<PAGE> 1
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 JUNE 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
July 31, 2000 was 30,962,665.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet.................................................... 3
Condensed Consolidated Statement of Operations.......................................... 4
Condensed Consolidated Statement of Cash Flows.......................................... 5
Notes to Condensed Consolidated Financial Statements ................................... 6
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations.................................................... 9
Risk Factors............................................................................ 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................. 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 18
Item 2. Changes in Securities................................................................... 18
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 ........................................................................................ 19
</TABLE>
2
<PAGE> 3
WINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS JUNE 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................................... $ 47,972 $ 58,032
Short-term investments ...................................................... 88,542 91,167
Accounts receivable - related parties ....................................... 619 61
Accounts receivable - third parties, net .................................... 206 429
Prepaid expenses - related parties .......................................... - 375
Prepaid expenses and other current assets ................................... 1,680 1,537
----------------- ---------------
Total current assets ..................................................... 139,019 151,601
Property and equipment, net .................................................... 3,650 2,538
Other assets - related parties ................................................. 1,534 1,493
Other assets ................................................................... 4,404 177
----------------- ---------------
$ 148,607 $ 155,809
================= ===============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable ............................................................ $ 1,470 $ 2,070
Accrued expenses ............................................................ 3,417 2,636
Deferred revenue - related parties .......................................... 194 200
Deferred revenue - third parties ............................................ 1,023 1,119
Current portion of capital lease obligations ................................ 140 365
----------------- ---------------
Total current liabilities ............................................. 6,244 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;
30,919 and 30,017 shares issued and outstanding .......................... 31 30
Additional paid-in capital .................................................. 238,758 210,601
Stockholders' notes receivable .............................................. (2,499) (2,749)
Unearned compensation ....................................................... (33,541) (9,458)
Accumulated deficit ......................................................... (61,288) (49,483)
Accumulated other comprehensive income....................................... 902 478
----------------- ---------------
Total stockholders' equity ............................................... 142,363 149,419
----------------- ---------------
$ 148,607 $ 155,809
================= ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
WINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Licenses - related parties .............. $ 120 $ 26 $ 243 $ 97
Licenses - third parties ................ 233 112 507 201
Services - related parties .............. 283 19 412 198
Services - third parties ................ - 124 - 124
--------- --------- ----------- -----------
Total revenues ....................... 636 281 1,162 620
--------- --------- ----------- -----------
Costs and expenses:
Costs of services - related parties. .... 121 52 155 142
Costs of licenses - third parties ....... - 63 16 63
Research and development ................ 4,179 2,203 8,081 4,160
Sales and marketing ..................... 2,900 1,951 5,260 5,082
General and administrative .............. 1,721 1,040 3,082 1,913
--------- --------- ----------- -----------
Total costs and expenses ........... 8,921 5,309 16,594 11,360
--------- --------- ----------- -----------
Loss from operations ....................... (8,285) (5,028) (15,432) (10,740)
Interest and other income .................. 1,961 1,348 3,646 1,590
Interest expense ........................... (8) (24) (20) (51)
--------- --------- ----------- -----------
Net loss.................................... $ (6,332) $ (3,704) $ (11,806) $ (9,201)
========== ========== =========== ===========
Net loss per share:
Basic and diluted ....................... $ (0.21) $ (0.37) $ (0.39) $ (0.92)
Weighted average shares outstanding..... 30,482 9,983 30,153 9,965
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
WINK COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ..................................... $ (6,332) $ (3,704) $ (11,806) $ (9,201)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............. 408 200 735 439
Stock-based costs and expenses ............ 943 896 1,596 2,952
Net loss of equity investment ............. 39 - 44 -
Changes in assets and liabilities:
Accounts receivable - related parties.... (419) (12) (558) 40
Accounts receivable - third parties...... 55 (97) 223 (12)
Prepaid expenses - related parties ...... 188 (375) 375 (375)
Prepaid expenses & other current assets.. 6 (340) (143) (274)
Other assets ............................ (41) 4 (41) (22)
Accounts payable ........................ 321 (46) (600) (223)
Accrued expenses ........................ 1,159 398 781 (210)
Deferred revenues--related parties....... 69 (38) (6) (21)
Deferred revenues--third parties......... (8) 41 (96) 58
---------- ---------- ------------ -----------
Net cash used in operating activities............ (3,612) (3,073) (9,496) (6,849)
