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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 000-26655
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WINK COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3212322
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 MARINA VILLAGE PARKWAY
ALAMEDA, CALIFORNIA 94501
(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 April
30, 2000 was 30,826,618
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INDEX
<TABLE>
<CAPTION>
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet....................... 3
Condensed Consolidated Statement of Operations............. 4
Condensed Consolidated Statement of Cash Flows............. 5
Notes to Condensed Consolidated Financial Statements ...... 6
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations....................... 9
Risk Factors............................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market
Risk....................................................... 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 15
Item 2. Changes in Securities...................................... 15
Item 3. Defaults Upon Senior Securities............................ 15
Item 4. Submission of Matters to a Vote of Security Holders........ 15
Item 5. Other Information.......................................... 16
Item 6. Exhibits and Reports on Form 8-K........................... 16
Signatures........................................................... 16
</TABLE>
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WINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
2000 1999
--------------- -------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................ $ 51,115 $ 58,032
Short-term investments ................................... 91,485 91,167
Accounts receivable - related parties .................... 200 61
Accounts receivable - third parties, net ................. 261 429
Prepaid expenses - related parties ....................... 188 375
Prepaid expenses and other current assets ................ 1,686 1,537
--------- ---------
Total current assets ................................... 144,935 151,601
Property and equipment, net ................................. 3,175 2,538
Other assets - related parties .............................. 1,493 1,493
Other assets ................................................ 1,572 177
--------- ---------
$ 151,175 $ 155,809
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 1,149 $ 2,070
Accrued expenses ......................................... 2,258 2,636
Deferred revenue - related parties ....................... 125 200
Deferred revenue - third parties ......................... 1,031 1,119
Current portion of capital lease obligations ............. 255 365
--------- ---------
Total current liabilities .............................. 4,818 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;
30,768 and 30,017 shares issued and outstanding ........ 31 30
Additional paid-in capital ............................... 212,124 210,601
Stockholders' notes receivable ........................... (2,499) (2,749)
Unearned compensation .................................... (8,807) (9,458)
Accumulated deficit ...................................... (54,957) (49,483)
Accumulated other comprehensive loss ..................... 465 478
--------- ---------
Total stockholders' equity ............................. 146,357 149,419
--------- ---------
$ 151,175 $ 155,809
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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WINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
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<S> <C> <C>
Revenues:
Licenses - related parties ............... $ 123 $ 71
Licenses - third parties ................. 274 89
Services - related parties ............... 129 179
-------- --------
Total revenues ....................... 526 339
-------- --------
Costs and expenses:
Costs of services - related parties ...... 34 90
Costs of licenses - third parties ........ 16 --
Research and development ................. 3,902 1,957
Sales and marketing ...................... 2,360 3,131
General and administrative ............... 1,361 873
-------- --------
Total costs and expenses ............. 7,673 6,051
-------- --------
Loss from operations ........................ (7,147) (5,712)
Interest and other income ................... 1,685 242
Interest expense ............................ (12) (27)
-------- --------
Net loss .................................... $ (5,474) $ (5,497)
======== ========
Net loss per share:
Basic and diluted ...................... $ (0.18) $ (0.55)
Weighted average shares outstanding..... 29,919 9,906
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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WINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................... $ (5,474) $ (5,497)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............... 327 239
Stock-based costs and expenses .............. 653 2,056
Net loss of equity investment ............... 5 -
Changes in assets and liabilities:
Accounts receivable -- related parties ... (139) 52
Accounts receivable-- third parties ...... 168 85
Prepaid expenses-- related parties ....... 187 -
Prepaid expenses and other current
assets ................................. (149) 66
Other assets ............................. - (26)
Accounts payable ......................... (921) (177)
Accrued expenses ......................... (378) (608)
Deferred revenues-- related parties ...... (75) 17
Deferred revenues-- third parties ........ (88) 17
-------- --------
Net cash used in operating activities .............. (5,884) (3,776)
-------- --------
Cash flows from investing activities:
Net (purchases) proceeds of short-term
investments .................................... (318) 1,446
Purchase of non-public equity securities ......... (1,400) -
Property and equipment purchases ................. (964) (275)
-------- --------
Net cash (used in) provided by investing
activities ....................................... (2,682) 1,171
-------- --------
Cash flows from financing activities:
Proceeds from Common Stock issuances ............. 1,509 102
Proceeds from stockholder note receivable ........ 250 -
Principal payments on capital lease obligations .. (110) (95)
-------- --------
Net cash provided by financing activities .......... 1,649 7
-------- --------
Net decrease in cash and cash equivalents .......... (6,917) (2,598)
Cash and cash equivalents at beginning of
Period ........................................... 58,032 16,892
-------- --------
Cash and cash equivalents at end of period ......... $ 51,115 $ 14,294
======== ========
Supplemental cash flow information:
Cash paid for interest ........................... $ 12 $ 27
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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WINK COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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.
