the revenues we generate from viewer
responses and to
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provide minimum revenue guarantees. See Notes 6 and 9 of Notes to
Consolidated Financial Statements.
- Microsoft and Wink have agreed to work together to promote the Wink
Response Network to current and prospective customers for set-top boxes
and televisions which utilize Microsoft software. Microsoft and Wink have
also agreed to work together to promote Microsoft's technology for
set-top boxes and televisions, and to promote products, services and
content that comply with Internet-based standards.
Strategic Relationships for Japan. As of March 31, 1999, approximately
150,000 Wink-enabled television sets have been shipped for distribution in Japan
under the brand names of Toshiba, Sony, JVC and Panasonic. We utilize Toshiba's
broadcast equipment sales team to sell Wink server and authoring tool products
to Japanese networks and direct broadcast satellite system operators. We have
server development and royalty agreements directly with Toshiba for these
products.
Wink Enhanced Broadcasting service was launched in the fourth quarter of
1996 in collaboration with the Intertext ITVision Promotion Consortium, a
consortium that has been formed to establish interactive television in Japan.
The Consortium includes companies such as Toshiba, Matsushita, Sony, Pioneer,
NTT and Dentsu, Japan's largest advertising agency. Several Japanese
broadcasters are currently using Wink technology to enhance their programming up
to seven days per week, including TV-Tokyo, TV-Osaka, TV-Aichi and Wowow.
Mitsui, Toshiba, Matsushita, NTT, Dentsu, Sony and other companies have
established MediaServe, a data center that collects responses from Wink-enabled
televisions through the Japanese public phone system. Viewers have used Wink
Enhanced Broadcasting to purchase women's apparel and to order groceries and
other products. We also have produced and licensed versions of our software
localized for Japan. The Wink programming enhancements currently airing in Japan
are similar to those being aired in the United States. Because Wink is not a
participant in the MediaServe data center, we do not receive any transaction fee
revenue from responses to Wink Enhanced Broadcasting in Japan.
COMPONENTS OF WINK ENHANCED BROADCASTING
Wink Enhanced Broadcasting provides an end-to-end solution for sending
interactive applications along with broadcast video to viewers' televisions.
This system is composed of core, proprietary technologies developed by us as
well as off-the-shelf electronic commerce and database solutions. Wink Enhanced
Broadcasting consists of:
- the Wink Studio and Wink Server Studio authoring tools that allow
networks, advertisers and cable operators to design interactive Wink
applications;
- the Wink Broadcast Server that manages the delivery of those
applications;
- the Wink Client software that enables the generation and capture of
viewer responses to Wink applications; and
- the Wink Response Server and Wink Response Network that are designed to
efficiently process viewer responses to applications and forward them to
advertisers or merchants.
The diagram on the inside front cover of this prospectus illustrates the
functional components of Wink Enhanced Broadcasting.
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WINK STUDIO AND WINK SERVER STUDIO
Wink Studio is a high-level authoring tool that allows non-technical
designers to create interactive programming and advertising applications. Wink
Studio is Windows-based and graphically oriented, and enables the creation of
simple interactive applications. A designer simply drags objects from an object
palette onto forms to create enhancements. More complex applications can be
created by fully utilizing the Wink Basic scripting language to control the
behavior of objects and forms. The Wink Server Studio is a high-level authoring
tool for server modules that provide live data updates to Wink applications. In
particular, Wink Server Studio is designed to make it easy to incorporate or
transpose data from web sites and databases for broadcast updates.
WINK BROADCAST SERVER
The Wink Broadcast Server manages the scheduling and insertion of
applications designed with Wink Studio into television programming. The Wink
Broadcast Server is designed to integrate with station management equipment such
as commercial insertion systems, when available, to enable broadcast and cable
networks to automate the delivery of interactive enhancements to programs and
advertisements. Local network affiliates and cable operators can also add
interactivity on a local level using the Wink Broadcast Server. In the future,
we expect to offer the capability to schedule and insert ATVEF applications into
television programming through the Wink Broadcast Server.
WINK CLIENT SOFTWARE
We expect to offer two versions of the Wink Client software. In
Internet-enabled set-top boxes and televisions, the Wink Client software will
enable the generation of Wink viewer responses to broadcast Internet-based
applications. In other set top boxes and televisions, the Wink Client software,
in this case known as the Wink Engine, displays the Wink applications and
enables the generation of viewer responses. Wink Client software can be
installed in Wink-capable televisions and most new advanced analog and digital
set-top boxes at the factory or downloaded through cable systems, satellite
systems or telephone modems into certain of such set-top boxes already installed
in a viewer's household.
WINK RESPONSE SERVER
The Wink Response Server collects viewer response data, or response
packets, which are generated by Wink applications. These response packets are
retrieved directly from televisions and satellite set-top boxes through phone
dial-up and from cable set-top boxes through cable head-end systems. The Wink
Response Server aggregates response packets and delivers them to the Wink
Response Network.
WINK RESPONSE NETWORK
The Wink Response Network is designed to enable the collection and
aggregation of viewer responses, requests for information and purchase orders
for transmission to and use by advertisers, merchants, broadcast and cable
networks and cable and direct broadcast satellite system operators. The Wink
Response Network includes two databases: one database correlates device serial
numbers to customer address and billing information, while the second correlates
a unique code for each interactive application to routing instruction and
product information. When a consumer responds to a Wink application and orders a
product, a response packet is generated by the Wink Engine in the set-top box or
television. A response packet includes the device serial number, the unique
application code and application specific data. These response packets are
collected, aggregated, converted into
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full electronic orders (name, address, and credit information, if appropriate),
and delivered to the advertiser or network.
In the case of set-top boxes, the customer database is maintained by the
satellite or cable operator's billing system, and Wink links to this database.
The Wink Response Network is operated by General Electric Information Services
at a data center located in Rockville, Maryland and with a backup in Brookpark,
Ohio. The Wink Response Network was activated in August 1998 following our first
launch of Wink Enhanced Broadcasting in Kingsport, Tennessee.
In addition to aggregating and delivering responses, we can provide
industry participants with additional reporting. For example, participating
networks are receiving aggregated information regarding all Wink applications
that run on their networks. Cable and direct broadcast satellite system
operators can obtain information regarding all applications that run on their
systems. Advertisers can obtain information regarding how their ads perform
across all networks. The Wink Response Network combines custom data processing
solutions developed by Wink with off-the-shelf electronic commerce systems to
provide a complete end-to-end solution for customers.
EMERGING STANDARDS
We believe that the most important aspects of our business relate to
capturing, aggregating and routing TV-viewer responses to interactive
programming and advertising. In contrast, we believe it is less important which
protocol or "language" is used to design interactive applications. Recently,
several formal and informal industry groups have proposed competing standards
for the language in which interactive programming and advertising should be
written. While we may support other proposed standards in the future, we became
an early adopter of the Advanced Television Enhancement Forum's proposal for an
Internet-based standard for enhanced television in the summer of 1998. In
conjunction with our agreement with Microsoft, we have accelerated the
development of a version of the Wink Broadcast Server that is compatible with
this standard, and a means of capturing and generating Wink response packets
from broadcast applications that are compatible with this standard. The founders
of the Advanced Television Enhancement Forum include Microsoft Corporation,
Intel Corporation, Liberate Technologies, Sony, DIRECTV, Cable Labs, NBC, The
Walt Disney Company and Discovery Communications. We are also monitoring the
standardization efforts of the Advanced Television Systems Committee.
TECHNICAL SUPPORT AND CUSTOMER SERVICE
We believe that comprehensive, high-quality support is an essential element
of our business approach. We provide users of our software with installation
services, training, documentation, technical and network support, and system
maintenance for all Wink server and authoring software. Upon request and for an
additional fee, we will provide customized technical consulting and support for
applications and server module development. We provide telephone technical
support for our products 24 hours a day, seven days a week, providing services
that include system monitoring, problem resolution and preventive
troubleshooting. We are also providing customer service to Wink viewers 24 hours
a day, seven days a week, through an agreement with Softbank that provides call-
center support. Whenever possible, we seek to connect viewers directly with
advertisers and merchants to lower customer service costs.
COMPETITION
We face competition from a number of companies, many of which have
significantly greater financial, technical, manufacturing and marketing
resources than Wink and may be in a better
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position to compete in the industry. 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.
A number of companies are developing system software for the general
interactive television market, including At Home Corporation, Intel Corporation,
Liberate Technologies, Sun Microsystems, OpenTV and Canal Plus. OpenTV and Canal
Plus already offer certain products with features similar to Wink Enhanced
Broadcasting. Intel and Liberate Technologies have developed technology that
enables interactivity over analog or digital broadcasts. Many of these
competitors have the support of, or relationships with, industry participants
with which we also have relationships, which could adversely affect the extent
of support these market participants give to Wink Enhanced Broadcasting. In
addition, Microsoft, which has recently purchased a substantial equity stake in
Wink and agreed to collaborate with us to develop, market and distribute Wink
Enhanced Broadcasting on Microsoft television platforms, has been active in a
variety of aspects of the interactive television market.
There also are a number of interactive system providers that have developed
proprietary software and hardware for adding interactivity to existing
television technologies, including Gemstar International Group Limited,
Worldgate Communications, Inc., Source Media and ACTV Inc. In addition, one or
more of these entities might choose to pursue hardware-independent,
cross-platform opportunities directly competitive with Wink Enhanced
Broadcasting. If we are not able to compete successfully against current or
future competitors, our business, operating results and financial condition will
be materially adversely affected.
INTELLECTUAL PROPERTY
Our ability to compete is dependent in part upon our internally developed,
proprietary intellectual property. We rely on patent, trademark, trade secret
and copyright law, as well as confidentiality procedures and licensing
arrangements to establish and protect our rights in our technology. Others may
develop technologies that are similar or superior to our technology. We
typically enter into confidentiality or license agreements with our employees,
consultants, customers, strategic partners and vendors, and typically control
access to and distribution of our software, documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our products or technology without
authorization, or to develop similar technology independently through reverse
engineering or other means. Policing unauthorized use of our products is
difficult. The steps we take may not prevent misappropriation of our technology
or such agreements may not be enforceable. In addition, effective patent,
copyright and trade secret protection may be unavailable or limited in certain
foreign countries. 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 materially
adversely affect our business.
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. We believe that the resolution
of this matter will not have a material adverse effect on us.
From time to time, we receive notices of claims of infringement of other
parties' proprietary rights or claims for indemnification resulting from
infringement claims. Irrespective of the validity or the successful assertion of
such claims, we may incur significant costs and diversion of resources with
respect to the defense of any claims brought, which could materially adversely
affect our business. In
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addition, the assertion of such infringement claims could result in injunctions
preventing us from distributing certain products, which could materially
adversely affect our operating results and financial condition. In addition, the
assertion of such infringement claims could result in injunctions preventing us
from distributing certain products, which could materially adversely affect our
business. 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.
The Wink Response Network is designed to collect and utilize data derived
from viewer responses to Wink-enhanced programming. This data can be used for
several purposes, including product inquiry and order fulfillment, advertising
impact research and polling. Although we believe we have a right to use and
compile such data, copyright, trade secret or other protection may not be
available for such data and information or others may claim rights to it. We are
also obligated to keep certain information regarding networks' and cable
systems' programming services and system technology confidential.
We have licensed in the past and expect that we may license in the future
elements of our technology and trademarks to third parties in the United States,
Japan and other countries. We attempt to ensure that the quality of our brand is
maintained by such business partners. However, such partners may take actions
that could adversely affect the value of our proprietary rights or the
reputation of our technologies.
Wink is a registered trademark of Wink Communications, Inc. Wink
Communications, the Wink Communications, Inc. logo, the stylized "i" logo, Wink
Engine, Wink Broadcast Server, Wink Response Server, Wink Server Studio, Wink
Response Network and Wink Enhanced Broadcasting are trademarks of Wink
Communications, Inc.
EMPLOYEES
As of June 30, 1999, we employed 99 full-time equivalents, excluding
temporary personnel and consultants. Of the total number, 49 full-time
equivalents were involved in product development, 13 in sales, marketing and
customer service, ten in accounting, finance and administration and 27 in
operations. We are not subject to any collective bargaining agreements and
believe our relationship with our employees is good. See "Risk Factors -- We are
dependent on the service of our chief executive officer, as well as our
technical personnel."
FACILITIES
Our corporate headquarters and executive offices are in Alameda,
California, where we lease approximately 38,000 square feet of space. The lease
on this facility expires in January 2000. We believe that we will be able to
renew this lease or secure sufficient space on reasonable terms upon expiration
of this lease.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding our directors,
executive officers and other officers and key employees as of June 30, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
<S> <C> <C>
EXECUTIVE OFFICERS
Mary Agnes Wilderotter..................... 44 Chief Executive Officer, President and Director
Brian P. Dougherty......................... 42 Chairman of the Board of Directors and Chief
Technical Officer
Allan C. Thygesen.......................... 36 Executive Vice President, Sales and Business
Development
Howard L. Schrott.......................... 44 Chief Financial Officer and Senior Vice President
Timothy V. Travaille....................... 41 Senior Vice President, Operations and Deployment
Katherine Sullivan......................... 43 Senior Vice President, Marketing and People
Development
Jeffrey H. Coats........................... 41 Director
Bruce W. Dunlevie.......................... 42 Director
Michael Fuchs.............................. 53 Director
F. Philip Handy............................ 55 Director
William Schleyer........................... 47 Director
Hidetaka Yamamoto.......................... 55 Director
OTHER OFFICERS AND KEY EMPLOYEES
Michael Capuano............................ 34 Vice President, Product Marketing
Dante Carpinito............................ 39 Vice President, Business Development
Gregory Clark.............................. 41 Vice President, Sales
Michael Gannon............................. 44 Vice President, Advertising Sales
Charles McCullough......................... 48 Vice President, Engineering
Patrick Ransil............................. 43 Vice President, Engineering
Reed Spiegel............................... 40 Vice President, Consumer Electronics Sales
Melinda White.............................. 39 Vice President, Cable Sales
</TABLE>
Mary Agnes Wilderotter has served as President and Chief Executive Officer
and a director of Wink since January 1997. From August 1995 to January 1997, Ms.
Wilderotter was the Executive Vice President of National Operations and Chief
Executive Officer of the Aviation Communications Division of AT&T Wireless
Services, Inc., a provider of wireless communications services in the United
States and a wholly owned subsidiary of AT&T Corporation. Prior to her tenure at
AT&T Wireless, Ms. Wilderotter was Senior Vice President of McCaw Cellular
Communications, Inc. from October 1991 to August 1995 and Regional President of
the California/Nevada/Hawaii Region. McCaw became AT&T Wireless upon McCaw's
acquisition by AT&T. Prior to joining McCaw, Ms. Wilderotter spent over 12 years
in the cable industry. Ms. Wilderotter serves as a director on the boards of
Airborne Freight Corporation, Gaylord Entertainment Co., American Tower Corp.,
The California Chamber of Commerce, California Cable Television Association,
California Community College Foundation, and Electric Lightwave. Ms. Wilderotter
is also a member of the board of trustees of the College of the Holy Cross. Ms.
Wilderotter received a B.A. degree in Economics and Business Administration from
the College of the Holy Cross.
Brian P. Dougherty co-founded Wink in October 1994 and served as Chief
Executive Officer of Wink from inception until December 1996. Mr. Dougherty has
also served as the Chairman of the
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Board of Wink since inception. Mr. Dougherty also serves as Chief Technical
Officer of Wink Communications. Prior to co-founding Wink Communications, Mr.
Dougherty founded Geoworks Corporation, a software developer, in 1983 and served
as its Chief Executive Officer from September 1983 until February 1993 and as
its Chairman from September 1983 until May 1997. Mr. Dougherty serves as a
director of Neomagic and Geoworks. Mr. Dougherty received a B.S. degree in
Electrical Engineering/Computer Science from the University of California,
Berkeley.
Allan C. Thygesen has served as our Executive Vice President, Sales and
Business Development since July 1999 and served as Senior Vice President,
Programming and Advertising from March 1998 to July 1999, and as Vice President,
Content, Tools and Development from July 1996 to March 1998. From November 1994
to July 1996, Mr. Thygesen served as Vice President and General Manager,
Consumer Products, of Gold Disk, Inc., a producer and publisher of personal
productivity software. From May 1993 to November 1994, Mr. Thygesen was employed
by Media Vision Technologies, Inc., a multimedia hardware manufacturer and
publisher of CD-ROM entertainment software, most recently as Vice President and
General Manager, Multimedia Publishing. Media Vision filed for bankruptcy in
March 1994. Earlier, Mr. Thygesen served in a variety of management positions in
finance, sales, marketing and operations at Pellucid Inc., Everex Systems Inc.
and Radiometer A/S. Mr. Thygesen received an MSc degree in Economics from the
University of Copenhagen and an M.B.A. degree from the Stanford Graduate School
of Business.
