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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-26655
WINK COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3212322
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1001 MARINA VILLAGE PARKWAY
ALAMEDA, CALIFORNIA 94501
(510) 337-2950
WWW.WINK.COM
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past (90) days. Yes |X| No |_|
The number of shares of the issuer's Common Stock outstanding as of
October 31, 2000 was 31,092,613.
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INDEX
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets .................................................... 3
Condensed Consolidated Statements of Operations .......................................... 4
Condensed Consolidated Statements of Cash Flows .......................................... 5
Notes to Condensed Consolidated Financial Statements ..................................... 6
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations .............................................................. 9
Risk Factors ............................................................................. 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............................... 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings ........................................................................ 19
Item 2. Changes in Securities .................................................................... 19
Item 3. Defaults Upon Senior Securities .......................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 19
Item 5. Other Information ........................................................................ 19
Item 6. Exhibits and Reports on Form 8-K ......................................................... 19
Signatures .......................................................................................... 20
</TABLE>
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WINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
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ASSETS
Current Assets:
Cash and cash equivalents .......................................... $ 32,287 $ 58,032
Short-term investments ............................................. 98,167 91,167
Accounts receivable - related parties .............................. 1,275 61
Accounts receivable - third parties, net ........................... 259 429
Prepaid expenses - related parties ................................. -- 375
Prepaid expenses and other current assets .......................... 2,650 1,537
--------- ---------
Total current assets ........................................... 134,638 151,601
Property and equipment, net ............................................. 4,035 2,538
Other assets - related parties .......................................... 1,574 1,493
Other assets ............................................................ 4,349 177
--------- ---------
$ 144,596 $ 155,809
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................... $ 1,319 $ 2,070
Accrued expenses ................................................... 3,786 2,636
Deferred revenue - related parties ................................. 132 200
Deferred revenue - third parties ................................... 933 1,119
Current portion of capital lease obligations ....................... -- 365
--------- ---------
Total current liabilities ...................................... 6,170 6,390
--------- ---------
Stockholders' Equity:
Preferred Stock, $0.001 par value: 5,000 shares authorized; 0 shares
issued and outstanding
Common Stock, $0.001 par value; 100,000 shares authorized;
31,038 and 30,017 shares issued and outstanding .................. 31 30
Additional paid-in capital ......................................... 241,203 210,601
Stockholders' notes receivable ..................................... (2,499) (2,749)
Unearned compensation .............................................. (33,455) (9,458)
Accumulated deficit ................................................ (68,176) (49,483)
Accumulated other comprehensive income ............................. 1,322 478
--------- ---------
Total stockholders' equity ..................................... 138,426 149,419
--------- ---------
$ 144,596 $ 155,809
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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WINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
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Revenues:
Licenses - related parties .................. $ 132 $ 195 $ 375 $ 292
Licenses - third parties .................... 211 174 718 375
Services - related parties .................. 1,096 100 1,508 298
Services - third parties .................... - - - 124
-------- -------- -------- --------
Total revenues .......................... 1,439 469 2,601 1,089
-------- -------- -------- --------
Costs and expenses:
Costs of services - related parties ......... 384 100 539 242
Costs of services - third parties ........... - - - 63
Costs of licenses - third parties ........... - - 16 -
Research and development .................... 4,634 2,672 12,715 6,832
Sales and marketing ......................... 3,997 2,483 9,257 7,565
General and administrative .................. 1,624 1,184 4,706 3,097
-------- -------- -------- --------
Total costs and expenses ................ 10,639 6,439 27,233 17,799
-------- -------- -------- --------
Loss from operations ............................. (9,200) (5,970) (24,632) (16,710)
Interest and other income ........................ 2,314 1,458 5,960 3,048
Interest expense ................................. (2) (20) (22) (71)
-------- -------- -------- --------
Net loss ......................................... $ (6,888) $ (4,532) $(18,694) $(13,733)
======== ======== ======== ========
Net loss per share:
Basic and diluted ........................... $ (0.22) $ (0.24) $ (0.62) $ (1.06)
Weighted average shares outstanding ......... 30,718 19,218 30,255 13,005
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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WINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................. $ (6,888) $ (4,532) $ (18,694) $ (13,733)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ......................... 475 263 1,210 702
Stock-based costs and expenses ........................ 1,723 1,368 3,319 4,320
Net loss on equity investment ......................... 55 - 99 -
Changes in assets and liabilities:
Accounts receivable - related parties ............ (813) 8 (1,214) 48
Accounts receivable - third parties .............. 104 115 170 103
Prepaid expenses - related parties ............... - 375 375 -
Prepaid expenses & other current assets .......... (970) (633) (1,113) (907)
Other assets ..................................... (40) (37) (81) (59)
Accounts payable ................................. (151) 331 (751) 108
Accrued expenses ................................. 369 391 1,150 181
Deferred revenues--related parties ............... (62) (275) (68) (296)
Deferred revenues--third parties ................. (90) (184) (186) (126)
--------- --------- --------- ---------
Net cash used in operating activities .......................... (6,288) (2,810) (15,784) (9,659)
--------- --------- --------- ---------
Cash flows from investing activities:
Net (purchases of) proceeds from short-term investments ... (9,206) (24,048) (6,143) (48,269)
Purchase of non-public equity securities .................. - - (4,271) -
Property and equipment purchases .......................... (860) (347) (2,707) (817)
--------- --------- --------- ---------
Net cash used in investing activities .......................... (10,066) (24,395) (13,121) (49,086)
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from Common Stock issuances ...................... 809 5,966 3,275 6,160
Proceeds from IPO, net .................................... - 77,261 - 77,261
Proceeds from stockholder's note receivable ............... - 40 250 40
Proceeds from Convertible Preferred Stock
issuances, net .......................................... - - - 44,322
Proceeds from issuance of convertible
promissory note - related party ......................... - - - 15,120
Principle payments on capital lease obligations ........... (140) (102) (365) (296)
--------- --------- --------- ---------
Net cash provided by financing activities ...................... 669 83,165 3,160 142,607
--------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents ........... (15,685) 55,960 (25,745) 83,862
Cash and cash equivalents at beginning of period ............... 47,972 44,794 58,032 16,892
--------- --------- --------- ---------
Cash and cash equivalents at end of period ..................... $ 32,287 $ 100,754 $ 32,287 $ 100,754
========= ========= ========= =========
Supplemental cash flow information:
Cash paid for interest .................................... $ 2 $ 20 $ 20 $ 71
========= ========= ========= =========
Supplemental noncash activities:
Common Stock issued for stockholder note .................. $ - $ - $ - $ 2,000
========= ========= ========= =========
Repurchase of Common Stock and cancellation
of related stockholder note ................................. $ - $ - $ - $ 245
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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WINK COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
Wink Communications, Inc. (the "Company") was incorporated in California on
October 7, 1994 and reincorporated in Delaware on August 12, 1999. The Company
offers an enhanced television broadcasting system that adds interactivity and
electronic commerce opportunities to traditional television programming and
advertising.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation of such information.