The results of operations for the interim period ended March 31, 2000, are not
necessarily indicative of results to be expected for the full year or any other
period.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, Wink Japan, Inc. All
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 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 quarters
ended March 31, 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
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128")
and SEC Staff Accounting Bulletin No. 98 ("SAB No. 98"). Under the provisions of
SFAS No. 128 and SAB No. 98, basic and diluted net loss per share is computed by
dividing the net loss available to Common stockholders for the period by the
weighted average number of Common shares outstanding during the period. The
calculation of diluted net loss per share excludes potential Common shares if
their effect is anti-dilutive. Potential Common shares consist of unvested
restricted Common Stock, incremental Common shares issuable upon the exercise of
stock options, shares issuable upon conversion of Convertible Preferred Stock
and Common shares issuable upon the exercise of warrants to purchase Common
Stock and Convertible Preferred Stock.
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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
March 31,
-----------------------
2000 1999
<S> <C> <C>
Numerator:
Net loss .............................. $ (5,474) $ (5,497)
======== ========
Denominator:
Weighted average shares ............... 30,317 10,556
Weighted average unvested common shares
subject to repurchase ............... (398) (650)
-------- --------
Denominator for basic and diluted ....... 29,919 9,906
======== ========
Net loss per share:
Basic and diluted ..................... $ (0.18) $ (0.55)
======== ========
</TABLE>
NOTE 3 - STOCK WARRANT
In December 1998, the Company granted warrants to purchase Common Stock to a
cable operator company that is also a holder of Common Stock, as consideration
for the future deployment of Wink-enabled technology to at least 200,000
households. The warrants enables the holder to purchase 250,000 shares of Common
Stock at either $12.00 or $16.00 per share, contingent upon achieving the
deployment criteria and the timing of such achievement. In the event the $12.00
exercise price is earned, the warrant will expire in January 2004. In the event
the $16.00 exercise price is earned, the warrant will expire in January 2005. At
December 31, 1999, the lowest aggregate fair value of the warrants totaled
$13,915,000. At March 31, 2000, the lowest aggregate fair value of the warrants
totaled $7,378,000. This amount will be remeasured at each reporting date until
the deployment of Wink-enabled technology to the specified number of cable
subscribers is achieved. When and if it becomes probable that the performance
criteria will be achieved, the Company will record the then fair value
associated with the units meeting the performance criteria as a charge to sales
and marketing expense.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130 ("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 during a period from
non-owner sources. The primary difference between net loss and comprehensive
loss, for the Company, is due to the unrealized gains on available-for-sale
securities. Comprehensive loss did not vary materially from the reported net
loss for the three months ended March 31, 1999. Comprehensive loss for the three
months ended March 31, 2000 was $5,487,000 as compared to a reported net loss of
$5,474,000.
NOTE 5 - INVESTMENT IN NON-PUBLIC COMPANY
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 for 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 period ending March 31, 2000 nor is
it expected to have a material impact on the financial position or results of
operations in the future.