Cash flows from investing activities:
Net proceeds (purchases) of short-term
investments................................ 3,381 (25,667) 3,063 (24,221)
Purchase of non-public equity securities...... (2,871) - (4,271) -
Property and equipment purchases.............. (883) (195) (1,847) (470)
---------- ---------- ------------ -----------
Net cash used in investing activities............ (373) (25,862) (3,055) (24,691)
---------- ---------- ------------ -----------
Cash flows from financing activities:
Proceeds from Common Stock issuances.......... 957 92 2,466 194
Proceeds from stockholder's note receivable... - - 250 -
Proceeds from Convertible Preferred Stock
issuances, net ............................ - 44,322 - 44,322
Proceeds from issuance of convertible
promissory note - related party............ - 15,120 - 15,120
Principle payments on capital lease
obligations................................ (115) (99) (225) (194)
---------- ---------- ------------ -----------
Net cash provided by financing activities........ 842 59,435 2,491 59,442
Net (decrease) increase in cash and cash
equivalents.................................. (3,143) 30,500 (10,060) 27,902
Cash and cash equivalents at beginning of
period....................................... 51,115 14,294 58,032 16,892
--------- ---------- ------------ -----------
Cash and cash equivalents at end of period....... $ 47,972 $ 44,794 $ 47,972 $ 44,794
========== ========== ============ ===========
Supplemental cash flow information:
Cash paid for interest........................ $ 12 $ 24 $ 20 $ 51
========== ========== ============ ===========
Supplemental noncash activities:
Common Stock issued for stockholder note...... $ - $ 2,000 $ - $ 2,000
========== ========== ============ ===========
Repurchase of Common Stock and cancellation
of related stockholder note................... $ - $ 245 $ - $ 245
========== ========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
WINK COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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.
The results of operations for the interim period ended June 30, 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, 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
six months ended June 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
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.
6
<PAGE> 7
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net Loss ................................ $ (6,332) $ (3,704) $ (11,806) $ (9,201)
Denominator:
Weighted average shares ................. 30,796 10,603 30,557 10,656
Weighted average unvested Common
shares subject to repurchase ......... (314) (620) (404) (691)
---------- ------------ ----------- ------------
Denominator for basic and diluted .......... 30,482 9,983 30,153 9,965
Net loss per share:
Basic and diluted........................ $ (0.21) $ (0.37) $ (0.39) $ (0.92)
</TABLE>
NOTE 3 - STOCK WARRANTS
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 enable 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 June 30, 2000, the lowest aggregate fair value of the warrants
totaled $6,763,000. 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.
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 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.
In May 2000, the Company granted a fully exercisable warrant to purchase Common
Stock to a direct broadcast satellite operator ("DBS operator") in connection
with a seven-year agreement to develop, deliver and promote interactive content
and Wink's viewer response services for the DBS operator's subscribers. The
warrant enables the holder to purchase 1,300,000 shares at $21.75 per share and
expires in May 2005. The fair value of the warrant on the measurement date
totaled $24,098,000. The amount will be amortized to sales and marketing expense
ratably over the seven-year term of the agreement. The warrant has not been
exercised as of this filing.
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. 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 did not vary materially from the reported net
loss for the three and six months ended June 30, 1999. Comprehensive loss for
the three and six months ended June 30, 2000 was $5,895,000 as compared to a
reported net loss of $6,332,000 and $11,381,000 as compared to a reported net
loss of $11,806,000, respectively.
7
<PAGE> 8
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 six months ending June 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 $2.9 million for a 14% interest in the company and a voting member seat
of the management committee. The Company will record the investment at cost and
evaluate the recoverability of the investment periodically and adjust the value,
if applicable.
NOTE 6 - SUBSEQUENT EVENT
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.
8
<PAGE> 9
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:
o developing and adapting our technology for operation in
televisions and advanced analog and digital set-top boxes;
o 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;
o licensing our Wink Server software to broadcast and cable
networks and cable system and digital satellite broadcast
(DBS) operators to incorporate Wink enhancements into their
television programming;
o developing the Wink Response Network for collecting and
managing responses to Wink Enhanced Broadcasting;
o marketing the concept of Wink Enhanced Broadcasting and
establishing the Wink brand; and
o establishing relationships with and licensing our technology
to key television industry participants.
Revenues. Through June 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 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. 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 basis in the second half of 1998, however no transaction
fee revenue has been recognized to date. All advertisers utilizing the Wink
Response Network as of June 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 in the future.
Although, initially the amounts will not be significant in the third quarter, we
will begin to recognize transaction fee revenue in the second half of 2000.