While the Company believes that the disclosures are adequate to make the
information not misleading, it is suggested that these financial statements be
read in conjunction with the consolidated financial statements and accompanying
notes included in the Company's Annual Report on Form 10-K filed March 30, 2000.
In accordance with the rules of the Securities and Exchange Commission, these
financial statements do not include all disclosures required by generally
accepted accounting principles. The results of operations for the interim period
ended September 30, 2000 are not necessarily indicative of results to be
expected for the full year or for any other period.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, Wink Japan, Inc. All
intercompany transactions and balances have been eliminated in consolidation.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents represent cash and highly liquid investments with a
remaining contractual maturity at the date of purchase of three months or less.
The Company classifies its investments in marketable securities as
available-for-sale. Accordingly, these investments are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. The Company recognizes gains and losses when
securities are sold using the specific identification method. For the three and
nine months ended September 30, 2000 and 1999, the Company did not recognize any
material realized gains or losses upon the sale of securities.
NOTE 2 - NET LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing the net loss
available to Common stockholders for the period by the weighted average number
of Common shares outstanding during the period. The calculation of diluted net
loss per share excludes potential Common shares if their effect is
anti-dilutive. Potential Common shares consist of unvested restricted Common
Stock, incremental Common shares issuable upon the exercise of stock options,
shares issuable upon conversion of Convertible Preferred Stock and Common shares
issuable upon the exercise of warrants to purchase Common Stock and Convertible
Preferred Stock.
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The following table sets forth the computation of basic and diluted net loss per
share for the periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
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Numerator:
Net Loss ............................ $ (6,888) $ (4,532) $(18,694) $(13,733)
Denominator:
Weighted average shares ............. 31,017 19,922 30,694 13,658
Weighted average unvested Common
shares subject to repurchase ...... (299) (704) (439) (653)
-------- -------- -------- --------
Denominator for basic and diluted ........ 30,718 19,218 30,255 13,005
-------- -------- -------- --------
Net loss per share:
Basic and diluted ................... $ (0.22) $ (0.24) $ (0.62) $ (1.06)
</TABLE>
NOTE 3 - COMMON STOCK WARRANTS AND COMMON STOCK
In December 1998, the Company granted warrants to purchase Common Stock to a
cable operator company, an existing holder of Common Stock, as consideration for
the future deployment of Wink-enabled technology to at least 200,000 households.
The warrants enable the holder to purchase up to 250,000 shares of Common Stock
at either $12.00 or $16.00 per share, contingent upon the number of units
deployed, the timing of deployment and a minimum duration of service. In the
event the $12.00 exercise price is earned, the warrant will expire in January
2004. In the event the $16.00 exercise price is earned, the warrant will expire
in January 2005. In the quarter ended September 30, 2000, the cable operator
achieved the 200,000 Wink-enabled household minimum deployment criteria, and the
Company recognized the fair value of the warrants associated with the number of
units deployed. The fair value of the warrants, which totalled $389,000 at
September 30, 2000, will be remeasured at each reporting date until performance
is completed. The fair value is recognized as sales and marketing expense
ratably over the remainder of the cable affiliation agreement. Accordingly,
$65,000 was recognized as a sales and marketing expense in the quarter.
In July 2000, the Company granted a fully exercisable warrant to purchase Common
Stock to a non-employee individual as consideration for consulting services
rendered. The warrant enables the holder to purchase 10,000 shares at $28.75 per
share and expires in July 2003. The fair value of the warrant on the measurement
date totaled $224,000 and was recognized as sales and marketing expense in the
quarter ended September 30, 2000 as there was no remaining performance
obligation on behalf of the warrant holder. The warrant has not been exercised
as of the date of this filing.
In September 2000, the Company granted a fully exercisable warrant to purchase
Common Stock to a cable operator company in connection with a three-year
agreement to develop, deliver and promote interactive content and Wink's viewer
response services for the cable operator's subscribers. The warrant enables the
holder to purchase 100,000 shares at $14.63 per share and expires in September
2005. The fair value of the warrant on the measurement date totaled $1,024,000.
The amount will be amortized to sales and marketing expense ratably over the
three-year term of the agreement. The warrant has not been exercised as of the
date of this filing.
The Company also entered into a warrant issuance agreement with this cable
operator for the future deployment of Wink-enabled technology to its
subscribers. In the warrant issuance agreement, the Company agrees to issue the
cable operator warrants to purchase 75,000 shares in 2001 and up to 75,000
shares in 2002 provided that the cable operator completes deployments of the
Wink service in at least 250,000 and 350,000 households, respectively. The
exercise price for the warrants shall be equal to 90% of the average closing
sale price of the Common Stock as reported on NASDAQ for the ten business days
prior to December 31, 2001 and 2002, respectively. In the event the warrants are
issued, the warrants will have a term of five years from the date of issuance.
When and if it becomes probable that the performance criteria will be achieved,
the Company will record the then fair value associated with the number of units
deployed. The fair value will be remeasured until performance is complete and
all conditions are known and will be recognized as a charge to sales and
marketing expense over the remainder of the term of the cable affiliation
agreement.
