Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) 145 640K
2: EX-2.1-1 Plan of Acquisition, Reorganization, Arrangement, 6 26K
Liquidation or Succession
3: EX-2.1-2 Plan of Acquisition, Reorganization, Arrangement, 1 11K
Liquidation or Succession
4: EX-3.1 Articles of Incorporation/Organization or By-Laws 12 40K
5: EX-3.2 Articles of Incorporation/Organization or By-Laws 18 72K
6: EX-4.2 Instrument Defining the Rights of Security Holders 13 49K
7: EX-4.3 Instrument Defining the Rights of Security Holders 15 52K
8: EX-4.4 Instrument Defining the Rights of Security Holders 15 53K
9: EX-10.1 Material Contract 9 35K
18: EX-10.13 Material Contract 4 27K
19: EX-10.14 Material Contract 5 31K
20: EX-10.15 Material Contract 5 31K
21: EX-10.16 Material Contract 5 31K
22: EX-10.17 Material Contract 11 50K
23: EX-10.18-1 Material Contract 20 85K
10: EX-10.2 Material Contract 9 36K
24: EX-10.20 Material Contract 10 40K
25: EX-10.21 Material Contract 4 27K
26: EX-10.22 Material Contract 24 106K
27: EX-10.23 Material Contract 7 40K
28: EX-10.24 Material Contract 11 45K
11: EX-10.3-1 Material Contract 8 38K
12: EX-10.3-2 Material Contract 1 11K
13: EX-10.4 Material Contract 9 37K
14: EX-10.5 Material Contract 8 34K
15: EX-10.6 Material Contract 9 36K
16: EX-10.8-1 Material Contract 20 90K
17: EX-10.8-2 Material Contract 3 18K
29: EX-21.1 Subsidiaries of the Registrant 1 9K
30: EX-23.1 Consent of Experts or Counsel 1 10K
31: EX-27.1 Financial Data Schedule (Pre-XBRL) 2 13K
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- Alternative Formats (Word, et al.)
- Assets
- Belo Corp
- Business
- Capitalization
- Cash and cash equivalents
- Certain Relationships and Related Transactions
- Certain U.S. Federal Tax Considerations for Non-United States Holders of Common Stock
- Common Stock
- Competition
- Consolidated Statement of Cash Flows for the year ended December 31, 1999
- Consolidated Statement of Operations for the year ended December 31, 1999
- Depreciation and amortization
- Description of Capital Stock
- Dilution
- Directors and Executive Officers
- Dividend Policy
- Dividends
- Employment Agreements
- Estate Tax
- Exhibits and Financial Statement Schedules
- Experts
- Forward-Looking Statements
- Indemnification of Directors and Officers
- Index to Financial Statements
- Interest expense
- Interest income
- Legal Matters
- Legal Proceedings
- Liquidity and Capital Resources
- Management
- Management's Discussion and Analysis of Financial Condition and Results of Operations
- Michael N. Garin
- National Broadcasting Company, Inc
- Notes to Consolidated Financial Statements
- Notes to Financial Statements
- Offering, The
- Other Expenses of Issuance and Distribution
- Patrick V. Stark
- Production and media costs
- Property and equipment
- Recent Sales of Unregistered Securities
- Registration Rights
- Report of Independent Accountants
- Research and development
- Revenues
- Risk Factors
- Scott P. Carlin
- Security Ownership of Principal Stockholders and Management
- Selected Consolidated Financial Data
- Shares Eligible for Future Sale
- Statements of Cash Flows for the years ended December 31, 1997 and 1998
- Statements of Changes in Stockholder's Deficit for the years ended December 31, 1997 and 1998
- Statements of Operations for the years ended December 31, 1997 and 1998
- Strategic Relationships
- Summary
- The Offering
- The Virtual Network
- Total
- Undertakings
- Underwriting
- Use of Proceeds
- Virtual Network, The
- Where You Can Find More Information
- Young & Rubicam, Inc
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| 1 | 1st Page - Filing Submission
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| " | Patrick V. Stark
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| 5 | Common Stock
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| 7 | Summary
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| 10 | The Virtual Network
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| 12 | The Offering
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| 15 | Risk Factors
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| 28 | Forward-Looking Statements
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| 29 | Use of Proceeds
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| 30 | Dividend Policy
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| 31 | Capitalization
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| 32 | Dilution
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| 34 | Selected Consolidated Financial Data
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| 35 | Management's Discussion and Analysis of Financial Condition and Results of Operations
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| 38 | Revenues
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| 39 | Production and media costs
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| " | Depreciation and amortization
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| " | Research and development
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| " | Interest income
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| " | Interest expense
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| 40 | Liquidity and Capital Resources
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| 43 | Business
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| 54 | Strategic Relationships
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| " | Belo Corp
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| " | National Broadcasting Company, Inc
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| 58 | Competition
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| 59 | Legal Proceedings
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| 60 | Management
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| " | Directors and Executive Officers
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| 65 | Employment Agreements
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| " | Michael N. Garin
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| " | Scott P. Carlin
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| 67 | Certain Relationships and Related Transactions
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| 69 | Young & Rubicam, Inc
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| 72 | Security Ownership of Principal Stockholders and Management
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| 74 | Description of Capital Stock
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| 75 | Registration Rights
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| 80 | Shares Eligible for Future Sale
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| 82 | Certain U.S. Federal Tax Considerations for Non-United States Holders of Common Stock
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| " | Dividends
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| 84 | Estate Tax
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| 85 | Underwriting
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| 89 | Legal Matters
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| " | Experts
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| " | Where You Can Find More Information
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| 90 | Index to Financial Statements
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| 91 | Report of Independent Accountants
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| 92 | Assets
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| 93 | Consolidated Statement of Operations for the year ended December 31, 1999
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| 94 | Total
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| 95 | Consolidated Statement of Cash Flows for the year ended December 31, 1999
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| 96 | Notes to Consolidated Financial Statements
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| " | Cash and cash equivalents
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| 112 | Statements of Operations for the years ended December 31, 1997 and 1998
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| 113 | Statements of Changes in Stockholder's Deficit for the years ended December 31, 1997 and 1998
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| 114 | Statements of Cash Flows for the years ended December 31, 1997 and 1998
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| 115 | Notes to Financial Statements
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| " | Property and equipment
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| 132 | Item 13. Other Expenses of Issuance and Distribution
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| " | Item 14. Indemnification of Directors and Officers
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| 133 | Item 15. Recent Sales of Unregistered Securities
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| 135 | Item 16. Exhibits and Financial Statement Schedules
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| 137 | Item 17. Undertakings
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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DIGITALCONVERGENCE.:COM INC.
(Exact Name of Registrant as Specified in its Charter)
[Download Table]
DELAWARE 7373 75-2791929
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification No.)
Incorporation or Organization) Classification Code Number)
[Enlarge/Download Table]
PATRICK V. STARK
EXECUTIVE VICE PRESIDENT
9101 N. CENTRAL EXPRESSWAY DIGITALCONVERGENCE.:COM INC.
6TH FLOOR 9101 N. CENTRAL EXPRESSWAY
DALLAS, TEXAS 75231 6TH FLOOR
(214) 292-6000 DALLAS, TEXAS 75231
(Address, Including Zip Code, and Telephone Number, (214) 292-6000
including (Name, Address, Including Zip Code, and Telephone Number,
Area Code, of Registrant's Principal Executive Offices) Including Area Code, of Agent For Service)
------------------------------
COPIES OF ALL COMMUNICATIONS TO:
[Download Table]
MARK EARLY DENNIS J. FRIEDMAN
P. GREGORY HIDALGO CLAUDE S. SERFILIPPI
VINSON & ELKINS L.L.P. CHADBOURNE & PARKE LLP
2001 ROSS AVENUE, SUITE 3700 30 ROCKEFELLER PLAZA
DALLAS, TEXAS 75201 NEW YORK, NEW YORK 10112
TELEPHONE: (214) 220-7700 TELEPHONE: (212) 408-5100
FACSIMILE: (214) 220-7716 FACSIMILE: (212) 541-5369
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 426(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
[Enlarge/Download Table]
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED AGGREGATE OFFERING PRICE (1) REGISTRATION FEE
Common Stock, $0.01 par value......... $100,000,000 $26,400
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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[inside front cover page of the prospectus]
The prospectus has been Internet Enhanced. The inside cover of this
prospectus will contain photographs of consumer products and excerpts from
selected magazines and newspapers, including exposed bar codes. Potential
investors will be able to access the related website either by using our
:Cue:C.A.T. device to swipe the code or by typing the related URL address.
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one (the
"U.S. Prospectus") to be used in connection with an offering in the U.S. and
Canada (the "U.S. Offering") of Common Stock of DigitalConvergence.:Com Inc.
(the "Company") (which includes Common Stock subject to the U.S. Underwriters'
over-allotment option) and one (the "International Prospectus") to be used in
connection with a concurrent international offering outside the U.S. and Canada
(together with the U.S. Offering, the "Offerings") of Common Stock of the
Company (which includes Common Stock subject to the International Managers'
over-allotment option). The U.S. Prospectus and the International Prospectus
will be identical in all respects except for the front cover and back cover
pages of the prospectuses and the information under the caption "Underwriting."
The form of the U.S. Prospectus is included herein and is followed by those
pages to be used in the International Prospectus that differ from those in the
U.S. Prospectus. Each of the pages to be used in the International Prospectus
included herein is labeled "Alternative Page for International Prospectus."
Final forms of such prospectuses will be filed with the Securities and Exchange
Commission pursuant to Rule 424(b).
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
------------------
This is DigitalConvergence.:Com Inc.'s initial public offering of common
stock. DigitalConvergence.:Com Inc. is selling all of the shares in this
offering. The U.S. underwriters are offering shares in the U.S. and Canada
and the international managers are offering shares outside the U.S. and
Canada.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National Market
under the symbol "DGTL."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
---------------------
[Download Table]
PER SHARE TOTAL
--------- -----
Public offering price.................................... $ $
Underwriting discount.................................... $ $
Proceeds, before expenses, to DigitalConvergence.:Com
Inc........................................................ $ $
The U.S. underwriters may also purchase up to an additional shares from
DigitalConvergence.:Com Inc. at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover
over-allotments. The international managers may similarly purchase up to an
additional shares from DigitalConvergence.:Com Inc.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery on or about ,
2000.
------------------------
JOINT BOOK-RUNNING MANAGERS
MERRILL LYNCH & CO. ING BARINGS
----------------
BANC OF AMERICA SECURITIES LLC BEAR, STEARNS & CO. INC.
----------------
The date of this prospectus is , 2000
TABLE OF CONTENTS
[Download Table]
PAGE
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Summary..................................................... 1
Risk Factors................................................ 9
Forward-Looking Statements.................................. 22
Use of Proceeds............................................. 23
Dividend Policy............................................. 24
Capitalization.............................................. 25
Dilution.................................................... 26
Selected Consolidated Financial Data........................ 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Business.................................................... 37
Management.................................................. 54
Certain Relationships and Related Transactions.............. 61
Security Ownership of Principal Stockholders and
Management................................................ 66
Description of Capital Stock................................ 68
Shares Eligible for Future Sale............................. 74
Certain U.S. Federal Tax Considerations for Non-United
States Holders of Common Stock............................ 76
Underwriting................................................ 79
Legal Matters............................................... 83
Experts..................................................... 83
Where You Can Find More Information......................... 83
Index to Financial Statements............................... F-1
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You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
ii
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" AND THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES TO THOSE CONSOLIDATED FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES,
REFERENCES IN THIS PROSPECTUS TO "DIGITALCONVERGENCE.:COM,"
"DIGITALCONVERGENCE," "DIGITAL," "US," "WE" OR "OUR" REFER TO
DIGITALCONVERGENCE.:COM INC.-TM- AND ITS SUBSIDIARIES AND THE TERM "YOU" REFERS
TO A PROSPECTIVE INVESTOR.
UNLESS WE INDICATE OTHERWISE, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE OVER-ALLOTMENT OPTIONS GRANTED TO THE U.S. UNDERWRITERS AND
INTERNATIONAL MANAGERS, ASSUMES THE CONVERSION INTO COMMON STOCK OF EACH
OUTSTANDING SHARE OF OUR PREFERRED STOCK AND GIVES EFFECT TO A FOR ONE
STOCK SPLIT OF OUR OUTSTANDING SHARES OF COMMON STOCK TO BE COMPLETED PRIOR TO
THE COMPLETION OF THIS OFFERING.
DIGITALCONVERGENCE.:COM INC.
We are a company whose technology allows media companies, manufacturers and
virtually all organizations to instantly and easily link their products with web
pages deep within their websites. Until we release our technology, we believe
that it is not possible for these companies to realize the full value of their
Internet efforts, because their websites have to be entered through their front
pages, often making access to a desired web page time-consuming and difficult.
Our :C.R.Q.-TM- software will send an Internet user's web browser to a specific
web page in response to our proprietary digital signal called a ":Cue-SM-"
transmitted by a television broadcast. Our :C.R.Q. software will also send an
Internet user's web browser to a specific web page when an Internet user
utilizes our :Cue:C.A.T.-TM- device to scan our proprietary codes called "Print
:Cues" on print media or to scan existing bar codes on consumer products. We
believe that our technology will empower media companies and corporate
advertisers to enhance their content and to transform television broadcasts or
other electronic media, print media or items bearing Print :Cues or bar codes
into powerful new advertising, promotional or e-commerce opportunities. Our
technology will be free to the public and will allow Internet users to quickly
and easily obtain relevant information and conduct e-commerce activities by
eliminating the input of lengthy website addresses and time-intensive web
navigation.
We intend to initiate a nationwide roll-out of our technology in September
2000 and plan to distribute, free to the public, at least 50 million CD-ROMs
containing our :C.R.Q. software and 50 million :Cue:C.A.T. devices by the end of
2001. To assist in the promotion, marketing and deployment of our technology, we
have established several strategic media, advertising and distribution
partnerships. We expect that our strategic partners will provide promotional
support and distribution capabilities to help build consumer awareness and
adoption of our technology and products. Our media partners include National
Broadcasting Company, Inc., Belo Corp., Forbes Inc., The Milwaukee Journal and
Wired Magazine. These partners have agreed to implement our technology in
television and cable networks, local television broadcasts and print
publications. Forbes Inc., The Milwaukee Journal and Wired Magazine have also
agreed to distribute our products to their subscribers. We expect that these
relationships, taken together, will provide us with broad media exposure in six
of the top ten U.S. media markets and a number of smaller markets, for total
coverage of approximately 40% of U.S. households. In addition, we are in
discussions with broadcast media companies covering approximately an additional
20% of U.S. households to also implement our technology in their television
broadcasts. Additionally, we have partnered with Tandy Corporation to produce
our :Cue:C.A.T. devices and make them available, free to consumers, in over
7,000 RadioShack retail outlets throughout the U.S. In addition, Tandy has
invested in us. Other companies that have made investments in us include
Young & Rubicam, Inc., Belo Corp., The Coca-Cola Company, The E.W. Scripps
Company and Spielberg/Katz Associates, LLC.
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MARKET OPPORTUNITY
Companies are investing billions of dollars in the development, execution
and promotion of Internet strategies. The growth in both the number of Internet
users and the volume of e-commerce creates significant challenges and
opportunities for businesses across multiple industries. We believe that our
technology will provide powerful solutions for a number of these companies and
will provide a means to create new revenue opportunities. To quickly establish
our technology on a broad scale, we have targeted the following significant
opportunities:
- BROADCAST AND CABLE MEDIA. In 1998, $47 billion was spent on television
advertising and $91 billion on goods and services purchased through direct
response television programming.
- PRINT MEDIA. In 1998, the following amounts were spent in the following
print media segments:
- $87 billion on goods purchased from print catalogs;
- $40 billion on direct mail advertising;
- $44 billion on newspaper display and classified advertising; and
- $14 billion on advertising in trade and consumer magazines.
- CODED CONSUMER PRODUCTS. There are tens of millions of active bar codes
that are widely used in labeling consumer products in the U.S. Until now,
no widely-adopted technology has emerged that allows a manufacturer to
leverage these codes to link to relevant sites on the Internet.
While the growth of the Internet has attracted Internet users at an
unprecedented pace, the volume of online information has made it increasingly
difficult for users to navigate the Internet effectively and efficiently. Major
corporate websites contain many layers of web pages, which often make finding
relevant information a frustrating and time-consuming experience. As websites
continue to proliferate and grow in size and complexity, we believe that users
will increasingly need a quicker, more direct link to their intended
destinations. Search engines will continue to have useful applications on the
Internet, but we believe that users want a more precise tool that takes them
directly to a specific web page deep within a website.
THE DIGITALCONVERGENCE.:COM SOLUTION
We believe that our technology will provide the solution to the desire of
broadcasters, publishers, merchants and advertisers for a simple, cost-effective
means of leveraging the Internet across all forms of traditional media. In
addition, our technology also addresses the needs of Internet users for a more
satisfying Internet experience. Elements of our solution include Internet
Enhanced-TM- broadcasting, print and coded products, and our Virtual Network, an
"L"-shaped area containing banner advertisements and related information that
will appear on the border of the user's web browser when using our technology.
INTERNET ENHANCED BROADCASTING
A broadcast can be linked to a website, or Internet Enhanced, by simply
embedding a :Cue in the broadcast. Unlike current television content and
advertisements in which a website address is briefly displayed on the television
screen, Internet Enhanced programming will load the web page on a user's web
browser for immediate access or store the web page address for later use. With
our technology, viewers will no longer need to recall and manually enter a
website address. By embedding :Cues in programming, our technology provides
broadcasters and advertisers with a powerful new tool to supplement existing
content and advertisements, which we believe will drive viewers to selected
websites, increase advertising revenue and generate additional e-commerce
opportunities. Accordingly, our technology will offer a platform for
broadcasters to enhance content and advertisers to deliver immediate buying
opportunities to their target consumers. As a result, we believe broadcasters
will be able to command premium rates for Internet Enhanced advertisements.
2
For example, our technology could be used in the following ways:
- A local television station differentiates its newscast with Internet
Enhanced weather reporting. While reporting the weather, the station
broadcasts a :Cue that directs the viewer's web browser to the
broadcaster's web page that includes detailed forecast information for
each city and town in the viewing area.
- An automobile company inserts a :Cue in a television advertisement, which
launches an Internet user's web browser to a web page designated by the
company. This enables the automobile company to provide more detailed
information on its web page than can be presented in the advertisement,
including specific information on an automobile's features and pricing,
local dealerships and immediate e-commerce opportunities.
We intend to generate our broadcast revenue from:
- fees from the sale of advertising :Cues to broadcast networks, cable
networks and local television stations;
- a fixed fee per sale completed by home shopping networks as a result of
using our :Cues; and
- fees from annual licenses to cable networks for the use of :Cues in
content.
INTERNET ENHANCED PRINT
Our :Cue:C.A.T. device will enable an Internet user to scan our Print :Cues
to link the user to a particular web page designated by the publisher or
corporate advertiser. With the swipe of a :Cue:C.A.T. device, users will be
immediately directed to more detailed information impractical to include in
print copy. Through the use of Internet Enhanced print content, publishers will
be able to drive readers deep in their websites for more detailed information.
In addition, print advertisers will have the ability to create Internet Enhanced
advertisements that place the consumer one swipe away from an e-commerce
opportunity. For example, a computer company can insert a Print :Cue in a
newspaper or magazine advertisement, which launches an Internet user's web
browser to a web page designated by the company. Internet Enhanced print
advertising provides the user with immediate access to more specific information
on the computer's features, pricing and special promotions and provides the
computer company with immediate e-commerce opportunities.
We intend to generate our print revenue from:
- fees from licenses to publishers for the use of Print :Cues for content
enhancement purposes;
- fees from the sale of any advertising Print :Cues in almost any print
media, including newspapers and magazines;
- a fixed fee per sale completed by catalog shoppers as a result of using
our Print :Cues; and
- commissions on increased revenues resulting from the use of Print :Cues in
classified ads.
INTERNET ENHANCED PRODUCTS AND OTHER :CUE:C.A.T. APPLICATIONS
We are completing a massive database that links existing bar codes,
including UPC, ISBN, EAN and other codes, to websites, thereby enabling
manufacturers to utilize their existing product codes for advertising and other
marketing purposes. Our technology will enable a user of the :Cue:C.A.T. device
to scan the bar code on a product, linking the user to a specified web page. For
example, a prescription drug bottle from a pharmacy can include a bar code that
directs the recipient's web browser to the drug manufacturer's website
containing information regarding the illness for which the drug was prescribed,
side effects of the drug, and additional products that may be useful in treating
the illness. Because our :Cue:C.A.T. technology scans substantially all bar
codes and will not require consumer
3
goods manufacturers to alter labels in any way, our solution is an inexpensive
and unobtrusive way of turning an existing label into a powerful new marketing
tool. In addition, our Print :Cues can be placed on credit cards and other
physical objects that are not normally assigned bar codes. In sum, our
technology allows any product to become Internet Enhanced.
We intend to generate our enhanced product revenue from:
- annual fees for bar codes on consumer products that are Internet Enhanced;
- fees per Print :Cue sold to publishers of free-standing inserts and direct
mail, and sold to manufacturers for use in product manuals; and
- annual fees for Print :Cues used on credit card statements.
THE VIRTUAL NETWORK
Each time our :C.R.Q. software or :Cue:C.A.T. device directs a user's web
browser to a specific web page, an "L"-shaped area called the "Virtual Network"
will appear on the border of the user's Internet web browser. The Virtual
Network will be populated with banner advertisements and a series of tabs that,
when clicked, will display information related to the website being viewed. The
Virtual Network is only visible when an individual is using our technology.
Banner advertisements and tabs will be customized to each user's profile,
displaying information and promotional offers designed to appeal to the
individual's interests. We believe that our Virtual Network, through modest
usage of our :C.R.Q. and :Cue:C.A.T. technology, will generate a significant
number of ad impressions and click-throughs to our advertisers' websites. We
intend to generate revenues from the sale of sponsorships and banner
advertisements on our Virtual Network.
STRATEGY
Our objective is to establish our technology as the primary means for
television and cable networks, local television broadcasters, newspaper,
magazine and catalog publishers, other mass media companies, as well as
corporate advertisers, to link their broadcasts, publications and products to
the Internet. To achieve this objective, we have adopted the following
strategies:
- leverage media relationships in order to support adoption and sustain our
first mover advantage;
- execute a nationwide roll-out of our :C.R.Q. and :Cue:C.A.T. technology;
- establish our technology as the "system standard" on personal computers;
- develop multiple revenue streams from multi-billion dollar advertising
markets;
- develop sophisticated research and data-mining capabilities as a
value-added service to customers; and
- pursue international markets.
RECENT DEVELOPMENTS
PREFERRED STOCK FINANCINGS
In April 2000, we issued 5,929,364 shares of Series B preferred stock and
5,372,593 shares of Series C preferred stock to various investors, including
Belo Corp., The Coca-Cola Company, The E.W. Scripps Company, Spielberg/Katz
Associates, LLC, Tandy Corporation and Young & Rubicam, Inc., for aggregate
consideration of $98.3 million. All outstanding shares of our preferred stock
will be automatically converted into our common stock upon completion of this
offering.
4
In April 2000, we issued two warrants to an affiliate of National
Broadcasting Company, Inc. to purchase 3,752,445 shares and 4,505,165 shares,
respectively, of our common stock at per share exercise prices of $5.00 and
$10.54, respectively. We are required to issue additional warrants to National
Broadcasting Company, Inc.'s affiliate with a per share exercise price of
$10.54, depending on the number of shares we reserve for issuance under our 1999
Stock Option Plan. The warrants will terminate in April 2005.
OTHER INFORMATION
We were incorporated in Delaware in September 1998 and began operations in
January 1999. Our executive offices are located at 9101 N. Central Expressway,
6th Floor, Dallas, Texas 75231, and our telephone number is (214) 292-6000.
Information contained on any website to which you are directed by this
prospectus does not constitute part of this prospectus.
5
THE OFFERING
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Common stock offered by DigitalConvergence.:Com
U.S. offering................................ shares
International offering....................... shares
Total...................................... shares
Common stock outstanding after the offering.... shares(1)
Use of proceeds................................ We estimate that our net proceeds from this
offering without exercise of over-allotment
options will be approximately $
million. We intend to use these net
proceeds:
- to pay expenses related to the
manufacture and distribution of our
:C.R.Q. CD-ROMs and :Cue:C.A.T.
devices;
- to market and promote the adoption of
our technology by Internet users;
- to purchase additional network server
and support equipment;
- to repay outstanding indebtedness; and
- for general corporate purposes,
including operating expenses, working
capital and other capital
expenditures.
See "Use of Proceeds."
Risk Factors................................... See "Risk Factors" and other information
included in this prospectus for a discussion
of factors that you should carefully
consider before deciding to invest in our
common stock.
Proposed Nasdaq National Market symbol......... DGTL
------------------------
(1) Includes:
- 61,113,150 shares of common stock outstanding immediately before
completion of this offering; and
- 21,360,537 shares of common stock that will be issued upon conversion of
our preferred stock upon completion of this offering.
Excludes:
- 9,245,200 shares of common stock issuable upon the exercise of stock
options granted by us, with exercise prices ranging from $3.31 to $9.37
per share and a weighted average exercise price of $4.17 per share, of
which stock options to purchase up to shares of common stock are
exercisable or will become exercisable within 60 days after the date of
this prospectus; and
- 8,382,350 shares of common stock issuable upon the exercise of warrants
issued by us, with exercise prices ranging from $5.00 to $10.54 per share
and a weighted average exercise price of $7.98 per share, of which all
warrants are immediately exercisable.
6
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes the consolidated statements of operations and
consolidated balance sheet data for our business. In January 1999, we acquired
from Infotainment Telepictures, Inc., our predecessor company for accounting
purposes (the "Predecessor"), our television show NET TALK LIVE! THE INTERNET
TALK SHOW and certain proprietary technology rights. We have included in this
prospectus the financial statements and the notes related thereto of the
Predecessor. The historical results presented below are not necessarily
indicative of the results to be expected for any future period. For a more
detailed explanation of this financial data, see "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto appearing elsewhere in this prospectus.
The unaudited pro forma consolidated balance sheet data gives effect to the
issuance of 48 shares of our Series A preferred stock in January 2000 for cash
consideration of $151,200 and the issuance of 5,929,364 shares of our Series B
preferred stock and 5,372,593 shares of our Series C preferred stock in
April 2000, for cash consideration of $98.3 million and also gives effect to the
use of proceeds therefrom.
The unaudited pro forma, as adjusted, consolidated balance sheet data gives
further effect to the following:
- the automatic conversion of all of our preferred stock into 21,360,537
shares of common stock upon completion of this offering; and
- the sale of shares of common stock in this offering at an assumed
initial public offering price of $ per share after deducting the
estimated underwriting discounts and commissions and our estimated
offering expenses and the application of the net proceeds as set forth
under "Use of Proceeds."
For an explanation of the number of shares used to compute net loss per
share, see Note 2 of the notes to our consolidated financial statements and
Note 2 of the Predecessor financial statements, each appearing elsewhere in this
prospectus.
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PREDECESSOR FINANCIAL DATA
YEAR ENDED DECEMBER 31, YEAR ENDED
----------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues............................... $ 97 $ 109 $ 690 $ 1,636 $ 1,543
Operating expenses:
Production and media costs............... 78 137 591 939 1,012
Selling, general and administrative...... 48 91 284 671 3,921
Depreciation and amortization............ -- 17 41 55 106
Research and development................. -- -- -- 36 410
----------- ----------- ----------- ----------- -----------
Total operating expenses............... 126 245 916 1,701 5,449
----------- ----------- ----------- ----------- -----------
Operating loss............................. (29) (136) (226) (65) (3,906)
Interest income............................ -- -- -- -- 660
Interest expense........................... (3) (14) (17) (24) (731)
----------- ----------- ----------- ----------- -----------
Net loss................................... $ (32) $ (150) $ (243) $ (89) $ (3,977)
=========== =========== =========== =========== ===========
Basic and diluted weighted average common
shares outstanding....................... 25,000 25,000 25,000 25,000 59,507,271
Basic and diluted net loss per common
share.................................... $ (1.30) $ (6.02) $ (9.72) $ (3.54) $ (0.07)
=========== =========== =========== =========== ===========
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AS OF DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 45,540 $138,378
Total assets................................................ 46,518 139,356
Long-term liabilities....................................... 9,145 3,521
Convertible preferred stock subject to redemption........... 47,888 146,350
Total stockholders' equity (deficit)........................ (11,246) (11,246)
8
RISK FACTORS
THE VALUE OF AN INVESTMENT IN DIGITALCONVERGENCE.:COM WILL BE SUBJECT TO THE
SIGNIFICANT RISKS INHERENT IN OUR BUSINESS. YOU SHOULD CONSIDER CAREFULLY THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION INCLUDED IN
THIS PROSPECTUS BEFORE YOU DECIDE TO PURCHASE ANY SHARES OF OUR COMMON STOCK. IF
ANY EVENT DESCRIBED BELOW OCCURS, WE COULD BE ADVERSELY AFFECTED IN A MATERIAL
WAY. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO DECLINE, PERHAPS
SIGNIFICANTLY.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND PROSPECTS.
We have a limited operating history on which to base an evaluation of our
business and prospects. We were formed in September 1998 and did not begin
operations until January 1999. To date, our principal source of revenues has
been our television show NET TALK LIVE! THE INTERNET TALK SHOW. We have not yet
commercially released our :C.R.Q. and :Cue:C.A.T. technology, which we expect to
be our principal source of revenues in the future. Consequently, there is little
historical financial or other information on which to evaluate our business and
prospects. Accordingly, you must consider our prospects in light of the risks,
expenses and difficulties frequently encountered by early stage companies in new
and rapidly evolving markets.
WE CANNOT PREDICT WHETHER WE WILL BE SUCCESSFUL IN IMPLEMENTING OUR BUSINESS
STRATEGY.
Our business model is new. We cannot be certain that our business model will
be successful or that we can achieve or sustain revenue growth or generate any
profits. This business model is unproven and depends upon our ability to, among
other things:
- effectively distribute our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to
millions of individual Internet users;
- generate acceptance of our :C.R.Q. and :Cue:C.A.T. technology by the
broadcast industry, print and media companies, leading consumer companies,
manufacturers, the marketing and advertising industries and individual
Internet users;
- gain advertiser acceptance of our Virtual Network;
- maintain our current relationships with our broadcast, publishing,
manufacturing, retail and marketing partners and enter into agreements
with many additional distribution and promotional partners; and
- generate significant revenues through usage fees, licensing fees and
advertising fees.
INTERNET USERS MAY NOT ADOPT OUR TECHNOLOGY.
To use our technology, Internet users must download or install our :C.R.Q.
software, register as a user of our technology, connect an audio cable from the
television to the computer and plug the :Cue:C.A.T. device into the computer.
Internet users may be unwilling to make these efforts because of their comfort
with existing habits, because of general reticence about technology or the
Internet, because they find the process confusing, burdensome or time-consuming
or for other reasons.
OUR FAILURE TO GAIN BROAD MARKET ACCEPTANCE WOULD RESULT IN OUR BEING UNABLE TO
MARKET AND SELL OUR SERVICES SUCCESSFULLY.
The market for technology allowing the convergence of the Internet with
virtually any form of media or product is new and rapidly evolving. As is
typical for any new, rapidly developing market, demand and market acceptance for
newly introduced technology, products and services are subject to a high level
of uncertainty and risk. The market for our technology may develop more slowly
than
9
expected or become saturated with competitors, or our technology may not achieve
or sustain mass media, market or public acceptance.
In order to gain broad market acceptance, we must, among other things:
- successfully implement and execute our business and marketing strategy,
including the commercial release of our :C.R.Q. and :Cue:C.A.T.
technology;
- develop, maintain and enhance our brand recognition;
- continue to develop and upgrade our technology, systems, products and
services;
- respond quickly and effectively to competitive developments;
- generate sufficient revenue to achieve and maintain profitability;
- maintain existing and establish new strategic partnerships; and
- attract, retain and motivate qualified personnel.
We cannot assure you that we will be successful in doing any of the
foregoing or that our technology will gain broad market acceptance. Some or all
of our targeted customers, which include broadcasters, publishers,
manufacturers, merchants and direct marketers, may choose not to use our
technology because Internet users do not adopt our technology, because the cost
of implementing an Internet strategy utilizing our technology exceeds its
perceived or actual benefits or for other reasons that we may not have
anticipated.
OUR FUTURE OPERATING RESULTS ARE UNCERTAIN AND WE ANTICIPATE SIGNIFICANT FUTURE
LOSSES AND NEGATIVE CASH FLOW.
To implement our business strategy, we plan to incur substantial costs to
produce and distribute, free to the public, at least 50 million :C.R.Q.
CD-ROMs and 50 million :Cue:C.A.T. devices by the end of 2001. These costs will
be incurred before we derive significant revenues from this increased spending.
Therefore, we expect significant operating and net losses and negative cash flow
for the foreseeable future. We do not have sufficient cash to indefinitely
sustain these operating losses. Further, we will need to generate significant
revenues if we are to achieve and then maintain profitability. We cannot assure
you that we will be able to do this. Our limited operating history and the
rapidly evolving nature of our industry also make forecasting quarterly results
difficult. Even if we do achieve profitability, we cannot be certain that we can
sustain or increase profitability on a quarterly or annual basis in the future.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
We will require substantial additional working capital to fund our business
and the deployment of our :C.R.Q. and :Cue:C.A.T. technology and, therefore,
will need to raise significant additional funds in the future. We cannot be
certain that additional financing will be available to us on favorable terms
when required or at all. If we raise additional funds through the issuance of
equity-related or debt securities, these securities may have rights, preferences
or privileges senior to those of the rights of our common stock and our
stockholders may experience additional dilution.
WE NEED TO DEPLOY OUR TECHNOLOGY RAPIDLY SO THAT IT BECOMES THE MARKET STANDARD.
We believe that we must establish the DigitalConvergence.:Com brand and our
:C.R.Q. and :Cue:C.A.T. products as the leading brand names in our targeted
markets in order for our technology to be widely adopted by Internet users, mass
media sources and advertisers. Such acceptance will be essential to generate
revenues from licensing and :Cue fees. Brand recognition will become
increasingly important as more companies, some with well-established brands,
offer competing products and
10
services. We expect that we will need to substantially increase our spending on
programs and marketing in order to create and perpetuate strong brand loyalty
and to ensure that our technology becomes the market standard. We cannot be
certain that our efforts will be successful.
WE ARE DEPENDENT ON THE EFFECTIVE AND RELIABLE PERFORMANCE OF OUR :C.R.Q. AND
:CUE:C.A.T. TECHNOLOGY.
The successful implementation and reliability of our :C.R.Q. and :Cue:C.A.T.
technology on a commercial basis are crucial to our success. Our technology will
not have been tested on a wide-scale basis prior to our launch date in September
2000. Technology and products as complex as ours frequently contain errors and
defects, especially when first introduced to the market. Any errors or defects
discovered in our :C.R.Q. or :Cue:C.A.T. technology after our launch date could:
- result in our failure to achieve mass media, market or public acceptance;
- divert development resources;
- injure our reputation;
- cause customer and Internet user dissatisfaction;
- result in cancellation of strategic partnership, licensing and advertising
agreements; and
- result in legal actions by customers against us.
Any delays caused by technological glitches in our :C.R.Q. or :Cue:C.A.T.
technology could be detrimental to the implementation of our business model and
our overall success.
WE RELY ON OUR STRATEGIC PARTNERS TO DEPLOY AND PROMOTE OUR TECHNOLOGY.
Development of our brand will depend largely on the success of our strategic
partners in providing a high quality interactive Internet experience for
Internet users and enhancing the Internet content and advertising value to
Internet users, which cannot be assured. We expect our strategic partners to
devote significant resources to the promotion and marketing of our technology,
which is important to promote Internet user adoption and acceptance of our
technology. However, most of our strategic partners are not contractually
obligated to do so. To the extent that our strategic partners do not promote and
market our technology or are ineffective in doing so, our efforts to gain broad
market acceptance by Internet users will be materially adversely affected.
WE MAY ENCOUNTER DIFFICULTIES IN ESTABLISHING OR MAINTAINING STRATEGIC
RELATIONSHIPS.
We intend to expand our operations and market presence by entering into
significant additional agreements, investments, joint ventures or other
strategic relationships with third parties, such as our agreements with National
Broadcasting Company, Inc., Belo Corp., Tandy Corporation, Forbes Inc., Wired
Magazine and The Milwaukee Journal. Each relationship will involve risks
commonly encountered in such relationships, which include, among others:
- the difficulty of implementing the relationship;
- the potential disruption of our ongoing business;
- the potential inability of our management to maximize our financial and
strategic position in the relationship;
- additional operating losses and expenses associated with implementing the
terms of the relationship;
- the maintenance of uniform standards, controls and policies; and
- the possible impairment of relationships with existing partners, employees
or customers.
11
We cannot assure you that we will be successful in overcoming these risks or any
other problems encountered in connection with these relationships or that we
will be able to enter into any additional relationships on terms and conditions
favorable to us.
OUR DEPENDENCE ON TANDY CORPORATION FOR THE PRODUCTION OF OUR :CUE:C.A.T.
DEVICES COULD ADVERSELY AFFECT US.
Tandy Corporation has agreed to act as a product sourcing manager for the
production of our :Cue:C.A.T. devices until December 31, 2001, and then for
successive one year terms if the agreement is not terminated by either party.
The agreement can be terminated by either party at any time upon 90 days prior
notice. Tandy currently utilizes two manufacturing facilities in Asia with which
it has manufacturing subcontracts for the production of our :Cue:C.A.T. devices.