Howard L. Schrott has served as Senior Vice President and Chief Financial
Officer since May 1999. From 1991 to 1999, he was Executive Vice President and
Chief Financial Officer of Emmis Communications Corporation, a diversified media
company. Prior to joining Emmis, Mr. Schrott was a Vice President in the
Communications Lending Group at First Union National Bank, Charlotte, North
Carolina. From 1984 to 1989, Mr. Schrott served as Chief Operating and Executive
Officer for a group of radio stations. Mr. Schrott also spent two years
practicing law in Washington, D.C. and Indianapolis, Indiana, where he
concentrated on matters before the Federal Communications Commission and general
business matters relating to broadcasting and media. Mr. Schrott received a B.S.
degree in Communications and Business from Butler University and a J.D. degree
from Indiana University School of Law -- Indianapolis.
Timothy V. Travaille has served as our Senior Vice President, Operations
and Deployments since March 1998 and served as Vice President, Operations and
Deployments from March 1997 to March 1998. From March 1994 to March 1997, Mr.
Travaille was employed by AT&T Wireless as Vice President, Chief Information
Officer. From December 1986 to February 1994, Mr. Travaille was employed by
Lamonts Apparel Inc., most recently as Vice President of Information Systems and
Merchandise Information Office. Mr. Travaille received B.S. degrees in
Accounting and Computer Science and an M.B.A. degree from the University of
Washington.
Katherine Sullivan has served as our Senior Vice President, Marketing and
People Development since June 1999 and served as Vice President, Consumer
Marketing and Marketing Communications from September 1997 to June 1999. From
June 1992 until September 1997, Ms. Sullivan was employed by McCaw Cellular
Communications/AT&T Wireless Communications, serving in several roles directing
Western Region retail sales and distribution. Ms. Sullivan received a B.A.
degree in Economics from The University of South Carolina.
Jeffrey H. Coats has served as a director of Wink since June 1997. Since
July 1999, Mr. Coats has served as a Founder and Managing Director of the T. H.
Lee, Putnam Internet Fund. From April 1996 to July 1999, Mr. Coats served as
Managing Director of GE Capital Equity Capital Group, Inc., a wholly owned
subsidiary of General Electric Capital Corporation. From September 1991 to April
1993, Mr. Coats was also a Managing Director of GE Capital Corporate Finance
Group, Inc., a wholly owned subsidiary of General Electric Capital Corporation.
From February 1994 to April 1996,
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<PAGE> 45
Mr. Coats served as President of Maverick Capital Equity Partners, LLC, and from
May 1993 to January 1994, Mr. Coats was a Managing Director with Veritas
Capital, Inc., both of which are investment firms. Mr. Coats is the Chairman of
the Board of The Hastings Group, Inc., which filed for Chapter 11 bankruptcy in
October 1995 and confirmed a plan of liquidation in December 1997. Mr. Coats is
a director of Krause's Furniture, Inc., autobytel.com, Inc. and The Museum
Company, Inc. Mr. Coats holds a B.B.A. in Finance from the University of Georgia
and an M.A. in International Management in Finance from the American Graduate
School of International Management.
Bruce W. Dunlevie has served as a director of Wink since March 1996. In May
1995, Mr. Dunlevie founded Benchmark Capital LLC, a venture capital firm, of
which he is currently a Managing Member. From October 1989 to the present, he
has served as a General Partner of Merrill, Pickard, Anderson & Eyre, a venture
capital firm. Mr. Dunlevie is a director of Genesys Telecommunications
Laboratories, Rambus Inc. and several private companies. Mr. Dunlevie received a
B.A. degree from Rice University and an M.B.A. degree from the Stanford Graduate
School of Business.
Michael Fuchs has served as a director of Wink since June 1998. Since
November 1995, Mr. Fuchs has been an investor and consultant in the media
business. Mr. Fuchs was Chairman and Chief Executive Officer of Home Box Office,
a division of TimeWarner Entertainment Company, L.P., from October 1984 until
November 1995, and Chairman and Chief Executive Officer of Warner Music Group, a
division of Time Warner Inc., from May 1995 to November 1995. Mr. Fuchs is
Chairman of autobytel.com, Inc. Mr. Fuchs holds a B.A. degree from Union College
and a J.D. degree from the New York University School of Law.
F. Philip Handy has served as a director of Wink since June 1997. Mr. Handy
is a private investor who is currently in partnership with Equity Group
Investments. Mr. Handy was Managing Director of EGI Corporate Investments, a
diversified management and investment business from June 1997 until December
1998. Previously, he was Partner of Winter Park Capital Company, a private
investment firm, from June 1980 until May 1997. Mr. Handy is a director of
Anixter International, Inc., Chart House Enterprises, Inc., Transmedia Network,
Inc. and Davel Communications. Mr. Handy received an A.B. degree in Economics
from Princeton University and an M.B.A. degree from Harvard Business School.
William T. Schleyer has served as a director of Wink since January 1998.
Mr. Schleyer is currently serving as Chairman of the Open Cable Initiative. From
October 1997 to June 1998, Mr. Schleyer served as an advisor to US WEST Media
Group. From November 1996 to October 1997, Mr. Schleyer served as President and
Chief Operating Officer of MediaOne, the broadband services arm of US WEST Media
Group. From November 1994 to November 1996, Mr. Schleyer was President and Chief
Operating Officer of Continental Cablevision, Inc. before the company's
acquisition by US WEST Media Group in November 1996. Continental became MediaOne
in May 1997. Mr. Schleyer serves on the board of directors and executive
committee of Cable Television Laboratories, Inc., a research and development
consortium of cable system operators. He serves on the board of directors of
Rogers Communications, Inc., a Canadian cable operator, and Antec Corporation, a
supplier of goods and services to cable and television industries. Mr. Schleyer
received a B.S. degree in Mechanical Engineering from Drexel University and an
M.B.A. degree from Harvard Business School.
Hidetaka (Hank) Yamamoto has served as a director of Wink since February
1995. Mr. Yamamoto has been employed by Toshiba Corporation since 1966, most
recently as a General Manager, New Business Development, of Toshiba's
Information and Industrial Systems Company. Mr. Yamamoto received a Bachelor of
Economics degree from the University of Tokyo and an M.B.A. degree from the
Graduate School of Business at the University of Chicago.
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<PAGE> 46
BOARD OF DIRECTORS
We currently have authorized eight directors. At present, each director
holds office until the next annual meeting of the stockholders or until his or
her successor is duly elected and qualified. Our Amended and Restated
Certificate of Incorporation provides for the establishment of a classified
Board of Directors upon the date of this offering. In accordance with the terms
of the Amended and Restated Certificate of Incorporation, the Board of Directors
will be divided into three classes, the terms of which will expire at different
times. Class I consists of Mr. Dougherty and Mr. Dunlevie, who will serve until
the annual meeting of stockholders to be held in 2000. Class II consists of Ms.
Wilderotter, Mr. Schleyer and Mr. Fuchs, who will serve until the annual meeting
of stockholders to be held in 2001. Class III consists of Mr. Coats, Mr. Handy
and Mr. Yamamoto, who will serve until the annual meeting of stockholders to be
held in 2002. At each annual meeting of stockholders beginning with the 2000
annual meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes such
that, as nearly as possible, each class will consist of an equal number of
directors.
Board Committees. The Board of Directors has a Compensation Committee and
an Audit Committee.
The Audit Committee of the Board of Directors reviews and monitors the
corporate financial reporting and the internal and external audits of Wink and
Wink's subsidiary, including, among other things, the audit and control
functions, the results and scope of the annual audit and other services provided
by our independent accountants and our compliance with legal matters that have a
significant impact on our financial reports. The Audit Committee also consults
with our management and our independent accountants prior to the presentation of
financial statements to stockholders and, as appropriate, initiates inquiries
into aspects of our financial affairs. In addition, the Audit Committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, our independent accountants. The current members of the Audit
Committee are Mr. Coats, Mr. Fuchs and Mr. Yamamoto.
The Compensation Committee of the Board of Directors reviews and makes
recommendations to the Board regarding all forms of compensation provided to the
executive officers and directors of Wink and Wink's subsidiary, including stock
compensation and loans. In addition, the Compensation Committee reviews and
makes recommendations on bonus and stock compensation arrangements for all of
Wink's employees. As part of the foregoing, the Compensation Committee also
administers our 1994 Stock Plan, 1999 Stock Plan and 1999 Employee Stock
Purchase Plan. The current members of the Compensation Committee are Mr.
Schleyer, Mr. Dunlevie and Mr. Handy.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Except for reimbursements received by non-employee directors for expenses
incurred in attending board meetings, directors of Wink do not receive cash
compensation for their services as directors.
Under our 1999 Director Option Plan, each new non-employee director who
joins Wink after this offering is entitled to receive an option to purchase
40,000 shares of our common stock. In addition, each current and future
non-employee director is entitled to receive an additional option to purchase
40,000 shares of common stock four years after the grant of such person's last
option, provided that he or she has served on the Board continuously during such
period. All options granted under the 1999 Director Option Plan will become
exercisable over a four-year period at the rate of 25% per year. The exercise
price per share for all options granted under the 1999 Director Option Plan will
be
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<PAGE> 47
equal to the fair market value of the common stock on the date of grant. See
"Management -- Employee Benefit Plans."
In 1998, we granted options under our 1994 Stock Plan to certain
non-employee directors. See "Certain Transactions -- Certain Sales and Option
Grants to Executive Officers and Directors."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the Compensation Committee, the Board of Directors
determined compensation for executive officers. No interlocking relationship
exists between our Board of Directors and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.
EXECUTIVE OFFICER COMPENSATION
The following table sets forth certain information concerning total
compensation received by our Chief Executive Officer and each person who served
as an executive officer of Wink during the last fiscal year and whose aggregate
salary and bonus for such year exceeded $100,000 (collectively, the "Named
Executive Officers") for services rendered to Wink in all capacities during the
fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ---------------------------
COMPENSATION RESTRICTED SECURITIES
-------------------- STOCK UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) AWARDS(#) OPTIONS(#)
<S> <C> <C> <C> <C>
Mary Agnes Wilderotter......................... $208,333 $ 25,000 25,000 100,000
President and Chief Executive Officer 21,000
Brian P. Dougherty............................. 90,000 50,000 -- --
Chairman of the Board and
Chief Technical Officer
Allan C. Thygesen.............................. 123,750 35,000 -- 50,000
Executive Vice President,
Sales and Business Development
Timothy V. Travaille........................... 124,583 100,000 -- 50,000
Senior Vice President,
Operations and Deployment
Katherine Sullivan............................. 103,738 40,000 -- --
Senior Vice President,
Marketing and People Development
Paritosh K. Choksi............................. 175,000 -- -- --
Former Chief Financial Officer
</TABLE>
The bonuses, restricted stock awards and option grants described above
include amounts paid or granted in 1998 with respect to fiscal 1997. For
additional information about Ms. Wilderotter's restricted stock award, see
"Certain Transactions -- Sales and Option Grants to Executive Officers and
Directors." Bonus amounts for Mr. Thygesen, Mr. Travaille and Ms. Sullivan
include the money value of stock bonuses paid in lieu of cash bonuses. The value
of Mr. Thygesen's stock bonus was $35,000. The value of Mr. Travaille's stock
bonus was $30,000. The value of Ms. Sullivan's stock bonus was $25,000. These
values were based upon a fair market value determined by the Board of
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<PAGE> 48
Directors to be $4.00 per share on the date of issuance. All stock bonuses were
fully vested at issuance. Ms. Sullivan's bonus also included $15,000 of moving
expenses.
OPTION GRANTS IN 1998
The following table sets forth, as to the Named Executive Officers who have
reportable information, information concerning stock options granted during the
year ended December 31, 1998. We granted options to purchase 1,092,231 shares of
common stock to employees and consultants in 1998.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
------------------------------------------------------ STOCK PRICE
SECURITIES PERCENT OF APPRECIATION FOR
UNDERLYING TOTAL OPTIONS EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE PER EXPIRATION -------------------
NAME GRANTED(#) YEAR(%) SHARE($) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Mary Agnes Wilderotter.............. 100,000 9.2% $4.00 1/15/08 $251,558 $637,497
21,000 1.9 8.00 9/24/08 105,654 267,749
Allan C. Thygesen................... 50,000 4.6 6.00 3/27/08 188,668 478,123
Timothy V. Travaille................ 50,000 4.6 6.00 3/27/08 188,668 478,123
</TABLE>
In reviewing the information above, please note:
- The options granted under the 1994 Stock Plan are incentive stock options
or nonqualified stock options and have exercise prices equal to the fair
market value of our common stock on the date of grant, as determined by
the Board of Directors on the date of grant.
- Except for the options granted to Ms. Wilderotter, all such options have
ten-year terms and vest over a period of four years at a rate of 1/4 of
the shares after the first year and 1/48 of the shares per month
thereafter.
- Ms. Wilderotter's option to purchase 100,000 shares vests at a rate of
1/48 per month, with accelerated vesting in the event of certain
corporate transactions. Ms. Wilderotter's option to purchase 21,000
shares was fully vested as of the date of grant.
See "Certain Transactions -- Employment Offer Letters and Severance
Arrangements."
In determining the fair market value of the common stock, the Board of
Directors considered various factors, including Wink's financial condition and
business prospects, its operating results, the absence of a market for the
common stock and the risks normally associated with technology companies.
Under rules promulgated by the Securities and Exchange Commission, the
amounts in the two columns on the far right of the above table represent the
hypothetical gain or "option spread" that would exist for the options in this
table based on assumed stock price appreciation from the date of grant until the
end of such options' ten-year term at assumed annual rates of 5% and 10%
increases over the exercise price, which equalled the fair market value on date
of grant. The 5% and 10% assumed annual rates of appreciation are specified in
Commission rules and do not represent our estimate or projection of future stock
price growth. We do not necessarily agree that this method can properly
determine the value of an option. Actual gains, if any, on stock option
exercises depend on numerous factors, including our future performance, overall
market conditions and the option holder's
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<PAGE> 49
continued employment with us throughout the entire vesting period and option
term, which factors are not reflected in this table.
AGGREGATED OPTION EXERCISES IN 1998 AND DECEMBER 31, 1998 OPTION VALUES
The following table sets forth, as to the Named Executive Officers who have
reportable information, information concerning stock option activity during the
last fiscal year and the number of shares subject to both exercisable and
unexercisable stock options as of December 31, 1998. Also reported are values
for "in-the-money" options, which values represent the positive spread, if any,
between the respective exercise prices of each outstanding stock option and the
fair market value of the common stock as of December 31, 1998 ($8.00 per share).
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY
SHARES DECEMBER 31, 1998 OPTIONS($)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Mary Agnes Wilderotter......... -- -- 43,917 77,083 $ 91,668 $308,332
Allan C. Thygesen.............. -- -- 76,250 113,750 570,000 570,000
Timothy V. Travaille........... -- -- 43,750 106,250 315,000 505,000
Katherine Sullivan............. -- -- 23,438 51,563 140,625 309,375
</TABLE>
EMPLOYEE BENEFIT PLANS
1999 Stock Plan. Our 1999 Stock Plan was approved by the Board of Directors
in June 1999 and by the stockholders in August 1999, to become effective on the
date of this offering. The 1999 Plan provides for the grant to employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the grant to employees, directors and
consultants of nonstatutory stock options and stock purchase rights. Unless
terminated sooner, the 1999 Plan will terminate automatically in 2009. A total
of 2,500,000 shares of common stock are currently reserved for issuance pursuant
to the 1999 Plan. The amount reserved under the 1999 Plan will automatically
increase at the end of each fiscal year by the lesser of 1,000,000 shares, 4% of
outstanding shares on such date or a lesser amount determined by the Board.
The 1999 Plan may be administered by the Board of Directors or a committee
of the Board, which committee must, in the case of options intended to qualify
as "performance-based compensation" within the meaning of Section 162(m) of the
Code, consist of two or more "outside directors" within the meaning of Section
162(m). The administrator has the power to determine the terms of the options or
stock purchase rights granted, including the exercise price, the number of
shares subject to each option or stock purchase rights, the exercisability
thereof, and the form of consideration payable upon such exercise. In addition,
the administrator has the authority to amend, suspend or terminate the 1999
Plan, provided that no such action may affect any share of common stock
previously issued and sold or any option previously granted under the 1999 Plan.
Options and stock purchase rights granted under the 1999 Plan are not
generally transferable by the optionee, and each option and stock purchase right
is exercisable during the lifetime of the optionee only by such optionee.
Options granted under the 1999 Plan must generally be exercised within three
months after the end of optionee's status as an employee or consultant of Wink,
or within twelve months after such termination by reason of death or disability,
but in no event later than the expiration of the option's term. Options
generally vest over a four-year period at a rate of 1/4 of the shares subject to
the option after the first year and 1/48 of the shares per month thereafter. In
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<PAGE> 50
the case of stock purchase rights, unless the administrator determines
otherwise, the restricted stock purchase agreement entered into at the time a
stock purchase right is exercised grants us a repurchase option exercisable upon
the voluntary or involuntary termination of the purchaser's employment or
consulting relationship with us for any reason (including death or disability).
The purchase price for shares repurchased pursuant to the restricted stock
purchase agreement is the original price paid by the purchaser and may be paid
by cancellation of any indebtedness of the purchaser to us. The repurchase
option lapses at a rate determined by the administrator.