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In September 2000, the Company issued unrestricted Common Stock to a marketing
consulting company for market research, analysis, and strategy services
rendered. The Company issued 1,778 shares and the fair value of the Common Stock
on the date of issuance totaled $20,000. The fair value was recognized as a
sales and marketing expense in the quarter ending September 30, 2000 as there
was no remaining performance obligation on behalf of the Common Stock holder.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income includes all changes in equity during a period from
non-owner sources. For the Company, the primary difference between net loss and
comprehensive loss is due to the unrealized gains (losses) on available-for-sale
securities. Comprehensive loss for the three and nine months ended September 30,
1999 was $7,743,000 as compared to a reported net loss of $4,532,000 and
$16,944,000 as compared to a reported net loss of $13,733,000, respectively.
Comprehensive loss for the three and nine months ended September 30, 2000 was
$6,469,000 as compared to a reported net loss of $6,888,000 and $17,837,000 as
compared to a reported net loss of $18,694,000, respectively.
NOTE 5 - INVESTMENTS IN NON-PUBLIC COMPANIES
In February 2000, the Company entered into a development agreement with a
non-public technology company to create certain software products for personal
computers that use Wink technology. Contemporaneously with the execution of the
development agreement, Wink and the technology company executed a stock purchase
agreement whereas Wink purchased $1,400,000 in non-marketable securities for a
19.9% interest in the company and the right to a board of director's seat. The
investment is accounted for using the equity method. Wink's share of the
company's net loss was not material for the three and nine months ending
September 30, 2000, nor is it expected to have a material impact on the
financial position or results of operations in the future.
In February 2000, the Company entered into an agreement under which it invested
in the latest private financing round of a Japanese company which provides
electronic commerce and response routing services for interactive television
platforms. This transaction was completed in April 2000, and the Company
invested $2,900,000 million for a 14% interest in the company and a voting
member seat on the management committee. The Company has recorded the investment
at cost and will evaluate the recoverability of the investment periodically and
adjust the value, if applicable.
NOTE 6 - CONTINGENCY
On August 6, 1998, John L. Berman, an individual, filed suit against the Company
in the U.S. District Court in the Northern District of California, alleging that
Wink infringed his patents for an interactive television graphics interface and
for a method and apparatus for applying overlay images. On June 27, 2000 the
Company and Berman entered into a Settlement Agreement in which Berman agreed to
grant the Company a non-exclusive license to operate under his patents for the
life of the patents. As a result of the settlement, the lawsuit was dismissed
with prejudice on June 28, 2000. On July 31, 2000 the Company and Berman entered
into the final Settlement and License Agreement by which Berman granted to Wink
rights, for the life of each asserted patent, to make, have made, use, offer for
sale, sell or otherwise transfer current and future Wink products and also
released Wink, its affiliates and all transferees and users from all claims or
liability for past infringement in exchange for consideration.
NOTE 7 - SUBSEQUENT EVENTS
Warrants
In October 2000, the Company granted two fully exercisable warrants to purchase
Common Stock to a cable operator company in connection with a three-year
agreement to develop, deliver and promote interactive content and Wink's viewer
response services for the cable operator's subscribers. The warrants enable the
holder to purchase 1,250,000 and 200,000 shares at $12.21 per share and $25.00
per share, respectively, and expire in October 2010. The fair value of the
warrants on the measurement date totaled $18,761,000. The amount will be
amortized to sales
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and marketing expense ratably over the three-year term of the agreement. The
warrant has not been exercised as of the date of this filing.
Commitments
In October 2000, the Company commenced the commercial launch of Wink Enhanced
Broadcasting with one of the Company's direct broadcast satellite ("DBS")
operator partners, a related party. The Company has agreed to provide marketing
and technical development funds to this DBS operator, including a per set-top
box fee of up to $3.50. The Company has estimated that committed payments to
this DBS operator will total $10,700,000 for the quarter ending December 31,
2000, with a related charge to sales and marketing expense totaling $2,400,000
in the period ending December 31, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this Report on Form 10-Q contains certain trend analysis
and other forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Act of 1934, as
amended. Words such as "anticipate," "believe," "plan," "estimate," "expect,"
"seek," and "intend," and words of similar importance are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and are subject to business and economic risks and uncertainties
that are difficult to predict. Therefore, our actual results of operations may
differ materially from those expressed or forecasted in the forward-looking
statements as a result of a number of factors, including, but not limited to,
those set forth in this discussion under "Risk Factors" and other risks detailed
from time to time in reports filed with the Securities and Exchange Commission.
In addition, factors that could cause or contribute to such differences include,
but are not limited to, those discussed in our Annual Report on Form 10-K filed
on March 30, 2000.
OVERVIEW
Wink Communications was founded in 1994. 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 and direct broadcast satellite (DBS)
operators to incorporate Wink enhancements into their television
programming;
- developing the Wink Response Network for collecting and managing
responses to Wink Enhanced Broadcasting;
- marketing the concept of Wink Enhanced Broadcasting and
establishing the Wink brand; and
- establishing relationships with and licensing our technology to
key television industry participants.
Revenues. Through September 30, 2000, our revenues were derived from
license fees relating to the Wink Engine, Wink Studio and Wink Broadcast Server
software, non-recurring and consulting engineering services under agreements to
port and integrate the Wink Engine and Broadcast Server 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 and Wink
Broadcast Server 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. Engineering consulting revenues are
recognized on a "time and materials" basis. Fees from installation services and
post-installation customer support fees are recognized ratably over the term of
the 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. The Wink Response Network was
activated on a limited
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basis in the second half of 1998, however insignificant transaction fee revenue
has been recognized to date. Substantially all the advertisers utilizing the
Wink Response Network as of September 30, 2000 entered into agreements that
provided for a flat fee to be paid to us in lieu of transaction fees. These fees
are recognized ratably over the life of the agreement, generally one year. Over
the next few quarters, we intend for some of these advertiser agreements to
transition from a flat fee payment structure to a transaction fee basis. We have
also entered into several agreements with advertisers and merchants that will
pay fees on a transaction basis and our business plan is to enter into more of
these types of agreements in the future. Although, initially the amounts will
not be significant in the third and fourth quarters, we have begun to recognize
transaction fee revenue.