Any manufacturing disruption caused by the termination of our agreement with
Tandy, the termination of Tandy's subcontracts with the two manufacturing
facilities or other factors would impair our ability to timely distribute a
large quantity of :Cue:C.A.T. devices to the public, which in turn would impair
our ability to implement our business strategy. In addition, if our agreement
with Tandy is terminated for any reason, we may be unable to negotiate another
manufacturing agreement for our :Cue:C.A.T. devices on terms acceptable to us or
at all. Our dependence on Tandy to manage the production of our :Cue:C.A.T.
devices also exposes us to additional risks, including the following:
- reduced control over delivery schedules;
- inadequate quality assurance by Tandy or its manufacturing subcontractors;
- inadequate production capacity during periods of excess demand; and
- misappropriation of our technology.
THE VIRTUAL NETWORK MAY NOT BE ACCEPTED AS AN ADVERTISING MEDIUM.
Many of our customers will likely have only limited experience with the
Internet as an advertising and promotion medium and neither those customers nor
their advertising agencies will likely have devoted a significant portion of
their advertising budgets to Internet-based advertising and promotion in the
past. In order for us to generate substantial revenue from our Virtual Network,
advertisers and advertising agencies must direct a greater portion of their
budgets to the Internet and, specifically, to the use of our Virtual Network.
There can be no assurance that advertisers or advertising agencies will be
persuaded to allocate increased portions of their budgets to Internet-based
advertising, or, if so persuaded, that they will find Internet-based advertising
on our Virtual Network to be effective. Acceptance of the Internet and our
Virtual Network by advertisers and advertising agencies also depends to a large
extent on growth in the number of Internet users, on the development of a large
base of users of our technology having demographic characteristics attractive to
advertisers and on the acceptance of new methods of conducting business and
exchanging information.
WE ARE DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS AND OTHERS MAY INFRINGE UPON
THOSE RIGHTS.
Our success is dependent on the protection of our internally developed
technology, applications and products and on the goodwill associated with our
trademarks, trade names, service marks and other proprietary rights. We rely on
patent, trademark, trade secret and copyright laws, as well as confidentiality
procedures and licensing arrangements, to protect the proprietary technology
that we have developed, but we can give no assurance that such laws or
procedures will provide sufficient protection to us or that others will not
develop technologies that are similar or superior to ours. These risks are
particularly heightened in foreign countries, in which effective patent,
trademark, copyright and trade secret protection may not be available.
12
We currently hold three United States patents for our technology and have
filed over 50 patent applications, both in the United States and
internationally, with respect to other aspects of our business. However, there
can be no assurance that our applications will be granted, that any current or
future patents will not be challenged, invalidated or circumvented, or that the
rights granted will provide a competitive advantage for us. Specifically, for a
variety of reasons, our patent applications may be rejected by a country's
patent office and never issue into a patent. Even if some of our patent
applications issue into patents, the legal protection provided by these patents
may not be sufficient to protect the technology described in the patent.
Further, most foreign countries do not give the same patent protection to
patentable inventions as does the United States. The laws of these foreign
countries may place a higher burden on us to prove that our invention is
patentable and may restrict the types of inventions that can be patented. For
example, software based inventions may not be patentable in foreign countries.
The laws may also restrict the scope of protection given to a particular
invention and the legal rights and remedies available to patent holders. These
laws also make it expensive for us to obtain a patent in the first place because
the cost of translating a patent application into a country's native language
and paying maintenance fees to keep the patent enforceable are generally greater
than similar costs in the United States. As a result, obtaining patent
protection for our inventions internationally is generally more difficult and
costly than it is in the United States and often results in less protection than
is available in the United States.
We typically enter into confidentiality and non-disclosure agreements with
our employees and strategic partners in an attempt to control access to our
proprietary technology and information. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use our products and
technology without authorization or to develop similar technology independently
through reverse engineering or other means.
While we have filed applications for registration for several of our
trademarks in the United States and internationally, there can be no assurance
that the trademarks described in these applications will ever become registered
trademarks. A country's trademark office can reject a trademark application for
any number of reasons. A rejection can prevent our mark from being registered,
or require us to seek registration of the mark in association with only some of
the products and services originally desired. In addition, while a trademark
application is pending, most countries provide for some period of time during
which a third party can challenge the registration of the mark. A third party
challenge would delay the registration of the mark, and defending the mark
against a challenge would be costly. In addition, registering a trademark in a
foreign country is often more difficult and expensive than registering the same
mark in the United States. Further, if the mark is registered, the legal rights
and remedies available to us in these foreign countries vary greatly from
country to country, and, generally, are less than corresponding rights and
remedies available in the United States. While we attempt to ensure that the
quality of our trademarks and brands are maintained by the licensees of our
trademark and brands, we cannot assure you that the licensees will not take
actions that would adversely affect the value of our proprietary rights or
reputation.
Policing unauthorized use of our proprietary technology and other
intellectual property rights could entail significant expense and could be
difficult or impossible, particularly given the global nature of the Internet
and that the laws of other countries may afford us little or no effective
protection of our intellectual property. In addition, third parties may bring
claims of copyright or trademark infringement against us or claim that our use
of certain technology violates a patent. Furthermore, litigation may be
necessary to enforce our intellectual property rights, to determine the validity
and scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Any claims of infringement, with or without merit,
could:
- be time consuming to defend;
- result in costly litigation;
13
- divert management's attention;
- require us to enter into costly royalty or licensing arrangements; and
- prevent us from using or distributing our technology or products.
We license some technology from third parties, including operating systems
and the financial and reporting systems for our business. There can be no
assurance that these third-party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of this technology
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost.
OUR RIGHT TO KEEP INFORMATION COLLECTED IN OUR DATABASES MAY BE CHALLENGED IN
THE FUTURE.
We intend to use our :C.R.Q. and :Cue:C.A.T. technology to develop and
maintain a substantial database of consumer demographic information that our
customers can use with our permission to conduct advertising campaigns. In
particular, we intend to require each user of our technology to provide basic
individual information in order to register and activate our :C.R.Q. software
application. Under our privacy policy, individual user information will not be
made available to outside parties and will be used internally by us only if a
user gives express permission for such use. Some summary demographic data,
however, may be made available to outside parties. Privacy concerns may cause
users to resist providing the personal data necessary to support this profiling
capability. More importantly, even the perception of security and privacy
concerns, whether or not valid, may inhibit Internet user acceptance of our
technology and products. Furthermore, users may bring lawsuits against us
seeking to prohibit us from collecting this data. Even if without merit,
lawsuits could impair Internet user acceptance of our technology and products.
In addition, legal requirements may heighten these concerns if businesses must
notify Internet users that the data captured after visiting certain websites may
be used by marketing entities to direct product promotion and advertising to
that user. We are not aware of any such laws currently in effect in the United
States. Other countries and political entities, such as the European Economic
Community, have adopted these types of laws. We cannot predict how the
international roll-out of our technology will be affected by these types of
laws.
SECURITY BREACHES COULD CAUSE INTERRUPTIONS, DELAYS OR CESSATION OF THE SERVICES
WE PROVIDE.
We must protect our computer systems and network from physical break-ins,
security breaches and other disruptions. Computer break-ins could jeopardize the
security of information stored in and transmitted through our computer systems
and network, which could adversely affect our ability to retain or attract
customers and users, damage our reputation and subject us to litigation.
Although we continue to implement security technology and establish operational
procedures to prevent break-ins, damage and failures, these security measures
may fail. Our insurance coverage may be insufficient to cover losses that may
result from these events.
WE ARE DEPENDENT ON KEY PERSONNEL.
Our future success depends, in significant part, upon the continued service
of our key technical, sales and senior management personnel, particularly J.
Jovan Philyaw, our Chairman and Chief Executive Officer, and Michael N. Garin,
our President and Chief Operating Officer. Mr. Garin has entered into an
employment agreement with us. Mr. Philyaw does not have an employment agreement
with us. See "Management--Employment Agreements." The loss of the services of
one or more of our key personnel could have a material adverse effect on us.
14
WE MUST ATTRACT AND RETAIN ADDITIONAL PERSONNEL.
Our future success depends on our ability to attract and retain highly
qualified technical, sales and marketing, customer support, financial and
accounting, and managerial personnel. If our technology is widely adopted, we
will need to hire many additional personnel for all facets of our business.
Competition for personnel in the Internet industry is intense, and there can be
no assurance that we will be able to retain our key personnel or that we can
attract, assimilate or retain other highly qualified personnel in the future. We
expect to experience difficulty in hiring and retaining candidates with
appropriate qualifications. Our failure to successfully hire and retain
candidates with appropriate qualifications could have a material adverse effect
on us.
WE MAY BE UNABLE TO MANAGE OUR GROWTH.
If our technology gains broad market acceptance, we expect to experience
rapid and significant growth of our operations, including the number of our
employees, especially sales and marketing personnel, the geographic scope of our
activities and our service offerings. Any failure to manage growth effectively
could harm our business. We may also experience difficulties meeting the
public's demand for our technology and products. We cannot assure you that our
systems, procedures or controls will be adequate to support the anticipated
growth in our operations.
THE INTEGRATION OF ANY FUTURE ACQUISITIONS MAY BE DIFFICULT AND DISRUPTIVE.
Although we may seek to grow our business through strategic acquisitions
from time to time in the future, we have no immediate plans or current
agreements to acquire any companies or businesses. If we acquire companies in
the future, however, these acquisitions will be subject to numerous risks
commonly encountered in completing and integrating acquisitions, including:
- diversion of management's attention from other business concerns,
including the implementation of our business strategy;
- potential disruption of our ongoing business;
- difficulties associated with assimilating technologies, products,
personnel and operations;
- the assumption of known or unknown liabilities in the acquisition; and
- loss of key personnel of the acquired company or business.
We may not successfully overcome these risks or any other problems encountered
in connection with any future acquisitions.
CAPACITY CONSTRAINTS OF OR SYSTEM FAILURES BY OUR NETWORK INFRASTRUCTURE OR OF
OTHER INTERNET BROWSERS' INFRASTRUCTURE MAY LEAD TO SYSTEM DISRUPTIONS.
The satisfactory performance, reliability and availability of our servers
and network infrastructure and users' web browsers are critical to attracting
and retaining users and maintaining relationships with our customers. System
interruptions that result in the unavailability of our software or slower
response times for users would reduce the number of Internet sites delivered
through the use of our technology and reduce the attractiveness of our products.
Although we intend to expand our network infrastructure, any unexpected increase
in traffic on our infrastructure may require us to further expand and adapt new
network infrastructure. If we are unable to add additional hardware to
accommodate increased traffic on our infrastructure, an unanticipated system
disruption could result, slowing response times. In addition, any disruption to
our infrastructure resulting from a natural disaster or other event could result
in an interruption in our service and impair our reputation. There can be no
assurance that we will be able to expand our network infrastructure on a timely
basis to meet increased demand or protect our network infrastructure from
disruptions.
15
OUR CUSTOMERS MAY ENCOUNTER DIFFICULTIES DUE TO INCREASED INTERNET TRAFFIC ON
THEIR WEBSITES.
If our technology is widely adopted by Internet users, our customers may
experience difficulties managing the Internet traffic on their own websites.
They may find it necessary to invest substantial resources in improving their
own network capacity in order to meet the increased demand. If our customers are
unable or unwilling to adequately address the increase in user traffic on their
websites, users may perceive our technology and products as ineffective and may
decrease or stop using our technology.
WE MAY FACE RISKS FROM THE EXPANSION OF OUR OPERATIONS INTERNATIONALLY.
We intend to expand our operations into international markets. As a result,
we will face risks from doing business on an international basis, including,
among other things:
- reduced protection for intellectual property rights in some countries;
- licenses, tariffs and other barriers;
- difficulties in staffing and managing foreign operations;
- political and economic instability;
- potentially adverse tax consequences;
- compliance with a wide variety of complex foreign laws and treaties; and
- variance and unexpected changes in local laws and regulations.
We currently anticipate opening an office in London within the next several
months and plan to establish additional facilities in other parts of the world.
The expansion of our operations into international markets will require
significant management attention and financial resources. We cannot be certain
that our investments in establishing operations in other countries will produce
desired levels of revenue or profitability.
WE ARE DEPENDENT ON CONTINUED GROWTH IN THE USE OF THE INTERNET.
Rapid growth in the use of and interest in the Internet is a recent
phenomenon, and there can be no assurance that acceptance and use of the
Internet will continue to develop or that a sufficient base of users will emerge
to support our customers and thus our business. Our revenues will depend largely
on the widespread acceptance and use of the Internet as a source of information
and entertainment and as a vehicle for commerce in goods and services. Demand
for recently introduced services and products integrating other communication
mediums with the Internet is very uncertain and few proven services and products
exist. To the extent that the Internet continues to experience an increase in
users and frequency of use by consumers resulting in increased bandwidth
demands, there can be no assurance that the infrastructure for the Internet will
be able to support the demands placed upon it. The Internet may not be accepted
as a viable commercial medium due to delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity or due to increased government regulation. Changes in the pricing or
quality of, or insufficient availability of, telecommunications services to
support the Internet could also result in higher prices to end users or slower
response times and could adversely affect use of the Internet generally and of
our Internet services particularly. If use of the Internet does not continue to
grow or grows more slowly than expected, or if the Internet infrastructure does
not effectively support the growth that may occur, our business would be
materially adversely affected.
16
WE MAY NOT BE ABLE TO IMPROVE THE PERFORMANCE, FEATURES AND RELIABILITY OF OUR
TECHNOLOGY, PRODUCTS AND SERVICES FAST ENOUGH OR AT ALL TO COMPETE EFFECTIVELY
WITH NEW TECHNOLOGY.
The market for our technology, products and services is characterized by
rapid technological developments, frequent new product introductions and
evolving industry standards. The emerging character of this technology and its
rapid evolution will require that we continually improve the performance,
features and reliability of our technology, products and services, particularly
in response to competitive offerings. There can be no assurance that we will be
successful in responding quickly, cost effectively and sufficiently to these
developments. In addition, the widespread adoption of new Internet technologies
or standards could require substantial expenditures by us to modify or adopt our
technology, products and services and could fundamentally affect the character,
viability and frequency of Internet-based advertising and commerce, either of
which could have a material adverse effect on us. New technology or enhancements
offered by us may contain design flaws or other defects that could require
costly modifications or result in a loss of confidence in our technology by
customers and users, either of which could have a material adverse effect on us.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST RELATED TECHNOLOGY, AND
COMPETITIVE PRESSURES COULD HAVE A NEGATIVE IMPACT ON US.
We may be unable to compete successfully against related technology, and
competitive pressures could have a negative impact on us. The market for
Internet convergence technology is new and rapidly evolving, and we expect
competition to intensify significantly in the future as companies further
utilize the advantages of the Internet. We face competition in the Internet
convergence market from existing companies with related technology, including,
among others:
- BarPoint.com, Inc.;
- Code Corporation;
- Digimarc Corp.;
- FastFrog.com;
- MicroCast, Inc.;
- NeoMedia Technologies, Inc.;
- WebTV Networks, Inc.;
- Wink Communications, Inc.; and
- WorldGate Communications, Inc.
We expect competition to increase as current competitors increase the
sophistication of their products and as new competitors enter the market. Some
of our competitors have, and new potential competitors may have:
- more experience deploying Internet convergence software and solutions;
- larger technology staffs;
- larger customer bases;
- more established distribution channels;
- greater brand recognition; and
- greater financial, marketing and other resources than we have.
17
In addition, our competitors may be able to develop or offer superior
technology, products or services that achieve greater market and public
acceptance or that have significantly improved functionality as compared to our
existing and future technology, products and services. In addition, as we
develop new products and services, we may begin competing with companies with
whom we have not previously competed. It is also possible that our competitors
will form alliances that may enable them to rapidly increase their market share.
FUTURE GOVERNMENT REGULATIONS OF THE INTERNET COULD DECREASE DEMAND FOR OUR
PRODUCTS AND SERVICES OR INCREASE OUR COST OF CONDUCTING BUSINESS.
Although there are currently few laws and regulations directly applicable to
the Internet, a range of new laws and regulations have been proposed, and could
be adopted, covering issues such as privacy, copyrights, obscene or indecent
communications and the pricing, characteristics and quality of Internet products
and services. In 1996, Congress enacted the Communications Decency Act, which,
among other things, purported to impose criminal penalties on anyone who
distributes "obscene" or "indecent" materials over the Internet. A number of
states have adopted or proposed similar legislation. Although certain provisions
of the Communications Decency Act have been held to be unconstitutional, the
manner in which the act and similar existing or future federal and state laws
will ultimately be interpreted and enforced and their effect on our operations
cannot yet be fully determined. Such laws could subject us to substantial
liability. For example, we do not and cannot practically screen the contents of
the various Internet sites that are accessible with our :C.R.Q. and :Cue:C.A.T.
technology. Restrictive laws or regulations could also dampen the growth of the
Internet generally and decrease the acceptance of the Internet as an advertising
medium, and could, thereby, have a material adverse effect on us. Application to
the Internet of existing laws and regulations governing issues such as property
ownership, libel and personal privacy is also subject to substantial
uncertainty.
The television industry is subject to extensive regulation at the federal,
state and local levels. In addition, legislative and regulatory proposals under
consideration by Congress and federal agencies may materially affect the
industry and our ability to distribute our :C.R.Q. technology to television
broadcasters.
There can be no assurance that current or new government laws and
regulations, or the application of existing laws and regulations, will not:
- subject us to significant liabilities;
- significantly dampen growth in Internet usage;
- prevent us from distributing our technology; or
- otherwise cause a material adverse effect on us.
WE COULD FACE LIABILITY FOR THE CONTENT WE PUBLISH ON OUR WEBSITE OR BROADCAST
ON NET TALK LIVE! THE INTERNET TALK SHOW.
As a publisher, producer and distributor of content on our website and on
NET TALK LIVE! THE INTERNET TALK SHOW, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based on the nature and content of the materials we publish, produce or
distribute. In addition, because our technology facilitates the downloading of
materials from third-parties' websites, there is a potential that claims will be
made against us for defamation, negligence, copyright or trademark infringement,
personal injury or other theories based on the nature and content of such
materials. Such claims have been brought, and sometimes successfully pressed,
against Internet service providers in the past. Our insurance may not be
adequate to indemnify us for all liability that may be imposed on us.
18
NO PUBLIC MARKET FOR OUR COMMON STOCK CURRENTLY EXISTS AND OUR STOCK PRICE MAY
FLUCTUATE AFTER THIS OFFERING. AS A RESULT, INVESTORS IN OUR COMMON STOCK MAY
NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING
PRICE.
Prior to this offering, there has been no public market for our common
stock. We will negotiate the initial public offering price with the
underwriters. The initial public offering price may not be indicative of the
price at which the common stock will trade following completion of this
offering. The completion of this offering provides no assurance that an active
trading market for our common stock will develop or, if developed, that it will
be sustained. The market price of our common stock also could be subject to
significant fluctuation and may be influenced by many factors, some of which are
beyond our control, including:
- variations in quarterly operating results;
- changes in financial estimates by securities analysts;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- additions or departures of key personnel;
- sales of common stock in the future;
- fluctuations in stock market price and trading volume, which are
particularly common among highly volatile securities of Internet
companies; and
- investor perceptions of us and the Internet industry.
As a result, investors in our common stock may not be able to resell their
shares at or above the initial offering price. In the past, securities class
action litigation has often been brought against a company following periods of
volatility in the market price of its securities. We may be the target of
similar litigation. Securities litigation could result in substantial costs and
divert our management's attention and resources, which could negatively impact
us.
THE MARKET FOR TECHNOLOGY STOCKS IS VOLATILE.
The stock market in general, and the Nasdaq National Market and the market
for Internet and technology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of technology companies. These broad market and
industry factors may have a material adverse effect on the market price of our
common stock, regardless of our operating performance. The trading prices of the
stocks of many technology companies are at or near historical highs and reflect
price-earnings ratios substantially above historical levels. There can be no
assurance that these trading prices and price-earnings ratios will be sustained.
CERTAIN EXISTING STOCKHOLDERS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK.
Following the closing of this offering, our officers, directors and
affiliated entities together will beneficially own approximately % of the
outstanding shares of our common stock ( % if the underwriters'
over-allotment options are exercised in full). As a result, these stockholders
will be able to control all matters requiring stockholder approval and, thereby,
our management and affairs. Matters that typically require stockholder approval
include:
- the election of directors;
- mergers or consolidations;
- the sale of all or substantially all our assets;
19
- the amendment of our charter; and
- our dissolution.
This concentration of ownership may delay, deter or prevent acts that would
result in a change of control, which in turn could reduce the market price of
our common stock. See "Security Ownership of Principal Stockholders and
Management."
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
After this offering, we will have outstanding shares of common
stock. Sales of a substantial number of shares of common stock in the public
market following this offering could substantially decrease the market price of
our common stock. All the shares sold in this offering will be freely tradeable,
other than those shares sold in this offering to any of our affiliates. The
remaining %, or shares, of our total outstanding shares will become
available for resale in the public market in the near future. In addition, an
affiliate of the National Broadcasting Company, Inc., the holders of shares of
common stock that will be issued upon conversion of the outstanding shares of
preferred stock upon completion of this offering and other holders of our common
stock have the right to require us to register their shares for resale after
180 days following the date of this prospectus. As restrictions on resale end or
upon registration of any such shares for resale, the market price could drop
significantly if the holders of these shares sell them or are perceived by the
market as intending to sell them. See "Shares Eligible for Future Sale."
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the pro forma
book value per share of our common stock. Purchasers of common stock in this
offering will experience immediate and substantial dilution in the pro forma net
tangible book value of their stock of $ per share assuming an initial
offering price for our common stock of $ per share. See "Dilution."
OUR MANAGEMENT'S BROAD DISCRETION IN THE USE OF PROCEEDS OF THIS OFFERING
INCREASES THE RISK THAT WE MAY NOT USE THEM EFFECTIVELY OR THAT WE MAY USE
THEM IN WAYS IN WHICH OUR STOCKHOLDERS OR THE MARKET IN GENERAL MAY NOT AGREE.
We currently plan to use the net proceeds of this offering:
- to pay expenses related to the manufacture and distribution of our :C.R.Q.
CD-ROMs and :Cue:C.A.T. devices;
- to market and promote the adoption of our technology by Internet users;
- to purchase additional network server and support equipment;
- to repay outstanding indebtedness; and
- for general corporate purposes, including operating expenses, working
capital and other capital expenditures.
Depending on future events, we may determine at a later time to use our net
proceeds for different purposes. We cannot assure you that, pending their use,
the proceeds will be invested to yield a favorable return. See "Use of
Proceeds."
WE HAVE NOT PAID DIVIDENDS AND DO NOT ANTICIPATE PAYING ANY DIVIDENDS ON OUR
COMMON STOCK IN THE FORESEEABLE FUTURE.
We currently intend to retain any earnings for the future operation and
development of our business and do not anticipate paying any dividends on our
common stock in the foreseeable future.
20
Any future dividends may be restricted by any loan agreements that we may enter
into from time to time. See "Dividends."
PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD DISCOURAGE A
TAKEOVER THAT STOCKHOLDERS MAY CONSIDER FAVORABLE.
Our certificate of incorporation and bylaws may discourage, delay or prevent
a merger or acquisition that a stockholder may consider favorable because they:
- authorize the issuance of "blank check" preferred stock;
- provide for a classified board of directors with staggered, three-year
terms;
- prohibit cumulative voting in the election of directors;
- limit the persons who may call special meetings of stockholders;
- prohibit stockholder action by written consent; and
- establish advance notice requirements for nominations for election to the
board of directors or for proposing matters to be approved by stockholders
at stockholder meetings.
Certain provisions of Delaware law may also discourage, delay or prevent
someone from acquiring or merging with us. In addition, purchase rights
distributed pursuant our stockholder rights plan will cause substantial dilution
to any person or group that attempts to acquire us without conditioning the
offer on our redemption of the rights. For a detailed description of the
anti-takeover provisions in our charter documents, stockholder rights plan and
those provisions of Delaware law, see "Description of Capital Stock."
21
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. All statements other
than statements of historical facts contained in this prospectus, including
statements regarding our future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. The words "believe," "may," "will," "estimate,"
"continue," "anticipate," "intend," "expect," and similar expressions, as they
relate to us, are intended to identify forward-looking statements. We have based
these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy and financial
needs. These forward-looking statements are subject to a number of risks,
uncertainties and assumptions, including, among other things:
- our ability to implement our technology on a commercial basis;
- our ability to obtain additional capital to finance the implementation of
our technology on a commercial basis;
- acceptance and adoption of our technology by the mass media, the Internet
convergence market and the public;
- the effectiveness and reliability of our :C.R.Q. and :Cue:C.A.T.
applications;
- the promotion and marketing of our technology by our strategic partners;
- our dependence on intellectual property rights;
- rapid technology changes within our market;
- our ability to compete with related and new technologies in the Internet
convergence market;
- our ability to effectively integrate the operations of any companies that
we may acquire in the future; and
- regulation of the Internet by the government.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events and circumstances discussed in this prospectus may not occur and actual
results could differ materially from those anticipated or implied in the
forward-looking statements. "See Risk Factors."
22
USE OF PROCEEDS
We expect to receive approximately $ million in net proceeds from
the sale of shares of common stock in this offering at an assumed initial
public offering price of $ per share (approximately $ if the
underwriters' over-allotment options are exercised in full), after deducting
underwriting discounts and commissions and estimated offering expenses, which we
expect to be approximately $ .
We currently expect to use the net proceeds of this offering:
- to pay expenses related to the manufacture and distribution of our :C.R.Q.
CD-ROMs and :Cue:C.A.T. devices;
- to market and promote the adoption of our technology by Internet users;
- to purchase additional network server and support equipment;
- to repay outstanding indebtedness to Infotainment Telepictures, Inc.; and
- for general corporate purposes, including operating expenses, working
capital and other capital expenditures.
Depending on future events, we may determine at a later time to use our net
proceeds for different purposes, including future acquisitions of or investments
in strategic businesses or technology. Pending these uses, we intend to invest
the net proceeds in short-term, interest-bearing, investment-grade instruments.
Our promissory note payable to Infotainment Telepictures, Inc. bears
interest at 6.0% per annum. This promissory note and related accrued and unpaid
interest will become due and payable upon completion of this offering. As of the
date of this prospectus, a principal balance of $3.5 million and accrued and
unpaid interest of approximately $ was outstanding.
We believe that, based on our current business plan and related assumptions,
the net proceeds of this offering, cash on hand and cash expected to be
generated by operations will be sufficient to fund our operations and capital
requirements for approximately the next 12 months after completion of this
offering. However, we may be required to seek additional sources of capital
prior to such time if:
- our operating assumptions change or prove to be inaccurate;
- we accelerate or expand the implementation of our business strategy; or
- we pursue future acquisitions of or investments in strategic businesses or
technology.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a further discussion of our
current and future capital requirements and our belief regarding our ability to
meet those requirements.
23
DIVIDEND POLICY
We have not declared or paid any dividends on our common stock, and we do
not anticipate declaring or paying any dividends on our common stock in the
foreseeable future. We currently intend to retain all future earnings to fund
the development and growth of our business. The payment of any future dividends
will be at the discretion of our board of directors and will depend on our
results of operations, financial condition, capital requirements, and other
factors deemed relevant by our board of directors.
24
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis giving effect to the issuance of 48 shares of our
Series A preferred stock in January 2000, for total cash consideration of
$151,200, the issuance of 5,929,364 shares of our Series B preferred stock
and 5,372,593 shares of our Series C preferred stock in April 2000, for
total cash consideration of $41.7 million and $56.6 million, respectively,
and also gives effect to the use of proceeds therefrom; and
- on a pro forma basis as adjusted to reflect:
- the automatic conversion of 11,317,923 shares of outstanding preferred
stock into 21,360,537 shares of common stock upon completion of this
offering; and
- the sale of shares of common stock in this offering at an assumed
initial public offering price of $ per share after deducting the
estimated underwriting discounts and commissions and our estimated
offering expenses and the application of the net proceeds as set forth
under "Use of Proceeds."
None of the columns set forth below reflects the exercise of:
- 9,245,200 shares of common stock issuable upon the exercise of stock
options granted by us, with exercise prices ranging from $3.31 to $9.37
per share and a weighted average exercise price of $4.17 per share, of
which stock options to purchase up to shares of common stock are
exercisable or will become exercisable within 60 days after the date of
this prospectus; and
- 8,382,350 shares of common stock issuable upon the exercise of warrants
issued by us, with exercise prices ranging from $5.00 to $10.54 per share
and a weighted average exercise price of $7.98 per share, of which all
warrants are immediately exercisable.
You should read this table together with "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the consolidated financial statements and the notes thereto appearing elsewhere
in this prospectus.
[Enlarge/Download Table]
AS OF DECEMBER 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 45,540 $138,378 $
======== ======== ========
Short-term and long-term debt............................... 9,152 3,529
Series A convertible preferred stock subject to
redemption................................................ 47,888 48,039
Series B convertible preferred stock subject to
redemption................................................ -- 41,683
Series C convertible preferred stock subject to
redemption................................................ -- 56,627
Stockholders' equity (deficit):
Common stock, $0.01 par value; 110,250,000 shares
authorized, 61,113,150 shares issued and outstanding
actual; 125,000,000 shares authorized,
61,113,150 shares issued and outstanding pro forma;
shares authorized, shares issued and
outstanding pro forma as adjusted....................... 611 611
Additional paid-in capital................................ 517 517
Excess of purchase price over Predecessor cost of net
liabilities acquired.................................... (8,397) (8,397)
Accumulated deficit....................................... (3,977) (3,977)
-------- -------- --------
Total stockholders' equity (deficit).................... (11,246) (11,246)
-------- -------- --------
Total capitalization................................ $ 45,794 $138,632 $
======== ======== ========
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DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering.
Net tangible book value per share represents the amount of total tangible
assets less total liabilities, divided by the number of shares of common stock
then outstanding. Our net tangible book value at December 31, 1999, would have
been $ million, or $ per share of common stock, after giving effect to
the automatic conversion of 11,317,923 shares of outstanding preferred stock
into 21,360,537 shares of common stock upon completion of this offering. After
giving effect to the sale of the shares of common stock in this offering
at an assumed initial public offering price of $ per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, our pro forma net tangible book value at December 31, 1999,
would have been $ million, or $ per share. This represents an immediate
increase in the pro forma net tangible book value of $ per share to
existing stockholders and an immediate and substantial dilution of $ per
share to new investors purchasing common stock in this offering. The following
table illustrates this per share dilution:
[Download Table]
Assumed initial public offering price per share............. $
Net tangible book value per share at December 31, 1999.... $
[Increase] [Decrease] per share attributable to preferred
stock conversion........................................
--------
Pro forma net tangible book value per share before this
offering................................................
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution in pro forma net tangible book value per share to
new investors(1).......................................... $
========
------------------------
(1) If the underwriters' over-allotment option is exercised in full, dilution
per share to new investors will be $ .
The following table summarizes on a pro forma basis as of December 31, 1999,
the total number of shares of common stock purchased from us, the total
consideration paid to us, and the average price per share paid by existing
stockholders and by new investors purchasing shares of common stock in this
offering at an assumed initial public offering price of $ per share and
before deducting underwriting discounts and commissions and estimated offering
expenses:
[Enlarge/Download Table]
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- -------- ----------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Existing stockholders............... % $ % $
Existing stockholders--conversion of
preferred stock...................
New investors.......................
----------- ------- ----------- ------
Total............................... 100.0% $ 100.0%
=========== ======= =========== ======
The foregoing discussion and tables assume no exercise of outstanding stock
options or warrants. As of the date of this prospectus, there were outstanding:
- stock options granted by us to purchase 9,245,200 shares of common stock
at a weighted average exercise price of $4.17 per share, of which stock
options to purchase up to shares of
26
common stock are exercisable or will become exercisable within 60 days
after the date of this prospectus; and
- warrants issued by us to purchase 8,382,350 shares of common stock at a
weighted average exercise price of $7.98 per share, of which all warrants
are immediately exercisable.
To the extent that any of these stock options or warrants are exercised, there
will be further dilution to new investors. See "Capitalization" and Note 8 to
our consolidated financial statements included elsewhere in this prospectus.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data for the
year ended December 31, 1999, and the consolidated balance sheet data as of
December 31, 1999, are derived from our audited consolidated financial
statements included elsewhere in this prospectus. The selected statements of
operations data for the years ended December 31, 1998 and 1997 and the balance
sheet data as of December 31, 1998 are derived from the audited financial
statements of the Predecessor, included elsewhere in this prospectus. The
balance sheet data as of December 31, 1997 are derived from the audited
financial statements of the Predecessor but are not included in this prospectus.
The selected statement of operations data for the year ended December 31, 1995
and the balance sheet data as of December 31, 1995 and 1996 are derived from our
unaudited financial statements that include, in our opinion, all adjustments,
consisting of only normal recurring adjustments, necessary for fair presentation
of the financial condition at that date and results of operations for such
period.
The historical results presented below are not necessarily indicative of the
results to be expected for any future period. The selected consolidated
financial data should be read in conjunction with our consolidated financial
statements and the notes to those consolidated financial statements, the
Predecessor financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus.
[Enlarge/Download Table]
PREDECESSOR FINANCIAL DATA
YEAR ENDED DECEMBER 31, YEAR ENDED
--------------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues........................................ $ 97 $ 109 $ 690 $ 1,636 $ 1,543
Operating expenses:
Production and media costs........................ 78 137 591 939 1,012
Selling, general and administrative............... 48 91 284 671 3,921
Depreciation and amortization..................... -- 17 41 55 106
Research and development.......................... -- -- -- 36 410
----------- ----------- ----------- ----------- -----------
Total operating expenses........................ 126 245 916 1,701 5,449
----------- ----------- ----------- ----------- -----------
Operating loss...................................... (29) (136) (226) (65) (3,906)
Interest income..................................... -- -- -- -- 660
Interest expense.................................... (3) (14) (17) (24) (731)
----------- ----------- ----------- ----------- -----------
Net loss............................................ $ (32) $ (150) $ (243) $ (89) $ (3,977)
=========== =========== =========== =========== ===========
Basic and diluted weighted average common shares
outstanding....................................... 25,000 25,000 25,000 25,000 59,507,271
Basic and diluted net loss per common share......... $ (1.30) $ (6.02) $ (9.72) $ (3.54) $ (0.07)
=========== =========== =========== =========== ===========
PREDECESSOR FINANCIAL DATA
AS OF DECEMBER 31, AS OF
--------------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ -------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 143 $ 87 $ -- $ 175 $ 45,540
Total assets........................................ 143 281 273 381 46,518
Accounts payable and accrued liabilities............ 2 11 41 85 722
Short-term borrowings, including current portion of
long-term debt(1)................................. 173 312 227 651 10
Long-term liabilities............................... -- 1 3 3 9,145
Series A convertible preferred stock subject to
redemption........................................ -- -- -- -- 47,888
Accumulated deficit................................. (32) (183) (426) (514) (3,977)
Total stockholders' deficit......................... (32) (183) (426) (514) (11,246)
------------------------------
(1) As of December 31, 1995, 1996 and 1997, short-term borrowings consisted
entirely of indebtedness to an officer of the Predecessor. As of
December 31, 1998, short-term borrowings consisted of $197,919 of
indebtedness to an officer of the Predecessor and $452,900 of advances from
a stockholder of ours.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES THERETO AND THE PREDECESSOR FINANCIAL STATEMENTS AND
THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
GENERAL
We are a company whose technology allows media companies, manufacturers and
virtually all organizations to instantly and easily link their products with web
pages deep within their websites. Until we release our technology, we believe
that it is not possible for these companies to realize the full value of their
Internet efforts, because their websites have to be entered through their front
pages, often making access to a desired web page time-consuming and difficult.
Our :C.R.Q. software will send an Internet user's web browser to a specific web
page in response to our proprietary digital signal called a ":Cue" transmitted
by a television broadcast. Our :C.R.Q. software also will send an Internet
user's web browser to a specific web page when an Internet user utilizes our
:Cue:C.A.T. device to scan our proprietary codes called "Print :Cues" on print
media or to scan existing bar codes on consumer products. We believe that our
technology will empower media companies and corporate advertisers to enhance
their content and to transform television broadcasts or other electronic media,
print media or items bearing Print :Cues or bar codes into powerful new
advertising, promotional or e-commerce opportunities. Our technology will be
free to the public and will allow Internet users to quickly and easily obtain
relevant information and conduct e-commerce activities by eliminating the input
of lengthy website addresses and time-intensive web navigation.
From our inception in September 1998 through the end of that year, we had no
operating activity. In January 1999, we acquired from Infotainment
Telepictures, Inc. the television show NET TALK LIVE! THE INTERNET TALK SHOW and
certain proprietary technology rights in exchange for an unsecured promissory
note with a principal amount of $8,000,000. Because of this transaction, we have
included in this prospectus the financial statements of Infotainment
Telepictures, Inc. as our predecessor for accounting purposes. For the year
ended December 31, 1999, we generated limited revenues from our television show
NET TALK LIVE! THE INTERNET TALK SHOW. Since our inception, we have conducted
research, developed our Internet convergence technology and established sales
and distribution outlets for our technology by educating potential partners in
the media and consumer products industries about how to adopt and utilize our
technology. We plan to achieve widespread distribution and adoption of our
technology through the strategic partnerships that we have established with a
major television network, local station groups, cable networks, publishers,
merchants and direct marketers and additional strategic partnerships that we
intend to establish. We intend to initiate a nationwide roll-out of our
technology beginning in September 2000 and plan to distribute, free to the
public, at least 50 million :C.R.Q. CD-ROMs and 50 million :Cue:C.A.T. devices
by the end of 2001.