The exercise price of all incentive stock options granted under the 1999
Plan must be at least equal to the fair market value of the common stock on the
date of grant. The exercise price of nonstatutory stock options and stock
purchase rights granted under the 1999 Plan is determined by the administrator,
but, with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the exercise price must at least be equal to the fair market value of the
common stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
granted to such person must equal at least 110% of the fair market value on the
grant date, and the term of such incentive stock option must not exceed five
years. The term of all other options granted under the 1999 Plan may not exceed
ten years.
The 1999 Plan provides that in the event of a merger of Wink with or into
another corporation or a sale of substantially all of our assets, each option or
right will be assumed or an equivalent option or right substituted by the
successor corporation. If the outstanding options or rights are not assumed or
substituted, all unexercised options or stock purchase rights will terminate
upon the consummation of such transaction.
1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan
was adopted by the Board of Directors in June 1999 and approved by the
stockholders in August 1999, to become effective on the date of this offering. A
total of 250,000 shares of common stock has been reserved for issuance under the
Purchase Plan. The amount reserved under the Purchase Plan will automatically
increase at the end of each fiscal year by the lesser of 75,000 shares, 0.3% of
the outstanding shares on such date or a lesser amount determined by the Board.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, contains successive six-month offering periods. The offering periods
generally start on the first trading day on or after February 1 and August 1 of
each year, except for the first such offering period, which commences on the
date on which the Securities and Exchange Commission declares the registration
statement for this offering effective and ends on the last trading day on or
before January 31, 2000.
Employees are eligible to participate in the Purchase Plan if they are
employed by Wink or any participating subsidiary for at least 20 hours per week
and more than five months in any calendar year, although any employee who would
own stock possessing 5% or more of the total combined voting power or value of
all classes of our stock may not participate in the Purchase Plan. The Purchase
Plan permits participants to purchase common stock through payroll deductions of
up to 15% of the participant's "compensation," up to a maximum aggregate
deduction of $21,250 for all offering periods ending within any calendar year.
Compensation is defined as the participant's gross earnings and commissions, and
will include cash payments for overtime, shift premiums, incentives, bonuses and
other compensation.
Amounts deducted and accumulated under the Purchase Plan are used to
purchase shares of common stock at the end of each offering period. The price of
stock purchased under the Purchase
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<PAGE> 51
Plan is 85% of the lower of the fair market value of the common stock at the
beginning of the offering period (or, in the case of the offering period
commencing on the date of this offering, the price to public of the shares
offered in this offering) or end of the offering period. Participants may end
their participation at any time during an offering period and will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with Wink.
Rights granted under the Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the Purchase Plan. The Purchase Plan provides that, in
the event of a merger of Wink with or into another corporation or a sale of
substantially all of our assets, each outstanding right to purchase shares under
the Purchase Plan during the offering period then in progress may be assumed or
substituted for by the successor corporation. If the successor corporation
refuses such assumption or substitution, the offering period then in progress
will be shortened and a new purchase date will be set at or prior to the closing
of such transaction after which time the Purchase Plan will terminate.
Otherwise, the Purchase Plan will terminate in 2009. The Board of Directors has
the authority to amend or terminate the Purchase Plan, except that no such
action may adversely affect any outstanding rights to purchase stock under the
Purchase Plan.
1999 Director Option Plan. All non-employee directors are entitled to
participate in the 1999 Director Option Plan. The Director Plan was adopted by
the Board of Directors in June 1999 and approved by the stockholders in August
1999, to become effective on the date of this offering. The Director Plan has a
term of ten years, unless terminated sooner by the Board of Directors. A total
of 250,000 shares of common stock have been reserved for issuance under the
Director Plan.
The Director Plan provides for the automatic grant of a nonstatutory option
to purchase 40,000 shares of common stock to each new non-employee director who
becomes a director after the date of this offering on the date such person
becomes a director. Each current and future non-employee director will
automatically be granted an additional nonstatutory option to purchase 40,000
shares on the fourth anniversary of the date of grant of his or her last option
if he or she has served on the Board continuously during such period. Each
option granted under the Director Plan will have a term of ten years, and will
vest as to 25% of the shares subject to the option on each anniversary of the
date of grant. The exercise price of each option granted under the Director Plan
will be 100% of the fair market value per share of the common stock on the date
of grant. Options granted under the Director Plan must be exercised within three
months of the end of the optionee's tenure as a director of Wink, or within
twelve months after such termination by reason of death or disability, but in no
event later than the expiration of the option's ten-year term. No option granted
under the Director Plan is transferable by the optionee other than by will or
the laws of descent and distribution, and each option is exercisable, during
such lifetime of the optionee, only by such optionee.
The Director Plan provides that in the event of a merger of Wink with or
into another corporation, a sale of substantially all of our assets or a like
transaction involving Wink, each option will be assumed or an equivalent option
substituted by the successor corporation. Following such an assumption or
substitution, if the optionee's status as a director of the successor
corporation terminates other than upon the optionee's voluntary resignation, the
option will become fully exercisable, including as to shares for which it would
not otherwise be exercisable. If the outstanding options are not assumed or
substituted, the Administrator will provide for each optionee to have the right
to exercise the option as to all of the currently vested stock, plus 50% of
shares as to which such options would not otherwise be exercisable for a period
of 15 days from the date of such notice, and all unexercised options will
terminate upon the expiration of such period.
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<PAGE> 52
1994 Stock Plan. Our 1994 Stock Plan provides for the grant to employees of
incentive stock options, and for the grant to employees, consultants and
directors of nonstatutory stock options. As of June 30, 1999, options to
purchase an aggregate of 4,069,314 shares of common stock were outstanding under
the 1994 Plan, with a weighted average exercise price of $5.22. The Board of
Directors has determined that no further options will be granted under the 1994
Plan after the completion of this offering. Terms of options issued under the
1994 Plan are substantially similar to those described for the 1999 Plan. The
1994 Plan provides that in the event of a merger of Wink with or into another
corporation, or a sale of substantially all of our assets, each outstanding
option or stock purchase right will be assumed or substituted for by the
successor corporation. If the successor corporation refuses to assume or
substitute for the option or stock purchase right, the option or stock purchase
right will terminate as of the closing of such transaction.
401(k) Plan. Our 401(k) Profit Sharing Plan was adopted in 1996. The 401(k)
Plan is designed to enable eligible employees to save for retirement and is for
the exclusive benefit of eligible employees and their beneficiaries. All
employees who have completed six months of service with Wink and have attained
the age of 21 are eligible to participate in the 401(k) Plan.
The 401(k) Plan permits us to make contributions to the Plan which match
employees' eligible contributions, subject to a maximum. To date, we have not
made any such matching contributions. The trustees under the 401(k) Plan invest
the assets of the 401(k) Plan, at the direction of each participating employee,
in any of several investment options. The 401(k) Plan is intended to qualify
under Section 401 of the Code, so that contributions by employees to the 401(k)
Plan, and income earned on Plan contributions, are not taxable to employees
until withdrawn, and so that any matching contributions by us will be deductible
by us when and if made.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our Amended and Restated Certificate of Incorporation limits the liability
of our directors for monetary damages arising from a breach of their fiduciary
duty as directors, except to the extent otherwise required by the General
Corporation Law of Delaware. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission. Our
Bylaws provide that we shall indemnify our directors and officers, and may
indemnify our other employees and agents, to the fullest extent permitted by
Delaware law, including in circumstances in which indemnification is otherwise
discretionary under Delaware law. We enter into indemnification agreements with
each of our officers and directors containing provisions that requires Wink to,
among other things, indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified and to cover our directors
and officers under any Wink liability insurance policies applicable to our
directors and officers. We also have obtained director and officer insurance.
At present, there is no pending litigation or proceeding involving any
director, officer, employee benefit plan fiduciary, employee or agent of Wink
where indemnification will be required or permitted.
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<PAGE> 53
CERTAIN TRANSACTIONS
The following sets forth certain transactions between Wink and our
directors, executive officers and 5% stockholders and their affiliates. We
believe that each of the transactions described below was on terms no less
favorable to Wink than could have been obtained from unaffiliated third parties.
All future transactions between Wink and any director or executive officer will
be subject to approval by a majority of the disinterested members of the Board.
SERIES B, SERIES C AND SERIES D PREFERRED STOCK FINANCINGS
Between December 21, 1995 and March 29, 1996, we sold an aggregate of
2,233,750 shares of Series B preferred stock at a price of $4.00 per share.
Between April 17, 1997 and December 2, 1998, we sold an aggregate of 4,322,250
shares of Series C preferred stock at a price per share of $8.00, and, in
connection with such sales, issued warrants to purchase an aggregate of
1,800,000 shares of common stock at exercise prices ranging from $0.80 to $16.00
per share. In June and July 1999, we sold an aggregate of 4,958,333 shares of
Series D preferred stock at a price of $12.00 per share. In connection with a
commercial agreement with Microsoft entered into concurrently with these sales,
we issued a warrant to purchase 500,000 shares of common stock at an exercise
price of $12.00 per share. The purchasers of Series B preferred stock, Series C
preferred stock, Series D preferred stock and warrants include, among others,
the following entities affiliated with directors and holders of more than five
percent of our voting securities:
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF WARRANTS TO
SERIES B SERIES C SERIES D PURCHASE
PREFERRED PREFERRED PREFERRED COMMON STOCK
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
ENTITIES AFFILIATED WITH DIRECTORS
Venture capital funds affiliated with
Benchmark Capital Partners, L.P. (Bruce
Dunlevie).................................. 375,000 93,750 -- 500,000
Venture capital funds affiliated with
EGI-Wink Investors, L.L.C. (affiliated with
F. Philip Handy)........................... -- 625,000 -- 125,000
General Electric Capital Corporation
(formerly affiliated with Jeffrey Coats)... -- 906,250 -- 550,000
NBC Multimedia, Inc. (formerly affiliated
with Jeffrey Coats)........................ -- -- -- 375,000
Toshiba Corporation (Hidetaka Yamamoto)...... 2,500 250,000 -- --
OTHER 5% STOCKHOLDERS
General Instrument Corporation............... 600,000 187,500 166,667 --
Vulcan Ventures Incorporated ................ -- 1,162,500 -- 250,000
Microsoft Corporation........................ -- -- 2,500,000 500,000
Hughes Electronics Corporation............... -- -- 1,249,999 --
</TABLE>
In reviewing the information above, please note:
- the warrants to purchase 500,000 shares of common stock held by venture
capital funds affiliated with Benchmark Capital Partners, L.P. expire on
the closing of this offering and have an exercise price of $6.00 per
share;
- the warrants to purchase 125,000 shares of common stock held by venture
capital funds affiliated with EGI-Wink Investors, L.L.C. expire on the
date of this offering and have an exercise price of $0.80 per share;
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<PAGE> 54
- the shares of Series B preferred stock listed opposite Toshiba
Corporation were purchased by Mr. Yamamoto personally; and
- simultaneously with the completion of this offering, all shares of
preferred stock will be converted into shares of common stock.
COMMERCIAL RELATIONSHIPS AND AGREEMENTS WITH PRINCIPAL STOCKHOLDERS
In September 1997, we entered into agreements with Toshiba Corporation
under which:
- we agreed to develop for, and license to, Toshiba certain of our
proprietary technology;
- we granted Toshiba a worldwide, non-exclusive, non-transferable right to
incorporate the Wink Engine software into certain Toshiba products; and
- we granted Toshiba the right to use and distribute Wink's Online Server
software.
In addition, in October 1997, we entered into a license agreement with
Toshiba America Consumer Products, Inc., a subsidiary of Toshiba, under which we
granted a non-exclusive, non-transferable license to incorporate the Wink Engine
software into certain of its products. In addition, on January 25, 1999, we
entered into an agreement, under which we agreed to develop demonstration
software for use in certain Toshiba products. From January 1, 1995 to June 30,
1999, Toshiba and Toshiba America paid Wink $605,000 in royalties, non-recurring
engineering fees and other payments. Toshiba is a holder of more than 5% of our
outstanding common stock. Hidetaka Yamamoto, a director of Wink, is General
Manager of New Business Development of Toshiba's Information and Industrial
Systems Company.
In June 1997, we entered into a contract with NBC Multimedia, Inc. under
which we licensed certain software and technology to NBC Multimedia in return
for certain programming commitments by NBC Multimedia. Such commitments have
since expired, although NBC continues to air Wink-enhanced programming. In
addition, Wink has agreed to pay to NBC a portion of the revenues Wink receives
relating to responses to Wink-enhanced advertising and programming broadcast
through NBC, if any. NBC Multimedia is affiliated with General Electric Capital
Corporation which is a holder of more than 5% of our outstanding common stock.
In June 1997, we issued to NBC Multimedia a warrant to purchase 375,000 shares
of common stock. This warrant expires in 2004 and has an exercise price of $8.00
per share.
In June 1995, we entered into an agreement with General Instrument under
which we agreed to develop and license to General Instrument certain of our
proprietary technology. From January 1, 1995 to June 30, 1999, General
Instrument has paid Wink $600,000 in royalties, non-recurring engineering fees
and other payments, and we have paid General Instrument $375,000 in connection
with a research and development agreement. In connection with this agreement,
General Instrument purchased from Wink 550,000 shares of common stock at $0.01
per share (giving effect to a 10-for-1 split of our common stock in June 1995).
General Instrument is a holder of more than 5% of our outstanding common stock.
In June 1998, we entered into an agreement with General Electric Capital
Corporation, under which certain affiliates of General Electric Capital
Corporation receive fixed rate pricing for all Wink products and services during
a charter period ending in 1999, in exchange for a commitment by these
affiliates to air specified amounts of Wink-enhanced advertising. Since July
1998, General Electric Capital Corporation and its affiliates have paid us
$25,000 of license fees. We also have an agreement with General Electric
Information Services, an affiliate of General Electric Capital Corporation, for
the operation of the Wink Response Network. Since May 1998, we have paid General
Electric
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<PAGE> 55
Information Services $328,000 under this agreement. In addition, in August 1998,
we issued to General Electric Capital Corporation a warrant to purchase 25,000
shares of common stock in exchange for consulting service under a letter
agreement dated September 1998.
In December 1998, we issued to Vulcan Ventures Incorporated warrants to
purchase up to an aggregate of 250,000 shares of common stock, subject to
certain performance and exercisability conditions. Any exercise of the warrants
is conditioned upon cable television system operators affiliated with Vulcan
deploying set-top boxes containing Wink Engines to at least 200,000 households
between January 1, 1999 and December 31, 2001. Vulcan may exercise the warrants
on or after February 1, 2001 for a number of shares equal to one-fifth the
number of households in which a Wink-enabled set-top box is deployed by a Vulcan
affiliate during calendar 1999, which box remains deployed for at least one year
after deployment. The exercise price for such shares is $12.00 per share. Vulcan
may exercise the warrants on or after February 1, 2002 for an additional number
of shares equal to one-fifth the number of households in which a Wink-enabled
set-top box is deployed during calendar 2000, which box remains deployed for at
least one year thereafter, less the number of shares which became exercisable in
2001, up to the aggregate maximum of 250,000 shares. The exercise price of such
additional shares is $16.00 per share. Vulcan Ventures Incorporated is a holder
of more than 5% of our outstanding common stock.
In October 1997, we entered into an agreement with Charter Communications
Inc. under which Charter licensed certain proprietary technology to enable the
delivery of Wink Enhanced Broadcasting to Charter subscribers in select markets.
This agreement was subsequently amended in March 1999 to include revenue
guarantees to Charter in exchange for a minimum volume commitment for Wink
Engines deployed. See Note 6 to Consolidated Financial Statements. Charter is
affiliated with Vulcan Ventures Incorporated, which is a holder of more than 5%
of our outstanding common stock.
In May 1999, we entered into an agreement with Microsoft pursuant to which
Microsoft agreed to collaborate with us to develop, market and distribute Wink
Enhanced Broadcasting. Pursuant to this agreement, we have agreed to pay
Microsoft a portion of the revenues we receive relating to responses to
Wink-enhanced advertising and programming broadcast through Microsoft's
television platforms and to provide Microsoft with certain minimum revenue
guarantees. In addition, in connection with these agreements, we issued to
Microsoft a warrant to purchase 500,000 shares of our common stock. This warrant
expires in 2004 and has an exercise price of $12.00. Microsoft is a holder of
more than 5% of our outstanding common stock. See "Business -- Strategic
Relationships -- Strategic Relationship with Microsoft" and "Risk Factors -- We
will incur substantial liability if Wink Enhanced Broadcasting fails to generate
sufficient revenue to meet our revenue guarantees and other obligations."
In December 1998, we entered into an agreement with DIRECTV, Inc., whereby
DIRECTV has licensed Wink technology for use in their direct broadcast satellite
set-top boxes. In exchange, we have agreed to provide DIRECTV with technical
development fees. To date, no technical development fees have been paid to
DIRECTV. DIRECTV is a subsidiary of Hughes Electronics Corporation, which is a
holder of more than 5% of our outstanding common stock.
CERTAIN SALES AND OPTION GRANTS TO EXECUTIVE OFFICERS AND DIRECTORS
On December 2, 1996, we sold 1,310,000 shares of common stock at a price of
$0.40 per share to Mary Agnes Wilderotter, our President and Chief Executive
Officer and a director of Wink. We have the right to repurchase such shares in
the event Ms. Wilderotter's services to us terminate, which right lapses
progressively over four years after the date of purchase. Ms. Wilderotter paid
for such shares with a full-recourse, ten-year $524,000 promissory note, secured
by the purchased shares pursuant to a security agreement entered into on the
same date. The note bears interest at a rate of
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<PAGE> 56
6.4% per annum. The aggregate outstanding principal and interest at June 30,
1999 was approximately $601,000.