We may also derive revenue in the future from sales of products by Wink
through our dedicated interactive channels. Additionally, we expect that in
future periods revenues may result from the license of the Wink Server Studio
application. This application is being licensed to customers under monthly
subscription fee arrangements with terms ranging from one to five years and 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 do not expect that
non-recurring or consulting engineering services will represent a significant
component of future revenues.
We have incurred net losses since inception and, at September 30, 2000, had
an accumulated deficit of approximately $68.2 million. We may never achieve
favorable operating results or profitability.
Cost of Services and Licenses. Cost of services is composed primarily of
direct engineering labor and materials associated with our arrangements to
provide non-recurring and consulting engineering services. Cost of licenses
includes royalty payments for third party software utilized in equipment at
deployment sites. In future periods, cost of services is also expected to
include costs of providing installation services 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, including a substantial escalation in the
portion of transaction fees shared with and guaranteed to certain television
industry participants, matching development funds, costs incurred by customer
service centers 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, general and patent-related legal costs, 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.
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.
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THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
Total revenues increased 199% to $1.4 million for the three months ended
September 30, 2000, compared to $469,000 for the three months ended September
30, 1999. The increase resulted primarily from a significant increase in
services provided to related parties, which increased $996,000 or 996%. This
increase resulted from a $1.1 million increase in engineering consulting revenue
from related parties to aid in the development and integration of Wink services
on their respective platforms, offset by a $71,000 decrease in non-recurring
engineering revenues to related parties. The decrease in licenses revenues of
$26,000, or 7%, included decreases in Wink Engine royalties from related parties
due to the expiration of contracts for older analog platforms and their related
revenues, offset by increases in third-party licenses revenues from an increase
in Wink Studio and Wink Broadcast Server license fees from charter advertisers
and programmers. During the three months ended September 30, 2000, transactions
with DirecTV and Microsoft, related parties, accounted for 52% and 23% of our
total revenues, respectively.
COSTS AND EXPENSES
Total costs and expenses increased 66% to $10.6 million for the three
months ended September 30, 2000, compared to $6.4 million for the three months
ended September 30, 1999. The increase was primarily a result of 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, general and administrative expenses to support anticipated
future growth, and non-cash charges for stock compensation and warrant
amortization. We believe that costs and expenses will continue to increase as we
expand our operations and sales and marketing efforts.
Costs and expenses include non-cash charges for stock compensation and
warrant amortization as follows:
THREE MONTHS
ENDED SEPTEMBER 30,
----------------------------
2000 1999
---- ----
Research and development............... $ 129,000 $ 128,000
Sales and marketing ................... 1,402,000 1,037,000
General and administrative............. 192,000 203,000
---------- ----------
$1,723,000 $1,368,000
========== ==========
Cost of Services and Licenses. Cost of services increased 74% to $384,000
for the three months ended September 30, 2000 from $100,000 for the three months
ended September 30, 1999, reflecting the significant increase in the engineering
consulting labor costs related to the performance of such services.
Changes in gross margins from services revenues realized during the
quarters ended September 30, 2000 and 1999 were primarily attributed to
engineering efforts required to meet the terms of individual consulting and/or
non-recurring engineering agreements. Our initial non-recurring engineering
agreements yielded lower gross margins than realized on subsequent consulting
and non-recurring engineering agreements. We do not expect that non-recurring or
consulting engineering fees will represent a significant component of future
revenues.
Research and Development. Research and development expense increased 70% to
$4.6 million for the three months ended September 30, 2000, from $2.7 million
for the three months ended September 30, 1999, as additional engineering and
operations personnel, consulting and telecommunication costs were incurred to
support increased product deployment activities and our expanded engineering and
research activities.
Sales and Marketing. Sales and marketing expense, excluding non-cash
charges for stock compensation and warrant amortization, increased 86% to $2.6
million for the three months ended September 30, 2000, from $1.4 million for the
three months ended September 30, 1999. The increase was due to increases in
personnel and advertising costs to support our expanded activities. Total sales
and marketing also rose due to the 35% increase in
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non-cash charges for stock compensation and warrant amortization related to
sales and marketing, $1.4 million for the three months ended September 30, 2000
compared to $1.0 million for the three months ended September 30, 1999.
In December 1998, we granted warrants to purchase Common Stock to a cable
operator company, an existing holder of Common Stock, as consideration for the
future deployment of Wink-enabled technology to at least 200,000 households.
The warrants enable the holder to purchase up to 250,000 shares of Common Stock
at either $12.00 or $16.00 per share, contingent upon the number of units
deployed, the timing of deployment and a minimum duration of service. In the
event the $12.00 exercise price is earned, the warrant will expire in January
2004. In the event the $16.00 exercise price is earned, the warrant will expire
in January 2005. In the quarter ended September 30, 2000, the cable operator
achieved the 200,000 Wink-enabled household minimum deployment criteria, and we
recognized the fair value of the warrants associated with the number of units
deployed. The fair value of the warrants, which totalled $389,000 at September
30, 2000, will be remeasured at each reporting date until performance is
completed. The fair value is recognized as sales and marketing expense ratably
over the remainder of the cable affiliation agreement. Accordingly, $65,000 was
recognized as a sales and marketing expense in the quarter.
In July 2000, we granted a fully exercisable warrant to purchase Common
Stock to a non-employee individual as consideration for consulting services
rendered. The warrant enables the holder to purchase 10,000 shares at $28.75
per share and expires in July 2003. The fair value of the warrant on the
measurement date totaled $224,000 and was recognized as sales and marketing
expense in the quarter ending September 30 as there was no remaining
performance obligation on behalf of the warrant holder. The warrant has not
been exercised as of the date of this filing.
In September 2000, we granted a fully exercisable warrant to purchase
Common Stock to a cable operator company in connection with a three-year
agreement to develop, deliver and promote interactive content and Wink's viewer
response services for the cable operator's subscribers. The warrant enables the
holder to purchase 100,000 shares at $14.63 per share and expires in September
2005. The fair value of the warrant on the measurement date totaled $1.0
million. The amount will be amortized to sales and marketing expense ratably
over the three-year term of the agreement. The warrant has not been exercised
as of the date of this filing.