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NOTE 6 - SUBSEQUENT EVENTS
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
$2.9 million for a 14% interest in the company and a voting member seat of the
management committee. The Company anticipates that the investment will be
accounted for using the equity accounting method due to significant influence in
the Japanese company. The Company does not expect that the equity accounting
treatment will have a material impact on the financial position or results of
operations.
In April 2000, the Company granted a fully exercisable warrant to purchase
Common Stock to a marketing consulting company in connection with a five year
consulting agreement. The warrant enables the holder to purchase 100,000 shares
at $33.38 per share and expires in April of 2005. The fair value of the warrant
on the measurement date totaled $1,579,000. The amount will be amortized to
sales and marketing expense ratably over the five-year term of the agreement.
The warrant has not been exercised as of this filing.
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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 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 March 31, 2000, our revenues were derived from license
fees relating to the Wink Engine, Wink Studio and Wink Broadcast Server
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
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. 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 basis in the second half of 1998. However, no transaction
fee revenue has been recognized to date. All advertising agreements in place as
of March 2000 provide for a flat fee to be paid to us without any transaction
fees. These fees are recognized ratably over the life of the agreement,
generally one year.
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 engineering services will represent a significant component of
future revenues.
We have incurred net losses since inception and, at March 31, 2000, had an
accumulated deficit of approximately $55.0 million. We may never achieve
favorable operating results or profitability.
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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 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 and to include the portion of transaction fees shared
with and guaranteed to certain television industry participants, matching
development funds, 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.
RESULTS OF OPERATIONS
Since inception, we have been engaged primarily in the development and
licensing of Wink Enhanced Broadcasting. Accordingly, our historical results of
operations are not indicative of and should not be relied upon as an indicator
of future performance.
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES
Total revenues increased 55% to $526,000 for the three months ended March
31, 2000, compared to $339,000 for the three months ended March 31, 1999. The
increase resulted primarily from a significant increase in license revenue of
$237,000 or 148%. The increase in license revenue 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. These license revenue increases were partially offset by a decrease
in service revenues - related parties resulting from a decrease in non-recurring
engineering revenues, offset by consulting revenue from engineering work done
with a related party. During the three months ended March 31, 2000, transactions
with General Instrument, Toshiba, and Matsutshita Electric accounted for 19%,
17% and 12% of our total revenues, respectively.
COSTS AND EXPENSES
Total costs and expenses increased 27% to $7.7 million for the three months
ended March 31, 2000, compared to $6.1 million for the three months ended March
31, 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 $1.4 million or 68% from the same
period in the prior year, due to warrants issued in the first quarter of 1999
with related compensation expense of approximately $2.0. We believe that costs
and expenses will continue to increase as we expand our operations and sales and
marketing efforts.
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Costs and expenses include non-cash charges for stock compensation and
warrant amortization as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Research and development .... $ 129,000 $ 26,000
Sales and marketing ......... 332,000 2,004,000
General and administrative... 192,000 26,000
---------- ----------
$ 653,000 $2,056,000
========== ==========
</TABLE>
Cost of Services and Licenses. Cost of services decreased 44% to $50,000 for
the three months ended March 31, 2000 from $90,000 for the three months ended
March 31, 1999, primarily reflecting the decrease in recognition of
non-recurring engineering expenses related to the performance of such services.
Research and Development. Research and development expense increased 99% to
$3.9 million for the three months ended March 31, 2000, from $2.0 million for
the three months ended March 31, 1999, as additional engineering and operations
personnel costs were incurred to support increased product deployment activities
and our expanded activities. The increase also reflects additional stock
compensation amortization costs.