On January 15, 1998, the Board of Directors granted Ms. Wilderotter an
option to purchase 100,000 shares of common stock at an exercise price of $4.00
per share, as well as the right to purchase 25,000 shares of restricted common
stock, at $4.00 per share. We have the right to repurchase such shares in the
event Ms. Wilderotter's services to us terminate, which right lapses
progressively over four years after the date of purchase. Ms. Wilderotter paid
for the 25,000 shares of restricted stock with a full-recourse, ten-year
$100,000 promissory note, secured by the purchased shares pursuant to a security
agreement entered into on the same date. The note bears interest at a rate of
6.4% per annum. The aggregate outstanding principal and interest at June 30,
1999 was approximately $109,000.
On January 15, 1998, the Board of Directors granted to each of Jeff Coats,
F. Philip Handy, Bruce Dunlevie and William Schleyer, directors of Wink, options
to purchase 40,000 shares of common stock at an exercise price of $4.00 per
share. On June 8, 1998, the Board of Directors granted Michael Fuchs, a director
of Wink, an option to purchase 40,000 shares of common stock at an exercise
price of $6.00 per share. All the options become exercisable over a four-year
period at the rate of 25% per year.
On August 25, 1998, the Board of Directors granted to Mr. Schleyer and Mr.
Fuchs stock purchase rights under the 1994 Plan to purchase 62,500 and 298,500
shares of common stock, respectively, at $8.00 per share. Such stock purchase
rights were exercised in cash.
On May 17, 1999, we sold 250,000 shares of common stock at a price of $8.00
per share to Howard L. Schrott, our Senior Vice President and Chief Financial
Officer. We have the right to repurchase the shares at cost in the event Mr.
Schrott's services to Wink terminate, which right lapses progressively over four
years after the date of purchase. Mr. Schrott paid for the shares with a
full-recourse, ten-year $2,000,000 promissory note, secured by the purchased
shares pursuant to a security agreement entered into on the same date. The note
bears interest at a rate of 6.4% per annum. The aggregate outstanding principal
and interest on June 30, 1999 was approximately $2,016,000. See "-- Employment
Offer Letters and Severance Arrangements."
On May 17, 1999, the Board of Directors granted to each of Ms. Wilderotter,
Ms. Sullivan, Mr. Thygesen and Mr. Travaille, each executive officers of Wink,
options to purchase 500,000, 100,000, 75,000 and 75,000 shares, respectively, of
common stock at an exercise price of $8.00 per share. All the options become
exercisable over a four-year period at the rate of 25% after the first year and
1/48 per month thereafter.
On June 1, 1999, Mr. Thygesen and Mr. Travaille each received a stock bonus
of 25,000 shares. The Board of Directors determined that the fair market value
of each bonus was $300,000.
RECENT SALES OF SECURITIES
In June 1999, one of our stockholders, who is not one of our officers or
affiliates, sold an aggregate of 10,050 shares of common stock to employees of
Donaldson, Lufkin & Jenrette Securities Corporation for an aggregate purchase
price of $80,400, or $8.00 per share.
In addition, in July 1999, the same stockholder sold an aggregate of 19,500
shares of common stock for an aggregate purchase price of $195,000, or $10.00
per share, to certain employees of Donaldson, Lufkin & Jenrette Securities
Corporation and an aggregate of 60,500 shares of common stock for an aggregate
purchase price of $605,000, or $10.00 per share, to DLJ Private Equity Partners
Fund, L.P., DLJ Private Equity Employees Fund, L.P. and DLJ Fund Investment
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<PAGE> 57
Partners II, L.P., each of which is affiliated with Donaldson, Lufkin & Jenrette
Securities Corporation.
EMPLOYMENT OFFER LETTERS AND SEVERANCE ARRANGEMENTS
In October 1996, we entered into an employment offer letter with Ms.
Wilderotter under which, if she is terminated without cause, Ms. Wilderotter
will be entitled to severance compensation at a $300,000 annual salary level for
one year or until Ms. Wilderotter finds new employment. In addition, in the
event Wink is acquired by or merged into another company prior to Ms.
Wilderotter's shares fully vesting and Ms. Wilderotter is not employed by the
acquiring company in a role acceptable to her, Wink's repurchase right will
lapse as to 50% of Ms. Wilderotter's unvested shares.
In May 1999, we entered into an employment offer letter with Mr. Schrott
under which, if he is terminated without cause prior to May 2000, Mr. Schrott
will be entitled to six months of severance compensation equivalent to Mr.
Schrott's base salary, which salary is $175,000 per year. In addition, in the
event Wink is acquired by or merged into another company prior to Mr. Schrott's
shares fully vesting, our repurchase right will lapse as to 50% of Mr. Schrott's
unvested shares.
In October 1997, we entered into an employment offer letter with our
previous chief financial officer, under which, if he were terminated without
cause, he would have been entitled to six months of severance compensation
equivalent to his base salary, which salary was $175,000 per year. At
approximately the same time, the officer purchased 215,000 shares of common
stock at $2.00 per share. Wink retained the right to repurchase such shares at
cost upon the officer's termination of employment, which right lapsed
progressively over four years from the start of his employment, provided that,
if Wink were acquired by or merged into another company prior to his shares
fully vesting, the repurchase right would have lapsed as to 50% of the unvested
shares. Such arrangement was amended upon the officer's resignation in January
1999 to provide for accelerated vesting of shares during a three-month
consulting period ended April 3, 1999, at the end of which Wink repurchased
122,292 shares at cost. The officer also received $87,500 as part of his
resignation compensation.
INDEMNIFICATION AGREEMENTS
We have entered into Indemnification Agreements with each of our executive
officers and directors. Such agreements require Wink to indemnify such
individuals to the fullest extent permitted by Delaware law. See
"Management -- Limitation of Liability and Indemnification Matters."
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<PAGE> 58
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of our common stock as of June 30, 1999, and as adjusted to reflect
the sale of the shares of common stock offered hereby, by:
- each person or entity who is known by us to own beneficially five percent
or more of our outstanding common stock;
- each of the Named Executive Officers;
- each of our current directors;
- all directors and executive officers as a group; and
- each selling stockholder.
Percentage ownership prior to this offering is based on 24,475,646 shares
outstanding. This number is based on shares of common stock and preferred stock,
on an as-converted to common stock basis, outstanding as of June 30, 1999, plus
shares of convertible preferred stock issued in July 1999 and shares of common
stock that are expected to be issued upon exercise of warrants that expire upon
the completion of this offering. Percentage ownership after this offering is
based on 29,025,646 shares outstanding, assuming no exercise of the
underwriters' over-allotment option. The number and percentage of shares
beneficially owned are determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Shares of common stock
subject to options or warrants that are currently exercisable, or exercisable
within 60 days of June 30, 1999, are deemed to be beneficially owned by the
person holding the options or warrants for the purpose of computing that
person's percentage ownership, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. Unless
otherwise indicated in the footnotes, each person or entity has sole voting and
investment power (or shares these powers with his or her spouse) with respect to
the shares shown as beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO BE SHARES
SHARES BENEFICIALLY SOLD IN BENEFICIALLY OWNED
OWNED PRIOR TO OFFERING OFFERING AFTER THE OFFERING
----------------------- ------------ -----------------------
NAME NUMBER PERCENTAGE NUMBER PERCENTAGE
<S> <C> <C> <C> <C> <C>
Brian P. Dougherty(a)................ 4,249,500 17.4% 100,000 4,149,500 14.3%
Microsoft Corporation(b)............. 3,000,000 12.0% -- 3,000,000 10.2%
One Microsoft Way
Redmond, WA 98052
Entities associated with General
Electric Capital Corporation(c).... 1,856,250 7.3% -- 1,856,250 6.2%
120 Long Ridge Road
Stamford, CT 06927
General Instrument Corporation....... 1,504,167 6.1% -- 1,504,167 5.2%
101 Tournament Drive
Horsham, PA 19044
Toshiba Corporation(d)............... 1,502,500 6.1% -- 1,502,500 5.2%
Hidetaka Yamamoto
1-1 Shibaura 1-Chome
Minato-ku
Tokyo, 105-01 Japan
</TABLE>
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<PAGE> 59
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO BE SHARES
SHARES BENEFICIALLY SOLD IN BENEFICIALLY OWNED
OWNED PRIOR TO OFFERING OFFERING AFTER THE OFFERING
----------------------- ------------ -----------------------
NAME NUMBER PERCENTAGE NUMBER PERCENTAGE
<S> <C> <C> <C> <C> <C>
Vulcan Ventures Incorporated......... 1,412,500 5.7% -- 1,412,500 4.8%
110 110th Ave. #550
Bellevue, WA 98004(e)
Mary Agnes Wilderotter(f)............ 1,374,583 5.6% 100,000 1,274,583 4.4%
Hughes Electronics Corporation....... 1,249,999 5.1% -- 1,249,999 4.3%
2230 East Imperial Highway
El Segundo, CA 90245
Entities associated with Benchmark
Capital Partners, L.P.(g).......... 1,245,417 5.1% -- 1,245,417 4.3%
Bruce W. Dunlevie
2480 Sand Hill Road, Suite 200
Menlo Park, CA 94025
Allan C. Thygesen(h)................. 125,208 * -- 125,208 *
Timothy V. Travaille(i).............. 85,625 * -- 85,625 *
Katherine Sullivan(j)................ 42,188 * -- 42,188 *
Paritosh K. Choksi................... 92,708 * -- 92,708 *
Jeffrey H. Coats(k).................. 10,000 * -- 10,000 *
Michael Fuchs(k)..................... 347,500 1.4% -- 347,500 1.2%
F. Philip Handy(l)................... 119,254 * -- 119,254 *
William Schleyer(k).................. 79,500 * -- 79,500 *
All directors and executive officers
as a group (12 persons)(m)......... 9,273,983 37.3% 200,000 9,073,983 30.9%
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
common stock at June 30, 1999.
(a) Represents shares held of record in the name of Mr. Dougherty's family
trust.
(b) Includes 500,000 shares subject to a currently exercisable warrant.
(c) Includes 550,000 shares subject to currently exercisable warrants held by
General Electric Capital Corporation, and 375,000 shares subject to a
currently exercisable warrant held by NBC Multimedia, Inc. Excludes up to
175,000 shares which NBC Multimedia, Inc. has indicated an interest in
purchasing from the underwriters as part of the offering.
(d) Includes 1,500,000 shares held by Toshiba Corporation, and 2,500 shares
held by Hidetaka Yamamoto personally. Mr. Yamamoto, a director of Wink, is
the General Manager of New Business Development of Toshiba's Information
and Industrial Systems Company and may be deemed to have voting and
investment power with respect to such shares.
(e) Includes 250,000 shares subject to currently exercisable warrants.
(f) At June 30, 1999, 806,083 shares held by Ms. Wilderotter were vested, and
507,917 shares were unvested and subject to a right of repurchase in favor
of Wink, which right lapses over time. Includes 16,667 shares which are
subject to the terms of a Loan and Pledge Agreement between Ms. Wilderotter
and Benchmark Capital Partners, L.P. and Benchmark Founders' Fund, pursuant
to which Ms. Wilderotter has an option to require Benchmark to purchase
such shares and Benchmark has an option to purchase such shares from Ms.
Wilderotter. Also includes 60,583 shares subject to currently exercisable
stock options.
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<PAGE> 60
(g) Represents (1) 638,622 shares held by Benchmark Capital Partners, L.P., (2)
80,128 shares held by Benchmark Founders' Fund, L.P., (3) 441,257 shares
subject to a currently exercisable warrant held by Benchmark Capital
Partners, L.P., (4) 58,743 shares subject to a currently exercisable
warrant held by Benchmark Founders' Fund, L.P. and (5) 10,000 shares
subject to stock options exercisable within 60 days of June 30, 1999 held
by Bruce M. Dunlevie. Each of the foregoing warrants is expected to be
exercised prior to the closing of this offering. Also includes 16,667
shares which Benchmark has the right to acquire upon exercise of currently
exercisable options granted by Mary Agnes Wilderotter. Mr. Dunlevie, a
director of Wink, is a managing member of Benchmark Capital Management Co.,
L.L.C., which is the general partner of both Benchmark Capital Partners,
L.P. and Benchmark Founders' Fund, L.P., and may be deemed to have voting
and investment power with respect to such shares.
(h) Includes 116,458 shares subject to stock options exercisable within 60 days
of June 30, 1999.
(i) Includes 78,125 shares subject to stock options exercisable within 60 days
of June 30, 1999.
(j) Includes 35,938 shares subject to stock options exercisable within 60 days
of June 30, 1999.
(k) Includes 10,000 shares subject to stock options exercisable within 60 days
of June 30, 1999.
(l) Includes 109,254 shares that represent Mr. Handy's pro rata share of shares
held by EGI-Wink Investors, L.L.C. and SZ Investments, L.L.C., in which, in
each case, Mr. Handy has no voting or dispositive power. Also includes
10,000 shares subject to stock options exercisable within 60 days of June
30, 1999.
(m) Includes 357,771 shares issuable upon the exercise of stock options
exercisable within 60 days of June 30, 1999, and 500,000 shares subject to
warrants held by entities affiliated with directors of Wink. All of these
warrants are expected to be exercised prior to the closing of this
offering.
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<PAGE> 61
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, our authorized capital stock will
consist of 100,000,000 shares of common stock, $0.001 par value per share, and
5,000,000 shares of preferred stock, $0.001 par value per share.
COMMON STOCK
Immediately prior to this offering, there are expected to be 24,475,646
shares of common stock outstanding, based on shares outstanding as of June 30,
1999, plus shares of convertible preferred stock issued in July 1999 and shares
of common stock that are expected to be issued upon exercise of warrants that
expire upon the completion of this offering, and treating all preferred stock as
if converted to common stock. These shares were held of record by approximately
232 stockholders. There are expected to be 29,025,646 shares of common stock
outstanding after giving effect to the sale of 4,550,000 shares of common stock
by Wink hereby. The holders of common stock are entitled to one vote per share
on all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends as may be declared by the Board out
of funds legally available therefor, subject to any preferences that may be
applicable to any outstanding preferred stock. See "Dividend Policy." In the
event of liquidation, dissolution or winding up of Wink, holders of common stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to any prior liquidation rights of any outstanding
preferred stock. The common stock has no preemptive, subscription or conversion
rights, and there are no redemption or sinking fund provisions applicable to the
common stock.
PREFERRED STOCK
Effective upon the completion of this offering, all of our then outstanding
preferred stock will automatically convert into common stock on a one-for-one
basis. Accordingly, effective upon the completion of this offering, 5,000,000
shares of undesignated preferred stock will be authorized, and no shares will be
outstanding. The Board has the authority, without any further vote or action by
the stockholders, to issue such shares of preferred stock in one or more series
and to fix the price, powers, designations, preferences and relative,
participating, optional or other rights thereof, including dividend rights,
conversion rights, voting rights, redemption terms, liquidation preferences and
the number of shares constituting any series and the designations of such
series. The issuance of preferred stock in certain circumstances may have the
effect of delaying, deferring or preventing a change of control of Wink without
further action by the stockholders, may discourage bids for our common stock at
a premium over the market price of the common stock and may adversely affect the
market price of, and the voting and other rights of, the holders of common
stock. We have no current plans to issue any shares of preferred stock.
ANTITAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN PROVISIONS OF OUR CERTIFICATE
OF INCORPORATION AND BYLAWS
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
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<PAGE> 62
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding certain shares for purposes of
determining the number of shares outstanding; or
- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Our Amended and Restated Certificate of Incorporation provides that, upon
the effective date of this offering, our Board of Directors will be classified
into three classes of directors. See "Management -- Board of Directors." In
addition, our Bylaws limit the ability of our stockholders to call a special
meeting of stockholders. Only our Board of Directors, Chairman, President or
stockholders holding more than 50% of our outstanding stock may call a special
meeting of stockholders.
These provisions are designed to discourage certain types of coercive
takeover practices and encourage persons seeking to acquire control of Wink to
first negotiate with us. However, these and other provisions could have the
effect of making it more difficult to acquire Wink by means of a tender offer,
proxy contest or otherwise or to remove the incumbent officers and directors of
Wink.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Upon the completion of this offering, the holders of 15,831,833 shares of
common stock, including shares issuable upon exercise of warrants, will be
entitled to certain rights with respect to the registration of such shares under
the Securities Act. Under the terms of the agreement between Wink and the
holders of such registrable securities, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other securities holders exercising registration rights, such holders
are entitled to notice of such registration and to include shares of such common
stock therein. Holders of registration rights may also require us to file a
registration statement under the Securities Act at our expense with respect to
their shares of common stock, and we are required to use our best efforts to
effect such registration. Further, holders may
59
<PAGE> 63
require us to file registration statements on Form S-3 at our expense when such
form becomes available for use by Wink. All such registration rights are subject
to certain conditions and limitations, including the right of the underwriters
of an offering to limit the number of registrable securities included in such
registration.