We also entered into a warrant issuance agreement with this cable operator
for the future deployment of Wink-enabled technology to its subscribers. In the
warrant issuance agreement, the Company agrees to issue the cable operator
warrants to purchase 75,000 shares in 2001 and up to 75,000 shares in 2002
provided that the cable operator completes deployment of the Wink service in at
least 250,000, and 350,000 households, respectively. The exercise price for the
warrants shall be equal to 90% of the average closing sale price of the Common
Stock as report on NASDAQ for the ten business days prior to December 31, 2001
and 2002, respectively. In the event the warrants are issued, the warrants
will have a term of five years from the date of issuance. When and if it
becomes probable that the performance criteria will be achieved, we will record
the then fair value associated with the number of units deployed. The fair
value will be remeasured until performance is complete and all conditions are
known and will be recognized as a charge to marketing expense over the remainder
of the term of the cable affiliation agreement.
General and Administrative. General and administrative expense increased
33% to $1.6 million for the three months ended September 30, 2000, from $1.2
million for the three months ended September 30, 1999. The increase was related
to the hiring of administrative and executive personnel to support anticipated
future growth and increased legal fees and costs related to a patent
infringement case.
Interest and Other Income, Net of Interest Expense. Net interest and other
income increased 64% to $2.3 million for the three months ended September 30,
2000, from $1.4 million for the three months ended September 30, 1999. This
increase was mostly due to a $911,000 increase from the prior period in interest
earned on larger average cash and short-term investment balances from the sale
of Common Stock in our initial public offering in August 1999 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 Delaware and
California minimum franchise taxes that are included in general and
administrative expenses. At September 30, 2000, we had federal net operating
loss carryforwards of approximately $57 million available to reduce future
taxable income. Under the Tax Reform Act of 1986, the amount of benefit from net
operating loss carryforwards may be impaired or limited as the Company has
incurred a cumulative
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ownership change of more than 50%, as defined, over a three-year period. 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.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
Total revenues increased 136% to $2.6 million for the nine months ended
September 30, 2000, compared to $1.1 million for the nine months ended September
30, 1999. The increase resulted primarily from a significant rise in services
revenues from related parties. Services revenues, related parties, increased by
$1.2 million or 406% from the same period in the prior year, resulting primarily
from an increase in engineering consulting revenue of $1.4 million. The
engineering consulting revenue was earned by assisting our partners in the
development and implementation of the Wink service on their respective
platforms. This significant increase from engineering consulting fees in the
period ending September 30, 2000 in the services revenues from related parties,
was offset by a decrease in non-recurring engineering fees from the period ended
September 30, 1999 of $156,000. License revenues also increased $426,000 from
the same period a year ago, with $343,000 or 81% of the increase in licenses
revenues from third parties. The increase in licenses revenues included
increases in Wink Engine royalties, from both related and third parties, due to
increased shipments of Wink-enabled televisions and set-top boxes, as well an
increase in Wink Studio and Wink Broadcast Server license fees from charter
advertisers and programmers. The aforementioned increases were offset by a
decrease in services revenues, third parties, from non-recurring engineering
revenues of $124,000. During the nine months ended September 30, 2000,
transactions with DirecTV and Microsoft, related parties, accounted for 29% and
24% of our total revenues, respectively.
COSTS AND EXPENSES
Total costs and expenses increased 52% to $27.2 million for the nine months
ended September 30, 2000, compared to $17.8 million for the nine months ended
September 30, 1999. The increase was primarily a result of 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. These increases were offset by a decrease in non-cash charges for stock
compensation and warrant amortization, which decreased $1.0 million or 23% from
the same period in the prior year, mostly due to warrants and stock bonuses
issued in the first nine months of 1999 with related compensation expense of
approximately $3.6 million, compared to new warrants issued in 2000 with related
stock compensation of $1.6 million, offset by higher amortization of stock
compensation related to employee options and warrants in 2000. We believe that
costs and expenses will continue to increase as we expand our operations and
sales and marketing efforts.
Costs and expenses include non-cash charges for stock compensation and
warrant amortization as follows:
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
2000 1999
---- ----
Research and development............... $ 388,000 $ 228,000
Sales and marketing ................... 2,355,000 3,784,000
General and administrative............. 576,000 308,000
---------- ----------
$3,319,000 $4,320,000
========== ==========
Costs of Services and Licenses. Costs of services and licenses increased
82% to $555,000 for the nine months ended September 30, 2000 from $305,000 for
the nine months ended September 30, 1999, primarily reflecting an increase of
$502,000 in labor costs related to the engineering consulting projects completed
for related parties. This was offset by a decrease of $267,000 in non-recurring
engineering labor costs related to the performance of such services.
Changes in gross margins from services revenues realized during the six
months ended September 30, 2000 and 1999 were primarily attributed to
engineering efforts required to meet the terms of individual consulting and/or
non-
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recurring engineering agreements. Our initial non-recurring engineering
agreements yielded lower gross margins than recognized on subsequent consulting
and non-recurring engineering agreements. We do not expect that non-recurring or
consulting engineering fees will represent a significant component of future
revenues.
Research and Development. Research and development expense increased 87% to
$12.7 million for the nine months ended September 30, 2000, from $6.8 million
for the nine months ended September 30, 1999, as additional engineering and
operations personnel costs were incurred to support increased product deployment
activities and our expanded research and engineering activities. The increase
also reflects additional costs for outside consultants, depreciation on larger
property and equipment used by engineering and operations, and stock
compensation amortization costs.
Sales and Marketing. Sales and marketing expense, excluding non-cash
charges for stock compensation and warrant amortization, increased 82% to $6.9
million for the nine months ended September 30, 2000, from $3.8 million for the
nine months ended September 30, 1999. The increase was due to increases in
personnel and advertising costs to support our expanded activities. This
increase was offset by a $1.4 million decrease in non-cash charges for stock
compensation and warrant amortization related to sales and marketing activities.