Although the initial roll-out of our technology will be limited to the
United States, we believe that there is a substantial market for our technology
outside the United States. Our :C.R.Q. and :Cue:C.A.T. technology does not
require foreign language translations or technical modifications to be
compatible with specific broadcasting or recording technology used in foreign
markets. Instead, international broadcasters, publishers, advertisers and
merchants can place our :Cues in any type of electronic or printed medium and
direct Internet users to websites using any language. We intend to expand our
international presence aggressively by adding direct sales and marketing
personnel and establishing strategic relationships with international partners
to capitalize fully on international market opportunities. We have hired a
president of our International Group and anticipate opening an office in London
within the next several months. We intend to commence international deployment
of our technology during 2001.
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REVENUE SOURCES
We have divided initial applications for our technology into four groups
from which we expect to derive revenue:
- broadcasting and electronic media;
- print media, bar-coded products and other :Cue:C.A.T. applications;
- Internet advertising; and
- database research and marketing.
Our initial pricing model for each application is described below. We will,
however, periodically review our pricing model for each application, and we
expect to make adjustments in our pricing model from time to time.
BROADCASTING AND ELECTRONIC MEDIA. Our :C.R.Q. technology works with any
television broadcast, cable programming, or other electronic media such as DVDs,
videotapes and CD-ROMs, and will offer a range of benefits to broadcasters. With
our :C.R.Q. technology, television and cable broadcasts become an instant and
direct link to the Internet. Broadcasters will be able to offer more engaging
interactive programming to their viewers and more valuable interactive ads to
their corporate advertisers.
We expect to derive our revenue from the following sources:
- fees from the sale of advertising :Cues to broadcast networks, cable
networks and local television stations;
- a fixed fee per sale completed by home shopping networks as a result of
using our :Cues; and
- fees from annual licenses to cable networks for the use of :Cues in
content.
We intend to sell :Cues to networks and television stations, who will resell
them to advertisers. We expect to limit the number of advertising :Cues that
each broadcast network, cable network or local television station can sell for
use in advertising spots each day and to charge a flat fee per :Cue.
Revenues from the sale of advertising :Cues will be recognized upon
notification that the :Cue has been transmitted. Revenues generated from the
sale of :C.R.Q. licenses to cable operators will be recognized ratably over the
respective contract period, which will generally be 18 months.
PRINT MEDIA, BAR CODED PRODUCTS AND OTHER :CUE:C.A.T. APPLICATIONS. By
inserting a Print :Cue in any print media or by linking existing bar codes for
consumer products to websites, our technology enables virtually any consumer
product or any printed media, including magazine articles, catalogs, print
advertisements, newspapers, free-standing inserts, billing invoices, bank
statements and newsletters, to become instantly interactive with the Internet.
With the swipe of a :Cue:C.A.T. device over a Print :Cue or a bar code, a user
can gain immediate access to in-depth information that was not previously
included in the printed version or on the consumer product due to space
limitations. We expect that publishers will be able to attain higher ad revenues
due to increased traffic on the website and generate additional e-commerce
opportunities for their advertisers. We also expect that manufacturers will be
able to transform the billions of consumer products on retailers' shelves into
powerful advertising, promotional and e-commerce opportunities.
For most print applications, we intend to allow publishers to use Print
:Cues at no cost for the first several months after launch, until we have
achieved widespread distribution of our :Cue:C.A.T. devices to Internet users.
We are completing a massive database that links existing UPC, ISBN, EAN and
other bar codes found on consumer products to web pages. We plan to activate
substantially all of these bar
30
codes when our :Cue:C.A.T. technology is launched and provide manufacturers with
one free year in which to evaluate the results. We expect to derive our revenue
from the following sources:
- after the first few months, fees from licenses to magazine and newspaper
publishers for the use of Print :Cues for content enhancement purposes;
- after the first few months, fees from the sale of any advertising Print
:Cues in any print media, including newspapers and magazines;
- a fixed fee per sale completed by catalog shoppers as a result of using
our Print :Cues;
- annual fees for Print :Cues assigned by credit card issuers to their
cardholders for tracking accounts online;
- fees per Print :Cue sold to publishers of free-standing inserts and direct
mail and sold to manufacturers for use in product manuals;
- after the first anniversary of our launch date, annual fees for bar codes
on consumer products that are Internet Enhanced; and
- commissions on increased revenues resulting from the use of Print :Cues in
classified ads.
Revenues from the sale of advertising Print :Cues will be recognized upon
notification from the respective publisher that the Print :Cues were
incorporated into publications during the applicable publication period.
Revenues generated from the sale of content Print :Cues will be on an annual
license basis, regardless of the number of content Print :Cues used, and will be
recognized ratably over the respective contract period, which is generally
12 months.
Revenues generated from the licensing of bar codes will be based upon a
fixed annual fee per bar code and will be recognized annually on a straight-line
basis.
INTERNET ADVERTISING. Each time our :C.R.Q. software launches a user's
personal computer to a web page, our Virtual Network will border the user's
Internet browser window. The Virtual Network will be populated with banner
advertisements and a series of tabs that, when clicked, will display information
related to that subject. We expect to sell up to eight banner ads along the
Virtual Network's vertical frame. We expect to charge advertisers a fee and will
remit 30% of the total advertising revenues to the agency that will sell the
banner ads on our behalf as well as 10-15% to advertising agencies representing
the corporate advertisers. Revenue from the sale of banner advertisements on the
Virtual Network, net of commissions, will be recognized ratably over the period
in which the advertisements are displayed.
DATABASE RESEARCH AND MARKETING. We intend to require each user of our
technology to provide basic individual information in order to register and
activate our :C.R.Q. and :Cue:C.A.T. technology. Additionally, we plan to offer
promotional and other incentives to encourage users to provide more detailed
individual information. We plan to use this information to develop a substantial
database of demographic information reflecting users' interests and preferences,
and tracking Internet behavior related to :Cues and viewing patterns of Internet
Enhanced content. This information will be used to better tailor our Virtual
Network banner ads and special vendor offers to each user, as well as to
generate summary demographic data reports for advertisers and merchants. These
firms would use our reports and data collection expertise to tailor advertising
campaigns, banner ads and website content to appeal to targeted consumer
segments. Under our privacy policy, individual user information will not be made
available to outside parties and will only be used internally by us with a
user's express permission. Some summary demographic data will be provided to
purchasers of :Cues free of charge. For more complex or detailed demographic
data, we intend to charge advertisers a flat fee per month, plus a small charge
per record.
31
EXPENSE COMPONENTS
Costs associated with our business primarily include product costs, selling,
general and administrative expenses, depreciation and amortization and research
and development. Although we expect these costs to continue to increase over
time, we expect each of them to decrease as a percentage of revenues as revenues
increase after we roll out our :C.R.Q. and :Cue:C.A.T. technology.
Product costs consist of the costs of manufacturing and distributing our
:C.R.Q. CD-ROMs and :Cue:C.A.T. devices. Our :C.R.Q. CD-ROMs and :Cue:C.A.T.
devices will be distributed free of charge to the public. In some cases, we
expect that certain of the costs of manufacturing and/or distributing :C.R.Q.
CD-ROMs and :Cue:C.A.T. devices will be borne or defrayed by our strategic
partners and by advertisers who advertise directly on :Cue:C.A.T. devices. Costs
incurred in manufacturing and distributing the :C.R.Q. CD-ROMs and :Cue:C.A.T.
devices will be charged to expense as incurred.
Selling, general and administrative expenses consist of:
- payroll and related expenses for executive, sales and marketing and
administrative personnel;
- corporate facilities expenses;
- professional services expenses;
- maintenance costs for our database and network infrastructure;
- marketing expenses;
- travel expenses; and
- other general corporate expenses.
We expect that in support of the expected growth of our business and our
operations as a public company, selling, general and administrative expenses
will continue to increase for the foreseeable future.
Depreciation and amortization expenses consist primarily of the amortization
of goodwill associated with business acquisitions, as well as fixed asset
depreciation. We anticipate larger depreciation and amortization expenses in the
foreseeable future as we continue to expand our network infrastructure. For
example, we anticipate using a portion of the net proceeds from this offering to
purchase additional network server and support equipment to prepare for the
anticipated launch of our technology in September 2000.
Research and development expenses include costs incurred by us to develop,
enhance, and develop new applications for our technology. These expenses consist
primarily of salaries and benefits for our Technology Group, systems personnel
and consultants. We intend to continue to enhance our technology and to develop
new uses and other products that utilize our technology. Accordingly, we expect
that our product research and development expenses will continue to increase for
the foreseeable future.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
REVENUES:
During the year ended December 31, 1999, we derived $1.5 million in revenue
from the sale of advertisements and sponsorships on our show, NET TALK LIVE! THE
INTERNET TALK SHOW. Two customers accounted for approximately 81% and 17% of our
annual revenues, respectively.
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OPERATING EXPENSES:
PRODUCTION AND MEDIA COSTS. Production and media costs were $1.0 million,
or 66%, of revenue for the year ended December 31, 1999. Production and media
costs consist of the personnel and other costs associated with producing,
editing and airing NET TALK LIVE! THE INTERNET TALK SHOW.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were comprised primarily of payroll and related expenses
for executive and administrative personnel, facilities expenses, professional
service expenses and other general corporate expenses. These expenses were
$3.9 million, or 254%, of total revenues for the year ended December 31, 1999.
Employee related costs were $2.0 million, or 51%, of the total selling, general
and administrative expenses for the year. We significantly increased our
employee expenses during the fourth quarter of the year when our employee base
increased from approximately 22 at September 30, 1999 to 61 at December 31,
1999. Selling, general and administrative expenses also include $380,300 in
legal fees primarily associated with the filing of patents and trademarks to
enhance our intellectual property and $529,400 in travel costs primarily
incurred in the second half of the year in connection with travel to meetings
with potential customers and investors.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $105,721,
or 7%, of total revenues during the year ended December 31, 1999. We purchased
$616,000 of property and equipment and capitalized software during the year
ended December 31, 1999. The majority of these assets were purchased during the
later portion of the year and did not have a full year of depreciation expense
in the year ended December 31, 1999.
RESEARCH AND DEVELOPMENT. Research and development costs during the year
ended December 31, 1999 were $410,017. These costs primarily consist of payroll
and related expenses associated with technology personnel for the development of
our :C.R.Q. software and :Cue:C.A.T. device.
OTHER INCOME (EXPENSE):
INTEREST INCOME. Interest income of $660,498 was recorded during the year
ended December 31, 1999. The income was earned from the investment of the
proceeds net of fees and cash issuance costs of $48.3 million raised from the
issuance of the Series A preferred stock. These proceeds were primarily received
by us in October, November and December of 1999; therefore, only a few months of
interest was earned on the proceeds.
INTEREST EXPENSE. Interest expense of $731,355 was recorded during the year
ended December 31, 1999. The interest primarily related to the $8.0 million
promissory note issued to the Predecessor in January 1999 for the purchase of
NET TALK LIVE! THE INTERNET TALK SHOW and certain proprietary technology rights.
Additional interest expense related to $2.5 million of debentures issued by us
in January 1999 to certain stockholders.
RESULTS OF OPERATIONS-PREDECESSOR
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES:
The Predecessor's revenues increased 137% from $689,967 in 1997 to
$1,636,422 in 1998. The increase was primarily related to $813,400 in additional
sponsorships sold on the Predecessor's television show, NET TALK LIVE! THE
INTERNET TALK SHOW, in 1998. Additionally, the Predecessor had $259,300 more
revenue related to infomercial productions in 1998 than in 1997.
33
OPERATING EXPENSES:
PRODUCTION AND MEDIA COSTS. Production and media costs increased $348,764,
or 59%, from $590,704 in 1997 to $939,468 in 1998. This increase was primarily
related to higher revenues recorded during the year ended December 31, 1998. As
a percentage of revenues, production and media costs decreased from 86% in 1997
to 57% in 1998. The decrease in costs as a percentage of revenues was primarily
related to the higher margin revenue recorded in 1998 related to the sale of
sponsorships on the Predecessor's show, NET TALK LIVE! THE INTERNET TALK SHOW.
There are very few incremental costs associated with the sale of advertising and
sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW in comparison to the costs
associated with the production of an infomercial.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 136% from $284,370 in 1997 to $670,953 in
1998. As a percentage of revenues these expenses were constant at 41%. The
largest increase in selling, general and administrative expenses was related to
employee-related costs which increased by $171,000 from 1997 to 1998. The
increase in employee-related costs comprised 44% of the total increase in
selling, general and administrative expenses for the years ended December 31,
1997 and 1998, and were largely related to supporting the growth of NET TALK
LIVE! THE INTERNET TALK SHOW. Facilities expense, professional service expense
and other general corporate expenses increased from 1997 to 1998 to support the
growth of the Predecessor.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased $14,393 from
$40,515 in 1997 to $54,908 in 1998 primarily due to the addition of certain
studio and phone equipment related to the Predecessor's NET TALK LIVE! THE
INTERNET TALK SHOW.
RESEARCH AND DEVELOPMENT. Research and development costs incurred during
the year ended December 31, 1998 were related to the Predecessor allocating
certain personnel resources toward the development of certain technology
designed to converge the radio, television and Internet mediums.
OTHER INCOME (EXPENSE):
INTEREST EXPENSE. Interest expense is primarily related to accrued interest
on certain advances from an officer of the Predecessor. Additionally, during the
fourth quarter of 1998, the Predecessor issued a note payable to one of our
stockholders. The note was repaid in January 1999 in conjunction with our
purchase of the Predecessor's assets.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity at December 31, 1999 included cash and
cash equivalents of $45.5 million. Since inception, we have financed our cash
requirements for investments in property and equipment and operations primarily
through the sale of $2.5 million of debentures in January 1999 and the sale of
$50.1 million of preferred stock in the fourth quarter of 1999. Working capital
at December 31, 1999 was $45.0 million. At December 31, 1999, we had an
accumulated deficit of $4.0 million.
Our operating activities during the year ended December 31, 1999 utilized
cash of $3.0 million. The net cash utilized during this period was to fund our
growth in employee costs, infrastructure and operations, research and
development and legal costs incurred in registering our intellectual property
rights in the United States and abroad.
Capital expenditures during 1999 consisted of purchases of equipment,
furniture and software of $616,000. A source of cash for investing activities in
1999 included the cash acquired in the acquisition of entities under common
control of $165,278.
In January 1999, we issued a promissory note for $8.0 million to purchase
substantially all of the assets of Infotainment Telepictures, Inc., consisting
of rights, title and interest in certain intellectual
34
property and NET TALK LIVE! THE INTERNET TALK SHOW. We made voluntary principal
payments of $1.5 million on this note in October 1999 and $3.0 million in
principal and $584,137 in accrued interest in April 2000. We currently
anticipate using a portion of the proceeds of this offering to repay the
remaining balance of this promissory note.
Net cash provided by financing activities during the year ended
December 31, 1999 was $48.8 million. Net cash provided by financing activities
primarily consisted of $2.5 million of cash proceeds from the issuance of
debentures in January 1999, $48.3 million in cash proceeds, net of fees and cash
issuance costs, from the issuance of Series A preferred stock in September 1999
including $252,000 cash received as a subscription for Series A preferred stock
that was issued subsequent to year end.
Although we currently have no material commitments for capital expenditures,
we anticipate a significant increase in our capital expenditures and lease
commitments during the year ending December 31, 2000, consistent with
anticipated growth in operations, infrastructure and personnel during 2000. This
will include approximately $20 million in anticipated expenditures on hardware
and software to build the network infrastructure necessary to service
anticipated Internet traffic during the first twelve months following our
product launch in September 2000. Additionally, in fiscal 2000, we expect to
spend approximately $1.4 million for costs associated with the build-out and
furnishing of our new corporate offices. Also, during the second half of fiscal
2000 we expect to spend approximately $125.0 million to manufacture and
distribute at least 20 million :C.R.Q. CD-ROMs and 12 million :Cue:C.A.T.
devices by the end of 2000.
In February 2000, we issued a letter of credit to Tandy Corporation for
approximately $15.5 million as security for our payment obligations to Tandy
Corporation for the manufacture of our :Cue:C.A.T. devices.
In April 2000, we issued 5,929,364 shares of Series B preferred stock to
various investors for aggregate consideration of approximately $41.7 million and
5,372,593 shares of Series C preferred stock to various investors for aggregate
consideration of approximately $56.6 million. We have used $6.3 million of the
proceeds to repay a portion of our outstanding indebtedness and intend to use
the remaining proceeds to pay expenses related to the manufacture and
distribution of our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices and for general
corporate purposes.
We currently anticipate that the net proceeds of this offering, together
with cash on hand and cash expected to be generated from operations, will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for approximately the next 12 months after the date of this
prospectus. However, we may need to raise additional funds prior to the
expiration of such period if, for example, we accelerate the rollout of our
technology or pursue other acquisitions, or we pursue business or technology
acquisitions or experience operating losses that exceed our current
expectations. In any event, after such time we will need to raise significant
additional capital. If we raise such funds through the issuance of equity,
equity-related or debt securities, such securities may have rights, preferences
or privileges senior to those of the rights of our common stock and our
stockholders may experience additional dilution. We cannot be certain that
additional financing will be available to us on acceptable terms when required,
or at all.
NON-CASH CHARGES
During the second quarter of the year ending December 31, 2000, we
anticipate recording a one-time charge to earnings in the amount of $37.2
million to reflect the difference between the respective issuance price of $7.03
and $10.54 and the estimated fair market value of the Series B and C preferred
stock, respectively, of $11.99, as determined by a contemporaneous independent
appraisal.
35
During February and April 2000, we issued 1,128,000 and 595,000 stock
options, respectively, to various employees at exercise prices ranging from
$5.00 to $9.37 per option. The February options were issued at the fair market
value of the common stock on the date of grant. The April options were issued
below the fair market value on the dates of grant. We will recognize
compensation expense for the difference between the fair market value at the
dates of grant of $10.90 per share, as determined by a contemporaneous,
independent appraisal, and the exercise price on the dates of grant. The
compensation will be deferred and will be amortized ratably over the applicable
vesting period for the April stock options.
In April 2000, we issued two warrants to an affiliate of National
Broadcasting Company, Inc. to purchase 3,752,445 and 4,505,165 shares,
respectively, of common stock at per share exercise prices of $5.00 and $10.54,
respectively. We valued the warrants using the Black-Scholes option-pricing
model at $31.7 million and $31.4 million, respectively, based on the following
assumptions:
- volatility of 70.0%;
- risk free interest rate of 6.5%;
- expected life of five years; and
- zero dividend yield.
We recognized a one-time charge to earnings for the fair market value of
these warrants on the date of grant.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS
No. 133, which will be effective for us for the fiscal year and quarters
beginning after June 15, 2000, requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. During June 1999, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("FAS") No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT 133. The Statement
defers the effective date of FAS 133 to fiscal 2001. We are evaluating FAS 133
but do not expect the potential effect of adopting the provisions of SFAS
No. 133 to have a significant impact on our financial position, results of
operations, and cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
("SAB 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the Commission.
SAB 101 outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosure related to revenue recognition policies. We
believe that SAB 101 will not have a material effect on our financial
statements.
36
BUSINESS
OVERVIEW
We are a company whose technology allows media companies, manufacturers and
virtually all organizations to instantly and easily link their products with web
pages deep within websites. Until we release our technology, we believe that it
is not possible for these companies to realize the full value of their Internet
efforts, because their websites have to be entered through their front pages,
often making access to a desired web page time-consuming and difficult. Our
technology includes our :C.R.Q. software and our :Cue:C.A.T. device, which will
enable a broadcast viewer or reader of print media to immediately access
relevant information or conduct e-commerce activities on a web page deep within
a website without inputting lengthy website addresses or conducting
time-intensive website navigation. Our :C.R.Q. software will respond to a
digital signal, referred to as a ":Cue," currently transmitted through an audio
cable from any television or other electronic media source, and direct a user's
personal computer to open any specified web page regardless of how deep the web
page is within a website. Our :Cue:C.A.T., a hardware device similar in size to
a computer mouse, will enable an Internet user to scan our proprietary codes in
print media, referred to as "Print :Cues," or existing bar codes on consumer
products to link the user to a designated web page. In addition, each time a
user uses our technology to open a web page, our Virtual Network will border the
user's browser. The Virtual Network will display banner advertisements with
special vendor offers targeted to the preferences of each user and will also
have a series of tabs that, when clicked, will display information related to
the specified subject. Our :C.R.Q. and :Cue:C.A.T. technology and our Virtual
Network will be available free to consumers. We believe that our technology will
empower media companies and corporate advertisers to enhance their content and
to transform television broadcasts or other electronic media, print media or
items bearing Print :Cues or bar codes into powerful new advertising,
promotional or e-commerce opportunities.
We plan to achieve widespread distribution and adoption of our technology
through our strategic partnerships with major television and cable networks,
local station groups, magazine and newspaper publishers, merchants and direct
marketers. We intend to initiate a nationwide roll-out of our technology in
September 2000 and plan to distribute, free to the public, at least 50 million
:C.R.Q. CD-ROMs and 50 million :Cue:C.A.T. devices by the end of 2001.
MARKET OPPORTUNITY
The Internet has emerged as a global medium for communications, information
and commerce and is dramatically changing the competitive environment in which
companies operate. Companies are investing billions of dollars in the
development, execution and promotion of Internet strategies. The growth in both
the number of Internet users and the volume of e-commerce creates significant
challenges and opportunities for businesses across multiple industries.
Currently, we believe that advertising for websites through traditional mass
media is limited by an Internet user's ability to recall a website home page
address and, once at the home page, to navigate the website through perhaps
multiple web pages to reach the desired destination. The proliferation of
websites, as well as of web pages within each corporate website, creates a
fundamental challenge of facilitating interaction with Internet users. We
believe that our technology provides powerful solutions for a number of these
challenges as well as a means to take advantage of new opportunities.
BROADCAST MEDIA
Television is one of the most pervasive communications media in society
today. According to Nielsen Media Research, there were approximately 99 million
television households in the United States in August 1999. Television
advertising is generally considered to be one of the most effective methods of
building brand and general consumer awareness of products and services. McCann
37
Erickson, Inc., a market research firm, estimates that $47 billion was spent on
television advertising in 1998. Approximately $91 billion of goods and services
were purchased through direct response television programming and advertising in
1998 according to the Direct Marketing Association. Nevertheless, traditional
television broadcasting, cable and direct broadcast satellite television systems
do not provide an integrated means for viewers to respond to programs and
advertisements without the addition of set-top boxes or other add-on
technologies.
Although television is pervasive and effective in reaching mass audiences,
television programmers face several challenges. Advertisers are increasingly
seeking highly targeted marketing programs that will generate measurable returns
on investment. This trend toward targeted marketing is intensifying the pressure
on television programmers to efficiently convert viewers into customers of its
advertising clients. In addition, as the reach and popularity of television has
grown, so too has the amount of programming available to viewers. As television
becomes more fragmented and the competition for viewers increases, networks and
other television programmers must find new ways to attract viewers and increase
viewer loyalty. Viewer loyalty determines network ratings that ultimately
determine advertising spot rates.
We believe that broadcasters view the Internet as an ideal interactive
medium through which they can provide consumers with greater content, appeal to
individualized interests and create opportunities for commerce. Broadcasters are
devoting increasing resources to website development, content and promotion. The
reach of television and growth of the Internet create an opportunity for
broadcasters to drive viewers either to their websites or to the websites of
their advertising clients. According to 24/7 Media, in January 1999, there were
33 million U.S. households connected to the Internet, of which 23 million
households had a computer in the same room as their television set. Furthermore,
18 million households, or 55% of all households connected to the Internet, use
the Internet while watching television.
PRINT MEDIA
Print media permeate the consumer world in the form of newspapers,
magazines, catalogs, coupons and direct mail and represent a larger share of
total advertising and marketing expenditures than broadcast media. According to
industry sources, advertising expenditures made in the following print media
categories in the U.S. in 1998 were:
- $87 billion on goods purchased from print catalogs;
- $40 billion on direct mail advertising;
- $44 billion on newspaper display and classified advertising; and
- $14 billion on advertising in trade and consumer magazines.
Traditional publishers are experiencing competitive pressures from the
electronic distribution of information and content. Information in print is
static and often out of date by the time it reaches the reader; as a result,
consumers increasingly access the Internet for more timely or relevant
information. We believe that publishers are concerned about the growing
competitive threat posed by web-based classified advertising. Classified
advertising accounted for approximately 40% of all advertising revenues for
newspaper publishers in 1998. Publishers are investing heavily in Internet
strategies to leverage content, create cross-selling synergies, maintain
readership and develop new revenue streams.
CONSUMER PRODUCTS
The use of bar codes on consumer products is widespread. These codes appear
on everything from food and other consumer products to drivers' licenses and
prescription drug containers. Currently, there are over 40 different bar code
topologies in commercial use, including UPC, ISBN and EAN. There
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are tens of millions of active bar codes in use. Currently, these bar codes are
used primarily to track inventory, assist in quality control, track product
pricing and perform other internal corporate tasks. To date, no technology has
been widely adopted that connects the millions of bar codes to the Internet.
USER WEB EXPERIENCE
While the growth of the Internet has attracted Internet users at an
unprecedented pace, the volume of online information has made it increasingly
difficult for users to navigate the Internet effectively and efficiently. The
total number of websites on the Internet grew 79% in 1999 to 3.6 million sites.
Internet users currently rely on Internet search engines or directories of
websites and web pages to locate information and make online purchases. Search
engines typically require users to construct keyword or complex search strings
that often result in hundreds or thousands of matches. In addition, we believe
that these methods often result in incomplete searches.
The difficulty of online navigation does not end when the desired website is
found. Once there, users often face the difficult task of searching an
overwhelming amount of information. Major corporate websites contain many layers
of web pages, which often make finding relevant information a frustrating and
time-consuming experience.
As websites continue to proliferate and grow in size and complexity, we
believe that users will increasingly need a quicker, more direct link to their
intended destinations. Search engines will continue to have useful applications
on the Internet, but we believe that users want a more precise tool that takes
them directly to a specific web page deep within a website.
THE DIGITALCONVERGENCE.:COM SOLUTION
Our technology enables companies to implement new Internet strategies that
enhance content, improve the targeting and overall effectiveness of advertising
and generate new revenue sources. Our technology enables users of virtually any
form of media or product to interact instantly and easily with the Internet to
obtain relevant information or conduct e-commerce activities. We believe that
our technology will provide the solution to the desire of broadcasters,
publishers, merchants and advertisers for a simple, cost-effective means of
leveraging the Internet across all forms of traditional media.
INTERNET ENHANCED BROADCASTING
Our :C.R.Q. software responds to a :Cue from any television or other mass
media source and directs a user's personal computer to open any specified web
page within a website. A broadcast can be Internet Enhanced by simply embedding
a :Cue in the broadcast. Unlike current television content and advertisements in
which a website address is briefly displayed on the television screen, Internet
Enhanced programming will load the web page on a user's web browser for
immediate access or store the web page address for later use. With our
technology, viewers will no longer need to recall and manually enter a website
address.
Broadcasters can now offer Internet Enhanced interactive programming to
their viewers and more valuable interactive ads to their advertisers and
advertising agencies. For example, news programming can become instantly
interactive, allowing local stations to enhance their content, capture Internet
advertising revenues and use their scale and promotional muscle to become
significant local portals. Our :C.R.Q. technology is designed to make television
programming more appealing to all viewers and particularly to younger
demographic groups which are highly attractive to advertisers and difficult to
reach. In an era of declining audience ratings and shares, we believe that we
offer broadcasters the means to increase revenue dramatically.
By placing :Cues in their television spots, advertisers can aggregate large
viewing audiences, direct them to specific web pages containing content designed
to reinforce their branding, and offer specific
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promotions and e-commerce opportunities. Accordingly, our technology will offer
a platform for broadcasters to enhance content and advertisers to deliver
immediate buying opportunities to their target consumers. As a result, we
believe broadcasters will be able to demand premium rates for Internet Enhanced
advertisements.
Our technology allows users to take advantage of enhanced content and
e-commerce opportunities without interrupting or overlaying the original
broadcast. These opportunities are experienced on the personal computer,
allowing viewers or groups of viewers to continue watching the broadcast without
disruption.
INTERNET ENHANCED PRINT
Our :Cue:C.A.T. device will enable an Internet user to scan our Print :Cues
to link the user to a particular web page designated by the publisher or
corporate advertiser. A print advertisement can be Internet Enhanced simply by
printing a Print :Cue on the advertisement, which, with a swipe of a :Cue:C.A.T.
device, can immediately direct the reader to in-depth information impractical to
include in the printed version. In this way, publishers gain a powerful new tool
to supplement existing printed content and drive traffic deep in their websites,
thereby increasing advertising revenue on the website and generating additional
e-commerce opportunities. Print advertisers, like their broadcast counterparts,
now have the ability to create ads that place the consumer one swipe away from
an e-commerce transaction.
We believe that newspapers, in particular, are concerned about the growing
competitive threat posed by web-based classified advertising and will now be
able to offer Internet Enhanced classifieds. For example, a Print :Cue placed in
a classified ad can take a reader directly to a web page showing photographs of
a house, car or boat advertised for sale or a job application form for an
advertised employment opportunity.
INTERNET ENHANCED PRODUCTS AND OTHER :CUE:C.A.T. APPLICATIONS
We are completing a massive database that links existing bar codes,
including UPC, ISBN, EAN and other codes, to websites, thereby enabling
manufacturers to utilize their existing product codes for advertising and other
marketing purposes. Our technology can transform any off-the-shelf product into
an interactive advertisement. For example, 15 billion soda cans on store shelves
around the world can be transformed into 15 billion interactive advertising,
promotional and e-commerce opportunities. Because our :Cue:C.A.T. technology
scans substantially all bar codes and will not require consumer goods
manufacturers to alter labels in any way, our solution is an inexpensive and
unobtrusive way of turning an existing label into a powerful new marketing tool.
Manufacturers will be able to offer alternative ideas for consumption of their
products and brand their other products on websites we link to their Internet
Enhanced bar codes. Most importantly, manufacturers will be able to update the
content on the website to ensure that their customers are never exposed to stale
information or expired promotional offers. Our technology can be easily applied
to a wide range of other products, such as prescription drug labels, bank
statements, insurance and brokerage statements, credit cards or instruction
manuals.
KEY ADVANTAGES
We believe that our technology solution represents a revolutionary approach
to marketing. Our solution provides the following key advantages:
- POWERFUL MEANS TO ENABLE MASS MEDIA TO LEVERAGE THE INTERNET. Our
technology allows television broadcasters, television and cable networks,
newspaper, magazine and catalog publishers and other mass media companies
to provide Internet Enhanced programming and advertising. Broadcasters and
publishers do not need to make extensive technology build-outs or
investments
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in order to use our :C.R.Q. or :Cue:C.A.T. technology. We believe that our
:C.R.Q. technology can greatly increase the effectiveness of advertising
in an era of declining market shares and ratings for television
broadcasters and many cable networks. Newspaper and magazine publishers
and direct marketers can deploy :Cue:C.A.T. devices to enhance the power
of advertisements, catalogs and articles to drive online direct sales.
Broadcasters, publishers, merchants and advertisers can use our technology
and our associated database and related services to monitor, measure and
analyze, on a real time basis, the number of confirmed advertising
deliveries for each broadcast of an advertisement and to refine
advertising campaigns quickly to target consumers more effectively.
- ATTRACTIVE TECHNOLOGY FOR INTERNET USERS. Our technology offers Internet
users numerous benefits and complements rather than modifies Internet user
behavior. We plan to make our technology widely available and to
distribute it free to the public. Users can download our :C.R.Q. software
or install a :C.R.Q. CD-ROM or :Cue:C.A.T. device onto a computer easily
and quickly. Once installed, our :C.R.Q. technology links a television
viewer to the Internet instantly upon transmission of an audio :Cue, and a
:Cue:C.A.T. device links a user to the Internet instantly upon the simple
swipe of the :Cue:C.A.T. device over an Internet Enhanced bar code or
Print :Cue on a newspaper, magazine, catalog, prescription drug container,
credit card statement, consumer product or other print advertising medium.
Users have full control over their use of our technology and therefore
view only the Internet-based information and advertising that interests
them. Internet users will benefit from our technology because it enables
them to execute easier, highly targeted Internet searches and navigation,
and allows them to experience Internet Enhanced television and print media
experiences and improved e-commerce opportunities. Furthermore, we believe
that our relationships with broadcasters, publishers, manufacturers and
other licensees of our technology will create applications that appeal to
Internet users and will increase the adoption and usage of our products.
- COMPELLING OPPORTUNITY FOR MERCHANTS. We provide merchants with an
innovative and efficient means to achieve their Internet objectives. Our
technology empowers merchants to instantly link virtually any type of
media or product to the merchants' websites at no cost to the public. We
have designed our :C.R.Q. software to empower merchants to utilize a
single :Cue to direct users to a web page deep within a website depending
on the particular Internet user's individual profile. Our technology takes
users directly to a transaction page without the trouble of clicking
through numerous links or needlessly searching through a website.
STRATEGY
Our objective is to establish our technology as the primary means for
television and cable networks, local television broadcasters, newspaper,
magazine and catalog publishers, other mass media companies, as well as
corporate advertisers, to link their their broadcasts, publications and products
to the Internet. To achieve this objective, we have adopted the following
strategies:
LEVERAGE MEDIA RELATIONSHIPS IN ORDER TO SUPPORT ADOPTION AND SUSTAIN OUR
FIRST MOVER ADVANTAGE
In order to build awareness of our brand and support adoption of our
products, we have established strategic relationships with several
well-established broadcasting and print media companies, including National
Broadcasting Company, Inc., Belo Corp., Forbes Inc., The Milwaukee Journal and
Wired Magazine. We expect that these relationships, taken together, will provide
us with broad media exposure in six of the top ten U.S. media markets and a
number of smaller markets, for total coverage of approximately 40% of U.S.
households. In addition, we are in discussions with broadcast media companies
covering approximately an additional 20% of U.S. households. By coordinating our
distribution strategy with the promotional, advertising and content support of
our media partners, we believe we will be able to attain widespread consumer
awareness of our brand and quickly build
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interest in our technology. Once consumers are introduced to our technology, we
believe they will quickly adopt the technology due to the ease with which it
allows users to access relevant, but difficult to find, websites. As consumer
and media partner usage increases, we believe that the familiarity and ubiquity
of our technology will deter consumers and media partners from adopting
competing products.
We intend to continue to pursue strategic relationships with companies that
can help us establish awareness of our brand and provide further penetration of
our selected media markets. As we continue discussions with additional partners,
we intend to convey to them the unique opportunities that our technology brings
to traditional media companies. Specifically, we intend to highlight that our
technology:
- allows advertisers to direct large numbers of viewers from television
broadcasts and print media directly to specific web pages; and
- provides incremental revenue opportunities through the sale of Internet
Enhanced advertising.
EXECUTE A NATIONWIDE ROLL-OUT OF OUR :C.R.Q. AND :CUE:C.A.T. TECHNOLOGY
We intend to widely distribute our products at no cost to consumers. To meet
this goal, we have entered into strategic relationships to assist in
distributing :C.R.Q. CD-ROMs and :Cue:C.A.T. devices. We have entered into an
agreement with Tandy Corporation in which Tandy has agreed to manufacture and
distribute our products through its over 7,000 owned or franchised RadioShack
retail outlets. Additionally, we have established a distribution arrangement
with Forbes Inc. in which Forbes has agreed to mail our :C.R.Q. and :Cue:C.A.T.
products to its approximately 750,000 subscribers. We have entered into similar
agreements with The Milwaukee Journal and Wired Magazine to distribute our
products to their subscribers. We intend to aggressively pursue additional
strategic partnerships that will assist us in executing the nationwide roll-out
of our :C.R.Q. and :Cue:C.A.T. technology.
ESTABLISH OUR TECHNOLOGY AS THE "SYSTEM STANDARD" ON PERSONAL COMPUTERS
We intend to establish "system standard" strategic relationships with major
computer manufacturers pursuant to which the manufacturers will agree to
pre-install our :C.R.Q. software on, and to include a :Cue:C.A.T. device with,
each personal computer sold. We believe that bundling our products with new
personal computers will expose a greater number of consumers to our technology
and will solidify our position as the market standard.
DEVELOP MULTIPLE REVENUE STREAMS FROM MULTI-BILLION DOLLAR ADVERTISING
MARKETS
Initially we intend to generate revenue through usage fees paid by our print
and television partners. Our technology is also well-suited for other
applications, including radio broadcasting, wireless communications and other
applications. In addition, we intend to derive revenue from banner
advertisements on our Virtual Network. As adoption of our :C.R.Q. and
:Cue:C.A.T. technology grows, we believe other practical applications of our
technology will emerge.
DEVELOP SOPHISTICATED RESEARCH AND DATA-MINING CAPABILITIES AS A VALUE-ADDED
SERVICE TO CUSTOMERS
We intend to require each user of our technology to provide basic individual
information to register and activate our :C.R.Q. and :Cue:C.A.T. technology. In
addition, we will be able to track how many people viewed or interacted with an
advertiser's website as a result of a :Cue. We plan to use this type of
information to develop a substantial database reflecting users' demographic
information, interests and preferences and Internet activity to generate summary
data reports for advertisers and merchants. These firms would use our reports
and data mining capabilities to tailor advertising campaigns, banner ads and
website content to appeal to targeted consumer segments. Under our
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privacy policy, we will not make individual user information available to
outside parties and will use the information internally only with a user's
express permission.
PURSUE INTERNATIONAL MARKETS
We believe that there is a substantial market for our technology outside the
United States. Our :C.R.Q. and :Cue:C.A.T. technology does not require foreign
language translations or technical modifications to be compatible with specific
broadcasting or recording technology used in foreign markets. Instead,
international broadcasters, publishers, advertisers and merchants can place
:Cues in any type of electronic or print medium and direct users to websites
using any language. We intend to expand our international presence aggressively
by adding sales and marketing personnel and establishing strategic relationships
with international partners to capitalize fully on international market
opportunities. We have hired a president for our International Group and
anticipate opening an office in London within the next several months. We intend
to commence international deployment of our technology during 2001.