9
<PAGE> 10
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 June 30, 2000, had an
accumulated deficit of approximately $61.3 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 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, 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.
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
Total revenues increased 126% to $636,000 for the three months ended June
30, 2000, compared to $281,000 for the three months ended June 30, 1999. The
increase resulted primarily from a significant increase in license revenue of
$215,000 or 156%. 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. Service revenues also increased by $140,000 or 98% from the same
period in the prior year, resulting from a $253,000 increase in engineering
consulting revenue from a related party, offset by a $124,000 decrease in
non-recurring engineering revenues to third parties. During the three months
ended June 30, 2000, transactions with Microsoft and General Instrument, related
parties, and Matsutshita Electric accounted for 39%, 16% and 10% of our total
revenues, respectively.
10
<PAGE> 11
COSTS AND EXPENSES
Total costs and expenses increased 68% to $8.9 million for the three months
ended June 30, 2000, compared to $5.3 million for the three months ended June
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:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Research and development................................................... $ 129,000 $ 74,000
Sales and marketing ....................................................... 622,000 743,000
General and administrative................................................. 192,000 79,000
-------------- --------------
$ 943,000 $ 896,000
============== ==============
</TABLE>
Cost of Services and Licenses. Cost of services increased 5% to
$121,000 for the three months ended June 30, 2000 from $115,000 for the three
months ended June 30, 1999, reflecting the small increase in non-recurring
engineering and consulting labor costs related to the performance of such
services.
Changes in gross margins from services revenues realized during the
quarters ended June 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
91% to $4.2 million for the three months ended June 30, 2000, from $2.2 million
for the three months ended June 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. 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 92% to $2.3
million for the three months ended June 30, 2000, from $1.2 million for the
three months ended June 30, 1999. The increase was due to increases in personnel
and advertising costs to support our expanded activities. This increase was
offset by a $121,000 decrease in non-cash charges for stock compensation and
warrant amortization related to sales and marketing, $622,000 for the three
months ended June 30, 2000 compared to $743,000 for the three months ended June
30, 1999.
In April 2000, we granted to a management consulting firm a fully
exercisable warrant to purchase 100,000 shares of Common Stock at $33.38 per
share in connection with the signing of a five-year agreement to provide
consulting services. The fair value of this warrant on the measurement date
totaled $1.6 million, was recognized as a component of stockholders' equity and
is being amortized as a sales and marketing expense over the estimated period of
benefit of five years. During the quarter ended June 30, 2000, amortization
recognized totaled $79,000. The warrant has not been exercised as of the date of
this filing.
In May 2000, we granted to a DBS operator a fully exercisable warrant to
purchase 1.3 million shares of Common Stock at $21.75 per share in connection
with the signing of a seven-year agreement. The fair value of this warrant on
the measurement date totaled $24.1 million, was recognized as a component of
stockholders' equity and is being amortized as a sales and marketing expense
over the estimated period of benefit of seven years. During the quarter ended
June 30, 2000, amortization recognized totaled $312,000. The warrant has not
been exercised as of the date of this filing.
11
<PAGE> 12
General and Administrative. General and administrative expense
increased 70% to $1.7 million for the three months ended June 30, 2000, from
$1.0 million for the three months ended June 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 54% to $2.0 million for the three months ended June 30,
2000, from $1.3 million for the three months ended June 30, 2000. This increase
was mostly due to a $1.7 million 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 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 quarter
ended June 30, 1999. We have no material remaining 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 June 30, 2000, we had federal net operating loss
carryforwards of approximately $50 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.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
Total revenues increased 94% to $1.2 million for the six months ended June
30, 2000, compared to $620,000 for the six months ended June 30, 1999. The
increase resulted primarily from a significant rise in license revenue of
$452,000 or 152%. 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. Service revenues also increased by $90,000 or 28% from the same
period in the prior year resulting from an increase in engineering consulting
revenue of $300,000 from a related party, offset by a decrease in non-recurring
engineering revenues to related and third parties of $210,000. During the six
months ended June 30, 2000, transactions with Microsoft, General Instrument and
Toshiba, related parties, and Matsutshita Electric accounted for 26%, 17%, 11%
and 11% of our total revenues, respectively.
COSTS AND EXPENSES
Total costs and expenses increased 46% to $16.6 million for the six months
ended June 30, 2000, compared to $11.4 million for the six months ended June 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 $1.4 million or 46% from the same
period in the prior year, due to warrants and stock bonuses issued in the first
six months of 1999 with related compensation expense of approximately $2.6
million. We believe that costs and expenses will continue to increase as we
expand our operations and sales and marketing efforts.