The decrease in stock compensation expense from the same period in 1999 is
related to three fully exercisable warrants for Common Stock issued to
broadcasting companies as incentives for signing definitive software licensing
agreements and to promote the development of Wink-enhanced programming during
the nine months ended September 30, 1999. The fair value of these warrants as of
the measurement date of $2.7 million was recorded as sales and marketing expense
in the period ended September 30,1999, as there were no remaining performance
obligations on behalf of the holders and no significant license revenues were
expected to be derived from the agreements.
In April and May 2000, we granted to a management consulting firm and a DBS
operator fully exercisable warrants to purchase 100,000 and 1.3 million shares
of Common Stock at $33.38 and $21.75 per share, respectively, for a total
compensation charge of $391,000 for the nine months ended September 30, 2000.
See a further description of the aforementioned warrant transactions in the
results of operations for the three-month period ended June 30, 2000 on Form
10-Q, filed August 11, 2000.
In July and September 2000, we granted to a non-employee individual and a
cable operator company fully exercisable warrants to purchase 10,000 and 100,000
shares of Common Stock at $28.75 and $14.63 per share, respectively, for a total
compensation charge of $224,000 for the nine-month period ended September 30,
2000. We also entered into a warrant issuance agreement with the cable operator
for the future deployment of Wink-enabled technology to its subscribers where
they may earn up to 150,000 shares through 2002 if certain performance criteria
are met. See further description of the warrant transactions above in the
results of operations for the three-month period ended September 30, 2000.
In December 1998, we granted warrants to purchase Common Stock to a
cable operator company, an existing holder of Common Stock, as consideration for
the future deployment of Wink-enabled technology to at least 200,000 households.
The cable operator company met their minimum performance obligation in the
quarter ended September 30, 2000 triggering a measurement date for the warrants.
The minimum fair value of the warrants was determined to be $389,000 at the
measurement date, of which $65,000 was recognized as a sales and marketing
expense in the quarter. The fair value will be remeasured at each reporting date
until the deployment of Wink-enabled technology to the specified number of cable
subscribers and the duration of the deployments are achieved in 2002. See
further description of the warrants transaction above in the results of
operations for the three-month period ended September 30, 2000.
General and Administrative. General and administrative expense increased
52% to $4.7 million for the nine months ended September 30, 2000, from $3.1
million for the nine months ended September 30, 1999. The increase was related
to the hiring of administrative and executive personnel to support anticipated
future growth, increased legal fees and costs related to a patent infringement
case and non-cash charges for stock compensation and amortization.
Interest and Other Income, Net of Interest Expense. Net interest and other
income increased 97% to $5.9 million for the nine months ended September 30,
2000, from $3.0 million for the nine months ended September 30, 1999. This
increase was mostly due to a $4.0 million increase from the prior period in
interest earned on larger average cash
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and short-term investment balances from the sale of Common Stock in our initial
public offering and Convertible Preferred Stock sold in a private financing, as
well as lower interest expense associated with borrowings under the Company's
lease financing facility. The 1999 balance included the recognition of other
income totaling $1.0 million resulting from a termination agreement with a third
party customer for cancellation of a development and license agreement. Under
this termination agreement, the third party paid us $1.1 million. Of this
amount, $1.0 million was included in other income. The remaining amount related
to a non-recurring engineering agreement and was included in services revenues
from third parties during the nine months ended June 30, 1999. We have no
remaining material obligations under these agreements.
Income Taxes. We have not generated taxable income since inception and, as
a result, the provision for income taxes consists solely of the Delaware and
California minimum franchise taxes that are included in general and
administrative expenses. At September 30, 2000, we had federal net operating
loss carryforwards of approximately $57 million available to reduce future
taxable income. Under the Tax Reform Act of 1986, the amount of benefit from net
operating loss carryforwards may be impaired or limited as the Company has
incurred a cumulative ownership change of more than 50%, as defined, over a
three-year period. 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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our activities largely through the sale
of equity securities and through proceeds from capital lease financing. As of
September 30, 2000, we have raised $104.5 million through the sale of our
Convertible Preferred Stock. In August 1999, we raised net proceeds of $77.3
million from the initial public offering of Common Stock. We had $130.5 million
of cash, cash equivalents and short-term investments at September 30, 2000.
Net cash used in operating activities totaled $15.8 million and $9.7
million for the nine months ended September 30, 2000 and 1999, respectively,
primarily as a result of our net losses.
Net cash used in investing activities totaled $13.1 million for the nine
months ended September 30, 2000, and was attributable to $6.1 million in net
purchases of short-term investments, investments in two non-public technology
companies of $4.3 million and the acquisition of $2.7 million of property and
equipment. For the nine months ended September 30, 1999, net cash used in
investing activities was $49.1 million and was attributable to net purchases of
short-term investments of $48.3 million as a result of proceeds from our sale of
Common Stock in our initial public offering, Convertible Preferred Stock and a
convertible promissory note (see net cash provided by financing activities
below) and by the acquisition of $817,000 of property and equipment.
Net cash provided by financing activities for the nine months ended
September 30, 2000 was $3.2 million, consisting of $3.3 million in proceeds from
the issuance of Common Stock under our employee stock option and purchase plans
and the repayment of a stockholder note balance of $250,000. These proceeds were
partially offset by principal payments made under capital lease obligation of
$365,000. For the nine months ended September 30, 1999, net cash provided by
financing activities was $142.6 million, consisting of net proceeds of $77.3
from our initial public offering, $44.3 million from the sale of our Convertible
Preferred Stock, proceeds of $15.1 million from the issuance of a convertible
promissory note to a related party, and proceeds of $6.2 million from our Common
Stock issued under our stock option plan, offset by capital lease obligation
principal payments of $296,000.
We have entered into agreements with Microsoft, cable and direct broadcast
satellite system operators and other television industry participants who
support Wink-enhanced programming to share with these entities a portion of
revenues, if any, the Company generates from viewer responses to Wink Enhanced
Broadcasting. These revenue sharing commitments are based upon the level of the
commitment the particular participant has made to support Wink Enhanced
Broadcasting. To date, no significant 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 sales and marketing in the period
the revenue is recognized.