RECENT DEVELOPMENTS
PREFERRED STOCK FINANCINGS.
In April 2000, we issued 5,929,364 shares of Series B preferred stock and
5,372,593 shares of Series C preferred stock to various investors, including
Belo Corp., The Coca-Cola Company, The E.W. Scripps Company, Spielberg/Katz
Associates, LLC, Tandy Corporation and Young & Rubicam, Inc., for aggregate
consideration of approximately $98.3 million. All outstanding shares of our
preferred stock will be automatically converted into our common stock upon
completion of this offering. We will recognize a one-time expense in the amount
of $37.2 million to reflect the difference between the issuance price of
$7.03 per share for the Series B preferred stock and $10.54 per share for the
Series C preferred stock and the estimated fair market value of the Series B and
C preferred stock of $11.99 per share, as determined by a contemporaneous,
independent appraisal.
In April 2000, we issued two warrants to an affiliate of National
Broadcasting Company, Inc. to purchase 3,752,445 shares and 4,505,165 shares, of
our common stock at per share exercise prices of $5.00 and $10.54, respectively.
We are required to issue additional warrants to National Broadcasting Company,
Inc.'s affiliate with a per share exercise price of $10.54, depending on the
number of shares we reserve for issuance under our 1999 Stock Option Plan. The
warrants will terminate in April 2005. We valued the warrants using the
Black-Scholes option pricing model at $31.7 million and $31.4 million,
respectively. We recognized a one-time charge to earnings for the fair market
value of these warrants on the date of grant.
PRODUCTS AND SERVICES
Our products and services consist of four integrated components:
- :C.R.Q., our software application;
- :Cue:C.A.T. device, a hardware device similar in size to a computer mouse;
- our Virtual Network, an advertising application that borders the Internet
user's browser window; and
- the aggregation, analysis and marketing of targeted consumer demographic
data collected through use of our :C.R.Q. and :Cue:C.A.T. technology and
our Virtual Network.
:C.R.Q.
Our patented :C.R.Q. software will respond to an audio signal, or :Cue, from
any television or other mass media source and direct a user's personal computer
to open any specified web page within a website, regardless of how deep the web
page is within that website. Our :C.R.Q. software will be available for
downloading onto a personal computer from our websites, our strategic partners'
websites
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and promotional CD-ROMs. When initially downloading :C.R.Q. software, a consumer
will be required to register as a user and will be offered incentives to provide
additional personal preference and demographic data. Depending on the amount of
information a user provides, a :Cue will direct a user's personal computer to a
designated web page of particular interest to that user. Our :C.R.Q. software
will listen for the :Cue, which television viewers will hear as a low level tone
one-third of a second in duration. An audio cable connecting the television and
the computer will transmit the signal to the computer. We have also designed a
wireless version of our :C.R.Q. technology in which a wireless transmitter and
receiver replace the audio cable, allowing wireless transmission. We expect to
make our wireless version of our :C.R.Q. software available for sale to
consumers in September 2000. A user may use our :C.R.Q. technology in several
ways. For example, if the user selects the active mode, the :C.R.Q. technology
will immediately launch the computer's web browser to retrieve the targeted web
page. A user may also choose to collect :Cues in a passive mode similar to
receiving e-mail messages and then automatically launch the web browser at a
later time chosen by the user. Our :C.R.Q. software is compatible with all
available web browsers.
:Cues can be embedded in any type of video or audio media, including
television broadcasts, CD-ROMs, DVDs and video tapes, to create Internet
Enhanced broadcasts and commercial advertisements. Through our :C.R.Q.
technology, television and cable broadcasts become an instant and direct link
and gateway to the Internet.
The following are examples of Internet Enhanced commercial advertising,
content and event promotion:
- COMMERCIAL ADVERTISING. A television commercial for a particular
automobile model will contain a :Cue that directs the viewer's web browser
to that model's specific web page within the manufacturer's website. The
web page will include detailed information concerning that model's
features and pricing, dealerships and related Internet sites.
- CONTENT. A local television station may differentiate its newscast with
Internet Enhanced weather reporting. While reporting the weather, the
station will broadcast a :Cue that directs the viewer's web browser to the
broadcaster's web page that includes detailed forecast information for
each city and town in the viewing area.
- EVENT PROMOTION. A television broadcast of a major league baseball game
will contain a :Cue that directs the viewer's web browser to the team's
website. The web page may contain information such as players' statistics
and functionality to purchase tickets and memorabilia.
:CUE:C.A.T.
Our :Cue:C.A.T. device, a hardware device similar in size to a computer
mouse, enables an Internet user to scan bar codes and Print :Cues included on
products and in printed material to link users to a particular website
designated by the manufacturer or publisher. The swipe of a :Cue:C.A.T. device
over a Print :Cue or bar code will direct a user to in-depth information
impractical to include in print copy. To install a :Cue:C.A.T. device, a user
simply installs our :C.R.Q. software and plugs the :Cue:C.A.T. device into his
personal computer.
Our :Cue:C.A.T. device reads substantially all known existing bar code
topologies as well as our proprietary codes that we generate to create Internet
Enhanced print media and products. Through our :Cue:C.A.T. technology,
publishers gain a powerful new tool to supplement existing printed content. In
turn, publishers will be able to attain higher advertising revenue on their
websites and potentially generate additional e-commerce opportunities. Marketers
will be able to transform the billions of consumer products on retailers'
shelves into powerful advertising, promotional and e-commerce opportunities.
Examples of the use of :Cue:C.A.T. devices include the following:
- A newspaper advertisement for a department store's clothing sale will
include a Print :Cue that directs readers' web browsers to the department
store's web page featuring photographs of a complete line of clothing
products and ordering information.
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- A book by a noted author will include a Print :Cue that directs readers to
the author's web page within the publisher's website that features
summaries of the author's other books and ordering information.
- An advertisement for a shampoo or the shampoo bottle itself will include a
bar code that directs the recipient's web browser to the advertiser's web
page containing an interactive form to request a free sample or provide a
coupon for the next purchase.
- A prescription drug bottle from a pharmacy will include a bar code that
directs the recipient's web browser to the drug manufacturer's web page
containing information regarding the illness for which the drug was
prescribed, side effects of the drug, and additional products that may be
useful in treating the illness.
- A credit card statement will include a bar code that directs the card
holder's web browser to the credit card company's web page where the card
holder can file a complaint with the credit card company regarding
erroneous charges or other types of disputes. Additionally, the bar code
could direct the card holder's web browser to the credit card company's
web page containing e-commerce possibilities or transaction history.
THE VIRTUAL NETWORK
Each time our :C.R.Q. software or :Cue:C.A.T. device launches a user's web
browser to a specific web page, an "L"-shaped area called the "Virtual Network"
will appear on the border of the user's Internet web browser window. The Virtual
Network will be populated with banner advertisements and a series of tabs that,
when clicked, will display information related to that subject. The Virtual
Network is only visible when an individual is using our technology. Banner
advertisements and tabs will be customized to each user's profile, displaying
information and promotional offers designed to strongly appeal to the
individual's interests. The Virtual Network will reach mass audiences, allowing
advertisers to offer complementary products via banner advertisements and
providing us with an additional channel to sell sponsorships and banner
advertisements. We believe that with modest usage of our :C.R.Q. and :Cue:C.A.T.
technology, the number of original ad impressions we would generate would exceed
those of the largest websites currently in operation.
DATABASE RESEARCH AND MARKETING
We intend to require each user of our technology to provide basic individual
information in order to register and activate our :C.R.Q. technology.
Additionally, we plan to offer promotional and other incentives to encourage
users to provide more detailed individual information. We plan to use this
information to develop a substantial database of demographic information
reflecting users' interests and preferences, tracking of Internet behavior
related to :Cues, and viewing patterns of Internet Enhanced content. This
information will be used to better tailor our Virtual Network banner ads and
special vendor offers to each user, as well as to generate summary demographic
data reports for advertisers and merchants. These firms would use our reports
and data mining expertise to tailor advertising campaigns, banner ads and
website content to appeal to targeted consumers. Under our privacy policy, we
will not make personal user information available to outside parties and will
only use the information internally with a user's express permission. We will
provide some summary demographic data to purchasers of :Cues free of charge. For
more complex or detailed demographic data, we intend to charge advertisers a
flat fee per month, plus a small charge per record.
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TECHNOLOGY INFRASTRUCTURE
SERVER NETWORK
We will use a network of approximately 25 servers to be housed in several
colocation facilities located throughout the United States. Currently, we have
an agreement with Exodus Communications to house our servers in its facilities.
We selected each of these facilities for its strategic location, network
availability and ability to meet the demands of a 24 hours a day, 7 days a week
environment. We are currently in discussions with a number of other web hosting
services companies, and we expect to finalize an agreement with them prior to
the effective date of this prospectus, at which time we intend to complete the
build-out of our entire server network.
In addition, we designed our system and network architecture specifically to
handle large numbers of simultaneous hits to our customers' website servers that
will result from the widespread use of our :C.R.Q. technology. Our large number
of strategically located servers, combined with ISP caching, provides several
levels of redundancy to prevent traffic bottlenecks and extreme loads on our
customers' website servers. As an additional precaution, we plan to enter into
agreements with content streaming companies that will help our clients and us
deliver content to Internet users more efficiently.
HARDWARE AND SOFTWARE INFRASTRUCTURE
We use Compaq Nonstop-TM- Himalaya-Registered Trademark- servers that offer
availability 24 hours a day, 365 days a year. These servers have the flexibility
to scale systems and solutions as desired and provide open access to our :C.R.Q.
application software.
Our software has been constructed in a highly scalable, easily upgradable
and low-maintenance manner. Developing our software with Microsoft's Visual
Studio-Registered Trademark- C++ offers greater design and maintenance
flexibility and the abundance of trained personnel available in the marketplace.
PROCESS
After our :C.R.Q. software on a user's computer identifies a :Cue from a
media source, the :Cue is then sent to our server network where it is translated
into a URL. This translation process includes both a direct tie in and a lookup
for a more specific website address based on demographic information. Once the
URL is determined, it is transferred back to the Internet user's computer
operating system where the appropriate registered program will launch and
connect to the specified URL. Our technology not only allows the URLs to launch
web browsers to web pages, but it also allows the URLs to launch other
applications.
MARKETING AND PROMOTION
We have designed our marketing and promotion strategy to attain widespread
adoption of our technology by Internet users and to establish strong
partnerships with major networks, local station groups, cable networks,
publishers, merchants and direct marketers. We expect to employ multiple
channels to achieve our goals, including:
USER ADOPTION
- MASS DISTRIBUTION. We intend to initiate a nationwide roll-out of our
technology in the United States beginning in September 2000 and plan to
distribute free to the public at least 50 million :C.R.Q. CD-ROMs and
50 million :Cue:C.A.T. devices by the end of 2001. We intend to distribute
our :C.R.Q. CD-ROMs and :Cue:C.A.T. devices without charge to the public
through the over 7,000 RadioShack retail outlets nationwide, through our
strategic partners and through our websites. For example, Forbes Inc. has
agreed to mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its
approximately 750,000 subscribers prior to mailing its September 2000
issue of BEST
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OF THE WEB magazine. Also, Wired Magazine has agreed to mail :C.R.Q.
CD-ROMs and :Cue:C.A.T. devices to its approximately 375,000 subscribers,
and The Milwaukee Journal has agreed to mail :Cue:C.A.T. devices to
subscribers of the Milwaukee Journal Sentinel.
- LEVERAGE STRATEGIC RELATIONSHIPS. We have established strategic
relationships with a major television network, local station groups, cable
networks, publishers and direct marketers. We expect our strategic
partners to promote our technology to consumers by marketing their
programming and printed materials as being Internet Enhanced in order to
increase viewership and readership. We also anticipate that our strategic
partners will aggressively market our technology to their advertisers in
an effort to increase advertising revenues. To assist our strategic
partners in their efforts, we have limited the number of audio :Cues that
will be broadcast in any particular market in order to create demand and
enhance the value of these :Cues.
- TRADITIONAL ADVERTISING. We intend to begin a program of print, radio and
television advertising to create public awareness of our technology. We
will produce television commercials which will be placed in media by our
strategic partners, affiliate kits given to our licensees, and an
infomercial which we will produce and place in appropriate media. We
intend to utilize NET TALK LIVE! THE INTERNET TALK SHOW, which reaches
approximately 550 million homes per week, to develop public interest and
knowledge of our :C.R.Q. and :Cue:C.A.T. technology.
- PROMOTIONS. We intend to engage in commercial giveaways sponsored both by
us and local sponsors and to institute :C.R.Q. Club, an organization of
Internet users who utilize our technology. We anticipate that :C.R.Q. Club
members will receive free gifts from some of our strategic partners and
that membership will encourage consumer loyalty to us.
COMMERCIAL ADOPTION AND MAINTENANCE
- LEVERAGE SENIOR MANAGEMENT RELATIONSHIPS. We have an experienced
management team that has many established relationships with broadcasters,
publishers, manufacturers and direct marketers. We intend to leverage
these relationships to encourage the adoption of our technology, as well
as to establish additional strategic partnerships. See
"Management--Directors and Executive Officers."
- SALES TEAM. In order to assist our strategic partners in executing a
successful launch strategy and to ensure Internet user acceptance, we are
building a diverse and highly skilled executive team to manage the sales
and implementation of our technology by various media-related companies.
The media team consists of executives from the broadcasting, cable, print
and advertising disciplines. In addition to guiding the implementation of
production procedures and the integration of our technology into existing
business practices, our team will provide insight and guidance regarding
local events and roll-outs to maximize Internet user acceptance. We expect
to form five media teams to oversee the sales process for broadcast and
cable networks, local television stations, newspapers and magazines,
studios and production companies and advertising agencies. Each team will
consist initially of a primary manager, as well as up to four account
executives, depending on the needs of our customers.
- STRATEGIC ACCOUNT MANAGEMENT TEAM. We are forming a team to manage the
accounts of our customers. We are employing people with substantial
experience in each market targeted by us, including television
broadcasting, print media, direct marketing and cable networks, to assist
our customers in developing compelling content for their websites. Each of
our customers will be assigned to a strategic account manager. Currently,
we have two strategic account managers and we expect to hire an additional
twelve to fifteen strategic account managers over the next 18 months.
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- INTERACTIVE DATABASE. We are completing a massive database that links
existing UPC, ISBN, EAN and other codes to web pages, thereby enabling
manufacturers to utilize their existing product codes for advertising
purposes. We intend to activate substantially all of these bar codes when
our :Cue:C.A.T. technology is launched and will provide manufacturers with
one free year in which to evaluate the results. At the end of the first
year, we intend to provide manufacturers with the results to demonstrate
the effectiveness of our technology.
- TRADE SHOWS. In order to maintain a high level of visibility among media
partners and corporate clients, we expect to participate in three to four
trade events per year, such as the National Association of Television
Programming Executives conference.
STRATEGIC RELATIONSHIPS
We believe that our strategic relationships provide us with significant
opportunities to gain market acceptance for our technology. We maintain
strategic relationships with, among others, the following companies:
BELO CORP. We entered into an agreement with Belo Corp. on September 29,
1999, under which we granted Belo Corp.'s newspapers and television stations an
exclusive license to deploy our technology for local programming in their
markets. Belo Corp. currently operates 18 television stations in 16 markets
reaching 14% of the total U.S. television audience and owns 7 newspapers in 7
markets.
FORBES INC. We entered into an agreement with Forbes Inc. on January 13,
2000, to launch Internet Enhanced content and advertising in its September 2000
issue of BEST OF THE WEB magazine. Forbes Inc. has agreed to promote this issue
as the first Internet Enhanced business magazine and thereafter to Internet
Enhance FORBES magazines for a one-year period. Forbes Inc. has also agreed to
mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its approximately 750,000
subscribers prior to mailing its September 2000 issue of BEST OF THE WEB
magazine. The term of the agreement ends on August 31, 2001.
NATIONAL BROADCASTING COMPANY, INC. We entered into an agreement with
National Broadcasting Company, Inc. on April 18, 2000, to license our :C.R.Q.
software to National Broadcasting Company, Inc. and certain of its affiliates
for a term ending on March 1, 2002. As part of the agreement, we granted
National Broadcasting Company, Inc.'s owned and operated television stations the
exclusive right to use :Cues in local programs, except in the Dallas market
where Belo Corp. has exclusive rights to use our :C.R.Q. software. The term of
the agreement ends 18 months after our launch date.
TANDY CORPORATION. We entered into an agreement effective on December 6,
1999, with our stockholder Tandy Corporation to act as a product sourcing
manager for the production of our :Cue:C.A.T. devices. Our principal retail
distribution channel for :Cue:C.A.T. devices will be Tandy's owned or franchised
RadioShack retail outlets. As our manufacturing and distribution partner, Tandy
offers substantial advertising strength, a 25,000 person sales force, which will
be trained to conduct :Cue:C.A.T. device demonstrations, and over 7,000 owned or
franchised RadioShack retail outlets located within five minutes of
approximately 94% of the U.S. population. The term of the agreement ends on
December 31, 2001, and will automatically renew for successive one-year terms
unless it is terminated by either party. The agreement can be terminated by
either party at any time upon 90 days prior notice.
WIRED MAGAZINE. We entered into an agreement on February 16, 2000, with
Wired Magazine to launch Internet Enhanced content and advertising in three
consecutive issues commencing with its October 2000 issue. Wired Magazine has
agreed to promote the October 2000 issue as Internet Enhanced and has also
agreed to mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its approximately
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375,000 subscribers prior to mailing the October 2000 issue. The term of the
agreement ends on December 31, 2000.
THE MILWAUKEE JOURNAL. We entered into an agreement on February 8, 2000,
with Journal Sentinel Incorporated, an affiliate of The Milwaukee Journal,
granting Journal Sentinel Incorporated the non-exclusive right to acquire Print
:Cues for use within its various publications. Journal Sentinel Incorporated,
Inc. has also agreed to mail :Cue:C.A.T. devices to the subscribers of The
Milwaukee Journal Sentinel. We also entered into an agreement on February 8,
2000, with Journal Broadcast Group, Inc., an affiliate of The Milwaukee Journal,
granting Journal Broadcast Group, Inc. the non-exclusive right to acquire :Cues
for use within television programs and station promotions in the Milwaukee,
Wisconsin area. The terms of these agreements end 18 months after our launch
date.
YOUNG & RUBICAM. By letter agreement, dated September 29, 1999, with
Young & Rubicam, Inc., a principal stockholder of ours, we granted Young &
Rubicam an exclusive right to resell our :C.R.Q. software and :Cue:C.A.T.
devices in the United States for the period of six months after the public
launch of this technology in the United States. The economic terms of this right
are to be negotiated in good faith by Young & Rubicam and us. In addition, we
granted to Young & Rubicam an exclusive right for a period of six months from a
date to be mutually determined by Young & Rubicam and us to resell this
technology outside the United States. The terms of this right are to be
negotiated in good faith by Young & Rubicam and us. We also agreed that, on
economic terms to be negotiated by Young & Rubicam and us, Young & Rubicam will
act as our marketing and sales agent with respect to the deployment of our
technology to our advertising customers or clients.
By a separate letter agreement, also dated September 29, 1999, we granted
Young & Rubicam a right of first refusal on our marketing and communication
assignments to third parties, provided that Young & Rubicam possesses core
competency to handle these assignments. The terms of each assignment are to be
negotiated by Young & Rubicam and us. In addition, we granted Young & Rubicam a
right to receive a percentage of revenues paid to us by clients or licensees of
Young & Rubicam. This percentage will equate to a "finders" or referral fee
customary for blanket licensing agreements or a commission or mark-up on the
Internet Enhancement of individual advertisements that is customary in the
broadcast or entertainment industries. We also agreed to recommend Young &
Rubicam as our preferred provider of marketing and communications services in
response to inquiries from our potential licensees or customers or from those of
Young & Rubicam. The rights described in this paragraph will no longer exist
when Young & Rubicam ceases to own Series A preferred stock, or at least 50% of
the common stock into which Young & Rubicam's Series A preferred stock is
converted upon completion of this offering.
MANUFACTURING AND DISTRIBUTION
Tandy Corporation has agreed to act as a product sourcing manager for the
production of our :Cue:C.A.T. devices until December 31, 2001, and then for
successive one-year terms if the agreement is not terminated by either Tandy or
us. Tandy currently utilizes two manufacturing facilities in Asia, with which it
has manufacturing subcontracts, for our manufacturing needs. Tandy has advised
us that they have the capacity to devote additional manufacturing facilities to
manufacture our :Cue:C.A.T. devices. Our :C.R.Q. CD-ROMs will be manufactured in
at least four locations in the United States. Our :C.R.Q. CD-ROMs and
:Cue:C.A.T. devices will be distributed without charge to consumers. In some
cases, we expect that the costs of manufacturing and/or distributing :C.R.Q.
CD-ROMs and :Cue:C.A.T. devices will be borne or defrayed by our strategic
partners and by advertisers who advertise directly on :Cue:C.A.T. devices.
Our principal retail distribution channel for :Cue:C.A.T. devices and
:C.R.Q. CD-ROMs will be Tandy's over 7,000 owned or franchised RadioShack retail
outlets nationwide. We will also distribute :Cue:C.A.T. devices and :C.R.Q.
software directly to consumers, principally through promotions by our
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strategic partners and other advertisers and merchants. For example,
Forbes Inc. has agreed to mail :C.R.Q. CD-ROMs and :Cue:C.A.T. devices to its
approximately 750,000 subscribers prior to mailing its September 2000 issue of
BEST OF THE WEB magazine. We are in discussions with an OEM manufacturer to
bundle our :C.R.Q. software application and :Cue:C.A.T. devices with new
personal computers. We intend to initiate a nationwide roll-out of our
technology beginning in September 2000 and plan to distribute free to consumers
at least 20 million :C.R.Q. CD-ROMs and 12 million :Cue:C.A.T. devices by the
end of 2000. By the end of 2001, we plan to distribute free to consumers at
least an additional 30 million :C.R.Q. CD-ROMs and 38 million :Cue:C.A.T.
devices.
PATENTS AND PROPRIETARY RIGHTS
We rely on a combination of patent, trademark, trade secret, and copyright
laws and contractual agreements to protect our proprietary technology and
intellectual property rights, and our success and ability to compete are
substantially dependent upon our internally developed technology and know-how.
We currently own U.S. Patent No. 5,907,793, entitled "Telephone-based
Interactive Broadcast or Cable Radio or Television Methods and Apparatus," U.S.
Patent No. 5,925,865, entitled "Automated Check Verification and Tracking
System" and U.S. Patent No. 5,594,226, entitled "Automated Check Verification
and Tracking System Using Bar Code Information." In addition, we have filed
approximately 50 other patent applications in the United States, and these
patent applications are currently pending in the United States Patent and
Trademark Office (the "USPTO"). We have also filed foreign counterpart
applications for some of our pending U.S. applications. Some of these foreign
applications have been filed as PCT patent applications, while others have been
filed with the European Patent Office. Additional patent applications have been
filed in South Korea, Japan and Taiwan. To date, we have filed approximately ten
foreign patent applications. Generally, under the laws of most, if not all, of
the countries where we have filed patent applications, a pending patent
application affords very little, if any, legal protection to the invention
described in the application, as legal protection to the invention described in
the patent application only arises after a particular country's patent office
approves the patent application and allows the application to issue into a
patent. There can be no assurance that our pending patent applications will ever
issue into enforceable patents. Also, once a patent application issues into a
patent, there can be no assurance that our patent rights will afford any
significant degree of protection or provide us with a competitive advantage. In
particular, there can be no assurance that any such patents will not be
challenged, invalidated or circumvented in the future.
Failure to maintain the protection afforded by our patents may have a
material adverse effect on our future revenues and ability to become profitable.
Further, there can be no assurance that our patents will ultimately be found to
be valid or enforceable, or that our patent rights will deter others from
developing substantially equivalent or competitive products. In addition, it may
be necessary for us to undertake infringement actions against others. The
defense and prosecution of patent litigation is costly and involves substantial
commitments of management time. Adverse determinations in patent proceedings to
which we are a party could subject us to significant liabilities to third
parties and require us to seek licenses from third parties. Although patent and
intellectual property disputes are often settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to us on satisfactory terms or at all.
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent us from manufacturing and
selling our products in one or more markets and would have a material adverse
effect on us.
We also seek to protect our proprietary technology, in part, through
confidentiality and non-disclosure agreements with employees, consultants and
other parties. Our confidentiality agreements with our employees and consultants
also contain industry standard provisions requiring such individuals
50
to assign to us without additional consideration any inventions conceived or
reduced to practice by them while employed or retained by us, subject to
customary exceptions. There can be no assurance that our confidentiality and
non-disclosure agreements with employees, consultants and others will not be
breached, that we would have adequate remedies for any breach or that our trade
secrets will not otherwise become known to or independently developed by
competitors.
We have filed applications for registration with the USPTO for several of
the trademarks we use or plan to use in our business. Some of the marks we are
attempting to register with the USPTO include DigitalConvergence-TM-,
DigitalConvergence.Com-TM- and the :C-TM- symbol. We are attempting to register
these marks in association with various products and services provided by us. In
addition, we have filed applications to register these marks mentioned above, as
well as other marks, in the European Community and Japan. We plan on pursuing
the trademark registration applications we have already filed and filing
additional applications as we develop new trademarks. Although we have filed
trademark applications for these marks, we have not received official word that
any of the trademarks described in the various applications will ultimately
become our registered trademarks. While our trademark applications are being
reviewed by the various countries' trademark offices, many events and
circumstances could arise that would prevent a given mark from ultimately being
registered or from being registered in association with all of the products and
services described in the original trademark application.
We have licensed in the past, and expect that we may license in the future,
certain of our proprietary rights, such as trademarks or copyrighted material,
to third parties. While we attempt to ensure that the quality of our brand is
maintained by such licensees, there can be no assurance that such licensees will
not take actions that would materially adversely affect the value of our
proprietary rights or reputation.
We also rely on certain technology that we license from third parties,
including the suppliers of the operating systems and financial and reporting
system for our business. There can be no assurance that these third-party
technology licenses will continue to be available to us on commercially
reasonable terms. The loss of such technology could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, which could materially adversely affect our business, results of
operations and financial condition.
We hold the Internet domain name "digitalconvergence.com." Under current
domain name registration practices, no one else can obtain an identical domain
name, but they can obtain a similar name, or the identical name with a country
designation. The relationship between regulations governing domain names and the
laws protecting trademarks and similar proprietary rights is evolving. Domain
names are regulated by Internet regulatory bodies, while trademarks are
enforceable under local national law. In addition, the regulation of domain
names in the United States and in foreign countries is subject to change. There
are plans to establish additional top-level domains, appoint additional domain
name registrars and modify the requirements for holding domain names in
countries in which we conduct business, and we could be unable to prevent
third-parties from acquiring domain names that infringe or otherwise decrease
the value of our domain names or trademarks.
Like other technology-based businesses, we face the risk that we will be
unable to protect our patents and other intellectual property and proprietary
rights, and the risk that we will be found to have infringed the proprietary
rights of others. For an expanded discussion of these risks, see "Risk Factors."
GOVERNMENT REGULATION
We are subject to varying degrees of federal, state, and local regulation,
as well as U.S. and state statutes and common law. The Federal Communications
Commission has established regulations, that, among other things, set
installation and equipment standards for communications systems. Additionally,
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the television industry is subject to extensive regulation at the federal, state
and local levels. Legislative and regulatory proposals under consideration by
Congress and federal agencies may materially affect that industry and our
ability to obtain distribution of our :C.R.Q. and :Cue:C.A.T. technology to
television broadcasters.
As a result of the increasing popularity and use of the Internet, the
Internet is receiving increasing legislative scrutiny. Applicability to the
Internet of existing laws and regulations governing issues such as intellectual
property ownership, copyrights and other intellectual property issues, taxation,
libel, obscenity and consumer privacy is uncertain. For example, in 1996
Congress enacted the Communications Decency Act, which, among other things,
purported to impose criminal penalties on anyone who distributes "obscene" or
"indecent" materials over the Internet. A number of states have adopted or
proposed similar legislation. Although certain provisions of the act have been
held to be unconstitutional, the manner in which the act and similar existing or
future federal and state laws will ultimately be interpreted and enforced and
their effect on our operations cannot yet be fully determined. Such laws could
subject us to substantial liability. Restrictive laws or regulations could also
dampen the growth of the Internet generally and decrease the acceptance of the
Internet as an advertising medium, and could, thereby, have a material adverse
effect on us.
In addition, it is possible that laws and regulations may be modified or
adopted at the federal, state and local levels related to issues such as
consumer privacy, defamation, network access, pricing, taxation, content
regulation, characteristics and quality of products and services, advertising
and intellectual property ownership and infringement. The application of
modified or new legislation or regulations to our products and services could
expose us to liability, increase our cost of doing business, and adversely
affect consumer or advertiser acceptance of our product. In sum, new or modified
legislation or regulation could have a material adverse effect on us.
To the extent that we do business in foreign countries or otherwise fall
within the jurisdiction of foreign countries, we could become subject to foreign
regulation and laws. Certain countries, such as some of the members of the
European Community, have passed Internet privacy and consumer protection laws
which are stricter than those in the United States. The application of foreign
legislation or regulations to our products and services could expose us to
liability, increase our cost of doing business, and adversely affect consumer or
advertiser acceptance of our product.
To our knowledge, there are currently no investigations, inquiries,
citations, fines or allegations of violations or noncompliance against us
pending before any government agencies or third parties. Whether noncompliance
may be discovered at some future time is unknown. Although the likelihood of
this risk is currently unknown, if noncompliance were to be found, it could
result in civil or criminal penalties, including monetary fines and injunctions,
as well as negative publicity. Such penalties could have a material adverse
effect on us.
COMPETITION
We believe that our technology is unique and innovative. As a result, we
believe that we currently have no direct competition because of the low cost and
ease of use of our technology and our use of two devices rather than
multi-tasking on a television. However, we have identified several related
technologies in the area of media convergence. In broadcasting and electronic
media, interactive set-top box companies, including WebTV Networks, Inc., Wink
Communications, Inc., WorldGate Communications, Inc. and MicroCast, Inc.,
attempt to link television programming and the Internet. We believe that our
technology should be perceived as complementary and not competitive to these
products and services because it can be used in conjunction with set-top boxes.
However, we also believe that our "two-device" solution is more likely to be
widely accepted by the public than a "one-box" solution because our solution
does not require the public to change habits or make additional monetary
investments. Viewers can continue to receive one-way information via the
passive, public
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medium of their televisions, while using their personal computer to establish
interactive one-on-one relationships with advertisers and content providers.
In print media, companies such as BarPoint.com, Inc., Digimarc Corp.,
FastFrog.com, NeoMedia Technologies, Inc. and Code Corporation have created
technology enabling users to use scanners to access relevant web pages. We
believe that these technologies will not compete effectively with our technology
for a number of reasons, including our superior product features, our low
manufacturing costs and deployment to the public without charge.
We expect that competition will increase as other established and emerging
companies enter the Internet convergence market and as new products and
technologies are introduced. Increased competition may result in price
reductions and loss of market share, either of which could materially adversely
affect us. See "Risk Factors--Competition."
FACILITIES
We lease 38,000 square feet in Dallas, 3,120 square feet in Addison, Texas,
and occupy approximately 5,500 square feet in New York. We believe that our
current facilities are adequate to meet our needs for the foreseeable future.
EMPLOYEES
As of March 31, 2000, we had 94 full-time employees and 28
part-time/temporary employees. Of our full-time employees, 30 are in sales and
marketing, 23 are in research and development and 41 are in general and
administrative positions. Most of our part-time/temporary employees assist us in
matching bar codes to websites. We consider our employee relations to be good.
LEGAL PROCEEDINGS
We are a co-defendant, with Infotainment Telepictures, Inc. in a lawsuit
pending in state court in Dallas, Texas. The plaintiff, Nissi Cosmetics, Inc.,
alleges that Infotainment Telepictures breached a 1997 contract for the creation
of two websites, two infomercials, and two direct response spots for the
advertising and marketing of certain of Nissi Cosmetics' body color, or
self-tanning, products. Nissi Cosmetics also alleges we were the "alter ego" of
Infotainment Telepictures in committing the alleged breaches. Nissi Cosmetics
seeks recovery of $585,000 paid to defendants, and unspecified damages for "lost
profits." We filed a general denial and intend to vigorously defend the matter.
Under the terms of our asset purchase agreement with Infotainment Telepictures,
Infotainment has agreed to indemnify us for any costs, expenses, liabilities or
other losses we may incur in connection with this matter.
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this prospectus, we are not aware of any legal proceedings pending or
threatened that we expect would have a material adverse effect on us.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our
executive officers and directors as of March 31, 2000:
[Enlarge/Download Table]
NAME AGE POSITION
---- -------- -----------------------------------------------------
J. Jovan Philyaw............... 35 Chairman of the Board and Chief Executive Officer
Michael N. Garin............... 53 President, Chief Operating Officer and Director
Patrick V. Stark............... 45 Executive Vice President and Director
Scott P. Carlin................ 44 President of the Media Group
Gregory D. Lerman.............. 54 President of the Interactive Group
Douglas L. Davis............... 33 President of the Technology Group
Stuart B. Graber............... 46 President of the International Group
Donald E. Welsh................ 56 President of the Publishing Group
William S. Leftwich............ 50 Vice President, Chief Financial Officer and Secretary
Blaine L. Thacker.............. 56 Chief Strategy Officer
Jeffrey A. Glickman............ 48 President of DigitalDemographics.:Com Inc.
John G. Huncke................. 47 Executive Vice President of the Media Group
William O. Hunt................ 66 Director
Michael H. Jordan.............. 63 Director
Jack A. Turpin................. 69 Director
J. Jovan Philyaw founded us in September 1998. Prior to founding us,
Mr. Philyaw created NET TALK LIVE! THE INTERNET TALK SHOW in September 1996 and
served as its Executive Producer and host from September 1996 to February 2000.
Since December of 1997, Mr. Philyaw has served as the President and Chief
Executive Officer of Infotainment Telepictures, Inc., the predecessor company
that produced NET TALK LIVE! THE INTERNET TALK SHOW, before we acquired these
predecessor rights. Mr. Philyaw served as Executive Vice President and Chief
Marketing Officer of Internet America, an Internet service provider, from
September 1995 to September 1996.
Michael N. Garin joined us as our President and Chief Operating Officer in
August 1999. From 1989 to 1999, Mr. Garin served as the global head of Media and
Communications for Furman Selz and ING Barings LLC after ING Barings acquired
Furman Selz in October 1997. Mr. Garin also served on the management committee
and board of directors of Furman Selz from 1993 to 1997. Mr. Garin holds a
masters degree in Philosophy and Arts from the New School of Social Research,
New York, and an A.B. in Economics from Harvard College.
Patrick V. Stark joined us as our Executive Vice President on December 31,
1999. Mr. Stark became one of our directors in September 1998. Mr. Stark was a
shareholder/director at the law firm of Kane, Russell, Coleman & Logan, P.C. in
Dallas, Texas, from January 1992 until he joined us. Mr. Stark holds a law
degree from Georgetown University Law Center and a B.A. in Spanish from Arizona
State University.
Scott P. Carlin joined us as the President of our Media Group in August
1999. From June 1995 until he joined us, he served as Executive Vice President
of Warner Bros. Domestic Television Distribution and Executive Vice President,
Telepictures Distribution. From March 1991 to June 1995, Mr. Carlin served as
Senior Vice President, Sales, Warner Bros. Domestic Television Distribution.
Mr. Carlin holds a B.A. in communications from the University of Colorado.
Gregory D. Lerman joined us as the President of our Interactive Group in
August 1999. Prior to joining us, Mr. Lerman served as President of E-Commerce
for Paxson Communications, which owns and operates television broadcast
stations, from February 1999 to October 1999 and Executive Vice President and
General Manager of Valuevision International, an integrated direct marketing
company,
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from January 1998 to February 1999. From January 1997 to September 1997,
Mr. Lerman served as President and Chief Operating Officer of Kent and Spiegel
Direct, a television direct marketing firm. Within one year after Mr. Lerman
left Kent and Spiegel Direct, the company filed for bankruptcy. From
January 1995 to December 1996, Mr. Lerman was retired. From October 1989 to
December 1994, he served as Executive Vice President of Fingerhut
Companies, Inc., a catalog direct marketer. Mr. Lerman holds a B.A. in history
from the University of Minnesota.
Douglas L. Davis joined us as the President of our Technology Group in
December 1999. Prior to joining us, he was employed by Internet America, an
Internet service provider, where he served as Executive Vice President and Chief
Operating Officer from July 1996 to December 1999 and as Chief Technology
Officer from January 1996 to July 1996. Mr. Davis was head of research and
development at Internet America from November 1995 to January 1996. From July
1990 to November 1995, Mr. Davis was a Director of Computer Operations for the
School of Engineering and Applied Science of Southern Methodist University.
Stuart B. Graber joined us as the President of our International Group in
December 1999. Mr. Graber served as Chief Executive of Music Choice Europe, a
digital audio company part-owned by Time Warner, British Sky Broadcasting, Sony
and EMI, from October 1993 to December 1999. Mr. Graber holds a masters degree
in international communications from Brooklyn College and a B.A. in journalism,
broadcasting and administration from the University of Maryland.