WARRANTS
Immediately following the closing of this offering, there will be
outstanding warrants to purchase an aggregate of 1,692,500 shares of our common
stock at a weighted average exercise price of $9.73 per share. Of such warrants,
warrants to purchase 17,500 shares expire in September 2002, warrants to
purchase 25,000 shares expire in August 2003, warrants to purchase 500,000
shares expire in May 2004, warrants to purchase 250,000 shares expire in January
2005, and warrants to purchase 900,000 shares expire in June 2009. All warrants
may be exercised on a "net" basis whereby, in lieu of paying the exercise price
in cash, the holder may instruct us to retain a number of shares that has a fair
market value at the time of exercise equal to the aggregate exercise price.
In December 1998, we issued to Vulcan Ventures Incorporated warrants to
purchase up to an aggregate of 250,000 shares of common stock, subject to
certain performance and exercisability conditions. Any exercise of the warrants
is conditioned upon cable television system operators affiliated with Vulcan
deploying set-top boxes containing Wink technology to at least 200,000
households between January 1, 1999 and December 31, 2001. Vulcan may exercise
the warrants on or after February 1, 2001 for a number of shares equal to
one-fifth the number of households in which a Wink-enabled set-top box is
deployed by a Vulcan affiliate during calendar 1999, which box remain deployed
for at least one year after deployment. The exercise price for such shares is
$12.00 per share. Vulcan may exercise the warrants on or after February 1, 2002
for an additional number of shares equal to one-fifth the number of households
in which a Wink-enabled set-top box is deployed during calendar 2000, which box
remain deployed for at least one year thereafter, less the number of shares
which became exercisable in 2001, up to the aggregate maximum of 250,000 shares.
The exercise price of such additional shares is $16.00 per share.
In addition to the foregoing warrants, we also have outstanding warrants to
purchase an aggregate of 1,063,200 shares of common stock, at a weighted average
exercise price of $7.58 per share. All of those warrants expire on the
completion of this offering. Warrants to purchase 863,200 shares are expected to
be exercised prior to that time. Such warrants may be exercised on a "net"
basis. The remaining warrant to purchase 200,000 shares is expected to expire
unexercised.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services. Its address is 235 Montgomery Street, 23rd Floor, San
Francisco, California 94109, and its telephone number at this location is (415)
743-1444.
LISTING
Our common stock is listed for quotation on the Nasdaq National Market
under the trading symbol "WINK."
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<PAGE> 64
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices from time to time.
Upon completion of this offering (based on shares outstanding at June 30,
1999, plus shares of convertible preferred stock issued in July 1999 and shares
of common stock that are expected to be issued upon exercise of warrants that
expire upon the completion of this offering), we expect to have outstanding an
aggregate of 29,025,646 shares of common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of other outstanding options
or warrants. Of these shares, the 4,750,000 shares sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act, unless such shares are purchased by an existing "affiliate" of
Wink as that term is defined in Rule 144 under the Securities Act. The remaining
24,275,646 shares of common stock held by existing stockholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. As a
result of the contractual restrictions described below and the provisions of
Rules 144, 144(k) and 701, additional shares will be available for sale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE OF AVAILABILITY
<C> <S>
83,750 August 18, 1999 to February 13, 2000 (on the date of this
prospectus or within the 180 days after the date of this
prospectus)
17,993,805 February 14, 2000 (180 days after the date of this
prospectus)
6,198,091 at various times thereafter upon the expiration of one-year
holding periods
</TABLE>
All officers and directors and certain stockholders and option and warrant
holders of Wink have agreed not to offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer, lend or
dispose of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock or enter into
any swap or other arrangement that transfers to another, in whole or in part,
any of the economic consequences of ownership of the common stock for a period
of 180 days after the date of this prospectus, without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation, subject to certain
limited exceptions. Donaldson, Lufkin & Jenrette Securities Corporation
currently has no plans to release any portion of the securities subject to
lock-up agreements, although it may do so, in its discretion, at any time. When
determining whether or not to release shares from the lock-up agreements,
Donaldson, Lufkin & Jenrette Securities Corporation will consider, among other
factors, the stockholder's reasons for requesting the release, the number of
shares for which the release is being requested and market conditions at the
time.
In addition, certain stockholders and option and warrant holders of Wink
have agreed not to transfer their shares of common stock for a period of 180
days after the date of this prospectus without our consent. We have agreed not
to permit any transfer of the securities held by these stockholders and option
and warrant holders without the consent of Donaldson, Lufkin & Jenrette
Securities Corporation.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted securities for at least one year
(including the holding period of any prior owner except an affiliate) will be
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 (which will equal
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<PAGE> 65
approximately 290,000 shares immediately after this offering); or the average
weekly trading volume of the common stock on the Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about Wink. Under Rule 144(k), a person who is not deemed to have
been an Affiliate of Wink at any time during the 90 days 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 limitation or notice requirements of Rule 144. Accordingly,
unless otherwise restricted, "144(k) shares" may be sold immediately upon
completion of this offering.
Any employee or consultant to Wink who purchased his or her shares pursuant
to a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus.
We have agreed not to offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer, lend or dispose
of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or enter into
any swap or similar agreement that transfers, in whole or in part, the economic
risk of ownership of the common stock, for a period of 180 days after the date
of this prospectus, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, subject to certain limited exceptions.
Following the offering, we intend to file a registration statement on Form
S-8 covering approximately 7,069,314 shares of common stock subject to
outstanding options or reserved for issuance under our employee stock plans
(based on options outstanding as of June 30, 1999). See "Management -- Employee
Benefit Plans." Shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to affiliates, be available
for sale in the open market, except to the extent that such shares are subject
to vesting restrictions with Wink or the contractual restrictions described
above.
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<PAGE> 66
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated August 18, 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Deutsche Bank Securities
Inc. and Bear, Stearns & Co. Inc. have severally agreed to purchase from us the
respective number of shares of common stock set forth opposite their names
below.
<TABLE>
<CAPTION>
NUMBER
OF
SHARES
UNDERWRITERS ----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,951,040
Deutsche Bank Securities Inc................................ 1,050,560
Bear, Stearns & Co. Inc..................................... 750,400
Banc of America Securities LLC.............................. 45,000
BancBoston Robertson Stephens............................... 45,000
A.G. Edwards & Sons, Inc.................................... 45,000
Goldman, Sachs & Co......................................... 45,000
Hambrecht & Quist LLC....................................... 45,000
ING Barings................................................. 45,000
Lehman Brothers Inc......................................... 45,000
J.P. Morgan & Co............................................ 45,000
PaineWebber Incorporated.................................... 45,000
Salomon Smith Barney........................................ 45,000
Schroder & Co. Inc.......................................... 45,000
SG Cowen.................................................... 45,000
Warburg Dillon Read LLC..................................... 45,000
Thomas Weisel Partners Llc.................................. 45,000
William Blair & Company..................................... 23,000
Fahnestock & Co. Inc........................................ 23,000
Gerard Klauer Mattison & Co., LLC........................... 23,000
Harris Webb & Garrison, Inc................................. 23,000
Hoak Breedlove Wesneski & Co................................ 23,000
Janney Montgomery Scott Inc................................. 23,000
Johnston, Lemon & Co. Incorporated.......................... 23,000
Kaufman Bros., L.P.......................................... 23,000
Ladenburg Thalmann & Co. Inc................................ 23,000
Legg Mason Wood Walker, Incorporated........................ 23,000
Brad Peery Inc.............................................. 23,000
Raymond James & Associates, Inc............................. 23,000
The Robinson-Humphrey Company, LLC.......................... 23,000
Sands Brothers & Co., Ltd................................... 23,000
Stephens Inc................................................ 23,000
C.E. Unterberg, Towbin...................................... 23,000
----------
Total............................................. 4,750,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
included in this offering are subject to approval of legal matters by their
counsel and to customary conditions, including the effectiveness of the
registration statement, the continuing correctness of our representations and
those of the selling stockholders, the receipt of a "comfort letter" from our
accountants, the listing of the common stock for quotation on the Nasdaq
National Market and no occurrence of an event that would have a
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<PAGE> 67
material adverse effect on us. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock, other than those covered by
the over-allotment option described below, if they purchase any of the shares of
common stock.
The underwriters propose to initially offer some of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page of this prospectus and some of the shares of common stock to
dealers (including the underwriters) at the initial public offering price less a
concession not in excess of $0.67 per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $0.10 per share on
sales to other dealers. After the initial offering of the common stock to the
public, the representatives of the underwriters may change the public offering
price and such concessions. The underwriters do not intend to confirm sales to
any accounts over which they exercise discretionary authority.
DLJdirect, an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in this offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect for sale to its
brokerage account holders.
The following table shows the underwriting fees to be paid to the
underwriters by the selling stockholders and by us in connection with this
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
NO FULL
EXERCISE EXERCISE
---------- ----------
<S> <C> <C>
Wink:
Per share................................................. $ 1.12 $ 1.12
Total..................................................... $5,096,000 $5,894,000
Selling stockholders:
Per share................................................. $ 1.12 $ 1.12
Total..................................................... $ 224,000 $ 224,000
</TABLE>
Wink has granted to the underwriters an option, exercisable for 30 days
after the date of the underwriting agreement, to purchase up to 712,500
additional shares of common stock at the initial public offering price less than
the underwriting fees. The underwriters may exercise such option solely to cover
overallotments, if any, made in connection with this offering. To the extent
that the underwriters exercise such option, each underwriter will become
obligated, subject to conditions, to purchase a number of additional shares
approximately proportionate to such underwriter's initial purchase commitment.
We estimate expenses relating to this offering will be $850,000.
The underwriters, Wink and the selling stockholders have agreed to
indemnify each other against liabilities, including liabilities under the
Securities Act of 1933.
Each of Wink and our executive officers, directors and some of our
stockholders (including the selling stockholders) has agreed that, for a period
of 180 days from the date of this prospectus and subject to certain exceptions,
they will not, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, do either of the following:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock.
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<PAGE> 68
Either of the foregoing transfer restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise. In addition, during such period
and subject to certain exceptions, we have agreed not to file any registration
statement with respect to, and each of our executive officers, directors and
some of our stockholders has agreed not to make any demand for, or exercise any
right with respect to, the registration of any shares of common stock or any
securities convertible into or exercisable for common stock without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
At our request, the underwriters have reserved up to seven percent of the
shares offered by this prospectus for sale at the initial public offering price
to our employees, officers and directors and other individuals associated with
us and members of their families. The number of shares of common stock available
for sale to the general public will be reduced to the extent these individuals
purchase or confirm for purchase, orally or in writing, such reserved shares.
Any reserved shares not purchased or confirmed for purchase will be offered by
the underwriters to the general public on the same basis as the other shares
offered by this prospectus.
In addition, NBC Multimedia, Inc., one of our stockholders and business
associates, has indicated an interest in purchasing up to 175,000 shares of our
common stock in this offering. The number of shares available for sale to the
general public in this offering will be reduced by the number of shares sold to
NBC Multimedia. NBC Multimedia is under no obligation and is not committed to
purchase any of these shares, and could purchase a lesser number or none of
these shares.
Our common stock is listed for quotation on the Nasdaq National Market
under the symbol "WINK."
Other than in the United States, no action has been taken by the
underwriters or us that would permit a public offering of the shares of common
stock included in this offering in any jurisdiction where action for that
purpose is required. The shares of common stock included in this offering may
not be offered or sold, directly or indirectly, nor may this prospectus or any
other offering material or advertisement in connection with the offer and sale
of any shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons who receive this prospectus
are advised to inform themselves about and to observe any restrictions relating
to this offering of the common stock and the distribution of this prospectus.
This prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of common stock included in this offering in any jurisdiction in which
that would not be permitted or legal.
DLJ Private Equity Partners Fund, L.P., DLJ Private Equity Employees Fund,
L.P. and DLJ Fund Investment Partners II, L.P., each of which are affiliates of
Donaldson, Lufkin & Jenrette Securities Corporation, are stockholders of Wink.
Donaldson, Lufkin & Jenrette Securities Corporation and its affiliates and
employees own an aggregate of less than one percent of the issued and
outstanding shares of our common stock. Under the National Association of
Securities Dealers Conduct Rules, 34,756 of these shares are deemed to be
underwriting compensation and, as such, may not be sold or transferred for a
period of one year after the date of this prospectus.
STABILIZATION
In connection with this offering, any of the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of common stock in the open market to cover such syndicate short position
or to stabilize the price of the common stock. In addition, the underwriting
syndicate may reclaim selling
65
<PAGE> 69
concessions from syndicate members and selected dealers if Donaldson, Lufkin &
Jenrette Securities Corporation repurchases previously distributed common stock
in syndicate covering transactions, in stabilization transactions or otherwise
if Donaldson, Lufkin & Jenrette Securities Corporation receives a report that
indicates that the clients of such syndicate members have "flipped" the common
stock. These activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities at any time.
PRICING OF THIS OFFERING
Prior to this offering, there has been no established market for the common
stock. The initial public offering price for the shares of common stock offered
by this prospectus was determined by negotiation among the representatives of
the underwriters and Wink. The factors to be considered in determining the
initial public offering price include:
- the history of, and the prospects for, the industry in which we compete;
- our past and present operations;
- our historical results of operations;
- our prospects for future earnings;
- the recent market prices of securities of generally comparable companies;
and
- the general conditions of the securities market at the time of this
offering.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Wink by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Latham & Watkins, Costa Mesa, California, is acting as counsel for
the underwriters in connection with certain legal matters relating to the shares
of common stock offered hereby. Certain members of Wilson Sonsini Goodrich &
Rosati and investment partnerships with which they are affiliated beneficially
own an aggregate of 8,750 shares of common stock.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the securities
offered hereby. This prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to Wink Communications and the common stock,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part thereof. The Registration Statement, including exhibits and
schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium
Center,
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<PAGE> 70
500 Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may
call the Commission at 1-800-SEC-0330 for further information on the operations
of the public reference facilities. Information concerning the Company is also
available for inspection at the offices of the Nasdaq National Market, Reports
Section, 1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the
Commission's public reference rooms and the Commission's Web site, which is
described above.