For Microsoft and certain cable and direct broadcast satellite system
operators, the Company has also provided a minimum revenue guarantee. If Wink
Enhanced Broadcasting fails to generate sufficient revenue to meet the
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guaranteed amount per Wink subscriber, we are obligated to pay the difference
between the guaranteed amount and the amount actually earned. Such revenue
guarantees will be recognized in the period incurred. We 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.
In February 2000, we entered into an agreement under which we invested in
the latest private financing round of a Japanese company which provides
electronic commerce and response routing services for interactive television
platforms. This transaction was completed in April 2000 and we invested $2.9
million.
We believe that our existing cash, cash equivalents and short-term
investments will be sufficient to meet our currently anticipated business
requirements, including capital expenditures and strategic operating programs,
for at least the next 12 months. Thereafter, if any, the Company may need to
sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity or convertible debt securities may
result in additional dilution to our stockholders. The Company may not be able
to raise any such capital on terms acceptable to us, if at all.
MARKET RISK DISCLOSURE
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less interest than expected if
interest rates fall. Due in part to these factors, the Company's future
investment income may fall short of expectations due to changes in interest
rates or the Company may suffer losses in principal if forced to sell securities
which have declined in market value due to changes in interest rates.
YEAR 2000 COMPLIANCE
To date our systems and software have not experienced any material
disruption due to the onset of the Year 2000, and we have completed our Year
2000 preparedness activities and have not incurred any significant expenses to
date. However, we cannot assure that we will not experience disruptions in the
future as a consequence of Year 2000 issues. We cannot quantify the amount of
our potential exposure, but do not believe it to be material.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB 25," ("FIN 44"). This interpretation
clarifies (a) the definition of an employee for purposes of applying Opinion 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms of a
previously fixed stock option plan or award, and (d) the accounting for an
exchange of stock compensation awards in business combination. FIN 44 is
effective July 1, 2000, however certain conclusions in this Interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of certain of the provisions of FIN 44 prior to June 30, 2000 did
not have a material effect on the financial statements. The Company does not
expect that the adoption of the remaining provisions of FIN 44 will have a
material effect on the financial statements.
RISK FACTORS
WE EXPECT TO INCUR SUBSTANTIAL OPERATING AND NET LOSSES
We have a limited operating history, which makes the prediction of future
results difficult. We have incurred significant net losses since inception and,
at September 30, 2000, had an accumulated deficit of $68.2 million. To date, we
have recognized minimal revenue, and our ability to generate revenue is subject
to substantial uncertainty. In addition, we currently intend to incur
substantial operating expenses to fund additional technological development,
sales, marketing, transaction processing and general activities. We expect that
our total operating expenses for the year ending December 31, 2000 will be $40.0
to $45.0 million.
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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 most of our revenue from license fees and engineering fees. In the
future, however, we anticipate that our revenues will depend substantially on
the level of viewer response activity. Our experience with viewer responses is
extremely limited. In addition, our expense levels are based largely on our
operating plans and estimates of future revenue. We may be unable to adjust
spending in a timely manner to compensate for any unexpected shortfall in
revenues. As a result, a shortfall in actual revenues as compared to estimated
revenues could have an immediate material adverse effect on our financial
performance.
OUR BUSINESS IS DEPENDENT UPON CONTENT PROVIDERS, DISTRIBUTORS AND CONSUMERS
EMBRACING THE WINK TECHNOLOGY
Since our business plan is premised upon receiving the primary portion of
our revenue directly from advertisers and merchants, our business could be
adversely affected if advertisers and merchants do not create and use
Wink-enhanced advertising. Additionally, if Wink Enhanced Broadcasting is not
broadly accepted by cable and direct broadcast satellite system operators, our
business plan will not succeed. These operators may choose not to implement Wink
Enhanced Broadcasting for a variety of reasons. Our success will depend heavily
upon broad acceptance of Wink Enhanced Broadcasting by television viewers. If
significant numbers of viewers do not request information or purchase goods and
services in response to Wink-enhanced programming and advertising, advertisers
and merchants are likely to terminate their use of Wink-enhanced advertising or
never adopt Wink Enhanced Broadcasting. Viewers may not react favorably to Wink
Enhanced Broadcasting for various reasons, including they may feel it is too
complex or they may be concerned about security or privacy issues.
WE WILL INCUR SUBSTANTIAL LIABILITY IF WINK ENHANCED BROADCASTING FAILS TO
GENERATE SUFFICIENT REVENUE TO MEET OUR REVENUE GUARANTEES AND OTHER OBLIGATIONS
We have entered into agreements with Microsoft, cable and direct broadcast
satellite system operators and other market participants to share with these
entities a portion of revenues, if any, we generate from viewer responses to
Wink Enhanced Broadcasting. For certain cable and direct broadcast satellite
system operators, we have provided a minimum revenue guarantee if the operator
meets a minimum volume threshold for Wink Engines deployed. These guarantees
range from $2 to $5 per year per Wink-enabled home. In addition, we have made
minimum revenue guarantees to Microsoft ranging from $2 to $4 per year per
Wink-enabled device in which Microsoft controls the operating system,
application environment and content and data services, in exchange for certain
rights to process viewer responses to enhanced television offers. If Wink
Enhanced Broadcasting fails to generate sufficient revenue to meet the
guaranteed amount per Wink subscriber, we are required to pay the difference
between the guaranteed amount and the amount actually earned by the operator or
Microsoft. These liabilities may be substantial.
We have also agreed to provide marketing and technical development funds to
a number of cable and direct broadcast satellite system operators, contingent
upon the commercial launch of Wink Enhanced Broadcasting, including in some
cases a per set-top box fee of up to $3.50.