Donald E. Welsh joined us as the President of our Publishing Group in
January 2000. Prior to joining us, Mr. Welsh, who has been in publishing for
thirty years, was Chairman of Group XXVII Communications from August 1997 to
December 1999. From March 1995 to March 1997, he was Executive Vice President of
Marvel Publications. From March 1990 to March 1996, he served as chairman of the
Welsh Publishing Group. Mr. Welsh holds an A.B. from Columbia University and a
J.D. from Cleveland Marshall School of Law.
William S. Leftwich joined us as our Vice President, Chief Financial Officer
and Secretary in May 1999. From March 1995 to May 1999, he served as Chief
Financial Officer for ViewCast.com (formerly MultiMedia Access Corporation), a
company that develops and sells streaming video products and desktop video
conferencing products. From January 1993 to March 1995, he served as Chief
Financial Officer of Integrated Security Systems, Inc., a provider of fully
integrated building security systems. Mr. Leftwich holds a B.B.A. in Accounting
from Texas A&M University and is a certified public accountant.
Blaine L. Thacker joined us as our Chief Strategy Officer in October 1999.
Prior to joining us, Mr. Thacker served as Executive Vice President of Sterling
Communications, Inc., an international systems integration firm, from August
1998 to September 1999. Prior to that, Mr. Thacker was the Vice President of
Sales and Marketing for Digital Network Access, an Internet service provider,
from September 1997 to August 1998. He served as President of Choice Com, Inc.,
a competitive local exchange carrier, from March 1997 until August 1997 after
acting as British Telecom's Vice President of Global Sales for its Information
Technology outsourcing business from May 1993 until January 1997. Mr. Thacker
has over 30 years of executive level experience with companies such at AT&T,
General Electric, and Oracle. He holds an M.B.A. from Western New England
College and a B.B.A. in marketing and finance from the University of Oklahoma.
Jeffrey A. Glickman joined us as the President of
DigitalDemographics.:Com Inc., our subsidiary that collects and sells
demographic data, in December 1999. Prior to joining us, Mr. Glickman served as
President of World Class Marketing, a database marketer, from March 1995 to
December 1999. Mr. Glickman holds a Ph.D. in reproductive endocrinology from the
University of Western Ontario, an M.Sc. in embryology from McGill University and
a B.S. in marine biology from McGill University.
John G. Huncke joined us as the Executive Vice President of our Media Group
in January 2000. Prior to joining us, Mr. Huncke served as General Counsel of
Universal Pictures from June 1998 to
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December 1999. From January 1995 to June 1998, Mr. Huncke served as General
Counsel and Chief Operating Officer of Polygram Television, a television
production and distribution company. From January 1987 to January 1995,
Mr. Huncke served as Executive Vice President and General Counsel for ITC
Entertainment Group, a motion picture production and distribution company.
Mr. Huncke holds a J.D. from the University of Southern California and a B.S.
from the University of Notre Dame.
William O. Hunt has served as one of our directors since January 1999.
Mr. Hunt has served as Chairman of the Board of Internet America since May 1995.
Mr. Hunt has also served as Chairman of the Board of Intellicall Inc., a company
that provides telephone network switching and other services, since 1992.
Mr. Hunt served as President and Chief Executive Officer of Intellicall from
December 1992 to May 1998. Mr. Hunt also currently holds directorships in Andrew
Corporation, American Homestar Corporation and Mobility Electronics, Inc.
Mr. Hunt holds an M.B.A. and a B.B.A. from the University of North Texas.
Michael H. Jordan has served as one of our directors since August 1999.
Mr. Jordan has served as Chairman of Luminant Worldwide Corporation, a leading
provider of Internet and electronic commerce professional services, since
September 1999. He also serves as Chairman and Chief Executive Officer of
EOriginal Inc., an electronic commerce company that provides secure documents.
Mr. Jordan retired in December 1998 as Chairman and Chief Executive Officer of
CBS Corporation (formerly Westinghouse Electric Corporation), positions he had
held since June 1993. Mr. Jordan is also a member of the Boards of Directors of
Aetna Inc., Dell Computer Corp. and Marketwatch.com. Mr. Jordan is a member of
the President's Export Council; is the Chairman of the U.S.-Japan Business
Council; is the Chairman of The College Fund/UNCF; and is the Chairman of the
Policy Board of the Americans for the Arts.
Jack A. Turpin has served as one of our directors since January 1999.
Mr. Turpin founded Hall-Mark Electronics Corporation, an electronics
distribution firm, in 1962 and served as its Chairman of the Board until its
sale in 1993. Mr. Turpin holds a B.S. in electrical engineering from Rice
University.
Pursuant to an amendment to our certificate of incorporation that will
become effective upon consummation of the offering, our Board of Directors will
be classified into three classes of directors, denoted as Class I, Class II and
Class III. Messrs. Hunt and Garin will be Class I directors, Messrs. Turpin and
Stark will be Class II directors, and Messrs. Philyaw and Jordan will be
Class III directors. The term of the Class I directors will expire at the 2001
annual meeting of our stockholders, the term of the Class II directors will
expire at the 2002 annual meeting of our stockholders and the term of the
Class III directors will expire at the 2003 annual meeting of our stockholders.
BOARD COMPENSATION
Directors who are also our officers, employees or affiliates do not receive
compensation for their services as directors. Each non-employee director is
entitled to an award of stock options to purchase 15,000 shares of our common
stock, when he becomes a non-employee director, at an exercise price equal to
the fair market value of our common stock on the date of grant. Additionally,
each non-employee director in office following each annual stockholders' meeting
is entitled to an award of stock options to purchase 8,000 shares of common
stock at an exercise price equal to the fair market value of our common stock on
the date of grant. In each case, the stock options granted to the non-employee
directors are fully vested on the date of grant. Directors are entitled to
reimbursement of their reasonable out-of-pocket expenses in connection with
their travel to and attendance at meetings of the board of directors or
committees thereof.
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INDEMNIFICATION OF DIRECTORS
We have entered into agreements to indemnify our directors and officers.
Under these agreements, we are obligated to indemnify our directors and officers
to the fullest extent permitted under Delaware General Corporate Law for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by them in any action or proceeding arising out of their services as a
director or officer. We believe that these agreements are necessary to attract
and retain qualified directors and officers.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
compensation of our chief executive officer and our other most highly paid
executives serving in such capacity at the end of 1999 whose total annual salary
and bonus exceeded $100,000 in 1999. These three individuals are referred to in
this prospectus as our "Named Executive Officers."
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($) (#) ($)
--------------------------- -------- -------- ------------ ------------ ------------
J. Jovan Philyaw ........................ $230,500 $150,000 $ -- $ -- $ --
Chief Executive Officer and
Chairman of the Board
Michael N. Garin ........................ 100,000 -- -- 2,677,500 --
President and Chief Operating Officer
Scott P. Carlin ......................... 62,500 150,000 -- 1,102,500 18,900(1)
President--Media Group
------------------------
(1) This number represents reimbursement of Mr. Carlin for moving expenses.
The following table provides information regarding stock options granted to
our Named Executive Officers during 1999.
OPTION GRANTS IN LAST FISCAL YEAR
[Enlarge/Download Table]
INDIVIDUAL GRANTS
------------------------------------------------------------------- GRANT DATE
PERCENT OF VALUE
TOTAL OPTIONS ------------
NUMBER OF GRANTED TO EXERCISE PRICE GRANT DATE
SECURITIES UNDERLYING EMPLOYEES IN OR BASE PRICE EXPIRATION PRESENT
NAME OPTIONS GRANTED (#) FISCAL YEAR ($/SHARE) DATE VALUE ($)(1)
---- --------------------- ------------- -------------- ---------- ------------
J. Jovan Philyaw............. -- -- $ -- -- $ --
Michael N. Garin............. 157,500(2) 2.0% 3.31 8/2/09 123,323
2,520,000(3) 33.2% 3.31 8/16/09 1,973,160
Scott P. Carlin.............. 1,102,500(3) 14.5% 3.31 8/16/09 863,258
------------------------
(1) The present value of each grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: dividend yield of 0% for all years; expected volatility of
0.10%; risk-free interest rate of 5.40% to 6.10%; and expected life of five
years.
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(2) 25% of the stock options became exercisable on August 2, 1999, the date of
grant, and 25% of the stock options will become exercisable on each
anniversary of the date of grant until they become fully exercisable.
(3) 25% of the stock options became exercisable on August 16, 1999, the date of
grant, and 25% of the stock options will become exercisable on each
anniversary of the date of grant until they become fully exercisable.
The following table provides summary information with respect to stock
options held by our Named Executive Officers as of December 31, 1999. The value
of unexercised in-the-money options is based on an assumed initial public
offering price of $ , less the exercise price payable for the shares.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
[Enlarge/Download Table]
NUMBER OF SECURITIES VALUE OF THE UNEXERCISED
UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
J. Jovan Philyaw...... -- $ -- -- -- $ $
Michael N. Garin...... -- -- 669,375 2,008,125
Scott P. Carlin....... -- -- 275,625 826,875
COMMITTEES OF THE BOARD
Our board of directors has established an audit committee and a compensation
committee. Our board has no nominating committee or other committee performing
similar functions at this time.
AUDIT COMMITTEE. The audit committee is comprised of Messrs. Hunt, Jordan
and Turpin. The audit committee reports on its activities to the board of
directors and is responsible for reviewing:
- the scope and timing of the audit and non-audit services performed by our
independent accountants;
- the appropriateness of our accounting policies;
- the adequacy of our financial controls; and
- the reliability of the financial information we report to the public.
COMPENSATION COMMITTEE. The compensation committee is comprised of
Messrs. Hunt, Jordan and Turpin. The primary functions of the compensation
committee are to:
- provide a general review of our compensation and benefit plans to
determine if they meet corporate objectives;
- evaluate and make recommendations regarding our chief executive officer's
compensation; and
- review our chief executive officer's recommendations regarding the:
- compensation of all of our other officers;
- granting of awards under our benefit plans; and
- adoption of, and changes to, our major compensation policies and
practices.
58
EMPLOYMENT AGREEMENTS
MICHAEL N. GARIN. On August 16, 1999, we entered into a three-year
employment agreement with Michael N. Garin which provides that he will serve as
our President and Chief Operating Officer. The employment agreement provides for
annual compensation of $400,000, which amount will be increased upon completion
of this offering to an amount commensurate to that paid by comparable companies
at comparable stages of development. Mr. Garin's employment agreement provides
for an annual bonus at the discretion of the board. In addition, the employment
agreement provides that Mr. Garin is eligible to participate in all benefit
programs for which employees and/or senior executives are generally eligible.
Under his employment agreement, we may terminate Mr. Garin's services for cause
or without cause. If Mr. Garin is terminated without cause or if we breach the
employment agreement, Mr. Garin will be entitled to receive his base salary for
the remainder of his term of employment in a lump sum payment. The employment
agreement also contains confidentiality provisions.
SCOTT P. CARLIN. On August 16, 1999, we entered into an employment
agreement with Scott P. Carlin which, as amended, provides that he will serve as
President of our Media Group for three years. We paid Mr. Carlin a $150,000
signing bonus. Mr. Carlin's employment agreement provides for annual
compensation of $250,000, which amount will be increased to a level negotiated
in good faith upon completion of this offering. Mr. Carlin's employment
agreement provides for an annual bonus at the discretion of the board. In
addition, his employment agreement provides that he is eligible to participate
in all benefit programs for which employees and/or senior executives are
generally eligible. Under his employment agreement, we may terminate
Mr. Carlin's services for cause or without cause. If Mr. Carlin is terminated
without cause or if we breach the employment agreement, Mr. Carlin will be
entitled to receive his base salary for the remainder of his term of employment
in a lump sum payment. Mr. Carlin's employment agreement also contains
confidentiality provisions.
STOCK OPTION PLAN
We adopted our 1999 Stock Option Plan on September 1, 1999. A total of
12,375,000 shares of common stock are authorized for issuance under the plan, as
amended. The plan provides for grants of incentive stock options to our
employees, including officers and employee-directors, and for grants of
nonstatutory stock options to our employees, consultants and nonemployee
directors. The purposes of the plan are:
- to attract and retain the best available personnel for positions of
substantial responsibility;
- to provide additional incentive to our employees and consultants; and
- to promote the success of our business.
Our compensation committee administers the plan. Our compensation committee
will designate the individuals to receive the options, the number of shares
subject to options, and the terms and conditions of each option.
While our compensation committee determines the terms of options granted
under the plan, the term of any incentive stock option cannot exceed ten years
from the date of grant and any incentive stock option granted to an employee who
possesses more than ten percent of the total combined voting power of all
classes of our shares within the meaning of Section 422(b)(6) of the Internal
Revenue Code cannot be exercisable after the expiration of five years from the
date of grant.
While the compensation committee determines the exercise price of options
granted under the plan, an option's exercise price cannot be less than the fair
market value of a share of common stock on the date the option is granted,
subject to adjustments. Further, the exercise price of any incentive stock
option granted to an employee who possesses more than ten percent of the total
combined voting power of all classes of our shares within the meaning of
Section 422(b)(6) of the Internal Revenue
59
Code must be at least 110% of the fair market value of the underlying share at
the time the option is granted. The exercise price of options granted under the
plan will be paid in full in a manner prescribed by our compensation committee.
EMPLOYEE STOCK PURCHASE PLAN
We adopted our Employee Stock Purchase Plan in April 2000. A total of
1,000,000 shares of common stock are authorized for issuance under the plan. The
plan provides for the grant of stock options to certain eligible employees. The
purpose of the plan is to provide eligible employees with an incentive to
advance the interests of the company by providing an opportunity to purchase
stock of the company at a favorable price. The plan is administered by our
compensation committee.
Any eligible employee may elect to participate in the plan by authorizing
our compensation committee to make payroll deductions to pay the exercise price
of an option at such time and in such manner as prescribed by our compensation
committee. Such payroll deduction may be a specific amount or a designated
percentage to be determined by the employee, but such specific amount may not be
less than an amount established by us and such designated percentage may not
exceed an amount of eligible compensation established by us from which the
deduction is made. In no event will an employee be granted an option under the
plan that would permit him to purchase stock with a fair market value in excess
of $25,000, or to purchase more than 10,000 shares, in a period established by
us.
There will be two six-month offering periods in each calendar year. The date
of grant and the date of exercise for the first option period is January 1 and
June 30, respectively, and the date of grant and date of exercise for the second
option period is July 1 and December 31, respectively. The first offering period
of the plan will commence on the date we close this offering, and will conclude
on December 31, 2000. The exercise price of options granted under the plan is an
amount equal to the lesser of 85% of the fair market value of the stock on the
date of exercise or on the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Currently, Messrs. Hunt, Jordan and Turpin are members of our compensation
committee. Mr. Hunt is the general partner of B&G Partnership, Ltd. and BCG
Partnership, Ltd., which are both our stockholders. Mr. Turpin is the sole
managing director of JAT FIVE, LTD., one of our stockholders. See "Certain
Relationships and Related Transactions."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PREFERRED STOCK FINANCINGS
The following information summarizes private placement transactions in which
we sold shares of preferred stock to our directors and 5% stockholders and
persons and entities associated with our directors and those stockholders. Each
share of Series A preferred stock will convert into 630 shares of common stock
and each share of Series B and Series C preferred stock will convert into one
share of common stock upon completion of this offering.
SERIES A FINANCING. From September 29, 1999 to January 14, 2000, we issued
15,966 shares of Series A preferred stock to various investors, including
Young & Rubicam, Inc., Belo Enterprises, Inc., DING.com LLC and ING Capital LLC,
for aggregate consideration of approximately $50.3 million, or $3,150 per share.
A trust of our President of the Publishing Group, Donald E. Welsh, invested
$200,000 in our Series A preferred stock through DING.com LLC. In addition, the
spouse of our president, Michael N. Garin, invested $500,000 in our Series A
preferred stock through DING.com LLC.
SERIES B FINANCING. In April 2000, we issued 5,929,364 shares of Series B
preferred stock to various investors, including Belo Corp., Young & Rubicam,
Inc., The Coca-Cola Company, The E.W. Scripps Company, Spielberg/Katz
Associates, LLC and Tandy Corporation, for aggregate consideration of
approximately $41.7 million, or $7.03 per share.
SERIES C FINANCING. In April 2000, we issued 5,372,593 shares of Series C
preferred stock to various investors, including Belo Corp., Young & Rubicam,
Inc., The Coca-Cola Company, The E.W. Scripps Company and Tandy Corporation, for
aggregate consideration of approximately $56.6 million, or $10.54 per share.
The following table summarizes the private placement transactions in which
we sold preferred stock to our directors and 5% beneficial stockholders and
persons and entities affiliated with our directors and those stockholders.
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NUMBER OF SHARES OF
---------------------------------
DIRECTORS, 5% BENEFICIAL SERIES A SERIES B SERIES C
STOCKHOLDERS AND AFFILIATED ENTITIES PREFERRED PREFERRED PREFERRED
------------------------------------ --------- --------- ---------
Belo Corp................................................... 3,970 1,422,474 1,897,532
Young & Rubicam, Inc........................................ 6,350 380,986 508,222
WARRANTS
We issued a warrant, dated September 29, 1999, to Belo Enterprises, Inc., an
affiliate of Belo Corp., to purchase 124,740 shares of our common stock at an
exercise price of $5.00 per share. The warrants will terminate on September 29,
2004. See "Business--Strategic Relationships."
We issued two warrants in April 2000, to an affiliate of National
Broadcasting Company, Inc., our strategic partner, to purchase 3,752,445 shares
and 4,505,165 shares, respectively, of our common stock at per share exercise
prices of $5.00 and $10.54, respectively. We are required to issue additional
warrants to National Broadcasting Company, Inc.'s affiliate with a per share
exercise price of $10.54, depending on the number of shares we reserve for
issuance under our 1999 Stock Option Plan. The warrants will terminate in
April 2005. See "Business--Strategic Relationships."
STOCK PURCHASE AGREEMENT
We entered into a stock purchase agreement, dated September 29, 1999, under
which we sold the Series A preferred stock. Under the stock purchase agreement,
we agreed:
- to provide periodically financial and other information to the holders;
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- not to engage in certain transactions without the prior consent of the
holders of at least two-thirds of the outstanding shares of Series A
preferred stock;
- as long as at least 1,900 shares of Series A preferred stock remain
outstanding, at any time that Michael Jordan is not our director, to
nominate to our board of directors one nominee designated by the majority
of the holders of such shares of our Series A preferred stock; and
- to give each investor in our Series A preferred stock preemptive rights
for new issuances of any shares of our capital stock, excluding issuances
of common stock in this offering (these investors waived this right in
connection with the issuance of the Series B preferred stock and Series C
preferred stock).
These provisions in the stock purchase agreement were terminated in April 2000.
STOCKHOLDERS AGREEMENTS
We entered into an agreement among stockholders, dated January 28, 1999,
with J. Jovan Philyaw, our Chairman of the Board and Chief Executive Officer;
JAT III, L.L.C.; B&G Partnership, Ltd.; and BCG Partnership, Ltd. William Hunt,
our director, is the general partner of B&G Partnership, Ltd. and BCG
Partnership, Ltd. Jack A. Turpin, also our director, is the sole managing
director of JAT III, L.L.C. This agreement was terminated on September 29, 1999.
We entered into an amended and restated stockholders agreement, dated
April 25, 2000, with J. Jovan Philyaw, Michael N. Garin, our President and Chief
Operating Officer, Patrick V. Stark, our Executive Vice President, an affiliate
of the National Broadcasting Company, Inc., B&G Partnership, Ltd., BCG
Partnership, Ltd., JAT FIVE, LTD., for whom Jack A. Turpin is the sole managing
director, Young & Rubicam, Inc., Belo Enterprises, Inc. and A.H. Belo
Foundation, affiliates of Belo Corp., and each of the other holders of preferred
stock. The stockholders agreement contains:
- a right of first refusal, exercisable by the stockholders who are parties
to the stockholders agreement and then us, to purchase any of our
securities proposed to be transferred by Messrs. Philyaw, Garin or Stark
and the right of those other stockholders to participate on a pro rata
basis in any transfer of securities by Messrs. Philyaw, Garin or Stark;
- our agreement to nominate a representative of the preferred stock holders
to our board of directors if, at any time, Michael Jordan is not our
director and at least 3,791,900 shares of our preferred stock remain
outstanding;
- our agreement to provide financial and other information to the holders;
- our agreement not to engage in certain transactions without the prior
consent of the holders of at least two-thirds of each class of preferred
stock; and
- preemptive rights for each preferred stockholder for new issuances of
shares of our capital stock, excluding issuances of common stock in this
offering.
This agreement will automatically terminate upon the completion of this
offering.
REGISTRATION RIGHTS AGREEMENTS
We entered into a registration rights agreement, dated January 28, 1999,
with JAT III, L.L.C., B&G Partnership, Ltd. and BCG Partnership, Ltd. This
agreement was terminated on September 29, 1999.
An affiliate of the National Broadcasting Company, Inc. and holders of our
preferred stock and other stockholders, including B&G Partnership, Ltd., BCG
Partnership, Ltd., JAT FIVE, LTD., Belo Enterprises, Inc., Young & Rubicam, Inc.
and A.H. Belo Foundation are entitled under an amended
62
and restated agreement with us, dated April 25, 2000, to the following
registration rights for the shares of common stock held by them or issuable upon
conversion of our preferred stock or upon exercise of outstanding warrants to
purchase our common stock:
- at any time after 180 days from the date of completion of this offering,
the holders of these registrable securities, other than the affiliate of
the National Broadcasting Company, Inc., may require, on three occasions
only, that we use our best efforts to register for public resale at least
ten percent of the aggregate amount of registrable securities that were
outstanding on April 25, 2000;
- at any time after 180 days from the date of completion of this offering,
the affiliate of the National Broadcasting Company, Inc. may require, on
up to three occasions only, that we use our best efforts to register for
public resale at least 15% of the aggregate amount of common stock
issuable upon full exercise of the affiliate of the National Broadcasting
Company, Inc.'s warrants;
- until the tenth anniversary of this offering, if we register any common
stock, either for our own account or for the account of other security
holders, the holders of registrable securities are entitled to include
their shares of common stock in the registration, subject to the ability
of the underwriters to limit the number of shares included in the offering
in view of market conditions; and
- the holders of registrable securities with a fair market value of not less
than $10,000,000 may require us to use our best efforts to register the
securities on a Form S-3 registration statement or any successor form
after we become eligible to use the form.
In most cases, we will bear all registration expenses other than
underwriting discounts and commissions. All demand registration rights terminate
when a holder is entitled to sell all of its registrable securities under
Rule 144(k) under the Securities Act.
BELO CORP. AGREEMENT
By letter agreement dated September 29, 1999, with Belo Corp., a strategic
partner and principal beneficial stockholder, we have granted Belo Corp.'s
newspapers and television stations an exclusive license to deploy our technology
in their markets. We intend to enter into licensing agreements with each of Belo
Corp.'s newspapers and television stations under which we will be paid a
licensing fee, the amount of which will be negotiated in good faith, provided
that each newspaper and television station will be entitled to the lowest
licensing fee paid to us by other newspapers or televisions stations having
comparable circulation levels or broadcasting in comparable markets. Belo Corp.
has agreed to advertise our technology in its newspapers and on its television
stations.
YOUNG & RUBICAM, INC. AGREEMENT
By letter agreement dated September 29, 1999, with Young & Rubicam, Inc., a
principal stockholder of ours, we granted Young & Rubicam an exclusive right to
resell our :C.R.Q. software and :Cue:C.A.T. devices in the United States for the
period of six months after the public launch of this technology in the United
States. The economic terms of this right are to be negotiated in good faith by
Young & Rubicam and us. In addition, we granted to Young & Rubicam an exclusive
right for a period of six months from a date to be mutually determined by
Young & Rubicam and us to resell this technology outside the United States. The
terms of this right are to be negotiated in good faith by Young & Rubicam and
us. We also agreed that, on economic terms to be negotiated by Young & Rubicam
and us, Young & Rubicam will act as our marketing and sales agent with respect
to the deployment of our technology to our advertising customers or clients.
63
By a separate letter agreement, also dated September 29, 1999, we granted
Young & Rubicam a right of first refusal on our marketing and communication
assignments to third parties, provided that Young & Rubicam possesses core
competency to handle these assignments. The terms of each assignment are to be
negotiated by Young & Rubicam and us. In addition, we granted Young & Rubicam a
right to receive a percentage of revenues paid to us by clients or licensees of
Young & Rubicam. This percentage will equate to a "finders" or referral fee
customary for blanket licensing agreements or a commission or mark-up on the
Internet Enhancement of individual advertisements that is customary in the
broadcast or entertainment industries. We also agreed to recommend Young &
Rubicam as our preferred provider of marketing and communications services in
response to inquiries from our potential licensees or customers or from those of
Young & Rubicam. The rights described in this paragraph will no longer exist
when Young & Rubicam ceases to own Series A preferred stock, or at least 50% of
the common stock into which Young & Rubicam's Series A preferred stock is
converted upon completion of this offering.
ISSUANCE OF COMMON STOCK AND DEBENTURES
On January 28, 1999, we sold 15,750,000 shares of common stock for a cash
purchase price of $2,500 and issued 8.0% Debentures, Series 1999A with an
aggregate principal amount of $2,500,000. In particular, we sold:
- 3,150,000 shares of common stock and $500,000 in aggregate principal
amount of the debentures to B&G Partnership, Ltd.;
- 3,150,000 shares of common stock and $500,000 in aggregate principal
amount of the debentures to BCG Partnership, Ltd.; and
- 9,450,000 shares of common stock and $1,500,000 in aggregate principal
amount of the debentures to JAT III, L.L.C. These shares have been
transferred to JAT FIVE, LTD., an affiliate of JAT III, L.L.C.
No interest payments are required to be paid on the debentures through the
second anniversary of their issuance unless otherwise determined by our board of
directors. Any unpaid interest will then be added to the principal amount of the
debentures. Any remaining principal balance and any accrued and unpaid interest
will be due and payable in full upon completion of this offering. In
April 2000, we fully paid the principal amount and all accrued interest on each
of the debentures.
EMPLOYEE STOCKHOLDERS AGREEMENT
We entered into a stockholders agreement, dated January 29, 1999, with
various stockholders, including William S. Leftwich, our Chief Financial
Officer. This agreement provides that the parties to the agreement, should they
desire to sell their stock, shall first offer the stock to us. This agreement
will automatically terminate upon the completion of this offering.
OTHER TRANSACTIONS
On January 4, 1999, we completed the acquisition of the rights to produce
our television show NET TALK LIVE! THE INTERNET TALK SHOW and certain
proprietary technology rights from Infotainment Telepictures, Inc. for a
promissory note with a principal amount of $8,000,000. We also assumed certain
liabilities in connection with this acquisition, including post-closing
liabilities associated with the Nissi Cosmetics litigation. Infotainment
Telepictures, Inc. has agreed to indemnify us for any costs, expenses,
liabilities or other losses we may incur in connection with the Nissi Cosmetics
litigation. See "Business--Legal Proceedings." J. Jovan Philyaw was the
President and Chief Executive Officer of Infotainment Telepictures, Inc., a
company owned by his father. The promissory note bears interest at 6.0% per
annum. No interest payments are required to be made through the second
anniversary of the
64
note. Any unpaid interest will then be added to the principal amount of the
note. Any remaining principal balance and any accrued and unpaid interest will
be due and payable in full upon completion of this offering. See "Use of
Proceeds." We paid $1,500,000 and $3,000,000 of the principal amount of the note
in 1999 and 2000, respectively. We paid $584,137 in accrued interest on the note
in 2000.
In connection with our acquisition of Infotainment Telepictures, Inc. in
January 1999, we assumed a loan payable to Jack A. Turpin in the principal
amount of $452,900, plus accrued and unpaid interest of $6,819. In January 2000,
Mr. Turpin loaned us an additional $147,090 for operating capital expenditures.
We repaid the principal amount of the loans, plus $10,770 in interest, in
January 2000.
We entered into a stock purchase agreement, dated May 17, 1999, with William
S. Leftwich under which Mr. Leftwich purchased 472,500 shares of our common
stock. We have the right, subject to limitations, to repurchase Mr. Leftwich's
shares purchased under the agreement if he ceases for any reason to be employed
by us.
Each of our executive officers and employees has entered into a proprietary
rights and information agreement regarding the ownership of inventions developed
in his or her capacity as our employee and the confidentiality of our
proprietary information. Each of our directors has entered into a nondisclosure
agreement.
Patrick V. Stark was a shareholder/director of the law firm of Kane,
Russell, Coleman & Logan, P.C. until December 31, 1999 and became of counsel as
of January 1, 2000. During 1999 and during the first quarter of 2000, we paid
Kane, Russell, Coleman & Logan, P.C. $135,000 and $21,000, respectively, for
legal services.
We have entered into indemnification agreements with each of our executive
officers and directors.
65
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of our common stock as of , 2000, after giving effect to
the automatic conversion of 11,317,923 shares of outstanding preferred stock
into 21,360,537 shares of common stock upon completion of this offering and as
adjusted to reflect the sale of the common stock in this offering by:
- each security holder known by us to own beneficially more than 5% of our
common stock;
- each of our directors;
- each of our executive officers; and
- all directors and executive officers as a group.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Unless otherwise indicated, the persons or
entities included in this table have sole voting and investment power with
respect to all the shares of common stock beneficially owned by them, subject to
applicable community property laws. The number of shares beneficially owned by a
person includes shares of common stock that are subject to stock options or
warrants that are either currently exercisable or exercisable within 60 days
after , 2000. These shares are also deemed outstanding for the
purpose of computing the percentage of outstanding shares owned by the person.
These shares are not deemed outstanding, however, for the purpose of computing
the percentage ownership of any other person.
[Enlarge/Download Table]
PERCENT OF COMMON STOCK
BENEFICIALLY OWNED
SHARES OF COMMON STOCK ----------------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE THE OFFERING AFTER THE OFFERING
------------------------ ---------------------- ------------------- ------------------
Belo Corp.(1)........................... 5,945,847 % %
JAT FIVE, LTD.(2)....................... 9,765,000 % %
National Broadcasting Company,
Inc.(3)............................... 8,257,610 % %
Young & Rubicam, Inc.(4)................ 4,889,708 % %
J. Jovan Philyaw........................ 40,950,000 % %
Michael N. Garin(5)..................... 1,438,750 % %
Patrick V. Stark(6)..................... 730,000 * *
Gregory D. Lerman(7).................... 551,250 * *
Scott P. Carlin(7)...................... 551,250 * *
Douglas L. Davis(7)..................... 117,810 * *
Stuart B. Graber(7)..................... 157,500 * *
Donald E. Welsh(8)...................... 7,112 * *
William S. Leftwich..................... 472,500 * *
Blaine L. Thacker....................... -- * *
Jeffrey A. Glickman..................... -- * *
John G. Huncke.......................... -- * *
William O. Hunt(9)...................... 6,615,000 % %
Michael H. Jordan(7).................... 78,750 * *
Jack A. Turpin(10)...................... 9,765,000 % %
All directors and executive officers as
a group (15 persons).................. 61,434,922 % %
------------------------
* Less than one percent (1%).
(1) Consists of (i) 5,267,773 shares issuable upon conversion of the shares of
our preferred stock held of record by Belo Enterprises, Inc., (ii) 553,334
shares issuable upon conversion of the shares of
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our preferred stock held of record by A.H. Belo Foundation and (iii)
124,740 shares issuable upon exercise of outstanding warrants held by Belo
Enterprises, Inc. Belo Enterprises, Inc. and A.H. Belo Foundation are both
indirect wholly-owned subsidiaries of Belo Corp. The address of Belo Corp.
is Silverside Carr Executive Center, 501 Silverside Road, Suite 401,
Wilmington, Delaware 19809.
(2) Address: 8201 Preston Road, Suite 310, Dallas, Texas 75225.
(3) Consists solely of shares issuable upon exercise of outstanding warrants
held by an affiliate of the National Broadcasting Company, Inc. National
Broadcasting Company, Inc.'s address is 30 Rockefeller Plaza, 46th Floor,
New York, New York 10112.
(4) Address: 285 Madison Avenue, New York, New York 10017.
(5) Consists solely of shares issuable upon exercise of stock options that have
already vested or will vest within 60 days. This number does not include
shares of common stock which may be attributable to Torunn Garin, the wife
of Mr. Garin, due to her passive investment in DING.com LLC, a stockholder
of ours. Mr. Garin disclaims beneficial ownership of these shares. See
"Certain Relationships and Related Transactions".
(6) Includes 257,500 shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(7) Consists solely of shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(8) Consists solely of shares issuable upon conversion of 7,112 shares of
Series B preferred stock owned by Bourne Welsh, the wife of Mr. Welsh. This
number does not include shares of common stock which may be attributable to
Mr. Welsh, due to his trust's passive investment in DING.com LLC, a
stockholder of ours. Mr. Welsh disclaims beneficial ownership of these
shares.
(9) Consists of 3,150,000 shares held of record by B&G Partnership, Ltd. and
3,465,000 shares held of record by BCG Partnership, Ltd. Mr. Hunt is the
general partner of each of these partnerships. Mr. Hunt disclaims
beneficial ownership of these shares.
(10) Consists of 9,765,000 shares held of record by JAT FIVE, LTD. Mr. Turpin
serves as the sole managing director of this entity. Mr. Turpin disclaims
beneficial ownership of these shares.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of shares of common stock,
par value $0.01 per share, and 27,000,000 shares of preferred stock, par value
$0.01 per share. 16,000 shares of preferred stock are designated as Series A
preferred stock, 12,100,000 shares of preferred stock are designated as
Series B preferred stock, and 3,300,000 shares of preferred stock are designated
as Series C preferred stock. As of the date of this prospectus,
(i) shares of common stock were issued and outstanding, (ii) 15,966
shares of Series A preferred stock were issued and outstanding, (iii) 5,929,364
shares of Series B preferred stock were issued and outstanding, and
(iv) 5,372,593 shares of Series C preferred stock were issued and outstanding.
In addition, (i) shares of common stock were reserved for issuance
under our stock option plan, (ii) shares of common stock were
reserved for issuance under our stock purchase plan, (iii) shares of
common stock were reserved for issuance upon exercise of outstanding warrants,
and (iv) 21,360,537 shares of common stock were reserved for issuance upon
conversion of all outstanding shares of preferred stock. All of our outstanding
shares of preferred stock will be converted automatically into common stock upon
completion of this offering.
The following description of our capital stock and certain provisions of our
certificate of incorporation and bylaws are summaries and are qualified by
reference to our certificate of incorporation and bylaws, copies of which have
been filed with the SEC as exhibits to the registration statement of which this
prospectus is a part. The descriptions of the common stock and preferred stock
reflect changes to our capital structure that will occur upon the closing of the
offering in accordance with the terms of the certificate of incorporation.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends that may be declared by our board of directors,
subject to any preferential dividend rights of outstanding preferred stock. In
the event of our liquidation, dissolution or winding up, holders of common stock
will be entitled to receive proportionately any of our assets remaining after
the payment of liabilities and subject to the prior rights of any outstanding
preferred stock. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. Our outstanding shares of common stock are, and
the shares offered by us in this offering will be, when issued and paid for,
fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted into 21,360,537 shares of common stock and automatically
returned to our authorized, unissued and undesignated shares of preferred stock.
Thereafter, our board of directors will have the authority, without further
action by the stockholders, to issue up to 27,000,000 shares of preferred stock
in one or more series and to designate the rights, preferences, privileges and
restrictions of each series. The issuance of preferred stock could have the
effect of restricting dividends on the common stock, diluting the voting power
of the common stock, impairing the liquidation rights of the common stock or
delaying or preventing our change in control without further action by the
stockholders. We have no present plans to issue any shares of preferred stock
after the completion of this offering.
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WARRANTS
As of the date of this prospectus, there were outstanding warrants to
purchase shares of our common stock at a weighted average exercise
price of $ per share. See "Certain Relationships and Related Transactions."
REGISTRATION RIGHTS
An affiliate of the National Broadcasting Company, Inc., holders of our
preferred stock and other stockholders are entitled under an agreement with us
to the following registration rights for the shares of common stock held by them
or issuable upon conversion of our preferred stock or upon exercise of
outstanding warrants to purchase our common stock:
- at any time after 180 days from the date of this offering, the holders of
these registrable securities, other than the affiliate of the National
Broadcasting Company, Inc., may require, on three occasions only, that we
use our best efforts to register for public resale at least ten percent of
the aggregate amount of registrable securities that were outstanding on
April 25, 2000;
- at any time after 180 days from the date of this offering, National
Broadcasting Company, Inc.'s affiliate may require, on up to three
occasions only, that we use our best efforts to register for public resale
at least 15% of the aggregate amount of common stock issuable upon full
exercise of its warrants;
- until the tenth anniversary of this offering, if we register any common
stock, either for our own account or for the account of other security
holders, the holders of registrable securities are entitled to include
their shares of common stock in such registration, subject to the ability
of the underwriters to limit the number of shares included in the offering
in view of market conditions; and
- the holders of registrable securities with a fair market value of not less
than $10,000,000 may require us to use our best efforts to register the
securities on a Form S-3 registration statement or any successor form
after we become eligible to use such form.
In most cases, we will bear all registration expenses other than
underwriting discounts and selling commissions. All demand registration rights
terminate at such time as a holder is entitled to sell all of its registrable
securities under Rule 144(k) under the Securities Act.
DESCRIPTION OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
CLASSIFIED BOARD OF DIRECTORS
Our bylaws provide that the board of directors shall be divided into three
classes of two or three directors each, with each class elected for three-year
terms expiring in successive years. Section 141 of the Delaware General
Corporation Law provides that, in the case of a corporation having a staggered
board, holders of a majority of the shares then entitled to vote in an election
of directors may remove a director only for cause. Our certificate of
incorporation defines "cause" as (i) a final conviction of a felony involving
moral turpitude or (ii) willful misconduct that is materially and demonstrably
injurious economically to us. No act, or failure to act, by a director will be
considered "willful" unless committed in bad faith and without a reasonable
belief that the act or failure to act was in the best interest of us or any of
our affiliates. "Cause" will not exist unless and until we have delivered to the
director a written notice of the act or failure to act that constitutes "cause"
and the director has not cured the act or omission within 90 days after the
delivery of the notice. The effect of this may be to restrict the ability of
stockholders to remove directors from our board of directors. Our certificate of
incorporation also allows the board of directors to fix the number of directors
in the bylaws.