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<PAGE> 71
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet.................................. F-3
Consolidated Statement of Operations........................ F-4
Consolidated Statement of Stockholders' Equity.............. F-5
Consolidated Statement of Cash Flows........................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Wink Communications, Inc. and its Subsidiary
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Wink
Communications, Inc. and its subsidiary at December 31, 1997 and 1998, and the
results of their operations and their 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
San Jose, California
February 23, 1999, except for Note 9
which is as of August 13, 1999
F-2
<PAGE> 73
WINK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
DECEMBER 31, JUNE 30, JUNE 30,
------------------- -------- -------------
1997 1998 1999 1999
(UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 8,530 $ 16,892 $ 44,794
Short-term investments............................ 5,452 4,441 28,662
Accounts receivable -- related parties............ 128 52 12
Accounts receivable -- third parties, net......... -- 187 199
Prepaid expenses -- related party................. -- -- 375
Prepaid expenses and other current assets......... 194 301 575
-------- -------- --------
Total current assets...................... 14,304 21,873 74,617
Property and equipment, net......................... 1,103 1,762 1,793
Other assets........................................ 222 285 307
-------- -------- --------
$ 15,629 $ 23,920 $ 76,717
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 286 $ 995 $ 772
Accrued expenses.................................. 663 1,243 1,033
Deferred revenue -- related parties............... 650 671 650
Deferred revenue -- third parties................. 991 1,119 1,177
Convertible promissory note -- related party...... -- -- 15,120
Current portion of capital lease obligations...... 347 402 433
-------- -------- --------
Total current liabilities................. 2,937 4,430 19,185
-------- -------- --------
Capital lease obligations, less current portion..... 767 365 140
-------- -------- --------
Commitments and contingencies (Note 6)
Stockholders' equity:
Convertible Preferred Stock, $0.001 par value,
issuable in series; aggregate liquidation
amount $45,512 and $89,892 (unaudited) at
December 31, 1998 and June 30, 1999,
respectively; 5,000 shares authorized; 5,675,
7,806 and 11,504 (unaudited) shares issued and
outstanding; no shares issued and outstanding
pro forma (unaudited).......................... 6 8 12 $ --
Common Stock, $0.001 par value; 100,000 shares
authorized; 9,816, 10,517 and 10,848
(unaudited) shares issued and outstanding;
22,352 shares issued and outstanding pro forma
(unaudited).................................... 10 11 11 23
Additional paid-in capital........................ 30,610 51,890 109,918 109,918
Stockholder notes receivable...................... (984) (1,046) (2,801) (2,801)
Unearned compensation............................. (494) (479) (9,288) (9,288)
Accumulated deficit............................... (17,223) (31,259) (40,460) (40,460)
-------- -------- -------- --------
Total stockholders' equity................ 11,925 19,125 57,392 $ 57,392
-------- -------- -------- ========
$ 15,629 $ 23,920 $ 76,717
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 74
WINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
(UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses -- related parties................... $ -- $ 384 $ 174 $ 78 $ 97
Licenses -- third parties..................... -- -- 224 113 201
Services -- related parties................... 155 148 -- -- 198
Services -- third parties..................... 193 87 119 99 124
------- ------- -------- ------- --------
Total revenues........................ 348 619 517 290 620
------- ------- -------- ------- --------
Costs and expenses:
Cost of services -- related parties........... 323 162 -- -- 142
Cost of services -- third parties............. 235 376 513 133 63
Research and development...................... 2,595 4,384 6,549 2,739 4,160
Sales and marketing........................... 2,263 3,510 5,578 2,576 5,082
General and administrative.................... 1,068 1,843 2,572 935 1,913
------- ------- -------- ------- --------
Total costs and expenses.............. 6,484 10,275 15,212 6,383 11,360
------- ------- -------- ------- --------
Loss from operations............................ (6,136) (9,656) (14,695) (6,093) (10,740)
Interest and other income....................... 279 684 813 394 1,590
Interest expense................................ (27) (194) (154) (78) (51)
------- ------- -------- ------- --------
Net loss........................................ $(5,884) $(9,166) $(14,036) $(5,777) $ (9,201)
======= ======= ======== ======= ========
Net loss per share:
Basic and diluted............................. $ (0.91) $ (1.25) $ (1.57) $ (0.66) $ (0.92)
======= ======= ======== ======= ========
Weighted average shares outstanding........... 6,432 7,337 8,954 8,695 9,965
Pro forma net loss per share (unaudited):
Basic and diluted............................. $ (0.92) $ (0.52)
======== ========
Weighted average shares outstanding........... 15,198 17,832
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 75
WINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDER
--------------- --------------- PAID-IN NOTES UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995............... 1,850 $ 2 8,016 $ 8 $ 4,706 $ -- $ (13)
Issuance of Series B Preferred Stock,
net...................................... 1,634 2 -- -- 6,512 (30) --
Exercise of Common Stock options........... -- -- 14 -- 1 -- --
Issuance of Common Stock for stockholder
note..................................... -- -- 1,310 1 523 (524) --
Amortization of unearned compensation...... -- -- -- -- -- -- 4
Net loss................................... -- -- -- -- -- -- --
------ --- ------ --- -------- ------- -------
BALANCE AT DECEMBER 31, 1996............... 3,484 4 9,340 9 11,742 (554) (9)
Issuance of Series C Preferred Stock,
net...................................... 2,191 2 -- -- 17,436 -- --
Exercise of Common Stock options........... -- -- 537 1 64 -- --
Issuance of Common Stock for stockholder
note..................................... -- -- 215 -- 430 (430) --
Repurchase of Common Stock................. -- -- (277) -- (3) -- --
Issuance of warrants for services.......... -- -- -- -- 240 -- --
Issuance of Common Stock for services...... -- -- 1 -- 1 -- --
Unearned compensation...................... -- -- -- -- 700 -- (700)
Amortization of unearned compensation...... -- -- -- -- -- -- 215
Net loss................................... -- -- -- -- -- -- --
------ --- ------ --- -------- ------- -------
BALANCE AT DECEMBER 31, 1997............... 5,675 6 9,816 10 30,610 (984) (494)
Issuance of Series C Preferred Stock,
net...................................... 2,131 2 -- -- 16,732 -- --
Exercise of Common Stock options........... -- -- 287 -- 207 -- --
Issuance of Common Stock
for cash................................. -- -- 389 1 3,000 -- --
Issuance of Common Stock
for stockholder note..................... -- -- 25 -- 100 (100) --
Unearned compensation...................... -- -- -- -- 600 -- (600)
Amortization of unearned compensation...... -- -- -- -- -- -- 615
Collection of stockholder note
receivable............................... -- -- -- -- -- 38 --
Issuance of warrants for services.......... -- -- -- -- 641 -- --
Net loss................................... -- -- -- -- -- -- --
------ --- ------ --- -------- ------- -------
BALANCE AT DECEMBER 31, 1998............... 7,806 8 10,517 11 51,890 (1,046) (479)
Exercise of Common Stock options
(unaudited).............................. -- -- 203 -- 194 -- --
Issuance of warrants for services
(unaudited).............................. -- -- -- -- 1,979 -- --
Issuance of warrant for services
(unaudited).............................. -- -- -- -- 4,050 -- (4,050)
Repurchase of Common Stock and cancellation
of related shareholder note
(unaudited).............................. -- -- (122) -- (245) 245 --
Issuance of Common Stock for stockholder
note (unaudited)......................... -- -- 250 -- 2,000 (2,000) --
Contribution of Company Common Stock by a
principal shareholder (unaudited)........ -- -- (50) -- -- -- --
Issuance of Common Stock for employee
bonuses (unaudited)...................... -- -- 50 -- 600 -- --
Unearned compensation (unaudited).......... -- -- -- -- 5,132 -- (5,132)
Amortization of unearned compensation
(unaudited).............................. -- -- -- -- -- -- 373
Issuance of Series D Preferred Stock, net
(unaudited).............................. 3,698 4 -- -- 44,318 -- --
Net loss (unaudited)....................... -- -- -- -- -- -- --
------ --- ------ --- -------- ------- -------
BALANCE AT JUNE 30, 1999 (UNAUDITED)....... 11,504 $12 10,848 $11 $109,918 $(2,801) $(9,288)
====== === ====== === ======== ======= =======
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
(IN THOUSANDS)
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995............... $ (2,173) $ 2,530
Issuance of Series B Preferred Stock,
net...................................... -- 6,484
Exercise of Common Stock options........... -- 1
Issuance of Common Stock for stockholder
note..................................... -- --
Amortization of unearned compensation...... -- 4
Net loss................................... (5,884) (5,884)
-------- --------
BALANCE AT DECEMBER 31, 1996............... (8,057) 3,135
Issuance of Series C Preferred Stock,
net...................................... -- 17,438
Exercise of Common Stock options........... -- 65
Issuance of Common Stock for stockholder
note..................................... -- --
Repurchase of Common Stock................. -- (3)
Issuance of warrants for services.......... -- 240
Issuance of Common Stock for services...... -- 1
Unearned compensation...................... -- --
Amortization of unearned compensation...... -- 215
Net loss................................... (9,166) (9,166)
-------- --------
BALANCE AT DECEMBER 31, 1997............... (17,223) 11,925
Issuance of Series C Preferred Stock,
net...................................... -- 16,734
Exercise of Common Stock options........... -- 207
Issuance of Common Stock
for cash................................. -- 3,001
Issuance of Common Stock
for stockholder note..................... -- --
Unearned compensation...................... -- --
Amortization of unearned compensation...... -- 615
Collection of stockholder note
receivable............................... -- 38
Issuance of warrants for services.......... -- 641
Net loss................................... (14,036) (14,036)
-------- --------
BALANCE AT DECEMBER 31, 1998............... (31,259) 19,125
Exercise of Common Stock options
(unaudited).............................. -- 194
Issuance of warrants for services
(unaudited).............................. -- 1,979
Issuance of warrant for services
(unaudited).............................. -- --
Repurchase of Common Stock and cancellation
of related shareholder note
(unaudited).............................. -- --
Issuance of Common Stock for stockholder
note (unaudited)......................... -- --
Contribution of Company Common Stock by a
principal shareholder (unaudited)........ -- --
Issuance of Common Stock for employee
bonuses (unaudited)...................... -- 600
Unearned compensation (unaudited).......... -- --
Amortization of unearned compensation
(unaudited).............................. -- 373
Issuance of Series D Preferred Stock, net
(unaudited).............................. -- 44,322
Net loss (unaudited)....................... (9,201) (9,201)
-------- --------
BALANCE AT JUNE 30, 1999 (UNAUDITED)....... $(40,460) $ 57,392
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 76
WINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------- ------------------
1996 1997 1998 1998 1999
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $(5,884) $ (9,166) $(14,036) $(5,777) $ (9,201)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 360 543 710 310 439
Stock-based costs and expenses......... 4 455 1,256 622 2,952
Changes in assets and liabilities:
Accounts receivable -- related
parties........................... -- (78) 76 -- 40
Accounts receivable -- third
parties........................... -- -- (187) (123) (12)
Prepaid expenses -- related party... -- -- -- -- (375)
Prepaid expenses and other current
assets............................ (26) (122) (107) (156) (274)
Other assets........................ (90) (124) (63) (33) (22)
Accounts payable.................... -- 208 709 465 (223)
Accrued expenses.................... 174 430 580 (359) (210)
Deferred revenues -- related
parties........................... (80) 80 21 39 (21)
Deferred revenues -- third
parties........................... 213 778 128 (74) 58
------- -------- -------- ------- --------
Net cash used in operating activities......... (5,329) (6,996) (10,913) (5,086) (6,849)
------- -------- -------- ------- --------
Cash flows from investing activities:
Purchase of short-term investments.......... -- (20,739) (8,060) (4,605) (30,678)
Proceeds from sale of short-term
investments.............................. -- 15,287 9,071 3,001 6,457
Property and equipment purchases............ (1,321) (381) (1,369) (791) (470)
------- -------- -------- ------- --------
Net cash used in investing activities......... (1,321) (5,833) (358) (2,395) (24,691)
------- -------- -------- ------- --------
Cash flows from financing activities:
Proceeds from Preferred Stock issuances,
net...................................... 6,484 17,438 16,734 1,990 44,322
Proceeds from Common Stock issuances........ 1 65 3,208 88 194
Proceeds from stockholder note receivable... -- -- 38 -- --
Proceeds from issuance of convertible
promissory note -- related party......... -- -- -- -- 15,120
Proceeds from lease financing transaction... 1,421 -- -- -- --
Principal payments on capital lease
obligations.............................. (8) (298) (347) (168) (194)
Repurchase of Common Stock.................. -- (3) -- -- --
------- -------- -------- ------- --------
Net cash provided by financing activities..... 7,898 17,202 19,633 1,910 59,442
------- -------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................. 1,248 4,373 8,362 (5,571) 27,902
Cash and cash equivalents at beginning of
period...................................... 2,909 4,157 8,530 8,530 16,892
------- -------- -------- ------- --------
Cash and cash equivalents at end of period.... $ 4,157 $ 8,530 $ 16,892 $ 2,959 $ 44,794
======= ======== ======== ======= ========
Supplemental cash flow information:
Cash paid for interest...................... $ 27 $ 194 $ 154 $ 78 $ 51
======= ======== ======== ======= ========
Supplemental noncash activities:
Common Stock issued for stockholder note.... $ 524 $ 430 $ 100 $ 100 $ 2,000
======= ======== ======== ======= ========
Repurchase of Common Stock and cancellation of
related stockholder note.................... $ -- $ -- $ -- $ -- $ 245
======= ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 77
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY
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. See Note 9 -- Delaware Reincorporation.
For periods prior to January 1, 1997, the Company was considered to be in
the development stage.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying 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.
USE OF ESTIMATES
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.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
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 amortized cost, which approximates fair value due to the short
maturities of such instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, deposits and accounts payable are carried at cost, which
approximates fair value because of the short-term nature of those instruments.
PROPERTY AND EQUIPMENT
Property and equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation is provided on a
straight-line basis over the estimated
F-7
<PAGE> 78
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
useful lives of the assets, which range from three to five years. Amortization
of leasehold improvements is computed using the straight-line method over the
shorter of the remaining lease term or the estimated useful life of the related
asset, typically three years. Purchased internal-use software consists primarily
of amounts paid to third parties for software applications that support the Wink
response network and the Company's computer equipment. Purchased internal-use
software is depreciated over its useful life, generally three years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS No. 121"). SFAS No. 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the estimated
future undiscounted cash flows attributable to such assets.
REVENUE RECOGNITION
The Company's historical revenues have been derived from license fees
relating to royalties earned from the Wink Engine software, license fees
relating to Wink Studio software, non-recurring engineering services under
agreements to port the Wink Engine software to various televisions and set-top
terminals, and service fees relating to software installation and post-contract
customer support. The Company recognizes 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 monthly over the term of the subscription
agreement, generally one year. 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-contract customer support fees are recognized
ratably over the term of the support agreement. Fees received in advance of
revenue recognition are included in the balance sheet as deferred revenue.
The Company expects that in future periods, revenues will also be derived
from the Wink response network, Wink Server Studio and Wink Broadcast Server.
Revenues from the Wink response network will be generated by charging
transaction fees to advertisers for each information request or purchase order
obtained from viewers or on a fixed fee basis. All advertising agreements in
place as of June 1999 provide for a fixed fee to be paid to the Company without
any per transaction fees. These fees are recognized ratably over the life of the
agreement. Revenues derived from the Wink Server Studio and Wink Broadcast
Server software applications will be recognized monthly based upon the
applicable subscription fee. 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.
REVENUE SHARING AND GUARANTEES
The Company's business model allows other television industry participants
supporting Wink-enhanced programming to benefit economically from Wink Enhanced
Broadcasting. In this regard, Wink has entered into a number of agreements with
cable system operators and certain other market participants to share with these
entities a portion of revenues, if any, the Company generates from
F-8
<PAGE> 79
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
viewer responses to Wink Enhanced Broadcasting. To date, no transaction fee
revenue has been recognized from the Wink Response Network. Any amounts payable
to third parties in future periods resulting from revenue sharing will be
included in cost of revenues in the period revenue is recognized.
The Company has also provided minimum revenue guarantees that become
effective once the relevant participant begins deployment or achieves specified
deployment levels of Wink Enhanced Broadcasting. For contracts that do not
require minimum deployment levels, the revenue guarantee will be recognized as
incurred as cost of revenues over the contract term as Wink-enabled devices are
deployed. For contracts that do require minimum deployment levels, the revenue
guarantee will be recognized as incurred over the contract term beginning in the
period the minimum deployment level is achieved.
SALES TO SIGNIFICANT CUSTOMERS
During the years ended December 31, 1996, 1997 and 1998, sales to customers
comprising 10 percent or more of the Company's total revenues for the periods
indicated were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
CUSTOMER 1996 1997 1998
<S> <C> <C> <C>
A -- related party................................... 10% 0% 0%
B -- related party................................... 34% 21% 0%
C -- related party................................... 0% 62% 43%
D -- third party..................................... 32% 14% 0%
E -- third party..................................... 24% 0% 40%
F -- third party..................................... 0% 0% 15%
</TABLE>
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and trade accounts receivable, which are not
collateralized. The Company limits its exposure to credit loss by placing its
cash and cash equivalents with financial institutions that management believes
are credit worthy and by placing its short-term investments in corporate
commercial paper issues of various entities. Concentrations of credit risk with
respect to trade accounts receivable are considered to be limited due to the
assessed credit quality of the customers comprising the Company's customer base.
The Company performs ongoing credit evaluations of its customers' financial
condition to determine the need for an allowance for doubtful accounts. The
Company has not experienced significant credit losses to date. At December 31,
1997, one related party customer accounted for the entire accounts receivable
balance. At December 31, 1998, five customers individually accounted for more
than 10% of the entire accounts receivable balance. These five customers, in
aggregate, accounted for 76% of the total accounts receivable balance at
December 31, 1998. One of these five customers was a related party and accounted
for 22% of the total accounts receivable balance at December 31, 1998.
F-9
<PAGE> 80
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred in accordance with
Statement of Financial Accounting Standards No. 2 ("SFAS No. 2"), "Accounting
for Research and Development Costs."
SOFTWARE DEVELOPMENT COSTS
Costs incurred in the research and development of new products and
enhancements to existing products are charged to expense as incurred until the
technological feasibility of the product or enhancement has been established
through the development of a working model. After establishing technological
feasibility, additional development costs incurred through the date the product
is available for general release would be capitalized and amortized over the
estimated product life. No costs have been capitalized to date, as the effect on
the financial statements for all periods presented is immaterial.
ADVERTISING COSTS
Advertising costs are expensed as incurred in accordance with Statement of
Position ("SoP") No. 93-7, "Reporting on Advertising Costs." Advertising costs
for the years ended December 31, 1996, 1997 and 1998 totaled $210,000, $147,000
and $904,000, respectively. Advertising costs for the six months ended June 30,
1998 and 1999 totaled $491,000 (unaudited) and $271,000 (unaudited),
respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency of the consolidated foreign subsidiary in Japan is
its local currency. Accordingly, all assets and liabilities of this entity are
translated at the current exchange rates at each balance sheet date. To date,
the subsidiary in Japan has not recognized revenues or expenses. In the event
that the subsidiary has revenue and expense components in future periods, such
amounts will be translated at weighted average exchange rates in effect during
the year. Gains and losses resulting from foreign currency translation have not
been material to the consolidated financial statements through December 31, 1998
and through June 30, 1999 (unaudited). To the extent these gains or losses are
recognized in future periods, such amounts will be recorded directly into a
separate component of stockholders' equity and comprehensive income. Foreign
currency transaction gains and losses are included in the determination of net
income or loss. During the years ended December 31, 1996, 1997 and 1998 and
during the six months ended June 30, 1998 (unaudited) and 1999 (unaudited), net
foreign currency transaction gains and losses did not have a material impact on
the consolidated financial statements.
STOCK-BASED COSTS AND EXPENSES
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation cost is recognized based on the difference, if any, on the date of
F-10
<PAGE> 81
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.
The Company accounts for equity instruments issued in exchange for the
receipt of goods or services from other than employees in accordance with SFAS
No. 123 and the consensus reached by the Emerging Issues Task Force in Issue No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in conjunction with Selling, Goods or Services."