THE EMERGING NATURE OF THE MARKET FOR INTERACTIVE TELEVISION MAY CREATE
SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS, WHICH COULD RESULT
IN A DECLINE IN THE TRADING PRICE OF OUR COMMON STOCK
Our future quarterly operating results may fluctuate significantly due to a
number of factors related to the emerging market including:
- the amount of transaction-processing activity through the Wink
Response Network;
- the timing and success of infrastructure upgrades necessary to support
deployment by industry participants;
- the timing of the change, if any, in the basis of our relationships
with advertisers and merchants from a fixed flat fee arrangement to a
fee-per-transaction arrangement; and
- the effect of stock-based incentives provided to various industry
participants.
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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.
WE FACE COMPETITION FROM A NUMBER OF COMPANIES
Many of our competitors may be in a better position to produce and market
their services due to their greater financial, technical, manufacturing and
marketing resources. As a result, we may not be able to compete effectively. Our
competitors may also have the support of, or relationships with, important
industry participants which could adversely affect the extent of support these
market participants give to Wink Enhanced Broadcasting.
Current and potential competitors in one or more aspects of our business
include television and other system software companies, interactive television
system providers and multimedia authoring tool providers. We also face
competition from other providers and companies operating in the direct marketing
business, especially operators of toll-free response call centers.
WE NEED TO ADAPT TO TECHNOLOGICAL CHANGE IN A MARKET THAT MAY NEVER FULLY
DEVELOP OR MAY DEVELOP WITH STANDARDS THAT ARE NOT COMPATIBLE WITH OUR
TECHNOLOGY
The emerging and unsettled market for interactive television will require
that we continually improve the performance, features and reliability of Wink
Enhanced Broadcasting, particularly in response to competitive offerings. We may
not be successful in responding quickly, cost-effectively and adequately to
these developments. The introduction of new technologies or standards for
enhanced broadcasting could render Wink Enhanced Broadcasting obsolete or
unmarketable. In addition, the widespread adoption of new television
technologies or standards, cable-based or otherwise, could require us to make
substantial expenditures to modify or adapt our technology, products, services,
network or business model.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS MAY BE ASSERTED AGAINST US, WHICH
COULD DISRUPT OUR BUSINESS
If third parties assert claims of infringement of their proprietary rights
against us, we will incur significant costs and a diversion of resources with
respect to the defense of these claims. If any claims or actions are asserted
against us, we may seek to obtain a license under a third party's intellectual
property rights. However, a license under such circumstances may not be
available on reasonable terms, if at all.
On September 15, 1999, a suit was filed in the United States District Court
for the Middle District of Florida, Fort Myers Division by Fort Myers
Broadcasting Company claiming certain federal trademark infringements. We
believe we have a meritorious defense and plan to vigorously defend ourselves in
this matter, and while the results of the litigation and claim cannot be
predicted with certainty, we believe that the resolution of this matter will not
have a material adverse effect on our consolidated financial position statement
of operations or on our cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity. Our exposure to market risk for interest rate
changes relates primarily to our short-term investment portfolio. We had no
derivative financial instruments as of September 30, 2000 or December 31, 1999.
We invest our marketable securities in accordance with our investment policy and
maintain our portfolio in the form of managed investment accounts comprised of
money market accounts, corporate bonds and government bonds and notes. We
consider all highly liquid investments with an original maturity of three months
or less to be cash equivalents. The primary objective of our portfolio is to
maintain proper liquidity to meet the operating needs of the business. Our
policy specifies credit quality standards for the investments and limits the
amount of credit exposure to any single issue, issuer or type of investment. The
weighted average maximum maturity of the portfolio is based on the Lehman 1-3
index.
Our holdings are subject to interest rate risk and will fall in value in
the event market interest rates increase. If market interest rates were to
increase immediately and uniformly by 50 basis points from levels as of
September 30, 2000, we believe the fair value of the portfolio would decline by
an immaterial amount.
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Foreign Currency Exchange Risk. The principal portion of our business is in
the United States. Additionally, contracts we have entered into with companies
headquartered in foreign countries have been denominated in US dollars.
Accordingly, we believe we are not subject to exposure from adverse movements in
foreign currency exchange rates. We may be subject to exposure in the future
from our Japanese subsidiary, which to date has not recognized any revenues or
incurred expenses.
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities
On August 18, 1999, we commenced the initial public offering ("IPO") of
5,462,500 shares of common stock (including 200,000 shares sold by existing
stockholders and the underwriter's over-allotment option of 712,500 shares) at
$16.00 per share pursuant to a registration statement (No. 333-80221) (the
"Initial Registration Statement") and a related registration statement
(333-85531) filed pursuant to Rule 462(b) of the Securities Act. The Initial
Registration Statement was declared effective by the Securities and Exchange
Commission on August 18, 1999. The offering has been terminated and all shares
have been sold. The aggregate gross proceeds from the offering were $84.2
million for the shares sold by the Company and $3.2 million for the shares sold
by the selling stockholders. The managing underwriters for the initial public
offering were Donaldson, Lufkin & Jenrette Securities Corporation, Deutsche Bank
Securities Inc. and Bear, Stearns & Co. Inc.
We incurred the following expenses in connection with the offering:
underwriters' discounts and commissions of $5,894,000 and approximately $1.0
million in other expenses, for total expenses of approximately $6,894,000. After
deducting expenses of the offering, we received net offering proceeds of $77.3
million.
We have used, and continue to expect to use, the proceeds from the offering
for general corporate purposes, including working capital. A portion of the
proceeds may also be used for the acquisition of businesses that are
complementary to ours. Pending such uses, we have invested the net proceeds of
the IPO in interest-bearing securities that management considers to be credit
worthy.
No payments constituted direct or indirect payments to any of our
directors, officers or general partners or their associates, to persons owning
10% of more of any class of our equity securities, or to any of our affiliates,
except that approximately $3,500 of expenses from the offering was paid in
connection with certain legal fees incurred by the two selling stockholders, who
are both directors and officers of the Company.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 - Financial Data Schedule
19
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WINK COMMUNICATIONS, INC.
(Registrant)
By: /s/ Howard L. Schrott
---------------------------------------
Chief Financial Officer and
Senior Vice President
(Principal Financial and Accounting
Officer)
Date: November 3, 2000
20
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
27.1 Financial Data Schedule.
21