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STOCKHOLDER MEETINGS AND PROPOSALS
Our bylaws provide that special meetings of stockholders generally can be
called only by the chairman of the board, the chief executive officer, the
president or our board of directors. There are advance notice procedures for the
nomination, other than by or at the direction of the board of directors, of
candidates for election as directors as well as for other stockholder proposals
to be considered at annual stockholder meetings. In general, notice of intent to
nominate a director or raise business at annual meetings must be received by us
not less than 90 nor more than 120 days before the meeting. The notice must
contain certain information concerning the person to be nominated or the matters
to be brought before the meeting and concerning the stockholder submitting the
proposal. These provisions may preclude a nomination for the election of
directors or preclude the conduct of business at a particular annual meeting if
the proper procedures are not followed. Furthermore, these provisions may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
the company, even if the conduct of the solicitation or attempt might be
beneficial to us and our stockholders.
STOCKHOLDER ACTION
Our certificate of incorporation does not allow stockholders to act by
written consent without a meeting. Our certificate of incorporation requires the
affirmative vote of the holders of not less than eighty percent of our shares
entitled to vote in an election of directors to amend or repeal this prohibition
of stockholder action by written consent. The effect of this provision is to
restrict stockholders' ability to circumvent the notice requirements relating to
an annual meeting. Our certificate of incorporation and bylaws do allow
stockholders to amend our bylaws.
BUSINESS COMBINATION UNDER DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless:
- the board of directors approved the transaction in which the stockholder
became an interested stockholder prior to the date the interested
stockholder attained that status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding shares owned by persons who are
directors and also officers; or
- on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the holders of at least 66 2/3% of our outstanding voting
stock which is not owned by the interested stockholder.
A "business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior to the determination of interested
stockholder status, did own, 15% or more of a corporation's voting stock.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
Our certificate of incorporation provides that no director will be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
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- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of laws;
- for unlawful payment of a dividend or unlawful stock purchase or stock
redemption; and
- for any transaction from which the director derived an improper personal
benefit.
The effect of these provisions is to eliminate our rights and the rights of
our stockholders, through stockholder derivative suits on our behalf, to recover
monetary damages against a director for breach of fiduciary duty as a director,
including breaches resulting from grossly negligent behavior, except in the
situations described above.
STOCKHOLDER RIGHTS PLAN
We anticipate that, immediately upon completion of this offering, our board
of directors will declare, pursuant to a rights agreement, a dividend
distribution of one common share purchase right for each outstanding share of
our common stock. Each right will entitle the registered holder to purchase from
us one thousandth of a share of our Series A Junior Participating Preferred
Stock, par value $.01 per share, at a price per share to be determined by our
board with the advice of our financial advisor about the long-term prospects for
our value, subject to adjustment. Each thousandth of a junior preferred share
will be economically equivalent to one share of our common stock. The purchase
price is expected to be significantly higher than the trading price of our
common stock. Therefore, the dividend will have no initial value and no impact
on our financial statements. The following summary of the rights does not
purport to be complete and is qualified in its entirety by reference to the
rights agreement, which is an exhibit to the registration statement of which
this prospectus is a part.
Initially, the rights will be attached to all certificates representing
shares of our common stock then outstanding, and no separate certificates
representing the rights will be distributed. Subject to extension by a majority
of our continuing directors (as defined in the rights agreement) acting on our
behalf, the rights will separate from our common stock upon the distribution
date, which is defined as the earlier of (a) ten days following a public
announcement that a person or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding shares of our common stock (any of the foregoing persons
being an acquiring person), or (b) ten business days following the commencement
of a tender offer or exchange offer that would result in a person or group
beneficially owning 15% or more of such outstanding shares of our common stock.
Until the distribution date, (i) the rights will be evidenced by our common
stock certificates and will be transferred with and only with our common stock
certificates, (ii) all certificates representing shares of our common stock will
contain a notation incorporating the rights agreement by reference and
(iii) the surrender for transfer of any certificate for our common stock
outstanding will also constitute the transfer of the rights associated with our
common stock represented by that certificate. As soon as practicable after the
distribution date, separate certificates evidencing the rights will be mailed to
holders of record of our common stock.
The rights are not exercisable until the distribution date and will expire
ten years after consummation of this offering, unless earlier redeemed by us.
In the event that, at any time following the distribution date, (a) we are
the surviving corporation in a merger or combination with an acquiring person
and our shares of common stock shall remain outstanding and not be changed or
exchanged, (b) a person becomes the beneficial owner of 15% or more of the then
outstanding shares of our common stock, or (c) an acquiring person engages in
one or more "self-dealing" transactions as set forth in the rights agreement,
each holder of a right will thereafter have the right to receive, upon exercise,
junior preferred shares (or, in certain circumstances, our common stock, cash,
property or other securities of ours) having a value equal to two times the
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exercise price of the right. For example, at an exercise price of $100.00 per
right, each right not owned by an acquiring person following an event described
above would entitle its holder to purchase from us $200.00 worth of junior
preferred shares (or in certain circumstances, our common stock, cash, property
or other securities of ours) for $100.00. Assuming that our common stock had a
current market price per share of $20.00 at that time, the holder of each valid
right would be entitled to purchase ten one-thousandths of junior preferred
shares for $100.00. Notwithstanding the foregoing, following the occurrence of
any of the events set forth in this paragaph, all rights that are, or (under
certain circumstances specified in the rights agreement) were, beneficially
owned by an acquiring person will be null and void. However, rights are not
exercisable following the occurrence of any of the events set forth above until
such time as the rights are no longer redeemable by us as set forth below.
In the event that, at any time following the date that a person has become
an acquiring person (a shares acquisition date), (a) we are acquired in a merger
or other combination transaction in which we are not the surviving entity,
(b) we consolidate with or merge with or into any other person pursuant to which
we are the surviving entity but all or a part of the shares of our common stock
are changed into or exchanged for stock of another person or cash or other
property or (c) 50% or more of our assets or earning power is sold or
transferred, each holder of a right (except rights that previously have been
voided as described above) shall thereafter have the right to receive, upon
exercise, common stock or other securities of the acquiring company having a
value equal to two times the exercise price of the right.
The purchase price payable and the number of junior preferred shares or
other securities or property issuable upon exercise of the rights are subject to
adjustment from time to time to prevent dilution (a) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, our common
stock, (b) upon the grant to holders of our common stock of certain rights or
warrants to subscribe for our common stock or convertible securities at less
than the current per-share market price of our common stock or (c) upon the
distribution to holders of our common stock of evidences of indebtedness or
assets of ours (excluding regular periodic cash dividends at a rate approved by
the majority of continuing directors of ours or dividends payable in our common
stock) or of subscription rights or warrants (other than those referred to
above).
With certain exceptions, no adjustment to the purchase price will be
required until cumulative adjustments require an adjustment of at least one
percent to the purchase price. Upon the exercise of a right, we will not be
required to issue fractional junior preferred shares or fractional shares of our
common stock (other than fractions in multiples of one-thousandth of a junior
preferred share) and, in lieu thereof, an adjustment in cash may be made based
on the market price of the junior preferred shares or our common stock on the
last trading date prior to the date of exercise.
At any time until 15 business days following the shares acquisition date, we
may redeem the rights in whole, but not in part, at a price of $.01 per right,
payable in cash. Immediately upon the action of our board of directors ordering
redemption of the rights, the rights will terminate and the only right of the
holders of rights will be to receive the $.01 redemption price.
Until a right is exercised, the holder thereof, as such, will have no rights
as a stockholder of ours, including, without limitation, the right to vote or to
receive dividends. While the distribution of the rights will not be taxable to
stockholders or to us, stockholders may, depending upon the circumstances,
recognize taxable income in the event that any of the rights are exercised for
our common stock (or other consideration) or for common stock or other
securities of the acquiring company as set forth above.
Any of the provisions of the rights agreement, other than those provisions
relating to the principal economic terms of the rights, may be amended by our
board of directors before the distribution date, and no stockholder approval
will be sought for noneconomic amendments to the rights agreement except as
required by law or by the rules of any national securities exchange or trading
system on which
72
our common stock is then listed. After the distribution date, the provisions of
the rights agreement may be amended by our board of directors to cure any
ambiguity, to make changes that do not adversely affect the interests of holders
of rights (excluding the interests of any acquiring person) or to shorten or
lengthen any time period under the rights agreement; provided, however, that no
amendment to adjust the time period governing redemption may be made when the
rights are not redeemable.
The rights have certain anti-takeover effects. The rights will cause
substantial dilution to any person or group that attempts to acquire us without
conditioning the offer on our redemption of the rights. The rights should not
interfere with any merger or other business combination approved by our board of
directors because the board of directors may, at its option, at any time before
the close of business on the earlier of the 15th day following the shares
acquisition date or ten years after the adoption of the rights agreement, redeem
all, but not less than all, of the then outstanding rights at $.01 per right.
LISTING
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "DGTL."
TRANSFER AGENT AND REGISTRAR
The transfer agent for our common stock is ChaseMellon Shareholder Services,
LLC.
73
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect the market price of our common stock. After this offering
is completed, the number of shares available for future sale into the public
markets will be subject to legal and contractual restrictions, some of which are
described below. The lapsing of these restrictions will permit sales of
substantial amounts of our common stock in the public market or could create the
perception that these sales could occur, which could adversely affect the market
price for our common stock. These factors could also make it more difficult to
raise funds through future offerings of common stock.
After this offering, shares of common stock will be outstanding
( shares if the U.S. underwriters and international managers exercise their
over-allotment options in full). Of these shares,
- the shares sold in this offering, plus any shares issued upon
exercise of the U.S. underwriters' and international managers'
over-allotment options, will be freely tradable without restriction under
the Securities Act, unless purchased by our "affiliates" as that term is
defined in Rule 144 under the Securities Act; and
- the remaining shares of common stock that will be outstanding after
this offering will be "restricted securities" within the meaning of
Rule 144 of the Securities Act.
Upon the closing of this offering, we intend to file one or more
registration statements under the Securities Act to register the shares of
common stock to be issued under our 1999 Stock Option Plan and our Employee
Stock Purchase Plan and, as a result, all shares of common stock acquired upon
exercise of stock options granted under our stock option plan or stock purchase
plan will also be freely tradable under the Securities Act unless purchased by
our affiliates.
Restricted securities generally may be sold only if they are registered
under the Securities Act or are sold pursuant to an exemption from registration,
such as the exemptions provided by Rules 144 and 701 under the Securities Act,
which are summarized below. Subject to the lock-up agreements described below,
shares held by our affiliates that are not restricted securities may be sold
subject to compliance with Rule 144 of the Securities Act without regard to the
prescribed holding period under Rule 144. Our executive officers and directors
and certain existing stockholders have agreed, with exceptions, not to sell or
transfer any common stock for 180 days after the date of this prospectus without
first obtaining the written consent of Merrill Lynch. Specifically, these
persons have agreed not to directly or indirectly:
- offer, pledge, sell or contract to sell any common stock;
- sell any option or contract to purchase any common stock;
- purchase any option or contract to sell any common stock;
- grant any option, right or warrant for the sale of any common stock;
- lend or otherwise dispose of or transfer any common stock;
- request or demand that we file a registration statement related to the
common stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition.
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Following the lock-up period, the number of shares of common stock that will
become eligible for sale in the public market under Rule 144 under the
Securities Act will be as follows:
- Beginning 180 days after the date of this prospectus, approximately
shares will be eligible for sale; and
- At various times thereafter upon the expiration of the applicable holding
periods, approximately shares will become eligible for sale.
Some of our stockholders have the right to require us to register shares of
common stock for resale in some circumstances. See "Description of Capital
Stock--Registration Rights."
In general, under Rule 144 as currently in effect, any person or persons
whose shares are aggregated, including an affiliate, who has beneficially owned
restricted securities for a period of at least one year is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of:
- one percent of the then outstanding shares of common stock, which will
equal approximately shares immediately after this offering; or
- the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on which
the notice of the sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to provisions relating to notice and
manner of sale and the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares for at least two years, including the holding
period of any prior owner other than an "affiliate," is entitled to sell the
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 under the Securities Act may be
relied upon for the resale of our common stock originally issued by us before
the date of this prospectus to our employees, directors, officers, consultants
or advisers under written compensatory benefit plans, including our 1999 Stock
Option Plan, or contracts relating to the compensation of such persons. Shares
of our common stock issued in reliance on Rule 701 are "restricted securities"
and, beginning 90 days after the date of this prospectus, may be sold by
non-affiliates subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with the one-year holding period,
in each case subject to the lock-up agreements.
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CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a summary of the material United States federal income and
estate tax consequences of the ownership and disposition of common stock
generally applicable to non-United States holders. Subject to the discussion
below under "Estate Tax," a non-United States holder is any beneficial owner of
common stock that, for United States federal income tax purposes, is a
non-resident alien individual, a foreign corporation, a foreign partnership or a
foreign estate or trust as such terms are defined in the Internal Revenue Code
of 1986, as amended. This discussion is based on the Internal Revenue Code,
existing, proposed and temporary regulations promulgated thereunder, and
administrative and judicial interpretations, all as of the date of this
prospectus, and all of which are subject to change either retroactively or
prospectively. This discussion does not address all aspects of United States
federal income and estate taxation that may be relevant to non-United States
holders in light of their particular circumstances and does not address any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction or the application of any particular tax treaty. Further, it does
not consider non-United States holders subject to special tax treatment under
the United States federal income tax laws including banks, insurance companies,
dealers in securities and holders of securities held as a part of a "straddle,"
"hedge" or "conversion transaction." PROSPECTIVE INVESTORS ARE URGED TO CONSULT
THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE AND LOCAL INCOME
AND OTHER TAX CONSEQUENCES, AND THE NON-UNITED STATES TAX CONSEQUENCES, OF
OWNING AND DISPOSING OF COMMON STOCK.
DIVIDENDS
Subject to the discussion below (including the discussion of backup
withholding), any dividend paid to a non-United States holder generally will be
subject to United States withholding tax at a rate of 30% of the gross amount of
the dividend or such lower rate as may be specified by any applicable tax
treaty. For purposes of determining whether tax is required to be withheld under
United States Treasury Regulations currently in effect we ordinarily will
presume that dividends paid to a holder with an address in a foreign country are
paid to a resident of such country absent knowledge that such presumption is not
warranted. Under such regulations, dividends paid to a holder with an address
within the United States generally will be presumed to be paid to a holder who
is not a non-United States holder and will not be subject to the 30% (or lower
treaty rate) withholding tax, unless we have actual knowledge that the holder is
a non-United States holder. Under final United States Treasury Regulations,
scheduled to become effective January 1, 2001, however, a non-United States
holder who wishes to claim the benefit of an applicable treaty rate would be
required to satisfy applicable certification and other requirements, which would
include the requirement that the non-United States holder file with us a United
States Internal Revenue Service Form W-8 which provides the holder's name and
address. In the case of a non-United States holder that is a foreign
partnership, the certification requirements would generally be applied to the
partners of the partnership.
Dividends received by a non-United States holder that are effectively
connected with a United States trade or business conducted by such non-United
States holder (or, if a tax treaty applies, that are attributable to a permanent
establishment in the United States maintained by such non-United States holder)
are exempt from withholding tax if the non-United States holder files an IRS
Form W-8ECI (or, prior to January 1, 2001, an IRS Form 4224) with the payor.
However, such effectively connected dividends are subject to regular United
States federal income tax. Effectively connected dividends received by a
corporate non-United States holder may be subject to an additional "branch
profits tax" at a rate of 30% (or such lower rate as may be specified by an
applicable tax treaty) of such corporate non-United States holder's effectively
connected earnings and profits for the taxable year, subject to certain
adjustments.
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A non-United States holder eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A non-United States holder generally will not be subject to United States
federal income tax with respect to gain realized upon the sale or other
disposition of common stock unless: (1) such gain is effectively connected with
a United States trade or business of the non-United States holder (or, if a tax
treaty applies, attributable to a permanent establishment in the United States
maintained by such non-United States holder); (2) the non-United States holder
is an individual who holds the common stock as a capital asset, is present in
the United States for a period or periods aggregating 183 days or more during
the taxable year in which such sale or disposition occurs, and certain other
conditions are met; (3) the non-United States holder is an individual subject to
tax pursuant to the provisions of United States tax law applicable to certain
United States expatriates; or (4) we are or have been a "United States real
property holding corporation" for United States federal income tax purposes at
any time within the shorter of the five-year period preceding such disposition
of such holder's common stock and such holder's holding period and certain other
conditions are met. We believe that we are not and have never been, and we do
not believe that we will become, a "United States real property holding
corporation" for United States federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report to the IRS the amount of dividends paid, the name
and address of the recipient, and the amount, if any, of tax withheld. A similar
report is sent to the recipient. Pursuant to tax treaties or other agreements,
the IRS may make its reports available to tax authorities in the recipient's
country of residence.
For payments made before January 1, 2001, backup withholding generally will
not apply to dividends paid to holders at an address outside the United States
(unless we have knowledge that the holder is a United States person). Unless we
have actual knowledge that a holder is a non-United States holder, dividends
paid during such period to a holder at an address within the United States may
be subject to backup withholding at a rate of 31% if the holder (1) is not a
corporation or other "exempt recipient" as defined in Treasury Regulations and
(2) fails to provide a correct taxpayer identification number and other
information to us. For payments made after December 31, 2000, non-United States
holder that is not an "exempt recipient" generally will be subject to backup
withholding at a rate of 31%, rather than withholding at a 30% rate or lower
treaty rate discussed above, unless such non-United States holder certifies as
to its foreign status (which certification may be made on IRS Form W-8).
Proceeds from the disposition of common stock by a non-United States holder
effected by or through a United States office of a broker will be subject to
information reporting and to backup withholding at a rate of 31% of the gross
proceeds unless such non-United States holder certifies under penalties of
perjury as to, among other things, its address and status as a non-United States
holder or otherwise establishes an exemption. Generally, United States
information reporting and backup withholding will not apply to a payment of
disposition proceeds if the transaction is effected outside the United States by
or through a non-United States office of a broker. However, if such broker is,
for United States federal income tax purposes, a United States person, a
"controlled foreign corporation," a foreign person who derives 50% or more of
its gross income for certain periods from the conduct of a United States trade
or business, or, for payments after December 31, 2000, a partnership with
certain connections to the United States, information reporting (but not backup
withholding) will apply unless (1) such broker has documentary evidence in its
files that the holder is a non-United States holder and certain other conditions
are met or (2) the holder otherwise establishes an exemption. Under final
77
United States Treasury Regulations, effective January 1, 2001, a non-United
States holder generally would not be subject to backup withholding if the
beneficial owner certifies to such owner's foreign status on a valid Form W-8
filed with us.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If backup withholding results in an overpayment of United States
income taxes, a refund may be obtained, provided the required documents are
filed with the IRS.
ESTATE TAX
An individual non-United States holder who is treated as the owner of common
stock at the time of such individual's death or has made certain lifetime
transfers of an interest in common stock will be required to include the value
of such common stock in such individual's gross estate for United States federal
estate tax purposes and may be subject to United States federal estate tax,
unless an applicable tax treaty provides otherwise. For United States federal
estate tax purposes, a "non-United States holder" is an individual who is
neither a citizen nor a domiciliary of the United States. Whether an individual
is considered a "domiciliary" of the United States for estate tax purposes is
generally determined on the basis of all of the facts and circumstances.
78
UNDERWRITING
GENERAL
We are offering our shares in the U.S. and Canada through the U.S.
underwriters and elsewhere through the international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, ING Barings LLC, Banc of America Securities
LLC and Bear, Stearns & Co. Inc. are acting as U.S. representatives of the U.S.
underwriters named below. Subject to the terms and conditions described in a
U.S. purchase agreement among us and the U.S. underwriters, and concurrently
with the sale of shares to the international managers, we have agreed
to sell to the U.S. underwriters, and the U.S. underwriters severally have
agreed to purchase from us, the number of shares listed opposite their names
below.
[Download Table]
NUMBER OF
U.S. UNDERWRITER SHARES
---------------- -----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................
ING Barings LLC.............................................
Banc of America Securities LLC..............................
Bear, Stearns & Co. Inc.....................................
-----------
Total.....................................................
===========
We have also entered into an international purchase agreement with the
international managers, for whom Merrill Lynch International, ING Barings
Limited, as agent for ING Bank, N.V., London Branch, Bank of America
International Limited and Bear, Stearns International Limited are acting as lead
managers, for sale of the shares outside the U.S. and Canada. Subject to the
terms and conditions in the international purchase agreement, and concurrently
with the sale of shares to the U.S. underwriters pursuant to the U.S.
purchase agreement, we have agreed to sell to the international managers, and
the international managers severally have agreed to purchase from us,
shares. The initial public offering price per share and the total underwriting
discount per share are identical under the U.S. purchase agreement and the
international purchase agreement.
The U.S. underwriters and the international managers have agreed to purchase
all of the shares sold under the U.S. and international purchase agreements if
any of these shares are purchased. If an underwriter defaults, the U.S. and
international purchase agreements provide that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreements may be
terminated. The closings for the sale of shares to be purchased by the U.S.
underwriters and the international managers are conditioned on one another.
We have agreed to indemnify the U.S. underwriters and the international
managers against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the U.S. underwriters and international
managers may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its
79
online brokerage customers. An electronic prospectus is available on the website
maintained by Merrill Lynch. Other than the prospectus in electronic format, the
information on the Merrill Lynch website relating to this offering is not a part
of this prospectus.
COMMISSIONS AND DISCOUNTS
The U.S. representatives have advised us that the U.S. underwriters propose
initially to offer the shares to the public at the initial public offering price
set forth on the cover page of this prospectus and to dealers at that price less
a concession not in excess of $ per share. The U.S. underwriters may
allow, and the dealers may reallow, a discount not in excess of $ per
share to other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to us. The information assumes either no exercise
or full exercise by the U.S. underwriters and the international managers of
their over-allotment options.
[Enlarge/Download Table]
PER SHARE WITHOUT OPTIONS WITH OPTIONS
--------- --------------- ------------
Public offering price................................... $ $ $
Underwriting discount................................... $ $ $
Proceeds, before expenses, to DigitalConvergence.:Com... $ $ $
The total expenses of the offering, not including the underwriting discount,
are estimated at $ and are payable by us.
OVER-ALLOTMENT OPTIONS
We have granted an option to the U.S. underwriters to purchase up to
additional shares at the public offering price less the underwriting
discount. The U.S. underwriters may exercise this option for 30 days from the
date of this prospectus solely to cover any over-allotments. If the U.S.
underwriters exercise this option, each will be obligated, subject to conditions
contained in the purchase agreements, to purchase a number of additional shares
proportionate to that U.S. underwriter's initial amount reflected in the above
table.
We have also granted an option to the international managers, exercisable
for 30 days from the date of this prospectus, to purchase up to
additional shares to cover any over-allotments on terms similar to
those granted to the U.S. underwriters.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the U.S. underwriters and the international
managers may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the U.S. underwriters and any dealer to whom
they sell shares will not offer to sell or sell shares to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, except in the case of
transactions under the intersyndicate agreement. Similarly, the international
managers and any dealer to whom they sell shares will not offer to sell or sell
shares to U.S. persons or Canadian persons or to persons they believe intend to
resell to U.S. or Canadian persons, except in the case of transactions under the
intersyndicate agreement.
80
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, approximately % of the shares offered by this
prospectus for sale to some of our employees and persons having business
relationships with us. If these persons purchase reserved shares, the number of
shares available for sale to the general public will be reduced accordingly. Any
reserved shares that are not orally confirmed for purchase within one business
day of the pricing of this offering will be offered by the underwriters to the
general public on the same terms as the other shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and certain existing
stockholders have agreed, with exceptions, not to sell or transfer any common
stock for 180 days after the date of this prospectus without first obtaining the
written consent of Merrill Lynch. Specifically, we and these other persons have
agreed not to directly or indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "DGTL."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us and the U.S. representatives and lead managers. In addition to prevailing
market conditions, the factors to be considered in determining the initial
public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues,
- the present state of our development, and
81
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also possible
that after the offering the shares will not trade in the public market at or
above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares being
offered in this offering to accounts over which they exercise discretionary
authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters from bidding for and purchasing our common stock. However, the U.S.
representatives may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives may reduce that short
position by purchasing shares in the open market. The U.S. representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor any
of the underwriters makes any representation that U.S. representatives or the
lead managers will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
OTHER RELATIONSHIPS
ING Barings LLC has performed investment banking and financial advisory
services for us in the past for which it has received customary fees and may, in
the future, perform similar services for us and receive additional compensation
from us for those services. In connection with our private placement of
Series A preferred stock in September 1999, ING Barings LLC received a placement
fee of approximately $1.7 million in December 1999 for acting as placement
agent. In addition, ING Barings LLC and DING.com LLC, an entity affiliated with
ING Barings, purchased 1,587 and 2,875 shares of Series A preferred stock,
respectively, in our Series A financing for a purchase price of $4,999,050 and
$9,056,250, respectively. The shares held by ING Barings LLC and DING.com LLC
will convert automatically into 999,810 and 1,811,250 shares of our common
stock, respectively, upon completion of this offering.
82
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Vinson & Elkins L.L.P., Dallas, Texas. Vinson & Elkins
L.L.P. owns 39,118 shares of our Series B preferred stock. In addition, Jeffrey
A. Chapman, a partner of Vinson & Elkins L.L.P., owns 5,040 shares of our common
stock and 3,556 shares of our Series B preferred stock. Various legal matters in
connection with the common stock offered by this prospectus will be passed upon
for the underwriters by Chadbourne & Parke LLP.
EXPERTS
The consolidated financial statements of DigitalConvergence.:Com Inc. as of
December 31, 1999 and for the year then ended included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. The financial statements of Infotainment
Telepictures, Inc. as of December 31, 1998 and for the years ended December 31,
1998 and 1997 included in this prospectus have been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission for the common stock we are offering by this prospectus.
This prospectus is a part of that registration statement. As allowed by SEC
rules, this prospectus does not include all of the information contained in the
registration statement or the exhibits to the registration statement. You should
refer to the registration statement and its exhibits for additional information.
When we complete this offering, we will be required to file annual,
quarterly and special reports, proxy statements and other information with the
SEC. You can obtain our SEC filings, including the registration statement, over
the Internet at the SEC's website at HTTP://WWW.SEC.GOV. You may also read and
copy any document we file with the SEC at its public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center,
Suite 1300, New York, New York 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. You may also obtain copies of
these documents at prescribed rates by writing to the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0300 for further information on the operation of the
public reference facilities. Our filings are also expected to be available at
the office of the Nasdaq National Market. For further information on obtaining
copies of our public filings at the Nasdaq National Market, you should call
(212) 656-5060.
83
INDEX TO FINANCIAL STATEMENTS
[Download Table]
PAGE
NO.
--------
DIGITALCONVERGENCE.:COM INC.
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet as of December 31, 1999.......... F-3
Consolidated Statement of Operations for the year ended
December 31, 1999......................................... F-4
Consolidated Statement of Stockholders' Deficit for the year
ended December 31, 1999................................... F-5
Consolidated Statement of Cash Flows for the year ended
December 31, 1999......................................... F-6
Notes to Consolidated Financial Statements.................. F-7
INFOTAINMENT TELEPICTURES, INC. (PREDECESSOR)
Report of Independent Accountants........................... F-21
Balance Sheet as of December 31, 1998....................... F-22
Statements of Operations for the years ended December 31,
1997 and 1998............................................. F-23
Statements of Changes in Stockholder's Deficit for the years
ended December 31, 1997 and 1998.......................... F-24
Statements of Cash Flows for the years ended December 31,
1997 and 1998............................................. F-25
Notes to Financial Statements............................... F-26
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
DigitalConvergence.:Com Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, stockholders' deficit and cash flows
present fairly, in all material respects, the financial position of
DigitalConvergence.:Com Inc. (the "Company") at December 31, 1999, and the
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
April 27, 2000
F-2
DIGITALCONVERGENCE.:COM INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
[Enlarge/Download Table]
PRO FORMA
DECEMBER 31, DECEMBER 31,
1999 1999
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45,539,823
Accounts receivable....................................... 31,847
Prepaid expenses and other................................ 90,482
------------
Total current assets.................................. 45,662,152
Property and equipment, net................................. 469,991
Intangibles, net............................................ 79,365
Other assets................................................ 306,859
------------
Total assets.......................................... $ 46,518,367
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 357,818
Accrued liabilities....................................... 363,998
Current portion of capital lease obligations.............. 9,780
------------
Total current liabilities............................. 731,596
------------
Long-term debt to related parties (net of unamortized
discount of $515,871)..................................... 8,484,129
Accrued interest on long-term debt.......................... 639,541
Capital lease obligation.................................... 18,911
Other liabilities........................................... 2,475
Series A convertible preferred stock subject to
redemption................................................ 47,887,725 --
Stockholders' equity (deficit):
Common stock, $.01 par value, 110,250,000 shares
authorized; 61,113,150 shares issued and outstanding;
71,141,490 shares issued and outstanding pro forma...... 611,132 711,415
Additional paid-in capital................................ 517,325 48,304,767
Excess of purchase price over Predecessor cost of net
liabilities
acquired................................................ (8,397,389) (8,397,389)
Accumulated deficit....................................... (3,977,078) (3,977,078)
------------ -----------
Total stockholders' equity (deficit).................. (11,246,010) 36,641,715
------------ -----------
Total liabilities and stockholders' equity
(deficit)......................................... $ 46,518,367 $46,518,367
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DIGITALCONVERGENCE.:COM INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
[Download Table]
YEAR ENDED
DECEMBER 31,
1999
------------
Revenues.................................................... $ 1,542,800
-----------
Costs and expenses:
Production and media costs................................ 1,012,407
General and administrative expenses....................... 3,920,876
Depreciation and amortization............................. 105,721
Research and development costs............................ 410,017
-----------
Total operating expenses................................ 5,449,021
-----------
Operating loss.......................................... (3,906,221)
Other income (expense):
Interest income........................................... 660,498
Interest expense.......................................... (731,355)
-----------
Total other expense..................................... (70,857)
-----------
Net loss.............................................. $(3,977,078)
===========
Basic and diluted weighted average common shares
outstanding............................................... 59,507,271
===========
Basic and diluted net loss per common share................. $ (0.07)
===========
Pro forma basic and diluted weighted average common shares
outstanding (unaudited)................................... 69,535,611
===========
Pro forma basic and diluted net loss per common share
(unaudited)............................................... $ (0.06)
===========
Supplemental pro forma basic and diluted weighted average
common shares outstanding (unaudited).....................
===========
Supplemental pro forma basic and diluted net loss per common
share (unaudited).........................................
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DIGITALCONVERGENCE.:COM INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1999
[Enlarge/Download Table]
COMMON STOCK
------------------------------------ EXCESS OF PURCHASE
NUMBER COMMON STOCK ADDITIONAL PRICE OVER PREDECESSOR ACCUMULATED
OF SUBSCRIPTION PAID-IN COST OF NET DEFICIT/RETAINED
SHARES AMOUNT RECEIVABLE CAPITAL LIABILITIES ACQUIRED EARNINGS
---------- -------- ------------ ----------- ---------------------- ----------------
Balances as of December 31,
1998......................... 41,422,500 $414,225 (1,000) $ (413,225) -- $ --
Issuance of common stock..... 19,690,650 196,907 -- 407,053 -- --
Purchase of assets on January
4
(see Note 1)............... -- -- -- -- (8,397,389) --
Cash received on common stock
subscription............... -- -- 1,000 -- -- --
Employee compensation
(see Note 8)............... -- -- -- 132,188 -- --
Warrants issued in connection
with preferred stock
issuance
(see Note 6)............... -- -- -- 391,309 -- --
Net loss..................... -- -- -- -- (3,977,078)
---------- -------- ------- ----------- ----------- -----------
Balances as of
December 31, 1999............ 61,113,150 $611,132 $ -- $ 517,325 (8,397,389) $(3,977,078)
========== ======== ======= =========== =========== ===========
TOTAL
------------
Balances as of December 31,
1998......................... $ --
Issuance of common stock..... 603,960
Purchase of assets on January
4
(see Note 1)............... (8,397,389)
Cash received on common stock
subscription............... 1,000
Employee compensation
(see Note 8)............... 132,188
Warrants issued in connection
with preferred stock
issuance
(see Note 6)............... 391,309
Net loss..................... (3,977,078)
------------
Balances as of
December 31, 1999............ $(11,246,010)
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DIGITALCONVERGENCE.:COM INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
[Download Table]
YEAR ENDED
DECEMBER 31,
1999
------------
Cash flows from operating activities:
Net loss.................................................. $(3,977,078)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred revenue from acquisition (see Note 1)........ (156,000)
Depreciation and amortization......................... 105,721
Accretion of discount on long-term debt to related
parties (see Note 5)................................ 84,963
Noncash compensation expense (see Note 8)............. 132,188
Changes in operating assets and liabilities:
Accounts receivable................................. (31,847)
Prepaid expenses.................................... (65,283)
Other assets........................................ (304,259)
Accounts payable.................................... 357,818
Accrued expense..................................... 886,264
-----------
Net cash used in operating activities............. (2,967,513)
-----------
Cash flows from investing activities:
Purchases of property and equipment....................... (397,277)
Cash acquired in acquisition of entities under common
control................................................. 165,278
Purchase of intangibles................................... (80,246)
-----------
Net cash used in investing activities............. (312,245)
-----------
Cash flows from financing activities:
Proceeds from long-term debt from related party (see Note
5)...................................................... 2,500,000
Payment of long-term debt to related party (see Note 5)... (1,500,000)
Proceeds from sale of common and preferred stock, net of
costs and placement fees................................ 48,283,161
Proceeds from stockholder................................. 147,090
Repayments to stockholder................................. (610,670)
-----------
Net cash provided by financing activities......... 48,819,581
-----------
Net increase in cash and cash equivalents................... 45,539,823
Cash and cash equivalents at beginning of year.............. --
-----------
Cash and cash equivalents at end of year.................... $45,539,823
===========
Supplemental disclosure of cash flows:
Cash paid during the year for interest.................... $ --
===========
Cash paid during the year for income taxes................ $ --
===========
Non-cash investing activities:
Predecessor net liabilities acquired, net of cash
acquired............................................ $ 523,296
Non-cash financing activities:
Issuance of promissory note to Predecessor............ $ 8,000,000
Issuance cost on Series A preferred stock (see Note
6).................................................. $ 391,309
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The Company was incorporated in the state of Delaware in September 1998
under the name of DigitalConvergence.:Com Inc. ("Digital" or "the Company") at
which time the founder was issued 41,422,500 shares of common stock for $1,000.
The accompanying financial statements include the consolidated accounts of
Digital and its wholly owned subsidiary, DigitalDemographics.:Com Inc.
(collectively, "the Company" or "Digital"). The Company had no operating
activity until January 4, 1999 when the Company entered into an Asset Purchase
Agreement (the "Purchase Agreement" or the "Acquisition") with Infotainment
Telepictures, Inc. ("Infotainment" or the "Predecessor"). Pursuant to the
Purchase Agreement, the Company purchased all of the rights, title and interest
in and to the trade names, trademarks, designs, copyrights, patents pending,
patents filed and other intellectual property, all of the rights in and to the
radio and television show known as NET TALK LIVE! THE INTERNET TALK SHOW
including, but not limited to, all prior and future programming, all trademarks,
copyrights, creative materials, designs and other intellectual property, all
rights, title and interest in and to the furniture, fixtures and equipment, and
certain liabilities ("the Assets") from the Predecessor.
The aggregate purchase price for the Assets was $8,000,000 in the form of a
promissory note, bearing interest at the rate of 6% per annum ("Promissory
Note"). As the owner of a majority of the Company's common stock on the date of
the Acquisition was part of a control group that controlled Infotainment, the
Acquisition was accounted for as an acquisition of entities under common
control. Accordingly, the assets and liabilities acquired were recorded at the
Predecessor's historical cost, and the excess of the purchase price was charged
to additional paid in capital in the amount of $8,397,389.
At inception, the Company's Certificate of Incorporation authorized
63,000,000 shares of common stock, par value $0.01, and 10,000 shares of
preferred stock, par value $0.01. In September 1999, the Board of Directors
approved an amendment to the Certificate of Incorporation to increase the number
of authorized shares of common and preferred stock to 110,250,000 and 30,000,
respectively.
The Company has developed technology that can link almost any form of media
or product instantly with the Internet. The Company's Internet convergence
technology enables users to access relevant content and conduct e-commerce
instantly without inputting lengthy website addresses or conducting
time-intensive website navigation. To date, the Company has not launched the
convergence technology; therefore, no revenues have been recorded from the
technology. The Company intends to initiate a full-scale roll out of the
technology beginning in September 2000.
In May 1999, DigitalDemographics.:Com Inc. ("DigitalDemographics") was
formed as a Delaware corporation. The Company purchased all of the 1,000 issued
and outstanding shares of DigitalDemographics for $1,000 in May 1999.
DigitalDemographics was established as a data mining company, but has had no
operations to date.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accounts of the Company and its consolidated subsidiary are included in
the consolidated financial statements after elimination of significant
intercompany accounts and transactions.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the date of acquisition to be cash equivalents.