Costs are measured at the fair market value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably
measurable. The value of equity instruments issued for consideration other than
employee services is determined on the earlier of the date on which there first
exists a firm commitment for performance by the provider of goods or services or
on the date performance is complete using the Black-Scholes pricing model.
Costs and expenses include non-cash charges for stock compensation and
warrant amortization as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ----------------
1996 1997 1998 1998 1999
---- ---- ------ ---- ------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Research and development............... $ -- $ 71 $ 204 $ 95 $ 100
Sales and marketing.................... -- 312 846 422 2,747
General and administrative............. 4 72 206 105 105
---- ---- ------ ---- ------
$ 4 $455 $1,256 $622 $2,952
==== ==== ====== ==== ======
</TABLE>
INCOME TAXES
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
common shares outstanding. Diluted net loss per share is computed using the
weighted average number of common and potential common shares outstanding.
Potential common shares consist of the incremental number of common shares
issuable upon conversion of Convertible Preferred Stock (using the if-converted
method) and common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method). Potential common shares are excluded
from the computation if their effect is anti-dilutive. Net loss per share
computations are in accordance with SFAS No. 128, "Earnings Per Share," and the
Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 98.
F-11
<PAGE> 82
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Weighted average potential common shares, which are excluded from the
determination of basic and diluted net loss per share as their effect is
anti-dilutive, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------ ------------------
1998 1999
(UNAUDITED)
<S> <C> <C>
Convertible Preferred Stock........................... 6,243,808 7,867,298
Common Stock options.................................. 2,536,986 3,389,089
Convertible Preferred Stock warrants.................. 17,500 17,500
Common Stock warrants................................. 1,588,200 2,148,145
Common Stock subject to repurchase.................... 1,118,236 691,356
------------ -----------
11,504,730 14,113,388
============ ===========
</TABLE>
See Note 10 -- Subsequent Events.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma basic net loss per share is computed using the weighted average
number of common shares outstanding and the pro forma effects of the automatic
conversion of the Company's Convertible Preferred Stock into shares of the
Company's Common Stock effective upon the closing of an initial public offering
as if such conversion occurred on January 1, 1998, or at date of original
issuance, if later. Pro forma diluted net loss per share is computed using the
pro forma weighted average number of common and potential common shares
outstanding. Pro forma potential common shares consist of Common Stock subject
to repurchase and stock options and warrants (using the treasury stock method).
Pro forma potential common shares have been excluded from the computation as
their effect is antidilutive. See Note 10 -- Subsequent Events.
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of an initial public offering, the outstanding
shares of Series A, Series B, Series C and Series D Convertible Preferred Stock
will automatically convert into 1,250,000, 2,233,750, 4,322,250 and 3,698,333
shares, respectively, of Common Stock. In addition, warrants to purchase 17,500
shares of Series B Convertible Preferred Stock will convert into warrants to
purchase 17,500 shares of Common Stock. The pro forma effects of these
transactions are unaudited and have been reflected in the accompanying pro forma
balance sheet at June 30, 1999. See Note 10 -- Subsequent Events.
UNAUDITED INTERIM RESULTS
The accompanying interim consolidated financial statements at June 30,
1999, and for the six months ended June 30, 1998 and 1999, are unaudited. The
unaudited interim consolidated financial statements have been prepared on the
same basis as the annual consolidated financial statements and, in the opinion
of management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Company's financial position,
results of operations and cash flows as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999. The financial data and other information disclosed
in these notes to consolidated financial statements related to
F-12
<PAGE> 83
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these periods are unaudited. The results for the six months ended June 30, 1999
are not necessarily indicative of the results to be expected for the year ended
December 31, 1999.
SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way companies report information about operating segments in financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. In accordance with the
provisions of SFAS No. 131, the Company has determined that it operates in only
one operating segment.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from nonowner
sources. To date, the Company's comprehensive net loss has not varied materially
from the reported net loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivatives
Instruments and Hedging Activities -- Deferral of Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 133, as amended by SFAS 137, is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000, with
earlier application encouraged. The Company does not currently nor does it
intend in the future to use derivative instruments and therefore does not expect
that the adoption of SFAS 133 will have any impact on its financial position or
results of operations.
In December 1998, the AICPA issued Statement of Position No. 98-9,
"Modification of SoP No. 97-2, Software Revenue Recognition, With Respect to
Certain Transactions" ("SoP 98-9"), which is effective for transactions entered
into in fiscal years beginning after March 15, 1999. SoP 98-9 amends SoP 97-2
and extends the effective date of SoP No. 98-4 "Deferral of the Effective Date
of a Provision of SoP 97-2, Software Revenue Recognition" ("SoP 98-4"), and
provides additional interpretive guidance. The adoption of SoP 97-2 has not had
and the adoption of SoP 98-4 and SoP 98-9 are not expected to have a material
impact on the Company's results of operations, financial position or cash flows.
F-13
<PAGE> 84
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- RELATED PARTY TRANSACTIONS
The Company has entered into various agreements with certain holders of the
Company's Preferred and Common Stock. These agreements consist primarily of
royalties derived from the sale of Wink enabled products and non-recurring
engineering services. Revenues and related costs of revenues together with
deferred revenues and accounts receivable from these related parties are
separately disclosed in the statement of operations and balance sheet. In June
1999, the Company paid $375,000 (unaudited) to a holder of Common and Preferred
Stock in connection with a research and development agreement for the period
from July 1, 1999 through September 30, 1999. This amount is separately
disclosed in the balance sheet.
NOTE 4 -- BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------- -----------
1997 1998 1999
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Accounts receivable -- third parties, net:
Accounts receivable -- third parties............. $ -- $ 187 $ 229
Less allowance for doubtful accounts............. -- -- (30)
------ ------- -------
$ -- $ 187 $ 199
====== ======= =======
Property and equipment, net:
Computer equipment............................... $1,050 $ 1,521 $ 2,069
Office furniture and equipment................... 526 575 587
Leasehold improvements........................... 357 358 358
Purchased internal-use software.................. 161 1,009 919
------ ------- -------
2,094 3,463 3,933
Less accumulated depreciation and amortization... (991) (1,701) (2,140)
------ ------- -------
$1,103 $ 1,762 $ 1,793
====== ======= =======
</TABLE>
Assets acquired under capital lease obligations are included in property
and equipment and totaled $1,421, $1,421 and $1,421 (unaudited), with related
accumulated depreciation of $674, $1,046 and $1,232 (unaudited) at December 31,
1997 and 1998 and June 30, 1999, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------- -----------
1997 1998 1999
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued expenses:
Compensation and benefits......................... $455 $1,083 $ 774
Deferred rent..................................... 117 72 40
Other............................................. 91 88 219
---- ------ ------
$663 $1,243 $1,033
==== ====== ======
</TABLE>
F-14
<PAGE> 85
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- INCOME TAXES
No current provision or benefit for federal or state income taxes has been
recorded for the years ended December 31, 1996, 1997 and 1998 and for the six
months ended June 30, 1998 (unaudited) and 1999 (unaudited), as the Company has
incurred net operating losses and has no carryback potential.
At December 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $27,000,000 available to reduce future taxable
income. At June 30, 1999, the Company had federal and state net operating loss
carryforwards of approximately $34,500,000 (unaudited) available to reduce
future taxable income. Such carryforwards may be limited in certain
circumstances including, but not limited to, cumulative stock ownership changes
of more than 50 percent over a three-year period and expire at varying amounts
during the period from 2002 through 2013. The Company believes that there were
cumulative changes of ownership of greater than 50 percent in December 1995,
March 1996 and March 1998. Accordingly, the amount of loss carryforwards that
can be utilized to reduce future taxable income for federal and state income tax
purposes will be limited to approximately $8,000,000 per year. Net deferred tax
assets are composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- -----------
1997 1998 1999
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating loss carryforwards................. $ 5,750 $ 10,700 $12,600
Deferred revenues................................ 600 700 600
Other............................................ 150 100 100
------- -------- -------
Gross deferred tax assets........................ 6,500 11,500 13,300
Deferred tax asset valuation allowance........... (6,500) (11,500) (13,300)
------- -------- -------
Net deferred tax assets.......................... $ -- $ -- $ --
======= ======== =======
</TABLE>
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. The valuation allowance increased by $5,000,000 from December 31, 1997
to December 31, 1998. The valuation allowance increased by $1,800,000
(unaudited) from December 31, 1998 to June 30, 1999.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its main office facilities under a noncancelable
operating lease which expires in January 2000. Under the terms of the lease, the
Company is required to pay property taxes, insurance and normal maintenance
costs. The Company also leases certain equipment under capital lease
obligations.
F-15
<PAGE> 86
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating and capital
leases are as follows at December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
(IN THOUSANDS)
<S> <C> <C>
1999...................................................... $743 $ 490
2000...................................................... 62 387
---- -----
$805 877
====
Less amount representing interest........................... (110)
-----
Present value of capital lease obligations.................. 767
Less current portion........................................ (402)
-----
Long-term portion........................................... $ 365
=====
</TABLE>
Rent expense on noncancelable operating leases for the years ended December
31, 1996, 1997 and 1998, totaled $573,000, $694,000 and $714,000, respectively.
Rent expense on noncancelable operating leases for the six months ended June 30,
1998 and 1999, totaled $352,000 (unaudited) and $355,000 (unaudited).
REVENUE SHARING, GUARANTEES AND OTHER COMMITMENTS
The Company has entered into a number of agreements with cable operators,
direct broadcast satellite operators ("DBS operators") and certain other market
participants to share with these entities a portion of revenues, if any, the
Company generates from viewer responses to Wink Enhanced Broadcasting. To date,
no transaction fee revenue has been recognized from the Wink Response Network.
For certain cable and DBS operators, the Company has also provided a
minimum revenue guarantee if the operator makes a minimum volume commitment for
Wink Engines deployed. If these minimum volume requirements are met, and Wink
Enhanced Broadcasting fails to generate sufficient revenue to meet the
guaranteed amount per Wink subscriber, the Company is obligated to pay the
difference between the guaranteed amount and the amount earned by the operator.
If no amounts are earned by the operators and the minimum deployment levels are
achieved, the aggregate three year revenue guarantee based on contracts in place
on December 31, 1998 and June 30, 1999 (unaudited) totaled $8,375,000.
In addition, the Company has provided a minimum revenue guarantee to one
industry participant totaling $2.50 over 18 months for each deployment of a
Wink-enabled device. The arrangement does not provide for a minimum level of
deployment, and accordingly, the Company is unable to reasonably estimate the
amounts, if any, that could become payable under this arrangement.
The Company has also agreed to provide marketing and technical development
funds to certain cable and digital broadcast satellite operators, contingent
upon the commercial launch of Wink enhanced broadcasting. The Company has agreed
to provide development funds at the rate of $1.00 per subscriber with a
guaranteed minimum of $1,000,000 to a major digital broadcast satellite
provider. Additional marketing development and networking equipment funds
committed to in contractual agreements with cable operators total approximately
$495,000 and $1,885,000 at
F-16
<PAGE> 87
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and June 30, 1999 (unaudited). These costs, if and when
incurred, shall be recorded as sales and marketing expense.
See Note 10 -- Subsequent Events.
LEGAL PROCEEDING
A patent claim arising in the ordinary course of business, seeking monetary
damages and other relief is pending. The amount of liability, if any, from such
claim can not be determined with certainty; however, in the opinion of
management, the ultimate liability for such claim will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
NOTE 7 -- STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock consists of the following:
<TABLE>
<CAPTION>
SHARES ISSUED
AND OUTSTANDING DECEMBER 31, 1998 JUNE 30, 1999
--------------------------- ---------------------- ----------------------
SHARES DECEMBER 31, JUNE 30, GROSS LIQUIDATION GROSS LIQUIDATION
AUTHORIZED 1997 1998 1999 PROCEEDS AMOUNT PROCEEDS AMOUNT
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Series A.................... 1,250 1,250 1,250 1,250 $ 2,000 $ 2,000 $ 2,000 $ 2,000
Series B.................... 2,251 2,234 2,234 2,234 8,936 8,936 8,936 8,936
Series C.................... 4,500 2,191 4,322 4,322 34,576 34,576 34,576 34,576
Series D.................... 5,000 -- -- 3,698 -- -- 44,380 44,380
------ ----- ----- ------ ------- ------- ------- -------
13,001 5,675 7,806 11,504 $45,512 $45,512 $89,892 $89,892
====== ===== ===== ====== ======= ======= ======= =======
</TABLE>
CONVERSION
Each share of Preferred Stock is convertible at the option of the holder at
any time into Common Stock at the initial conversion rate of one share of Common
Stock for each share of Preferred Stock. The initial conversion rate of each
series of Preferred Stock is subject to adjustment as provided in the
Certificate of Incorporation, as amended. Each share of Preferred Stock shall
automatically be converted into shares of Common Stock at the then effective
conversion rate for each series upon the closing of a firm commitment
underwritten initial public offering of the Company's Common Stock at a price
per share not less than $8.00 per share and an aggregate offering price to the
public of not less than $10,000,000, exclusive of underwriting commissions and
offering expenses.
VOTING
Each holder of Series A, Series B, Series C and Series D Preferred Stock is
entitled to a number of votes equal to the number of shares of Common Stock into
which such holders' shares of Preferred Stock could be converted.
F-17
<PAGE> 88
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DIVIDEND
Holders of Series A, Series B, Series C and Series D Preferred Stock are
entitled to a noncumulative dividend, when and if declared by the Board of
Directors, at the fixed rate of $0.128, $0.32, $0.64 and $0.96 (unaudited),
respectively, per share per annum, prior and in preference to any distribution
on the Common Stock.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company
(as defined), the holders of the Series A, Series B, Series C and Series D
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution to the holders of the Common Stock, the amount of $1.60, $4.00,
$8.00 and $12.00 (unaudited), respectively, per share plus an amount equal to
all declared but unpaid dividends on such shares.
COMMON STOCK
REPURCHASE RIGHTS
At December 31, 1998, the Company had the right to repurchase the unvested
portion of 3,072,916 shares of Common Stock sold to certain key employees at a
weighted average price of $0.40 per share. Under employment arrangements with
certain key employees, in the event the Company is acquired by or merged into
another company prior to full vesting of the shares subject to repurchase
rights, the employees are entitled to have the Company's repurchase right lapse
as to 50 percent of the unvested shares. The Common Stock repurchase rights
reside solely with the Company and there are no situations under which the
Stockholders can put their shares or cause any other form of redemption. At
December 31, 1998, 830,954 shares were subject to repurchase rights of the
Company. At June 30, 1999, the Company had the right to repurchase the unvested
portion of 3,200,624 shares (unaudited) of Common Stock. At June 30, 1999,
752,175 shares (unaudited) were subject to repurchase rights of the Company.
RESERVED SHARES
The Company has reserved an adequate number of shares of Common Stock to
satisfy the conversion of all Preferred Stock and the exercise of all
outstanding options and warrants.
WARRANTS
In July 1996, the Company granted a fully exercisable warrant to purchase
Common Stock to two companies affiliated with a director of the Company in
connection with the issuance of Series B Preferred Stock. The warrant enables
the holders to purchase 441,257 and 58,743 shares of Common Stock, respectively,
at $6.00 per share and expires in July 2001. The warrant had an immaterial fair
value on the date of grant.
In September 1996, the Company granted a fully exercisable warrant to
purchase Series B Preferred Stock to a company providing property and equipment
lease financing. The warrant enables the holder to purchase 17,500 shares of
Series B Preferred Stock at $4.00 per share and expires in September 2002. The
warrant and related services had an immaterial fair value on the date of grant.
F-18
<PAGE> 89
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In April 1997, the Company granted a fully exercisable warrant to purchase
Common Stock to certain holders of Series C Preferred Stock providing business
development services. The warrant enables the holders to purchase 75,000 shares
of Common Stock at $0.80 per share and expires in April 2007. The warrant and
related services had an immaterial fair value on the date of grant.
In June 1997, the Company granted a fully exercisable warrant to purchase
Common Stock in connection with the issuance of Series C Preferred Stock. The
warrant enables the holders to purchase 525,000 shares of Common Stock at $8.00
per share and expires in June 2009. The estimated fair value of the warrant
totaled $142,000 and is included in additional paid-in capital.
In June 1997, the Company granted a warrant to purchase Common Stock to a
broadcasting company that agreed to use its reasonable best efforts to develop
and air Wink-enhanced programming over an approximate 18 month period. The
broadcasting company is affiliated with a holder of the Company's Series C
Preferred Stock. The warrant enables the holder to purchase 375,000 shares of
Common Stock at $8.00 per share and expires in June 2009. On the date of grant,
the warrant was exercisable with respect to 75,000 shares (the "fixed shares")
and was exercisable with respect to the remaining 300,000 shares (the "variable
shares") contingent upon the completion of specified future performance
obligations of the broadcasting company. The grant date fair value of the
warrant relating to the fixed shares totaled $20,000, which was charged to sales
and marketing expense. The fair value of the warrant relating to the variable
shares on December 31, 1997, totaled $726,000. Of this amount, $220,000 was
recognized as sales and marketing expense during the year ended December 31,
1997. On February 1, 1998, the Company amended the terms of the warrant to
eliminate any future performance obligation of the broadcasting company. The
fair value of the warrant relating to the variable shares on the date the
performance obligation was eliminated had not changed from the estimated fair
value on December 31, 1997. Accordingly, the unamortized value of the warrant
totaling $506,000 was recognized as sales and marketing expense during the year
ended December 31, 1998 over the period in which the Company received benefits
from the broadcaster's services.