Sales and Marketing. Sales and marketing expense, excluding non-cash charges
for stock compensation and warrant amortization, increased 80% to $2.0 million
for the three months ended March 31, 2000, from $1.1 million for the three
months ended March 31, 1999. The increase was due to increases in personnel and
advertising costs to support our expanded activities. This increase was offset
by a $1.7 million decrease in non-cash charges for stock compensation and
warrant amortization related to sales and marketing, $332,000 for the three
months ended March 31, 2000 compared to $2.0 million for the three months ended
March 31, 1999. The decrease in stock compensation expense from the same period
in 1999 is related to two fully exercisable warrants for Common Stock issued to
broadcasting companies with related compensation expense of $2.0 million in the
period ended March 31,1999.
General and Administrative. General and administrative expense increased 56%
to $1.4 million for the three months ended March 31, 2000, from $873,000 for the
three months ended March 31, 1999. The increase was related to the hiring of
administrative and executive personnel to support anticipated future growth,
increased legal fees 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 678% to $1.7 million for the three months ended March 31, 2000,
from $215,000 for the three months ended March 31, 2000. This increase was due
to interest earned on increases in the average cash and 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.
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 March 31, 2000, we had federal net operating loss
carryforwards of approximately $43.5 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 March
31, 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 $142.6 million of cash, cash
equivalents and short-term investments at March 31, 2000.
Net cash used in operating activities totaled $5.9 million and $3.8 million
for the three months ended March 31, 2000 and 1999, respectively, primarily as a
result of our net losses.
Net cash used in investing activities totaled $2.7 million for the three
months ended March 31, 2000, and was attributable to the investment in a
non-public technology company of $1.4 million, the acquisition of $964,000 of
property and equipment and the net
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purchases of short-term investments of $318,000. For the three months ended
March 31, 1999, net cash provided by investing activities was $1.2 million and
was attributable to the net proceeds from short-term investment maturities of
$1.4 million, which was partially offset by acquisition of $275,000 of property
and equipment.
Net cash provided by financing activities for the three months ended March
31, 2000 was $1.6 million, consisting of $1.5 million in proceeds from 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 capital lease obligation principal payments of $110,000. For
the three months ended March 31, 1999, net cash provided by financing activities
was $7,000, consisting primarily of proceeds from Common Stock issued under the
our stock option plan of $102,000, offset by capital lease obligation principal
payments of $95,000.
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 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. 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.
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 Opinion No. 25 ("FIN 44"). FIN 44
establishes guidance for the accounting for stock option grants or modifications
to existing stock options awards and is effective for option grants made after
June 30, 2000. FIN 44 also establishes guidance for the repricing of stock
options and determining whether a grantee is an employee, for which the
12
<PAGE> 13
guidance was effective after December 15, 1998 and modifying a fixed option to
add a reload feature, for which the guidance was effective after January 12,
2000. The adoption of certain of the provisions of FIN 44 prior to March 31,
2000 did not have a material effect on the financial statements. The Company
does not expect that the adoption of the remaining provisions 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 March 31, 2000, had an accumulated deficit of $55.0 million. To date, we have
recognized minimal revenue, and our ability to generate revenue is subject to
substantial uncertainty. In addition, we currently intend to incur substantial
operating expenses to fund additional technological development, sales,
marketing, transaction processing and general activities. We expect that our
total operating expenses for the year ended December 31, 2000 will be $40.0 to
$45.0 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.
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
13
<PAGE> 14
Our future quarterly operating results may fluctuate significantly due to a
number of factors related to the emerging market including:
- the amount of transaction-processing activity through the Wink Response
Network;
- the timing and success of infrastructure upgrades necessary to support
deployment by industry participants;
- the timing of the change, if any, in the basis of our relationships with
advertisers and merchants from a fixed flat fee arrangement to a
fee-per-transaction arrangement; and
- the effect of stock-based incentives provided to various industry
participants.
Due to these factors, it is possible that our operating results in one or
more future quarters will fail to meet or exceed the expectations of securities
analysts or investors. In such event, the trading price of our Common Stock
would likely decline.
WE FACE COMPETITION FROM A NUMBER OF COMPANIES
Many of our competitors may be in a better position to produce and market
their services due to their greater financial, technical, manufacturing and
marketing resources. As a result, we may not be able to compete effectively. Our
competitors may also have the support of, or relationships with, important
industry participants which could adversely affect the extent of support these
market participants give to Wink Enhanced Broadcasting.