F-7
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, ranging from three to five years. Leasehold
improvements are amortized over the life of the underlying lease using the
straight-line method. Expenditures for maintenance and repairs, as well as minor
renewals, are charged to operations as incurred, while betterments and major
renewals are capitalized. Any gain or loss resulting from the retirement or sale
of an asset is credited or charged to operations.
The Company evaluates long-lived assets to be held and used in the business,
or to be disposed of, for impairment whenever events or changes in circumstances
indicate that the net book value of the asset may not be recoverable. An
impairment is determined by comparing expected future cash flows (undiscounted
and before interest) to the net book value of the assets. If impairment exists,
the amount of impairment is measured as the difference between the net book
value of the assets and the estimated fair value of the related assets. The
Company believes that no impairment of property or equipment existed at
December 31, 1999.
CAPITALIZED SOFTWARE
All costs incurred in the internal development of computer software, which
will be provided free to Internet users, are expensed until a product design and
a working model of the software have been tested and completed in accordance
with Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED ("FAS 86").
Thereafter, any further development or production costs are capitalized until
the software is placed into service. In the event unamortized software costs
exceed the net realizable value of the software, the excess is expensed in the
period the excess is determined. During the year ended December 31, 1999, no
software costs were capitalized, as the Company did not incur significant
development costs after the point at which a product design and working model of
the software had been completed. At December 31, 1999, capitalized software is
comprised of software purchased from third parties used in the operations of the
Company and is reflected in "Intangibles" on the Balance Sheet.
REVENUE RECOGNITION
Revenue derived from the sale of advertising spots and sponsorships during
NET TALK LIVE! THE INTERNET TALK SHOW is recognized upon broadcast of the show
in which the advertisement or sponsorship is aired. In cases where payment is
received prior to the airing of the advertisement or sponsorship, the Company
defers recognition of the corresponding revenue until the advertisement or
sponsorship has been aired. For the year ended December 31, 1999, two customers
accounted for approximately 17% and 81% of the Company's revenues, respectively.
CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances exceeding federally insured limits in a
money market fund. However, management believes the fund is of high credit
quality and considers any exposure from concentrations of credit risk to be
limited.
The Company's revenue primarily relates to the sale of advertising spots and
sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW. The Company performs
ongoing credit evaluations of its customers'
F-8
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial condition and, generally, requires no collateral from its customers.
Credit losses have been within management's expectations and adequate allowance
for any uncollectible trade receivables are maintained.
INCOME TAXES
The Company presents income taxes pursuant to Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES ("FAS 109"). FAS 109
uses an asset and liability approach to account for income taxes, wherein
deferred taxes are provided for book and tax basis differences for assets and
liabilities. In the event differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities result in deferred tax
assets, an evaluation of the probability of being able to realize the future
benefits indicated by such assets is required. A valuation allowance is provided
for a portion or all of the deferred tax assets when there is sufficient
uncertainty regarding the Company's ability to recognize the benefits of the
assets in future years.
ADVERTISING COSTS
Advertising and promotion-related expenses are charged to operations in the
period incurred. Advertising expense for the year ended December 31, 1999 was
approximately $13,500.
RESEARCH AND DEVELOPMENT
Research and development costs are primarily costs incurred to develop,
enhance and develop new applications for our technology. Research and
development expenses are charged to operations in the period incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments reflected in the
consolidated balance sheet at December 31, 1999 approximate their respective
fair values.
PRO FORMA SERIES A CONVERTIBLE PREFERRED STOCK SUBJECT TO REDEMPTION
(UNAUDITED)
Effective upon the closing of this offering, the outstanding shares of
Series A convertible preferred stock subject to redemption will automatically
convert into approximately 10,028,340 shares of Common Stock. This conversion
assumes the shares related to the preferred stock subscription will also convert
into Common Stock as of December 31, 1999 (see Note 6). The pro forma effects of
this transaction are unaudited and have been reflected in the accompanying pro
forma balance sheet as of December 31, 1999.
NET LOSS PER SHARE
Basic net loss per share is computed based on the weighted average number of
shares of common stock outstanding. Diluted net loss per share is computed based
on the weighted average outstanding shares and the effect of dilutive potential
common shares. For the year ended December 31, 1999, basic and diluted net loss
per share are equal because the Company's potential common shares of 17,687,880
were anti-dilutive.
F-9
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1999 is
computed using the weighted average number of common shares outstanding,
including the conversion of the Company's Series A preferred stock into shares
of the Company's Common Stock effective upon the closing of the Company's
initial public offering, as if such conversion occurred on January 1, 1999. The
resulting pro forma adjustment includes an increase in the weighted average
shares used to compute the basic net loss per share by 10,028,340 shares.
SUPPLEMENTAL PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Supplemental pro forma net loss per share for the year ended December 31,
1999 adjusts pro forma net loss per share to relect the assumed issuance of
shares of Common Stock (based upon the expected initial offering price of
$ per share) to fund the $3.5 million cash payment of debt plus accrued
interest to the Predecessor. The resulting supplemental pro forma adjustment
includes an increase in the weighted average shares used to compute the pro
forma basic net loss per share by shares.
STOCK SPLITS
A 630-for-one stock split of the Company's common stock was effective on
January 3, 2000. All references in the consolidated financial statements to
common stock shares, share prices, per share amounts, options and warrants have
been adjusted retroactively for this stock split.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("FAS 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. Pro forma disclosure of net loss based on the provisions of
FAS 123 is presented in Note 8. For financial reporting purposes, the Company
has elected to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related
Interpretations.
COMPREHENSIVE INCOME
In 1998, Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME ("FAS 130") was issued. FAS 130 requires separate financial
statement disclosure of comprehensive income, which encompasses changes in net
asset values derived from activity from both owner and non-owner sources. There
were no items that qualify for treatment as components of comprehensive income
for the year ended December 31, 1999.
SEGMENT INFORMATION
In 1998, Statement of Financial Accounting Standards No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("FAS 131") was issued.
FAS 131 supercedes Statement of Financial Accounting Standards No. 14, FINANCIAL
REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE,replacing the "industry"
approach with the "management" approach. The management approach designates the
internal organization that is used by management for making operating decisions
and assessing
F-10
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
performance as the source of the Company's reportable segments. FAS 131 also
requires disclosures about products and services, geographic areas, and major
customers. The adoption of FAS 131 did not affect the results of operations or
financial position of the Company. For the year ended December 31, 1999,
management assessed the Company's performance and made operating decisions as
one reportable segment.
UNCERTAINTIES AND THE USE OF ESTIMATES AND ASSUMPTIONS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133, which
will be effective for us for the fiscal year and quarters beginning after
June 15, 2000, requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. During June 1999, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-DEFERRAL
OF THE EFFECTIVE DATE OF FASB STATEMENT 133. The Statement defers the effective
date of SFAS 133 to fiscal 2001. Management is evaluating SFAS 133 but does not
expect the potential effect of adopting the provisions of SFAS No. 133 to have a
significant impact on our financial position, results of operations, and cash
flows.
In December 1999, the Commission issued Staff Accounting Bulletin ("SAB")
No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the Commission. SAB 101 outlines the basic criteria that must be met
to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. Management believes that SAB 101 will not have a material
effect on our financial statements.
F-11
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1999 follows:
[Download Table]
ESTIMATED
LIFE
---------
Computer and office equipment........................... $ 393,991 3 Years
Studio and phone equipment.............................. 213,250 5 Years
Furniture and fixtures.................................. 55,844 5 Years
Leasehold improvements.................................. 24,577 Various
---------
Gross property and equipment............................ 687,662
Less: accumulated depreciation.......................... (217,671)
---------
Property and equipment, net............................. $ 469,991
=========
Assets recorded under capital leases, primarily consisting of computer
equipment, are recorded at the lower of the present value of future minimum
lease payments or the fair value of the assets. Total gross assets recorded
under capital lease in 1999 amounted to $42,244, and accumulated amortization
was $5,867. Amortization of assets under capital lease is included in
depreciation and amortization expense. Future minimum lease payments and related
interest are as follows:
[Download Table]
YEAR ENDING
DECEMBER 31,
------------
2000........................................................ $13,159
2001........................................................ 13,159
2002........................................................ 7,172
-------
Aggregate minimum lease payments............................ 33,490
Less: amount representing interest.......................... 4,799
Less: current portion....................................... 9,780
-------
Long-term capital lease obligation.......................... $18,911
=======
The interest rate of the capital lease is 12.59%. Interest expense on the
capital lease for the year ended December 31, 1999 was $1,597.
4. ACCRUED LIABILITIES
A summary of accrued liabilities follows:
[Download Table]
DECEMBER 31,
1999
------------
Accrued travel costs........................................ $ 87,820
Accrued legal costs......................................... 31,000
Accrued accounting costs.................................... 20,000
Accrued payroll and taxes................................... 110,456
Accrued franchise tax....................................... 75,752
Other accruals.............................................. 38,970
--------
$363,998
========
F-12
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT
In January 1999, the Company issued a promissory note for $8,000,000,
bearing interest at the rate of 6% per annum, as consideration for the
Acquisition. Accrued interest thereon is payable on a quarterly basis beginning
March 31, 2001. All or a portion of the promissory note will be repaid if
certain events occur. In any event, all principal and interest amounts for the
promissory note will be fully paid during 2002 and 2003, and the note will be
paid in full by January 31, 2004. In October 1999, the Company voluntarily
repaid $1,500,000 of the promissory note.
Also in January 1999, the Company entered into a Common Stock and Debenture
Purchase Agreement in which the Company issued 15,750,000 shares of common stock
and $2,500,000 of the Company's 8.0% Debentures, Series 1999A (the "Debentures")
for total proceeds of $2,502,500. The proceeds were allocated to the stock and
the debenture based on their relative fair value. The portion of the proceeds
allocated to the debenture amounted to $1,899,166 and resulted in a discount of
$600,834, which reflects an effective interest rate of 15% and will be accreted
over the life of the debenture using the effective interest method. The accrued
interest on the Debentures will be paid on a quarterly basis beginning
March 31, 2001. The unpaid accrued interest balance will be added to the
principal balance beginning January 28, 2001, and the principal and interest
will be paid on a quarterly basis beginning March 31, 2002 and ending
December 31, 2003. If certain events occur, all or a portion of the Debentures
will be repaid at an earlier date.
Principal payments on the Company's debt in 2000, 2001, 2002, 2003 and 2004
are estimated to be $0, $0, $4,699,064, $4,699,064 and $0, respectively.
6. SERIES A CONVERTIBLE PREFERRED STOCK SUBJECT TO REDEMPTION
In September 1999, the Company's Board of Directors unanimously approved the
issuance of Series A convertible preferred stock to certain outside investors
pursuant to the Stock Purchase Agreement. In November 1999, 15,838 shares of the
Series A preferred stock were issued to various investors for $3,150 per share
for total gross proceeds in the amount of $49,889,700 subject to issuance costs
of $2,253,975. In December 1999, the Company received $252,000 for 80 additional
shares of Series A preferred stock at $3,150 per share. The cash received in
December 1999 was classified as Series A preferred stock subscribed, as the
share certificates were not issued by December 31, 1999.
Following is a summary of the Series A convertible preferred stock subject
to redemption issued by the Company as of December 31, 1999:
[Enlarge/Download Table]
NUMBER OF SHARES
DATE CASH RECEIPT SHARES ISSUED AND TOTAL CARRYING
SERIES ISSUED DATE DESIGNATED OUTSTANDING PROCEEDS VALUE
--------------------- -------------- -------------- ---------- ----------- ----------- -----------
A November 1999 Various 27,000 15,838 $49,889,700 $47,635,725
A -- December 1999 -- -- 252,000 252,000
----------- -----------
$50,141,700 $47,887,725
=========== ===========
The carrying value of the Series A preferred stock represents proceeds from
the sale of the stock and proceeds from the preferred stock subscription of
$252,000, net of issuance costs of $2,253,975.
The Series A preferred stock subject to redemption has a par value of $0.01
per share and has a liquidation preference over the Company's common stock. In
certain situations, including a change in control, the holders of this Series A
preferred stock can deem the event a liquidation of the Company.
F-13
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SERIES A CONVERTIBLE PREFERRED STOCK SUBJECT TO REDEMPTION (CONTINUED)
As a result, these shares have been classified as temporary equity on the
balance sheet. The holders of the Series A preferred stock are entitled to
receive dividends when and if declared by the Company's Board of Directors and
at any time that dividends are declared on the Company's common stock. Each
share of Series A preferred stock is convertible, at the option of the holder,
at any time on or after the date of issuance, into 630 shares of common stock at
the Conversion Price, as defined in the Certificate of Designation of Series A
preferred stock. The initial Conversion Price of these shares is equal to the
issuance price of $3,150 per share. The shares convert automatically into common
stock upon the election of the holders of at least two-thirds of the then
outstanding Series A preferred stock or the closing of a firm commitment
underwritten public offering which raises gross proceeds of at least
$75,000,000, and whereby the aggregate value of the shares of common stock
issuable on conversion of each share of Series A preferred stock is at least two
times the conversion value.
In connection with the issuance of the Series A preferred stock, the Company
issued a warrant to purchase 124,740 shares of the Company's common stock to one
of the investors as a finder's fee for attracting additional investors. The
exercise price of the warrant is $5.00 per share and the warrant expires on
September 29, 2004. The warrant is exercisable immediately. The Company valued
the warrant using the Black-Scholes option-pricing model. The value of the
warrant on the date of grant was $391,309 using the following assumptions:
(1) volatility of 70%; (2) risk-free rate of interest of 5.79%; (3) fair market
value of the common stock on date of grant of $5.00 per share; (4) expected life
of five years; and (5) zero dividend yield.
7. STOCKHOLDERS' EQUITY (DEFICIT)
In conjunction with the incorporation of the Company on September 25, 1998,
the founder purchased 41,422,500 shares of common stock for $1,000. As discussed
in Note 5 in January 1999, 15,750,000 shares of common stock, along with
debentures, were issued to outside investors for $2,502,500 and $603,834 of the
proceeds, were allocated to additional paid-in capital as a discount to debt.
Additionally, in January 1999 certain employees and outside investors of the
Company purchased 3,468,150 shares of common stock for $550.50. An officer of
the Company purchased an additional 472,500 shares of common stock in May 1999
for $75.
8. STOCK-BASED COMPENSATON
In August 1999, the Board of Directors of the Company approved the adoption
of the Company's 1999 Stock Option Plan ("1999 Plan"). In September 1999, the
stockholders of the Company approved the 1999 Plan. Under the 1999 Plan, the
Company is authorized to grant options to purchase 9,450,000 shares of the
Company's common stock to key employees of the Company or eligible
non-employees, as defined by the 1999 Plan. Options granted under the 1999 Plan
may be in the form of incentive stock options or nonqualified stock options.
Options granted under the 1999 Plan generally expire ten years from date of
grant.
The Compensation Committee of the Board of Directors ("Committee")
administers the 1999 Plan and determines the number and the terms of
exercisability of options granted. The exercise price of the options granted
under the 1999 Plan is fixed by the Committee on the date of grant of the
options and equals at least one hundred percent of the fair market value of the
Company's common stock on the date of grant. The options granted under the 1999
Plan may be fulfilled with authorized and unissued shares of common stock,
issued shares of the Company's common stock held in treasury, or issued shares
of common stock reacquired by the Company in each situation as the Committee may
determine from time to time.
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DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK-BASED COMPENSATON (CONTINUED)
As discussed in Note 2, the Company has adopted the disclosure only
provisions of FAS 123 for options issued to employees. Had compensation cost for
the option issuances to employees under the Company's 1999 Plan been determined
based on the fair value provisions of FAS 123, the Company's net loss and net
loss per share would have increased to the pro forma amounts indicated below:
[Download Table]
PRO FORMA
1999
-----------
Net loss--as reported....................................... $(3,977,078)
Net loss--pro forma......................................... $(5,377,568)
Basic and diluted net loss per common share--as reported.... $ (0.07)
Basic and diluted net loss per common share--pro forma...... $ (0.09)
The pro forma disclosures provided are not likely to be representative of
the effects on reported net loss for future years due to future grants and the
vesting requirements of the Company's stock options issued under the 1999 plan.
The weighted average fair value for options granted to employees under the
1999 Plan was $0.96 in 1999. The fair value of each option granted is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used:
[Download Table]
Dividend yield.............................................. --
Expected volatility......................................... 0.0%
Risk-free rate of return.................................... 5.6%
Expected life............................................... 5 Yrs.
The following table summarizes activity under the Company's 1999 Plan during
the year ended December 31, 1999:
[Download Table]
NUMBER OF WTD. AVG.
OPTIONS EXER. PRICE
--------- -----------
Options outstanding at beginning of year............... -- --
Options granted........................................ 7,585,200 $3.88
Options exercised...................................... -- --
Options canceled....................................... -- --
--------- -----
Options outstanding at end of year..................... 7,585,200 $3.88
--------- -----
Options exercisable at end of year..................... 1,575,000 $3.65
========= =====
The following table summarizes information for stock options outstanding at
December 31, 1999:
[Download Table]
EXERCISE PRICE NUMBER OF OPTIONS WTD. AVG. REMAINING LIFE WTD. AVG. EXER. PRICE
-------------- ----------------- ------------------------ ---------------------
$3.31 5,040,000 9.61 $3.31
$5.00 2,545,200 9.88 $5.00
9. INCOME TAXES
Deferred taxes are provided for those items reported in different periods
for income tax and financial reporting purposes. The net deferred tax asset has
been fully reserved because realization is
F-15
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
not considered more likely than not. The tax effects of temporary differences
that give rise to significant portions of the deferred tax assets are presented
below:
[Download Table]
DECEMBER 31,
1999
------------
Deferred tax assets:
Net operating loss carryforwards.......................... $ 1,575,000
Intangible assets......................................... 2,888,000
Other..................................................... 11,000
-----------
Gross deferred tax assets............................... 4,474,000
Deferred tax liabilities:
Depreciation.............................................. 5,000
-----------
Net deferred tax assets..................................... 4,469,000
Valuation allowance......................................... (4,469,000)
-----------
Deferred tax balance........................................ $ --
===========
When realization of the deferred tax asset is more likely than not to occur,
the benefit related to the asset purchase from Infotainment of approximately
$2,888,000 will be credited to additional paid-in capital.
The provision for income taxes is different than the amount computed using
the applicable statutory federal income tax rate with the difference for each
year summarized below:
[Download Table]
DECEMBER 31,
1999
------------
Federal tax benefit at statutory rate....................... (34)%
State taxes, net of federal benefit......................... (3)%
Permanent differences....................................... (2)%
Adjustment due to increase in valuation allowance........... 35%
---
Provision for income taxes.................................. 0%
===
As of December 31, 1999, the Company has available net operating loss
carryforwards totaling approximately $4,261,000 which expire beginning in 2019.
Utilization of net operating loss carryforwards may be limited by ownership
changes which may have occured or could occur in the future.
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
On November 18, 1999, the Company entered into a ten-year lease for its new
corporate facilities located in Dallas, Texas commencing in 2000 and expiring in
2010. The Company may cancel the lease effective in the 84(th) month of the
lease term in accordance with the lease provisions, subject to a cancellation
fee, and renew the lease for two additional 5-year terms.
Additionally, the Company is obligated by the end of the third year of the
lease, if not elected earlier, to acquire additional space in the building for
an additional rental expense of approximately
F-16
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
$320,000 per year. The Company expects to spend approximately $1.5 million
during 2000 in completing the build-out and improvements in the new corporate
offices.
In December 1999, the Company entered into a sub-lease agreement to provide
for temporary office space in Dallas, Texas. Under the terms of the lease, the
Company will pay $11,500 per month. The lease expires on November 30, 2000;
provided, however, that the lease can be terminated upon 30 days written notice.
In January 2000, the Company entered into a lease for additional temporary
office space in Dallas, Texas. The lease expires in May 2000, unless terminated
earlier under certain provisions to the lease agreement. The Company will pay
approximately $57,700 under the lease during 2000.
The Company has an additional noncancelable lease for other Dallas, Texas
facilities that expires in 2001. Rent expense totaled $56,600 during the year
ended December 31, 1999 related to this facility lease and various other
equipment operating leases. Total future minimum payments under all operating
leases are as follows:
[Download Table]
YEAR ENDING
DECEMBER 31, OPERATING LEASE
------------ ---------------
2000........................................................ $ 839,593
2001........................................................ 842,500
2002........................................................ 877,800
2003........................................................ 1,213,000
2004........................................................ 1,213,000
Thereafter.................................................. 6,921,750
-----------
Total minimum lease payments................................ $11,907,643
===========
In December 1999, the Company entered into a manufacturing and marketing
agreement with Tandy Corporation ("Tandy") under which the Company granted Tandy
a limited, royalty-free, nonexclusive, revocable worldwide license to
(1) manufacture the Company's patented Cue:C.A.T. devices (2) market and sell
Cue:C.A.T. devices and :C.R.Q. software, and (3) use Cue:C.A.T. and :C.R.Q.
technology in Tandy's RadioShack.com web site in order to incorporate the
Company's Intellectual Property into Tandy's Internet web site. Under the
agreement, the Company is obligated to purchase at least 1,000,000 component
parts from Tandy. During February 2000, the Company placed an order for
2,000,000 component parts and has issued a letter of credit to Tandy for
approximately $15.5 million. Upon shipment of the product to the Company, the
Company will pay Tandy $15.5 million in cash and cancel the underlying letter of
credit. The manufacturing and marketing agreement is effective through
December 31, 2001 with an automatic one year renewal absent proper nonrenewable
notice.
The Predecessor has agreed to indemnify the Company from any costs,
expenses, liabilities or other losses in connection with lawsuits related to the
Predecessor.
CONTINGENCIES
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures will be made
and such expenditures can be reasonably estimated. In the opinion of
F-17
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect on the financial position, results of the
operations or cash flows of the Company.
On January 29, 1999, the Predecessor entered into individual agreements with
certain independent contractors who had provided services to the Predecessor for
the period from 1996 through early 1999. Certain of these contractors are now
employees of the Company. According to the contract agreements, the Predecessor
agreed to pay future cash bonuses to the individuals contingent upon the
occurrence of (1) the finalization of an initial public offering whereby the
Company raises a net amount of proceeds of at least $30 million and (2) the
receipt of at least $8 million in cash collections by the Company prior to the
date of an initial public offering which raises a net amount of proceeds of at
least $30 million. As a result of the $1,500,000 voluntary repayment of the
Promissory Note by the Company in October 1999, management of the Predecessor
elected to prepay a certain percentage of these bonuses in the amount of
approximately $132,000 even though the conditions of the bonus agreements had
not been satisfied. The payments remain the property of the contractors
regardless of whether the conditions of the bonus agreements are met. The
Company accounted for these transactions as if they were a compensating plan
adopted by the Company with an offsetting contribution to capital. As of the
date of this report, the Predecessor remains liable for an additional
$1,000,000, contingent upon the satisfaction of the stipulated conditions of the
bonus agreements.
11. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) defined contribution retirement plan ("401(k)
Plan") covering all employees who have completed at least one month of service.
The 401(k) Plan allows eligible employees to defer receipt of up to twenty
percent of their annual compensation (not to exceed $10,000 per calendar year)
and contribute such amounts to various investment funds. Eligible employees may
elect to participate at the beginning of any quarter after their hire date.
Employee contributions vest immediately.
The Company makes matching contributions of twenty-five percent of the
employees' annual contributions, not to exceed eight percent of the employee's
annual pay. The Company's matching contributions vest on a pro rata basis over
five years. During the year ended December 31, 1999, the Company contributed
approximately $6,500 to the 401(k) Plan.
12. SUBSEQUENT EVENTS
In January 2000, the Company issued 128 shares of Series A Convertible
Preferred Stock to various investors for aggregate consideration of $403,000, of
which $252,000 in cash was received prior to year-end.
During February and April 2000, the Company issued 1,128,000 and 595,000
stock options, respectively, to various employees at strike prices ranging from
$5.00 to $9.37 per option. The February options were issued at fair market value
of the common stock on the date of grant, and the April options were issued
below fair market value of the common stock on the dates of grant. The Company
will recognize compensation expense related to the April options for the
difference between the fair market value of the common stock at the date of
grant and the respective strike prices, which will be amortized over the
applicable vesting period.
F-18
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS (CONTINUED)
In April 2000, the Company issued 5,929,364 shares of Series B Convertible
Preferred Stock to various investors for aggregate consideration of
approximately $41.7 million. The Series B Convertible Preferred Stock has a par
value of $0.01 per share and has liquidation preference over the Company's
common stock. The holders of the Series B Convertible Preferred Stock are
entitled to receive dividends when and if declared by the Company's board of
directors and at any time that dividends are declared on the Company's common
stock. Each share of Series B Convertible Preferred Stock is convertible, at the
option of the holder, at any time on or after the date of issuance, into one
share of common stock upon the election of the holders of at least two-thirds of
the then outstanding Series B Convertible Preferred Stock or the closing of a
firm commitment underwritten public offering which raises gross proceeds of at
least $75,000,000, and whereby the aggregate value of the Company on a
pre-initial public offering basis is at least $750,000,000.
In April 2000, the Company issued 5,372,593 shares of Series C Convertible
Preferred Stock to various investors for aggregate consideration of
approximately $56.6 million. The Series C Convertible Preferred Stock has a par
value of $0.01 per share and has liquidation preference over the Company's
common stock. The holders of the Series C Convertible Preferred Stock are
entitled to receive dividends when and if declared by the Company's board of
directors and at any time that dividends are declared on the Company's common
stock. Each share of Series C Convertible Preferred Stock is convertible, at the
option of the holder, at any time on or after the date of issuance, into one
sharecommon stock upon the election of the holders of at least two-thirds of the
then outstanding Series C Convertible Preferred Stock or the closing of a firm
commitment underwritten public offering which raises gross proceeds of at least
$75,000,000 and whereby the aggregate value of the Company on a pre-initial
public offering basis is at least $750,000,000.
During the second quarter of the year ended December 31, 2000, the Company
recorded a one-time charge to earnings in the amount of $37.2 million to reflect
the difference between the issuance price and the fair market value of the
Series B and C preferred stock, as determined by a contemporaneous, independent
appraisal.
In April 2000, the Company issued two warrants to an affiliate of National
Broadcasting Company, Inc. The first warrant is exercisable to purchase up to
3,752,445 shares of Common Stock at a per share exercise price of $5.00. The
second warrant is exercisable to purchase up to 4,505,165 shares of Common
Stock, plus an additional number of shares of Common Stock equal to 5% of any
shares of Series B Preferred or Series C Preferred issued by the Company after
the date of the Agreement., at a per share exercise price of $10.54. The
exercise price for the first warrant is subject to adjustment if the aggregate
market value of shares of Common Stock outstanding immediately after the closing
of the Company's initial public offering is less than $350,000,000, determined
utilizing the per share offering price in the Company's initial public offering.
The exercise price for the second warrant is subject to reduction if the
aggregate market value of shares of Common Stock outstanding immediately after
the closing of the Company's initial public offering is less than $750,000,000,
determined utilizing the per share offering price in the Company's initial
public offering. The number of shares issuable upon the exercise of each warrant
and the exercise of price of each warrant is subject to adjustment in the event
of, among other things, a stock split, reclassification or merger, issuance of
additional shares of Common Stock, issuance of options or convertible securities
and payment of dividends or other distribution. Both of the warrants will expire
in April 2005.
F-19
DIGITALCONVERGENCE.:COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS (CONTINUED)
The Company valued the warrants using the Black-Scholes option-pricing
model. The fair value of the first warrant on the date of grant was
$31.7 million, and the fair value of the second warrant was $31.4 million using
the following assumptions: 1) volatility of 70.0%, 2) risk-free rate of interest
of 6.5%, 3) fair market value of the common stock on date of grant of per share,
4) expected life of five years and 5) zero dividend yield. The Company will
recognize a one-time expense for the fair market value of the warrants.
The Company adopted the Employee Stock Purchase Plan in April 2000. A total
of 1,000,000 shares of common stock are authorized for issuance under the plan.
The plan provides for the grant of stock options to certain eligible employees.
The purpose of the plan is to provide eligible employees with an incentive to
advance the interests of the Company by providing an opportunity to purchase
stock of the Company at a favorable price. The plan is administered by the
Company's Compensation Committee.
In April 2000, the Company repaid $3,000,000 in principal and $584,137 in
interest related to the promissory note. In addition, the Company repaid the
$2,500,000 of debentures and all related accrued interest.
F-20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Infotainment Telepictures, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholder's deficit, and cash flows present fairly,
in all material respects, the financial position of Infotainment
Telepictures, Inc. (the "Company") at December 31, 1998 and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
February 29, 2000, except as to
Note 11 which is as of April 27, 2000
F-21
INFOTAINMENT TELEPICTURES, INC.
BALANCE SHEET
DECEMBER 31, 1998
[Download Table]
1998
---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 174,953
Accounts receivable....................................... --
Deferred production costs................................. --
Prepaid expenses.......................................... 22,725
Deferred tax assets....................................... 2,846
---------
Total current assets.................................. 200,524
Property and equipment, net............................... 177,554
Other assets.............................................. 2,600
---------
Total assets.......................................... $ 380,678
=========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses..................... $ 85,299
Deferred revenue.......................................... 156,000
Advances from officer..................................... 197,919
Notes payable............................................. 452,900
---------
Total current liabilities............................... 892,118
Deferred tax liability.................................... 2,846
---------
Total liabilities....................................... 894,964
Stockholder's deficit:
Common stock, no par value, 25,000 shares authorized,
issued and outstanding.................................. --
Accumulated deficit....................................... (514,286)
---------
Total stockholder's deficit........................... (514,286)
---------
Total liabilities and stockholder's deficit......... $ 380,678
=========
The accompanying notes are an integral part of these financial statements.
F-22
INFOTAINMENT TELEPICTURES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
[Enlarge/Download Table]
1997 1998
--------- -----------
Sales....................................................... $ 689,967 1,636,422
Cost and expenses:
Production costs.......................................... 590,704 939,468
Selling, general and administrative....................... 284,370 670,953
Depreciation.............................................. 40,515 54,908
Research and development.................................. -- 35,771
--------- -----------
Operating loss.......................................... (225,622) (64,678)
--------- -----------
Interest expense.......................................... 17,272 23,754
--------- -----------
Net loss................................................ $(242,894) $ (88,432)
========= ===========
Weighted average shares outstanding......................... 25,000 25,000
========= ===========
Basic and diluted net loss per share........................ $ (9.72) $ (3.54)
========= ===========
The accompanying notes are an integral part of these financial statements.
F-23
INFOTAINMENT TELEPICTURES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
[Enlarge/Download Table]
TOTAL
COMMON ACCUMULATED STOCKHOLDER'S
SHARES STOCK DEFICIT DEFICIT
-------- -------- ----------- -------------
Balance at December 31, 1996........................ 25,000 -- (182,960) (182,960)
Net loss............................................ -- (242,894) (242,894)
------ ------- --------- ---------
Balance at December 31, 1997........................ 25,000 (425,854) (425,854)
Net loss............................................ -- (88,432) (88,432)
------ ------- --------- ---------
Balance at December 31, 1998........................ 25,000 $ -- $(514,286) $(514,286)
====== ======= ========= =========
The accompanying notes are an integral part of these financial statements.
F-24
INFOTAINMENT TELEPICTURES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
[Download Table]
1997 1998
--------- ---------
Cash flows from operating activities:
Net loss.................................................. $(242,894) $ (88,432)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.......................................... 40,515 54,908
Deferred revenue...................................... 288,200 (272,000)
Barter transactions (see Note 2 and 7) (17,000) (2,400)
Changes in operating assets and liabilities:
Accounts receivable................................. (38,462) 63,300
Deferred production costs........................... (4,743) 51,505
Prepaid expenses.................................... -- (22,725)
Other assets........................................ -- (2,600)
Accounts payable and accrued expenses............... 29,648 44,536
--------- ---------
Net cash used in operating activities............. 55,264 (173,908)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment........................ (57,538) (74,681)
--------- ---------
Net cash used in investing activities............. (57,538) (74,681)
--------- ---------
Cash flows from financing activities:
Borrowings on line of credit.............................. -- 587,900
Repayment of line of credit............................... -- (135,000)
Advances from officer..................................... (84,928) (29,530)
--------- ---------
Net cash provided by financing activities......... (84,928) 423,370
--------- ---------
Net increase in cash and cash equivalents................... (87,202) 174,781
Cash and cash equivalents at beginning of year.............. 87,374 172
--------- ---------
Cash and cash equivalents at end of year.................... $ 172 $ 174,953
========= =========
Supplemental disclosure of cash flows:
Cash paid during the year for interest.................... $ -- $ 6,818
========= =========
Cash paid during the year for income taxes................ $ -- $ --
========= =========
For disclosure of non-cash transactions see Note 7.
The accompanying notes are an integral part of these financial statements.
F-25
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The Company was incorporated in the state of Nevada in 1993 under the name
"Gunn Industries." Since inception, the Company has been owned by a sole
shareholder. By decision of the Board of Directors held on January 2, 1998, the
name of the Company was changed to Infotainment Telepictures, Inc.
("Infotainment" or the "Company"). Infotainment is a media company focused on
providing original radio, television and Internet programming relating to
information technologies and the Internet and the production of infomercials for
third parties for the sale of goods and services. The Company's properties
include the radio and television program, NET TALK LIVE! THE INTERNET TALK SHOW,
and the related Internet site. Revenues are derived from the sale of radio,
television and Internet advertising and sponsorships on THE NET TALK LIVE! THE
INTERNET TALK SHOW and revenue and royalties from the production of infomercials
for third parties. In January 1999, substantially all of the Company's assets
and liabilities were sold to DigitalConvergence.:Com Inc. ("Digital") (see
Note 11).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with maturities of three
months or less at date of acquisition to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, ranging from three to five years.
The Company evaluates long-lived assets to be held and used in the business
for impairment whenever events or changes in circumstances indicate that the net
book value of the asset may not be recoverable. An impairment is determined by
comparing expected future cash flows (undiscounted and before interest) to the
net book value of the assets. If impairment exists, the amount of impairment is
measured as the difference between the net book value of the assets and the
estimated fair value of the related assets. Based on its most recent analysis,
the Company believes that no impairment of property or equipment existed at
December 31, 1998.
CONCENTRATION OF CREDIT RISK
The Company's revenue and accounts receivable primarily relate to the sale
of advertising spots and sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW
and the production of infomercials. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. Credit losses have been within management's
expectations and adequate allowances for any uncollectible trade receivables are
maintained.
Substantially all of the Company's accounts receivable are derived from
sales to one customer in each of the years ended December 31, 1997 and 1998.
Historically, the Company has not incurred material credit related losses.
F-26
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are primarily costs incurred to develop,
enhance and develop new applications for our technology. Research and
development costs are charged to expense in the period incurred.
ADVERTISING COSTS
Advertising and promotion-related expenses are charged to operations when
incurred. Advertising expense for 1997 and 1998 was approximately $0 and
$10,031, respectively.
INCOME TAXES
Deferred income taxes are recorded to reflect the future tax consequences of
temporary differences between the tax and financial bases of assets and
liabilities based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect the taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
REVENUE RECOGNITION
Revenue derived from the sale of advertising spots and sponsorships during
NET TALK LIVE! THE INTERNET TALK SHOW is recognized upon broadcast of the show
in which the advertisement or sponsorship is aired. In cases where payment is
received prior to the airing of the advertisement or sponsorship, the Company
defers recognition of the corresponding revenue until the advertisement or
sponsorship has been aired.
Revenue derived from the production of infomercials is recognized when
production is complete and the master is delivered to the customer, which is
less than one year. Payments received in advance and costs incurred for
production are deferred until completion of the related infomercial. Infomercial
royalty revenue is recognized upon the sale of goods and/or services by the
customer.
BARTER TRANSACTIONS
The Company trades advertisements and sponsorships on NET TALK LIVE! THE
INTERNET TALK SHOW and Internet site in exchange for goods and services. Barter
transactions are recorded at the fair market value of the goods and services
provided or received, whichever is lower. Barter revenues are recognized in the
period the advertisement or sponsorship is aired. If a barter agreement extends
over the end of any accounting period, an asset or a liability is recorded based
on the fair value of the related goods or services earned or to be provided at
such period end. Historically, the goods and services provided and received have
been exchanged in the same 30-day period. Therefore, advertising and sponsorship
revenues are generally offset by an equal amount of production costs and/or
property and equipment.
In January 2000, the Emerging Issues Task Force ("EITF") released Issue
No. 99-17, "Accounting for Advertising Barter Transactions," which is effective
for transactions occurring after January 20, 2000. Management does not expect
adoption of the EITF to have a material impact on its operations and financial
position.
F-27
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number of
shares of common stock outstanding and common equivalent shares. For the years
ended December 31, 1997 and 1998, there were 25,000 shares of common stock
issued and outstanding. Basic and diluted net loss per share are equal because
the Company had no potentially dilutive shares outstanding during the years
ended December 31, 1997 and 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, accounts
receivable, and accounts payable approximate their respective fair values.
UNCERTAINTIES AND THE USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
[Download Table]
DECEMBER
31,
---------
1998
---------
Computer equipment.......................................... $ 53,280
Production equipment........................................ 205,036
Phone equipment............................................. 8,214
Furniture and fixtures...................................... 23,856
---------
Property and equipment, gross............................... 290,386
Less accumulated depreciation............................... (112,832)
---------
Property and equipment, net................................. $ 177,554
=========
F-28
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of accounts payable and accrued expenses follows:
[Download Table]
DECEMBER 31,
------------
1998
------------
Accounts payable............................................ $21,515
Federal taxes............................................... 63,327
Other accruals.............................................. 457
-------
$85,299
=======
5. NOTES PAYABLE
During 1998, the Company borrowed $587,900 through a line of credit with an
investor of Digital at an interest rate of 8.0%, of which $135,000 was repaid in
the same year. The note was unsecured. The remaining amount of the borrowings
were repaid in 1999 in connection with the sale of the Company's assets and
liabilities to Digital (see Note 11).