12
<PAGE> 13
Costs and expenses include non-cash charges for stock compensation and
warrant amortization as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
Research and development................................................... $ 259,000 $ 100,000
Sales and marketing ....................................................... 953,000 2,747,000
General and administrative................................................. 384,000 105,000
-------------- --------------
$ 1,596,000 $ 2,952,000
============== ==============
</TABLE>
Cost of Services and Licenses. Cost of services and licenses decreased
17% to $171,000 for the six months ended June 30, 2000 from $205,000 for the six
months ended June 30, 1999, primarily reflecting a decrease of $164,000 in
non-recurring engineering labor costs related to the performance of such
services, offset by an increase of $117,000 in engineering labor costs related
to a consulting project with a related party.
Changes in gross margins from services revenues realized during the six
months ended June 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 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
93% to $8.1 million for the six months ended June 30, 2000, from $4.2 million
for the six months ended June 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 stock compensation amortization costs.
Sales and Marketing. Sales and marketing expense, excluding non-cash
charges for stock compensation and warrant amortization, increased 87% to $4.3
million for the six months ended June 30, 2000, from $2.3 million for the six
months ended June 30, 1999. The increase was due to increases in personnel and
advertising costs to support our expanded activities. This increase was offset
by a $1.8 million decrease in non-cash charges for stock compensation and
warrant amortization related to sales and marketing. 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 as
incentive for signing definitive software licensing agreements and to promote
the development of Wink-enhanced programming during the six months ended June
30, 1999. The fair value of these warrants as of the measurement date of $2.0
million was recorded as sales and marketing expense in the period ended June
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 six months ended June 30, 2000. See a
further description of the transactions above in the results of operations for
the three-month period ended June 30, 2000.
General and Administrative. General and administrative expense
increased 63% to $3.1 million for the six months ended June 30, 2000, from $1.9
million for the six months ended June 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 140% to $3.6 million for the six months ended June 30,
2000, from $1.5 million for the six months ended June 30, 1999. This increase
was mostly due to a $3.1 million 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 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
13
<PAGE> 14
cancellation of a development and license agreement. See a further description
of the transaction above in the results of operations for the three-month period
ended June 30, 2000.
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 June 30, 2000, we had federal net operating loss
carryforwards of approximately $50 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 June 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 $136.5 million
of cash, cash equivalents and short-term investments at June 30, 2000.
Net cash used in operating activities totaled $9.5 million and $6.8
million for the six months ended June 30, 2000 and 1999, respectively, primarily
as a result of our net losses.
Net cash used in investing activities totaled $3.1 million for the six
months ended June 30, 2000, and was attributable to investments in two
non-public technology companies of $4.3 million and the acquisition of $1.8
million of property and equipment, offset by $3.1 million in net proceeds from
short-term investments. For the six months ended June 30, 1999, net cash used in
investing activities was $24.7 million and was attributable to net purchases of
short-term investments of $24.2 million as a result of proceeds from our sale of
Convertible Preferred Stock and a convertible promissory note and by the
acquisition of $470,000 of property and equipment.
Net cash provided by financing activities for the six months ended June
30, 2000 was $2.5 million, consisting of $2.5 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 capital lease obligation principal payments of $225,000. For
the six months ended June 30, 1999, net cash provided by financing activities
was $59.4 million, consisting of proceeds of $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 $194,000 from
our Common Stock issued under our stock option plan, offset by capital lease
obligation principal payments of $194,000.
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.
14
<PAGE> 15
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 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 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 will have a material effect on the
financial statements.
15
<PAGE> 16
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 June 30, 2000, had an accumulated deficit of $61.3 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.
16
<PAGE> 17
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:
o the amount of transaction-processing activity through the Wink
Response Network;
o the timing and success of infrastructure upgrades necessary to
support deployment by industry participants;
o 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
o 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 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 statement of operations or on
our cash flows.
17
<PAGE> 18
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 June 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 June 30,
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
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.
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.
18
<PAGE> 19
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
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.
<TABLE>
<S> <C>
WINK COMMUNICATIONS, INC.
(Registrant)
By: /s/ HOWARD L. SCHROTT
------------------------------------------------------
Chief Financial Officer and Senior Vice President
(Principal Financial and Accounting Officer)
Date: August 11, 2000
</TABLE>
19
<PAGE> 20
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
27.1 Financial Data Schedule.
20