In November 1997, the Company granted a fully exercisable warrant to
purchase Common Stock to a company providing business development services. The
warrant enables the holder to purchase 38,200 shares of Common Stock at $4.00
per share and expires in November 2009. The warrant and related services had an
immaterial fair value on the date of grant.
In January 1998, the Company granted a fully exercisable warrant to
purchase Common Stock in connection with the issuance of Series C Preferred
Stock. The warrant enables the holder to purchase 50,000 shares of Common Stock
at $0.80 per share and expires in January 2008. The estimated fair value of the
warrant totaled $226,000 and is included in additional paid-in capital.
In August 1998, the Company granted a fully exercisable warrant to purchase
Common Stock to a holder of Series C Preferred Stock providing consulting
services. The warrant enables the holder to purchase 25,000 shares of Common
Stock at $8.00 per share and expires in August 2003. The estimated fair value of
the warrant totaled $135,000 and is included in sales and marketing expense.
In December 1998, the Company granted a warrant to purchase Common Stock to
a cable operator company that is a holder of Series C Preferred 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
F-19
<PAGE> 90
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 June 30, 1999, the lowest aggregate fair value of the warrant
totaled $2,050,000 (unaudited). 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.
OTHER
Through December 31, 1998, no dividends on either the Preferred or Common
Stock have been declared by the Board of Directors.
See Note 10 -- Subsequent Events.
NOTE 8 -- EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
The 1994 Stock Plan (the "Plan"), as amended, provides for the issuance of
up to 7,000,000 shares of Common Stock in connection with incentive and
non-statutory stock option awards granted to employees, directors and
consultants to the Company. Stock purchase rights may also be granted under the
Plan. Options must be issued at prices not less than 100 percent and 85 percent,
for incentive and non-statutory options, respectively of the estimated fair
value of the Common Stock on the date of grant and are exercisable for periods
not exceeding ten years from the date of grant. Options granted to stockholders
who own greater than 10 percent of the outstanding stock at the time of grant
are exercisable for periods not exceeding five years from the date of grant and
must be issued at prices not less than 110 percent of the estimated fair value
at the date of grant. Options granted under the Plan generally vest ratably over
four years following the date of grant, although the Board of Directors may
issue options that vest over a period up to five years. The Company has certain
repurchase rights and rights of first refusal on shares purchased under the
Plan.
During the year ended December 31, 1997 and 1998 and the six months ended
June 30, 1998 and 1999, the Company recognized unearned compensation totaling
$700,000, $600,000, $600,000 (unaudited) and $5,132,000 (unaudited),
respectively, with respect to certain stock option grants and sales of
restricted stock to employees. These expenses are being amortized over the
respective four-year vesting periods. Amortization of unearned compensation
totaled $215,000, $615,000, $359,000 (unaudited) and $305,000 (unaudited) for
the year ended December 31, 1997 and 1998 and for the six months ended June 30,
1998 and 1999, respectively, and has been allocated to operating costs and
expenses based upon the primary activity of the applicable employees. See Note
10 -- Subsequent Events.
F-20
<PAGE> 91
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under the
minimum value method prescribed by SFAS No. 123, the Company's net loss would
have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- ------------------
1996 1997 1998 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss:
As reported......................... $(5,884) $(9,166) $(14,036) $(5,777) $(9,201)
Pro forma........................... $(5,905) $(9,235) $(14,342) $(5,906) $(9,533)
Basic and diluted net loss per share:
As reported......................... $ (0.91) $ (1.25) $ (1.57) $ (0.66) $ (0.92)
Pro forma........................... $ (0.92) $ (1.26) $ (1.60) $ (0.68) $ (0.96)
</TABLE>
Under SFAS No. 123, the minimum value of each option grant is estimated on
the grant date using the minimum value method with the following weighted
average assumptions used for grants made:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
1996 1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected lives, in years........................ 5 5 5 5 5
Risk free interest rates........................ 6.30% 6.30% 5.00% 5.47% 5.45%
Dividend yield.................................. 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
The following table summarizes information about stock option transactions
under the Plan:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- -------------------
1996 1997 1998 1999
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period....................... 793 $0.05 1,759 $0.23 2,122 $1.06 2,813 $2.90
Granted........................ 980 0.37 1,099 1.82 1,092 5.66 1,717 8.16
Exercised...................... (14) 0.05 (537) 0.13 (287) 0.62 (203) 0.96
Canceled....................... -- -- (199) 0.44 (114) 2.59 (258) 3.05
----- ----- ----- --------
Outstanding at end of period... 1,759 0.23 2,122 1.06 2,813 2.90 4,069 5.22
----- ----- ----- --------
Options vested at period end... 431 289 971 1,183
----- ----- ----- --------
Weighted-average fair value of
options granted during the
period....................... 0.15 0.67 1.23 4.43
</TABLE>
F-21
<PAGE> 92
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects of
reported net income (loss) for future years.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
------------------------------------ -----------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE VESTED PRICE
(IN THOUSANDS, EXCEPT YEARS AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
$ 0.01 - $0.25 372 6.8 year $ 0.12 236 $ 0.12
0.40 - 0.80 565 7.9 0.50 287 0.47
1.00 - 2.00 627 8.4 1.46 220 1.44
4.00 - 6.00 1,006 9.4 4.92 199 4.01
8.00 218 9.6 8.00 21 8.00
12.00 25 9.8 12.00 8 12.00
----- ---
2,813 8.55 2.90 971 1.59
===== ===
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 1999 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE VESTED PRICE
<S> <C> <C> <C> <C> <C>
$ 0.01 - $0.25 244 6.2 year $0.09 194 $ 0.10
0.40 - 0.80 517 7.4 0.50 323 0.48
1.00 - 2.00 443 8.0 1.38 220 1.36
4.00 - 6.00 951 7.3 4.88 396 4.49
8.00 1,819 9.5 8.00 27 8.00
12.00 95 7.9 12.00 23 12.00
----- -----
4,069 8.3 5.22 1,183 2.32
===== =====
</TABLE>
401(k) PLAN
Effective July 1996, the Company adopted the Wink Communications, Inc.
401(k) Profit Sharing Plan (the "401(k) Plan"), which qualifies as a deferred
salary arrangement under Section 401 of the Internal Revenue Service Code. Under
the 401(k) Plan, participating employees may defer a portion of their pretax
earnings not to exceed 15% of their total compensation. The Company, at its
discretion, may make contributions for the benefit of eligible employees. The
Company made no contributions through December 31, 1998.
F-22
<PAGE> 93
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- DELAWARE REINCORPORATION
In February 1999, the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware to be effective prior to
the Company's initial public offering. The reincorporation was completed in
August 1999. As a result of the reincorporation, the Company is authorized to
issue 100,000,000 shares of $0.001 par value Common Stock and 5,000,000 shares
of $0.001 par value Preferred Stock. The Board of Directors has the authority to
issue the undesignated Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof.
NOTE 10 -- SUBSEQUENT EVENTS (UNAUDITED)
WARRANTS
In February 1999, the Company granted a fully exercisable warrant to
purchase Common Stock to a company affiliated with a broadcasting company as an
incentive for signing a definitive software licensing agreement with the
broadcasting company. The warrant enables the holder to purchase 200,000 shares
of Common Stock at $12.00 per share, subject to adjustment, and expires in
February 2004. The exercise price is subject to adjustment in the event that the
Company completes a qualified equity financing with a per share issuance price
of less than $12.00 per share prior to an initial public offering by the
Company. The maximum exercise price is $12.00 per share. The fair value of the
warrant on the measurement date totaled $1,220,000 (unaudited) and was
recognized as sales and marketing expense as there was no remaining performance
obligation on behalf of the warrant holder and no significant license revenues
are expected to be derived from the agreements.
In March 1999, the Company granted a fully exercisable warrant to purchase
Common Stock to a separate broadcasting company as an incentive for signing a
definitive software licensing agreement. The warrant enables the holder to
purchase 125,000 shares of Common Stock at $12.00 per share, subject to
adjustment, and expires in March 2004. The exercise price is subject to
adjustment in the event that the Company completes a qualified equity financing
with a per share issuance price of less than $12.00 per share prior to an
initial public offering by the Company. The maximum exercise price is $12.00 per
share. The fair value of the warrant on the measurement date totaled $760,000
(unaudited) and was recognized as sales and marketing expense as there was no
remaining performance obligation on behalf of the warrant holder and no
significant license revenues are expected to be derived from the agreement.
In May 1999, the Company granted a fully exercisable warrant to purchase
Common Stock to Microsoft Corporation in connection with a 10 year definitive
software distribution agreement. The warrant enables the holder to purchase
500,000 shares of Common Stock at $12.00 per share, subject to adjustment, and
expires in May 2004. The exercise price is subject to adjustment in the event
that the Company completes a qualified equity financing with a per share
issuance price of less than $12.00 per share prior to an initial public offering
by the Company. The maximum exercise price is $12.00 per share. The fair value
of the warrant on the measurement date totaled $4,050,000 (unaudited) which has
been included in unearned compensation in the accompanying statement of
stockholders equity. During the six months ended June 30, 1999, amortization
recognized as sales and marketing expense totaled $68,000 and the remaining
$3,982,000 will be recognized as sales and marketing expense ratably over the
remainder of the ten year term of the agreement.
F-23
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WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Due to the possibility of rapid technological change and the high level of
competition in the Company's industry, there is a possibility that the estimated
period of benefit from this arrangement may ultimately be less than the
contractual term of ten years. In the event that future events or transactions
reduce or eliminate the period of future benefit, the then unamortized value of
the warrant will be recognized as a charge to sales and marketing expense either
over the remaining period of benefit or immediately at the time of such change,
as applicable.
In July 1999, the Company granted a fully exercisable warrant to purchase
Common Stock to a broadcasting company as an incentive for signing a definitive
software licensing agreement and to promote the development of Wink-enhanced
programming. The warrant enables the holder to purchase 75,000 shares of Common
Stock at $12.00 per share, subject to adjustment, and expires in July 2004. The
exercise price is subject to adjustment in the event that the Company completes
a qualified equity financing with a per share issuance price of less than $12.00
per share prior to an initial public offering by the Company. The maximum
exercise price is $12.00 per share. The fair value of the warrant on the
measurement date totaled $734,000 (unaudited) and was recognized as sales and
marketing expense during the three months ended September 30, 1999, as there was
no remaining performance obligation on behalf of the warrant holder and no
significant license revenues are expected to be derived from the agreement.
CONTRACT TERMINATION AGREEMENT
In May 1999, the Company and a third party executed an agreement that
terminated a development and license agreement dated April 1998. Under this
termination agreement, the third party paid the Company $1,112,000. Of this
amount, $1,000,000 was included in other income and the remaining $112,000
related to a non-recurring engineering agreement and was included in services
revenues from third parties during the six months ended June 30, 1999. The
Company has no material remaining obligations under these agreements.
COMMON STOCK
In May 1999, the Company entered into an employment agreement with a member
of management. In connection with this employment agreement, the Company sold
250,000 shares of Common Stock at a price of $8.00 per share in exchange for a
full-recourse, ten-year $2,000,000 promissory note. The note bears interest at a
rate of 6.40% per annum. The Company has the right to repurchase the shares at
original issuance cost of $8.00 per share. These repurchase rights lapse
progressively over a four-year period. In connection with the sale of these
shares, the Company recognized unearned compensation totaling $1,000,000
(unaudited), which will be amortized over the four-year vesting period.
DISTRIBUTION AGREEMENT
In May 1999, the Company entered into a 10 year definitive software
distribution agreement with Microsoft Corporation (the "distributor") that
entitles the distributor to share a portion of revenues, if any, the Company
generates from viewer responses to Wink Enhanced Broadcasting. The Company has
also provided a minimum revenue guarantee ranging from $2 to $4 per year, per
Microsoft-controlled Wink-enabled device. If such devices are enabled by
Microsoft and Wink Enhanced Broadcasting fails to generate sufficient revenue to
meet the guaranteed amount per Wink subscriber, the Company is obligated to pay
the difference between the guaranteed amount and the
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WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amount earned by the distributor. Such costs, if and when incurred, shall be
recorded as cost of revenues.
CONVERTIBLE PROMISSORY NOTE
In May 1999, the Company issued a convertible promissory note to Microsoft
Corporation in exchange for cash totaling $15,120,000. The convertible
promissory note may be converted, at the discretion of the holder, into
1,260,000 shares of the Company's Series D Convertible Preferred Stock at $12.00
per share. The convertible promissory note accrues interest at 10 percent, per
annum. At June 30, 1999, the Company had obligations totaling $15,120,000 under
the convertible promissory note. In July 1999, Microsoft Corporation exercised
its right to exchange the convertible promissory note for 1,260,000 shares of
the Company's Series D Convertible Preferred Stock.
SERIES D CONVERTIBLE PREFERRED STOCK FINANCING
In June 1999, the Company sold an aggregate of 3,698,333 shares of Series D
Convertible Preferred Stock at $12.00 per share for gross proceeds totaling
$44,380,000.
1999 STOCK PLAN
In June 1999, the 1999 Stock Plan (the "1999 Plan") was adopted by the
Board of Directors and will be submitted to the stockholders for their approval
prior to the date of the Company's initial public offering, to become effective
on the date of the initial public offering. The 1999 Plan provides for the grant
to employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and for grants to
employees, directors and consultants of nonstatutory stock options and stock
purchase rights. Unless terminated sooner, the 1999 Plan will terminate
automatically in 2009. A total of 2,500,000 shares of Common Stock have been
reserved for issuance pursuant to the 1999 Plan. The amount reserved under the
Plan will automatically increase at the end of each year by the lesser of (1)
1,000,000 shares, (2) 4% of outstanding shares on such date or (3) a lesser
amount determined by the Board of Directors.
1999 EMPLOYEE STOCK PURCHASE PLAN
In June 1999, the 1999 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board of Directors and will be submitted to the stockholders
for their approval prior to the date of the Company's initial public offering,
to become effective on the date of the initial public offering. The Purchase
Plan permits participants to purchase Common Stock through payroll deductions of
up to 15% of the participant's compensation, up to a maximum aggregate deduction
of $21,250 for all offering periods ending in any calendar year. A total of
250,000 shares of Common Stock have been reserved for issuance pursuant to the
Purchase Plan. The amount reserved under the Plan will automatically increase at
the end of each year by the lessor of (1) 75,000 shares, (2) 0.3% of outstanding
shares on such date or (3) a lesser amount determined by the Board of Directors.
1999 DIRECTOR OPTION PLAN
In June 1999, the 1999 Director Option Plan (the "Director Plan") was
adopted by the Board of Directors and will be submitted to the stockholders for
their approval prior to the date of the Company's initial public offering, to
become effective on the date of the initial public offering. The Director Plan
provides for the automatic grant of a nonstatutory option to purchase 40,000
shares of Common Stock to each new non-employee director who becomes a director
after the date of the
F-25
<PAGE> 96
WINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's initial public offering on the date that such person becomes a
director. Each current and future non-employee director will automatically be
granted an additional nonstatutory option to purchase 40,000 shares on the
fourth anniversary of the date of grant of his or her last option if he or she
served on the Board of Directors continuously during such period. A total of
250,000 shares of Common Stock have been reserved for issuance pursuant to the
Director Plan.
EMPLOYEE BONUS
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 sales
and marketing expense as there were no remaining performance obligations on
behalf of the holders.
F-26
<PAGE> 97
GRAPHIC IN TWO PARTS
TITLE: [Wink logo] Wink Enhanced Broadcasting (TM)
PART 1: End-to-End System
Wink logo and series of pictures depicting viewer use of the Wink system
with the following captions:
1. Our symbol indicates show or ad has Wink;
2. Viewer interacts & responds with remote control;
3. Sent for fulfillment by advertiser;
4. Viewer receives order via mail; and
5. Wink supplies advertisers/programmers with a variety of reports.
PART 2: Production, Delivery and Response Collection
Diagram of pictures depicting various components of the Wink system with
the following captions:
o Wink Software is used to create enhanced TV applications;
o Wink Broadcast Server manages the scheduling and insertion of
applications;
o Video Integration Wink enables networks & advertisers to add Wink
to their video;
o Data Insertion integrates broadcast programming with Wink
applications;
o Satellite;
o Cable;
o Broadcast;
o Wink Engine enables TV to display Wink; and
o The Wink Response Network collects & aggregates viewer responses.
<PAGE> 98
[LOGO]
<PAGE> 99
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AUGUST 18, 1999
[WINK LOGO]
4,750,000 SHARES OF COMMON STOCK
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P R O S P E C T U S
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DONALDSON, LUFKIN & JENRETTE
DEUTSCHE BANC ALEX. BROWN
BEAR, STEARNS & CO. INC.
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We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus should create an
implication that the information contained in this prospectus or the affairs of
Wink have not changed since the date of this prospectus.
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Until September 12, 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities may be required to deliver
a prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in this offering and when selling
previously unsold allotments or subscriptions.
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