6. INCOME TAXES
Income tax expense on income before income taxes consists of:
[Download Table]
DECEMBER 31,
-------------------
1997 1998
-------- --------
Current provision:
Federal............................................... $ -- $ --
State................................................. -- --
Deferred provision...................................... (74,838) (22,848)
Valuation allowance..................................... 74,838 22,848
-------- --------
Total income tax benefit................................ $ -- $ --
======== ========
Reconciliations of the U.S. corporate income tax rate and the effective tax
rate on loss before income taxes are summarized below:
[Download Table]
DECEMBER 31,
--------------------
1997 1998
--------- --------
U.S. corporate tax rate 34% 34%
Loss before taxes...................................... $(242,894) $(88,432)
--------- --------
Tax benefit at statutory rates......................... $ (82,584) $(30,067)
Tax effect of non income tax penalties................. 6,222 6,920
Tax effect of meals and entertainment.................. 1,524 299
Increase in valuation allowance........................ 74,838 22,848
--------- --------
Total income tax benefit............................... $ -- $ --
========= ========
F-29
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The components of the deferred tax asset and liability as of December 31,
1998 are as follows.
[Download Table]
1998
---------
ASSETS:
Net operating losses........................................ $ 158,692
Other temporary differences................................. 2,489
Valuation allowance......................................... (158,335)
---------
Deferred tax assets......................................... 2,846
=========
LIABILITIES:
Differences between book and tax basis of property and
equipment................................................. 2,846
=========
Deferred tax liability...................................... 2,846
---------
Net deferred tax asset (liability).......................... $ --
=========
The expiration date of the net operating losses is as follows:
[Download Table]
EXPIRATION
AMOUNT DATE
-------- ----------
$ 32,480 2010
148,854 2011
225,563 2012
59,843 2019
--------
$466,740
========
7. BARTER TRANSACTIONS
During the periods presented, in exchange for advertisements and
sponsorships on NET TALK LIVE! THE INTERNET TALK SHOW, the Company has primarily
received radio and television airtime to broadcast the show.
For the years ended December 31, 1997 and 1998, barter transactions are
summarized as follows:
[Download Table]
DECEMBER 31,
--------------------
1997 1998
--------- --------
Revenues............................................... $ 293,275 $ 48,930
Expenses............................................... (276,275) (46,530)
Property and equipment................................. (17,000) (2,400)
--------- --------
Total.................................................. $ -- $ --
========= ========
The decrease of barter transactions from 1997 and 1998 results from new
broadcast contracts with other radio and television stations by which the
Company generally pays cash to the stations for the value of the air time.
F-30
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. LEASES
The Company has a noncancelable lease for facilities that expires in 2001.
Future minimum lease payments under the lease are as follows:
[Download Table]
YEAR ENDING OPERATING
DECEMBER 31, LEASES
-------------------------------------------------- ---------
1999.............................................. $31,200
2000.............................................. 31,200
2001.............................................. 10,300
-------
Total minimum lease payments...................... $72,700
=======
Rental expense from operating leases amounted to $17,000, and $20,275 for
the years ended December 31, 1997, and 1998, respectively. These expenses
include $17,000, and $0, respectively resulting from a barter transaction (see
Note 7).
9. MAJOR CUSTOMERS AND CONTRACTS
CUSTOMERS
For the year ended December 31, 1997, two customers accounted for
approximately 28.0% and 63.1% of the Company's total revenues, respectively.
For the year ended December 31, 1998, three customers, accounted for
approximately 26.5%, 25.3% and 24.9% of the Company's total revenues,
respectively.
CONTRACTS
In June 1997, the Company entered into a contract with Nissi
Cosmetics, Inc. ("Nissi") to produce two infomercials, two direct response spots
and two web sites for the advertising and marketing of a Nissi product. The
Company received a flat fee for its services.
In December 1997, the Company entered into a contract with Computer
City, Inc. ("Computer City") for Computer City to become a broadcast sponsor of
NET TALK LIVE! THE INTERNET TALK SHOW. This contract, which terminated after six
months, provided for sponsorship of the show, including commercial spots within
the show, as well as the linking and co-branding of the respective company's web
sites and personal appearances by the cast members of the show. The Company
received a per show fee for these services.
In December 1997, the Company entered into a contract with GTE
Internetworking for GTE Internetworking to become a broadcast sponsor of NET
TALK LIVE! THE INTERNET TALK SHOW This one-year contract provided for
sponsorship of the show, including commercial spots within the show, as well as
the linking and co-branding of the respective company's web sites. The Company
received a per show fee for these services.
In December 1997, the Company entered into a contract with The Associates
for The Associates to become a broadcast sponsor of NET TALK LIVE! THE INTERNET
TALK SHOW. This sixteen-week contract provided for sponsorship of the show,
including commercial spots within the show, and the development of a web site
for The Associates' product. The Company received a per show fee for these
services.
F-31
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. MAJOR CUSTOMERS AND CONTRACTS (CONTINUED)
In December 1998, the Company entered into a contract with Microsoft
Corporation ("Microsoft") to produce and air two commercial spots on its NET
TALK LIVE! THE INTERNET TALK SHOW each week for a minimum of sixteen weeks, as a
part of Microsoft's "watch and win" marketing campaign. For these services, the
Company received a flat fee plus various production and modification fees.
10. RELATED PARTY TRANSACTIONS
Included in current liabilities on the accompanying balance sheet is an
advance from a director of the Company for $197,919 for the year ended
December 31, 1998.
11. SUBSEQUENT EVENTS
On January 4, 1999, the Company entered into an Asset Purchase Agreement
(the "Agreement") pursuant to which the Company sold substantially all of its
assets and certain liabilities to Digital. The transaction will be accounted for
as a business acquisition of entities under common control. In accordance with
the Agreement, the Company sold all of its rights, title and interest in and to
the trade names, trademarks, designs, copyrights, patents pending, patents filed
and other intellectual property, all of the Company's rights in and to the radio
and television show known as NET TALK LIVE! THE INTERNET TALK SHOW including,
but not limited to, all prior and future programming, all trademarks,
copyrights, creative materials, designs and other intellectual property, and all
of the Company's right, title and interest in and to the furniture, fixtures and
equipment ("the Assets").
The aggregate purchase price for the Assets was $8,000,000, payable in the
form of a promissory note, bearing interest at the rate of 6% per annum
("Promissory Note"). The promissory note and accrued interest thereon is payable
on a quarterly basis to the Company beginning March 31, 2001. All or a portion
of the Promissory Note will be repaid if certain events occur. In any event, all
principal and interest amounts for the Promissory Note will be fully paid to the
Company by January 31, 2004. During the month of October 1999, Digital repaid
$1,500,000 of the promissory note. During the month of April 2000, Digital
repaid $3,000,000 of principal and $584,137 of interest on the promissory note.
On January 29, 1999, the Company entered into individual agreements with
certain independent contractors who had provided services to the Company for the
period from 1996 through early 1999. According to the contract agreements, the
Company agrees to pay future cash bonuses to the individuals contingent upon the
occurrence of two events including (1) the finalization of an initial public
offering whereby Digital raises a net amount of proceeds of at least
$30 million and (2) the receipt of at least $8 million in cash collections by
Digital prior to the date of an initial public offering which raises a net
amount of proceeds of at least $30 million. As a result of the $1,500,000
voluntary repayment of the promissory note by Digital in October 1999,
management elected to prepay a certain percentage of these bonuses in the amount
of approximately $132,000 even though the conditions of the bonus agreements had
not been satisfied. The payments remain the property of the contractors
regardless of whether the conditions of the bonus agreements are met. As of the
date of this report, the Company remains liable for an additional $1,000,000,
contingent upon the satisfaction of the stipulated conditions of the bonus
agreements.
F-32
INFOTAINMENT TELEPICTURES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS (CONTINUED)
LEGAL PROCEEDINGS
In September 1999, the Company became a co-defendant in a lawsuit pending in
state court in Dallas, Texas. The plaintiff, Nissi Cosmetics, Inc., alleges that
the Company breached a 1997 contract for the creation of two websites, two
informercials, and two direct response spots for the advertising and marketing
of certain of Nissi Cosmetics' body color, or self-tanning, products. Nissi
Cosmetics seeks recovery of $585,000 paid to defendants, and unspecified damages
for "lost profits." The Company filed a general denial and intends to vigorously
defend the matter. In the opinion of management, the ultimate resolution of any
such claims would not have a material adverse impact on the financial position
of the Company.
F-33
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--------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
ING BARINGS
BANC OF AMERICA SECURITIES LLC
BEAR, STEARNS & CO. INC.
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
------------------
This is DigitalConvergence.:Com Inc.'s initial public offering of common
stock. DigitalConvergence.:Com Inc. is selling all of the shares in this
offering. The international managers are offering shares outside the U.S.
and Canada and the U.S. underwriters are offering shares in the U.S. and
Canada.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National Market
under the symbol "DGTL."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE OF THIS PROSPECTUS.
---------------------
[Download Table]
PER SHARE TOTAL
--------- -----
Public offering price.................................. $ $
Underwriting discount.................................. $ $
Proceeds, before expenses, to DigitalConvergence.:Com
Inc.................................................. $ $
The international managers may also purchase up to an additional
shares from DigitalConvergence.:Com Inc. at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The U.S. underwriters may similarly purchase up to an aggregate
of an additional shares from Digital Convergence.:Com Inc.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery on or about
, 2000.
--------------------
JOINT BOOK-RUNNING MANAGERS
MERRILL LYNCH INTERNATIONAL ING BARINGS LIMITED
--------------------
BANK OF AMERICA INTERNATIONAL LIMITED BEAR, STEARNS INTERNATIONAL LIMITED
--------------------
The date of this prospectus is , 2000
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
GENERAL
We are offering our shares outside the U.S. and Canada through the
international managers and in the U.S. and Canada through the U.S. underwriters.
Merrill Lynch International, ING Barings Limited, as agent for ING Bank, N.V.,
London Branch, Bank of America International Limited and Bear, Stearns
International Limited are acting as lead managers of the international managers
named below. Subject to the terms and conditions described in an international
purchase agreement among us and the international managers, and concurrently
with the sale of shares to the U.S. underwriters, we have agreed to sell
to the international managers, and the international managers severally and not
jointly have agreed to purchase from us, the number of shares listed opposite
their names below.
[Download Table]
NUMBER
INTERNATIONAL MANAGER OF SHARES
--------------------- -----------
Merrill Lynch International.................................
ING Barings Limited, as agent for ING Bank, N.V., London
Branch....................................................
Bank of America International Limited.......................
Bear, Stearns International Limited.........................
-----------
Total...................................................
===========
We have also entered into a U.S. purchase agreement with the U.S.
underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, ING
Barings LLC, Banc of America Securities LLC and Bear, Stearns & Co. Inc. are
acting as U.S. representatives, for sale of the shares in the U.S. and Canada.
Subject to the terms and conditions set forth in the U.S. purchase agreement,
and concurrently with the sale of shares to the international managers
pursuant to the international purchase agreement, we have agreed to sell to the
U.S. underwriters, and the U.S. underwriters severally have agreed to purchase
from us, shares. The initial public offering price per share and the total
underwriting discount per share are identical under the international purchase
agreement and the U.S. purchase agreement.
The international managers and the U.S. underwriters have agreed to purchase
all of the shares sold under the international and U.S. purchase agreements if
any of these shares are purchased. If an underwriter defaults, the U.S. and
international purchase agreements provide that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreements may be
terminated. The closings for the sale of shares to be purchased by the
international managers and the U.S. underwriters are conditioned on one another.
We have agreed to indemnify the international managers and the U.S.
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the international managers and the
U.S. underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its
1
online brokerage customers. An electronic prospectus is available on the website
maintained by Merrill Lynch. Other than the prospectus in electronic format, the
information on the Merrill Lynch website relating to this offering is not a part
of this prospectus.
COMMISSIONS AND DISCOUNTS
The lead managers have advised us that the international managers propose
initially to offer the shares to the public at the initial public offering price
set forth on the cover page of this prospectus and to dealers at that price less
a concession not in excess of $ per share. The international managers may
allow, and the dealers may re-allow, a discount not in excess of $ per share
to other dealers. After the initial public offering, the public offering price,
concessions and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to us. The information assumes either no exercise
or full exercise by the international managers and the U.S. underwriters of
their over-allotment options.
[Enlarge/Download Table]
PER WITHOUT WITH
SHARE OPTIONS OPTIONS
----------- ----------- -----------
Public offering price...................................... $ $ $
Underwriting discount...................................... $ $ $
Proceeds, before expenses, to us........................... $ $ $
The expenses of the offering, not including the underwriting discount, are
estimated at $ and are payable by us.
OVER-ALLOTMENT OPTIONS
We have granted an option to the international managers to purchase up to
additional shares at the public offering price less the underwriting
discount. The international managers may exercise this option for 30 days from
the date of this prospectus solely to cover any over-allotments. If the
international managers exercise this option, each will be obligated, subject to
conditions contained in the purchase agreements, to purchase a number of
additional shares proportionate to that international manager's initial amount
reflected in the above table.
We have also granted an option to the U.S. underwriters, exercisable for
30 days from the date of this prospectus, to purchase up to
additional shares to cover any over-allotments on terms similar to
those granted to the international managers.
INTERSYNDICATE AGREEMENT
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the international managers and the U.S.
underwriters may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the international managers and any dealer to
whom they sell shares will not offer to sell or sell shares to U.S. or Canadian
persons or to persons they believe intend to resell to U.S. or Canadian persons,
except in the case of transactions under the intersyndicate agreement.
Similarly, the U.S. underwriters and any dealer to whom they sell shares will
not offer to sell or sell shares to persons who are non-U.S. or non-Canadian
persons or to persons they believe intend to resell to persons who are non-U.S.
or non-Canadian persons, except in the case of transactions under the
intersyndicate agreement.
2
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and certain existing
stockholders have agreed, with exceptions, not to sell or transfer any common
stock for 180 days after the date of this prospectus without first obtaining the
written consent of Merrill Lynch, Pierce & Co. Specifically, we and these other
individuals have agreed not to directly or indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "DGTL."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us and the U.S. representatives and lead managers. In addition to prevailing
market conditions, the factors to be considered in determining the initial
public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues,
- the present state of our development, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also possible
that after the offering the shares will not trade in the public market at or
above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares being
offered in this offering to accounts over which they exercise discretionary
authority.
3
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters from bidding for and purchasing our common stock. However, the U.S.
representatives may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives may reduce that short
position by purchasing shares in the open market. The U.S. representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor any
of the underwriters makes any representation that the U.S. representatives or
lead managers will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
UK SELLING RESTRICTIONS
Each international manager has agreed that
- it has not offered or sold and will not offer or sell any shares of common
stock to persons in the United Kingdom, except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses
or otherwise in circumstances which do not constitute an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995;
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the common stock in, from or otherwise involving the United
Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance
of common stock to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements)(Exemptions)
Order 1996 as amended by the Financial Services Act 1986 (Investment
Advertisements)(Exemptions) Order 1997 or is a person to whom such
document may otherwise lawfully be issued or passed on.
NO PUBLIC OFFERING OUTSIDE THE UNITED STATES
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation or distribution of this prospectus or any
other material relating to us or shares of our common stock in any jurisdiction
where action for that purpose is required. Accordingly, the shares of our common
stock may not be offered or sold, directly or indirectly, and neither this
prospectus nor any other offering material or
4
advertisements in connection with the shares of common stock may be distributed
or published, in or from any country or jurisdiction, except in compliance with
any applicable rules and regulations of any such country or jurisdiction.
Purchasers of the shares offered by this prospectus may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price on the cover page of this
prospectus.
OTHER RELATIONSHIPS
ING Barings LLC has performed investment banking and financial advisory
services for us in the past for which it has received customary fees and may, in
the future, perform similar services for us and receive additional compensation
from us for those services. In connection with our private placement of
Series A preferred stock in September 1999, ING Barings LLC received a placement
fee of approximately $1.7 million in December 1999 for acting as placement
agent. In addition, ING Barings LLC and DING.com LLC, an entity affiliated with
ING Barings, purchased 1,587 and 2,875 shares of Series A preferred stock,
respectively, in our Series A financing for a purchase price of $4,999,050 and
$9,056,250, respectively. The shares held by ING Barings LLC and DING.com LLC
will convert automatically into 999,810 and 1,811,250 shares of our common
stock, respectively, upon completion of this offering.
5
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH INTERNATIONAL
ING BARINGS LIMITED
BANK OF AMERICA INTERNATIONAL LIMITED
BEAR, STEARNS INTERNATIONAL LIMITED
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by DigitalConvergence.:Com in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
[Download Table]
SEC registration fee........................................ $ 26,400
NASD filing fee............................................. 10,500
Nasdaq National Market Listing Fee.......................... *
Printing and engraving costs................................ *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer Agent and Registrar fees........................... *
Miscellaneous expenses...................................... *
----------------
Total..................................................... $ *
================
------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees)), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
The Company's Amended and Restated Certificate of Incorporation provides for
the indemnification of directors to the fullest extent permitted by the DGCL. In
addition, as permitted by
II-1
the DGCL, the Amended and Restated Certificate of Incorporation provides that
directors of the company shall have no personal liability to the company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except (1) for any breach of the director's duty of loyalty to the company or
its stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, (3) under Section 174 of the
DGCL or (4) for any transaction from which a director derived an improper
personal benefit.
The Company's By-laws provides for the indemnification of all current and
former directors and all current or former officers to the fullest extent
permitted by the DGCL.
DigitalConvergence.:Com has entered into indemnification agreements with its
directors and executive officers, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to all securities issued or sold by
DigitalConvergence.:Com in the last three years and not registered under the
Securities Act. Each of the transactions described below was conducted in
reliance upon the exemption from registration provided in Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder. Each of the
certificates representing DigitalConvergence.:Com's securities issued in
connection with such transaction contains a restrictive legend. The information
provided in this Item takes into account a 630 for 1 stock split of the common
stock effected on January 3, 2000 and a for one stock split of the
common stock that will occur prior to the completion of this offering.
On September 25, 1998, DigitalConvergence.:Com sold 41,422,500 shares of
common stock of DigitalConvergence.:Com (the "Common Stock") to J. Jovan Philyaw
for a purchase price of $1,000.
On January 28, 1999, DigitalConvergence.:Com sold 3,150,000 shares of Common
Stock to B&G Partnership, Ltd. for a purchase price of $500.
On January 28, 1999, DigitalConvergence.:Com sold 3,150,000 shares of Common
Stock to BCG Partnership, Ltd. for a purchase price of $500.
On January 28, 1999, DigitalConvergence.:Com sold 9,450,000 shares of Common
Stock to JAT III, L.L.C. for a purchase price of $1,500.
On January 29, 1999, DigitalConvergence.:Com sold 315,000 shares of Common
Stock to BCG Partnership, Ltd. for a purchase price of $50.
On January 29, 1999, DigitalConvergence.:Com sold 315,000 shares of Common
Stock to JAT III, L.L.C. for a purchase price of $50.
On January 29, 1999, DigitalConvergence.:Com sold 850,500 shares of Common
Stock to Dave Mathews for a purchase price of $135.
On January 29, 1999, DigitalConvergence.:Com sold 567,000 shares of Common
Stock to Brad Smith for a purchase price of $90.
On January 29, 1999, DigitalConvergence.:Com sold 472,500 shares of Common
Stock to Laura Lewis for a purchase price of $75.
On January 29, 1999, DigitalConvergence.:Com sold 346,500 shares of Common
Stock to Luis Vallecillo for a purchase price of $55.
On January 29, 1999, DigitalConvergence.:Com sold 157,500 shares of Common
Stock to Kurt Boxdorfer for a purchase price of $25.
II-2
On January 29, 1999, DigitalConvergence.:Com sold 78,750 shares of Common
Stock to Jeff Harris for a purchase price of $12.50.
On January 29, 1999, DigitalConvergence.:Com sold 78,750 shares of Common
Stock to Brandon Brown for a purchase price of $12.50.
On January 29, 1999, DigitalConvergence.:Com sold 220,500 shares of Common
Stock to Kozette Hedger for a purchase price of $35.
On January 29, 1999, DigitalConvergence.:Com sold 47,250 shares of Common
Stock to Georgia Foy for a purchase price of $7.50.
On January 29, 1999, DigitalConvergence.:Com sold 18,900 shares of Common
Stock to Mike Simeone for a purchase price of $3.
On May 17, 1999, DigitalConvergence.:Com sold 472,500 shares of Common Stock
to William Leftwich for a purchase price of $75.
Between September 28, 1999 and January 14, 2000, DigitalConvergence.:Com
sold 2,875 shares of Series A Convertible Preferred Stock (the "Series A
Convertible Preferred Stock") to DING.com LLC for a purchase price of
$9,056,250.
On September 30, 1999, DigitalConvergence.:Com sold 3,970 shares of
Series A Convertible Preferred Stock to Belo Enterprises, Inc. for a purchase
price of $12,505,500.
On October 1, 1999, DigitalConvergence.:Com sold 6,350 shares of Series A
Convertible Preferred Stock of DigitalConvergence.:Com to Young & Rubicam Inc.
for a purchase price of $20,002,500.
On October 1, 1999, DigitalConvergence.:Com sold 1,587 shares of Series A
Convertible Preferred Stock to ING Capital LLC for a purchase price of
$4,999,050.
On October 15, 1999, DigitalConvergence.:Com sold 318 shares of Series A
Convertible Preferred Stock to Michael H. Anderson for a purchase price of
$1,001,700.
On October 18, 1999, DigitalConvergence.:Com sold 318 shares of Series A
Convertible Preferred Stock to Ingram Capital, Inc. for a purchase price of
$1,001,700.
On October 29, 1999, DigitalConvergence.:Com sold 318 shares of Series A
Convertible Preferred Stock to LJBB Investment Group LP for a purchase price of
$1,001,700.
On November 3, 1999, DigitalConvergence.:Com sold 16 shares of Series A
Convertible Preferred Stock to Robert D. Hamman for a purchase price of $50,400.
On November 3, 1999, DigitalConvergence.:Com sold 16 shares of Series A
Convertible Preferred Stock to Robert D. Hamman as Trustee for the Robert D.
Hamman CLU, Inc. Profit Sharing Plan for a purchase price of $50,400.
On November 5, 1999, DigitalConvergence.:Com sold 198 shares of Series A
Convertible Preferred Stock to Digital Investment Partners for a purchase price
of $623,700.
On April 25, 2000, DigitalConvergence.:Com sold 5,929,364 shares of
Series B Convertible Preferred Stock to accredited investors, as that term is
defined in Rule 501(a) of Regulation D promulgated under the Securities Act, for
an aggregate purchase price of $41.7 million.
On April 25, 2000, DigitalConvergence.:Com sold 5,372,593 shares of
Series C Convertible Preferred Stock to accredited investors, as that term is
defined in Rule 501(a) of Regulation D promulgated under the Securities Act, for
an aggregate purchase price of $56.6 million.
II-3
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
*1.1 -- Form of Underwriting Agreement
+2.1.1 -- Asset Purchase Agreement, dated January 4, 1999, by and
between DigitalConvergence.:Com and Infotainment
Telepictures, Inc.
+2.1.2 -- First Amendment to Asset Purchase Agreement, dated
January 4, 1999, by and between DigitalConvergence.:Com and
Infotainment Telepictures, Inc.
*2.1.3 -- Second Amendment to Asset Purchase Agreement, dated
April , 2000, by and between DigitalConvergence.:Com and
Infotainment Telepictures, Inc.
+3.1 -- Form of Second Amended and Restated Certificate of
Incorporation
+3.2 -- Form of Amended and Restated Bylaws
*4.1 -- Form of Common Stock Certificate
+4.2 -- Amended Certificate of Designation of Series A Convertible
Preferred Stock
+4.3 -- Certificate of Designation of Series B Convertible Preferred
Stock
+4.4 -- Certificate of Designation of Series C Convertible Preferred
Stock
*4.5 -- First Amended and Restated Registration Rights Agreement,
dated April 25, 2000, by and among DigitalConvergence.:Com
and the security holders named therein
*4.6 -- First Amended and Restated Stockholders Agreement, dated
April 25, 2000, by and among DigitalConvergence.:Com and the
security holders named therein
*5.1 -- Opinion of Vinson & Elkins L.L.P.
+10.1 -- Employment Agreement, dated as of August 16, 1999, by and
between DigitalConvergence.:Com and Michael N. Garin
+10.2 -- Employment Agreement, dated as of August 16, 1999, by and
between DigitalConvergence.:Com and Gregory D. Lerman
+10.3.1 -- Employment Agreement, dated as of August 16, 1999, by and
between DigitalConvergence.:Com and Scott P. Carlin
+10.3.2 -- First Amendment to Employment Agreement, dated as of
August 16, 1999, by and between DigitalConvergence.:Com and
Scott P. Carlin
+10.4 -- Employment Agreement, dated as of January 3, 2000, by and
between DigitalConvergence.:Com and Donald E. Welsh
+10.5 -- Employment Agreement, dated as of December 15, 1999, by and
between DigitalConvergence.:Com and Douglas L. Davis
+10.6 -- Employment Agreement, dated as of January 1, 2000, by and
between DigitalConvergence.:Com and Patrick V. Stark
*10.7 -- License Agreement, dated , 2000, by and between
DigitalConvergence.:Com and Belo Corp.
+10.8.1 -- Warrant Agreement, dated September 29, 1999, by and between
DigitalConvergence.:Com and Belo Enterprises, Inc.
+10.8.2 -- Warrant Certificate No. 1, dated September 29, 1999, for the
purchase of DigitialConvergence.:Com common stock by Belo
Enterprises, Inc.
*10.9 -- Licensing Agreement, dated as of April 18, 2000, by and
between DigitalConvergence.:Com Inc. and National
Broadcasting Company, Inc.
*10.10.1 -- Warrant Agreement, dated as of April 18, 2000, by and
between DigitalConvergence.:Com and National Broadcasting
Company, Inc.
*10.10.2 -- Warrant Certificate No. 1, dated April 18, 2000, for the
purchase of DigitalConvergence.:Com common stock by National
Broadcasting Company, Inc.
*10.11 -- Warrant Agreement, dated as of April 18, 2000, by and
between DigitalConvergence.:Com Inc. and National
Broadcasting Company, Inc.
*10.12 -- Warrant Certificate No. 1, dated April 18, 2000, for the
purchase of DigitalConvergence.:Com common stock by National
Broadcasting Company, Inc.
II-4
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
+10.13 -- Promissory Note, dated January 4, 1999, by and between
DigitalConvergence.:Com and Infotainment Telepictures, Inc.
+10.14 -- Debenture, dated January 28, 1999, by and between
DigitalConvergence.:Com and JAT III L.L.C.
+10.15 -- Debenture, dated January 28, 1999, by and between
DigitalConvergence.:Com and B&G Partnership, Ltd.
+10.16 -- Debenture, dated January 28, 1999, by and between
DigitalConvergence.:Com and BCG Partnership, Ltd.
+10.17 -- Form of Indemnification Agreement for directors and officers
of DigitalConvergence.:Com
+10.18.1 -- DigitalConvergence.:Com Inc. 1999 Stock Option Plan
*10.18.2 -- First Amendment to the DigitalConvergence.:Com Inc. 1999
Stock Option Plan
*10.19 -- DigitalConvergence.:Com Inc. Employee Stock Purchase Plan
+10.20 -- Stock Purchase Agreement, dated May 17, 1999, by and between
DigitalConvergence.:Com and William S. Leftwich
+10.21 -- Form of Proprietary Rights and Information Agreement
+10.22 -- Manufacturing and Marketing Agreement, effective as of
December 6, 1999, by and between DigitalConvergence.:Com and
Tandy Corporation
+10.23 -- Print Publishing Agreement, dated January 13, 2000, by and
between DigitalConvergence.:Com and Forbes, Inc.
+10.24 -- Print License Agreement, dated February 16, 2000, by and
between DigitalConvergence.:Com and Wired Magazine
*10.25 -- Print License Agreement, dated as of February 8, 2000, by
and between DigitalConvergence.:Com and Journal Sentinel
Incorporated
*10.26 -- Broadcast Station Agreement, dated as of February 8, 2000,
by and between DigitalConvergence.:Com and Journal Broadcast
Group, Inc.
+21.1 -- Subsidiaries of DigitalConvergence.:Com
+23.1 -- Consent of PricewaterhouseCoopers LLP
*23.2 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1)
+24.1 -- Power of Attorney (included in signature page)
+27.1 -- Financial Data Schedule
------------------------
+ Filed herewith
* To be filed by amendment
II-5
(b) FINANCIAL STATEMENT SCHEDULES
The following reports of independent accountants and financial statement
schedules are included in this Registration Statement:
- Report of Independent Accountants on Financial Statement Schedule of
DigitalConvergence.:Com Inc.
- Report of Independent Accountants on Financial Statement Schedule of
Infotainment Telepictures, Inc.
- Valuation and Qualifying Accounts of DigitalConvergence.:Com Inc. for the
year ended December 31, 1999
- Valuation and Qualifying Accounts of Infotainment Telepictures, Inc. for
the years ended December 31, 1997 and 1998
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 14, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) To provide to the underwriter(s) at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter(s) to permit prompt delivery to each
purchaser.
(c) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the day of April, 2000.
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DIGITALCONVERGENCE.:COM INC.
By: /s/ MICHAEL N. GARIN
-----------------------------------------
Michael N. Garin
PRESIDENT AND CHIEF OPERATING OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael N. Garin, Patrick V. Stark and
William S. Leftwich and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including pre- and post-effective amendments) to this Registration Statement
and any additional registration statement pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that each of
said attorneys-in-fact and agents or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
[Enlarge/Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ J. JOVAN PHILYAW
------------------------------------------- Chief Executive Officer and April 28, 2000
J. Jovan Philyaw Chairman of the Board
/s/ MICHAEL N. GARIN
------------------------------------------- President, Chief Operating April 28, 2000
Michael N. Garin Officer and Director
/s/ WILLIAM S. LEFTWICH
------------------------------------------- Chief Financial Officer April 28, 2000
William S. Leftwich
/s/ PATRICK V. STARK
------------------------------------------- Director April 28, 2000
Patrick V. Stark
/s/ MICHAEL H. JORDAN
------------------------------------------- Director April 28, 2000
Michael H. Jordan
II-7
[Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM O. HUNT
------------------------------------------- Director April 28, 2000
William O. Hunt
/s/ JACK A. TURPIN
------------------------------------------- Director April 28, 2000
Jack A. Turpin
II-8
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
DigitalConvergence.:Com Inc.
Our audits of the consolidated financial statements referred to in our
report dated April 27, 2000 appearing in this Registration Statement on Form S-1
of DigitalConvergence.:Com Inc. also included an audit of the financial
statement schedule listed in such Registration Statement. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
April 27, 2000
S-1
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Infotainment Telepictures, Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 29, 2000, except as to Note 11 which is as of April 27,
2000 appearing in this Registration Statement on Form S-1 of
DigitalConvergence.:Com Inc. also included an audit of the financial statement
schedules listed in such Registration Statement. In our opinion, these financial
statement schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 29, 2000
S-2
SCHEDULE II
DIGITALCONVERGENCE.:COM INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
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ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS PERIOD
-------------- ---------- ---------- ---------- ----------
December 31, 1999
Income tax valuation allowance.................... $ 158 $4,311 $ -- $4,469
====== ====== ======= ======
(a) This schedule should be read in conjunction with the
Digitalconvergence.:Com Inc. audited consolidated financial statements and
related notes thereto.
S-3
SCHEDULE II
INFOTAINMENT TELEPICTURES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
[Enlarge/Download Table]
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ----------
1997
Income tax valuation allowance.................... $ 61 $74 $-- $135
==== === === ====
1998
Income tax valuation allowance.................... $135 $23 $-- $158
==== === === ====
(a) This schedule should be read in conjunction with the Infotainment
Telepictures, Inc. audited financial statements and related notes thereto.
S-4
EXHIBIT INDEX
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
*1.1 -- Form of Underwriting Agreement
+2.1.1 -- Asset Purchase Agreement, dated January 4, 1999, by and
between DigitalConvergence.:Com and Infotainment
Telepictures, Inc.
+2.1.2 -- First Amendment to Asset Purchase Agreement, dated
January 4, 1999, by and between DigitalConvergence.:Com and
Infotainment Telepictures, Inc.
*2.1.3 -- Second Amendment to Asset Purchase Agreement, dated
April , 2000, by and between DigitalConvergence.:Com and
Infotainment Telepictures, Inc.
+3.1 -- Form of Second Amended and Restated Certificate of
Incorporation
+3.2 -- Form of Amended and Restated Bylaws
*4.1 -- Form of Common Stock Certificate
+4.2 -- Amended and Restated Certificate of Designation of Series A
Convertible Preferred Stock
+4.3 -- Certificate of Designation of Series B Convertible Preferred
Stock
+4.4 -- Certificate of Designation of Series C Convertible Preferred
Stock
*4.5 -- First Amended and Restated Registration Rights Agreement,
dated April 25, 2000, by and among DigitalConvergence.:Com
and the security holders named therein
*4.6 -- First Amended and Restated Stockholders Agreement, dated
April 25, 2000, by and among DigitalConvergence.:Com and the
security holders named therein
*5.1 -- Opinion of Vinson & Elkins L.L.P.
+10.1 -- Employment Agreement, dated as of August 16, 1999, by and
between DigitalConvergence.:Com and Michael N. Garin
+10.2 -- Employment Agreement, dated as of August 16, 1999, by and
between DigitalConvergence.:Com and Gregory D. Lerman
+10.3.1 -- Employment Agreement, dated as of August 16, 1999, by and
between DigitalConvergence.:Com and Scott P. Carlin
+10.3.2 -- First Amendment to Employment Agreement, dated as of
August 16, 1999, by and between DigitalConvergence.:Com and
Scott P. Carlin
+10.4 -- Employment Agreement, dated as of January 3, 2000, by and
between DigitalConvergence.:Com and Donald E. Welsh
+10.5 -- Employment Agreement, dated as of December 15, 1999, by and
between DigitalConvergence.:Com and Douglas L. Davis
+10.6 -- Employment Agreement, dated as of January 1, 2000, by and
between DigitalConvergence.:Com and Patrick V. Stark
*10.7 -- License Agreement, dated , 2000, by and between
DigitalConvergence.:Com and Belo Corp.
+10.8.1 -- Warrant Agreement, dated September 29, 1999, by and between
DigitalConvergence.:Com and Belo Enterprises, Inc.
+10.8.2 -- Warrant Certificate No. 1, dated September 29, 1999, for the
purchase of DigitialConvergence.:Com common stock by Belo
Enterprises, Inc.
*10.9 -- Licensing Agreement, dated as of April 18, 2000, by and
between DigitalConvergence.:Com Inc. and National
Broadcasting Company, Inc.
*10.10.1 -- Warrant Agreement, dated as of April 18, 2000, by and
between DigitalConvergence.:Com and National Broadcasting
Company, Inc.
*10.10.2 -- Warrant Certificate No. 1, dated April 18, 2000, for the
purchase of DigitalConvergence.:Com common stock by National
Broadcasting Company, Inc.
*10.11 -- Warrant Agreement, dated as of April 18, 2000, by and
between DigitalConvergence.:Com Inc. and National
Broadcasting Company, Inc.
*10.12 -- Warrant Certificate No. 1, dated April 18, 2000, for the
purchase of DigitalConvergence.:Com common stock by National
Broadcasting Company, Inc.
+10.13 -- Promissory Note, dated January 4, 1999, by and between
DigitalConvergence.:Com and Infotainment Telepictures, Inc.
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
+10.14 -- Debenture, dated January 28, 1999, by and between
DigitalConvergence.:Com and JAT III L.L.C.
+10.15 -- Debenture, dated January 28, 1999, by and between
DigitalConvergence.:Com and B&G Partnership, Ltd.
+10.16 -- Debenture, dated January 28, 1999, by and between
DigitalConvergence.:Com and BCG Partnership, Ltd.
+10.17 -- Form of Indemnification Agreement for directors and officers
of DigitalConvergence.:Com
+10.18.1 -- DigitalConvergence.:Com Inc. 1999 Stock Option Plan
*10.18.2 -- First Amendment to the DigitalConvergence.:Com Inc. 1999
Stock Option Plan
*10.19 -- DigitalConvergence.:Com Inc. Employee Stock Purchase Plan
+10.20 -- Stock Purchase Agreement, dated May 17, 1999, by and between
DigitalConvergence.:Com and William S. Leftwich
+10.21 -- Form of Proprietary Rights and Information Agreement
+10.22 -- Manufacturing and Marketing Agreement, effective as of
December 6, 1999, by and between DigitalConvergence.:Com and
Tandy Corporation
+10.23 -- Print Publishing Agreement, dated January 13, 2000, by and
between DigitalConvergence.:Com and Forbes, Inc.
+10.24 -- Print License Agreement, dated February 16, 2000, by and
between DigitalConvergence.:Com and Wired Magazine
*10.25 -- Print License Agreement, dated as of February 8, 2000, by
and between DigitalConvergence.:Com and Journal Sentinel
Incorporated
*10.26 -- Broadcast Station Agreement, dated as of February 8, 2000,
by and between DigitalConvergence.:Com and Journal Broadcast
Group, Inc.
+21.1 -- Subsidiaries of DigitalConvergence.:Com
+23.1 -- Consent of PricewaterhouseCoopers LLP
*23.2 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1)
+24.1 -- Power of Attorney (included in signature page)
+27.1 -- Financial Data Schedule
------------------------
+ Filed herewith
* To be filed by amendment
Dates Referenced Herein
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