Current and potential competitors in one or more aspects of our business
include television and other system software companies, interactive television
system providers and multimedia authoring tool providers. We also face
competition from other providers and companies operating in the direct marketing
business, especially operators of toll-free response call centers.
WE NEED TO ADAPT TO TECHNOLOGICAL CHANGE IN A MARKET THAT MAY NEVER FULLY
DEVELOP OR MAY DEVELOP WITH STANDARDS THAT ARE NOT COMPATIBLE WITH OUR
TECHNOLOGY
The emerging and unsettled market for interactive television will require
that we continually improve the performance, features and reliability of Wink
Enhanced Broadcasting, particularly in response to competitive offerings. We may
not be successful in responding quickly, cost-effectively and adequately to
these developments. The introduction of new technologies or standards for
enhanced broadcasting could render Wink Enhanced Broadcasting obsolete or
unmarketable. In addition, the widespread adoption of new television
technologies or standards, cable-based or otherwise, could require us to make
substantial expenditures to modify or adapt our technology, products, services,
network or business model.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS MAY BE ASSERTED AGAINST US, WHICH
COULD DISRUPT OUR BUSINESS
If third parties assert claims of infringement of their proprietary rights
against us, we will incur significant costs and a diversion of resources with
respect to the defense of these claims. If any claims or actions are asserted
against us, we may seek to obtain a license under a third party's intellectual
property rights. However, a license under such circumstances may not be
available on reasonable terms, if at all.
On August 6, 1998, John L. Berman, an individual, filed suit against us in
the U.S. District Court in the Northern District of California, alleging that we
infringed his patents for an interactive television graphics interface and for a
method and apparatus for applying overlay images. 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. If we fail to defend these allegations
successfully, our business and financial performance may be adversely affected.
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 March 31, 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
14
<PAGE> 15
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 March 31, 2000,
we believe the fair value of the portfolio would decline by an immaterial
amount.
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
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
At 9:00 a.m. on May 2, 2000, the Company held its Annual Shareholders Meeting at
the at the Waterfront Plaza Hotel located at Ten Washington Street, Oakland,
California. The propositions voted upon at the meeting were the (1) election of
four members of the Board of Directors and (2) the ratification of the
independent auditors. Only stockholders of record at the close of business on
March 6, 2000 were
15
<PAGE> 16
entitled to vote at the Annual Meeting or by proxy. There were 22,866,647 shares
present or represented by proxy at the meeting, representing a quorum. The
results are as follows:
<TABLE>
<CAPTION>
Shares Voted
--------------------------------------------------
For Against Abstain Total
--- ------- ------- -----
<S> <C> <C> <C> <C>
Proposition (1) 22,863,833 2,814 22,866,647
Proposition (2) 22,859,612 2,640 4,395 22,866,647
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27.1 - Financial Data Schedule
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: May 15, 2000
------
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S MARCH 31, 2000 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 51,115,000
<SECURITIES> 91,485,000
<RECEIVABLES> 491,000
<ALLOWANCES> 30,000
<INVENTORY> 0
<CURRENT-ASSETS> 144,935,000
<PP&E> 6,207,000
<DEPRECIATION> 3,032,000
<TOTAL-ASSETS> 151,175,000
<CURRENT-LIABILITIES> 4,818,000
<BONDS> 0
0
0
<COMMON> 31,000
<OTHER-SE> 151,144,000
<TOTAL-LIABILITY-AND-EQUITY> 151,175,000
<SALES> 526,000
<TOTAL-REVENUES> 526,000
<CGS> 50,000
<TOTAL-COSTS> 50,000
<OTHER-EXPENSES> 7,623,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,000
<INCOME-PRETAX> (5,474,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,474,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,474,000)
<EPS-BASIC> (.18)
<EPS-DILUTED> (.18)
</TABLE>
