S-1 1 ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on May 5, 2004

Registration No. 333-          


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

PRN CORPORATION

(Exact name of registrant as specified in its charter)


Delaware   4833   54-1615029
(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification No.)

600 Harrison Street

4th Floor

San Francisco, CA 94107

(415) 808-3500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


Charles A. Nooney

Chief Executive Officer and Chairman of the Board

PRN Corporation

600 Harrison Street, 4th Floor

San Francisco, CA 94107

(415) 808-3500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Jorge del Calvo, Esq.

Stanley F. Pierson, Esq.

Mary A. Helvey, Esq.

Pillsbury Winthrop LLP

2475 Hanover Street

Palo Alto, California 94304-1114

(650) 233-4500

 

Craig W. Adas, Esq.

Anthony S. Wang, Esq.

Weil, Gotshal & Manges LLP

201 Redwood Shores Parkway

Redwood Shores, California 94065

(650) 802-3000


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 462(b) 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(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, check the following box.    ¨

CALCULATION OF REGISTRATION FEE


Title of each class of

securities to be registered

  

Proposed maximum

aggregate
offering price(1)(2)

   Amount of
registration fee

Common Stock, $0.001 par value per share

   $126,500,000    $16,028


(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2)   Includes shares the Underwriters have the option to purchase to cover over-allotments.

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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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 we are not soliciting any offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated May 5, 2004

 

PROSPECTUS

 

             Shares

LOGO

 

Common Stock

 


 

We are offering              shares of our common stock in this initial public offering. No public market currently exists for our common stock.

 

We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol “PRNC.” We anticipate that the initial public offering price will be between $              and $              per share.

 

Investing in our common stock involves risks. See “ Risk Factors” beginning on page 8.

 

     Per Share

   Total

Public Offering Price

   $                         $                     

Underwriting Discount

   $      $  

Proceeds to PRN (before expenses)

   $      $  

 

We have granted the underwriters a 30-day option to purchase up to an aggregate of              additional shares of common stock on the same terms and conditions set forth above to cover over-allotments, if any.

 

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.

 

Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on or about                     , 2004.

 


 

LEHMAN BROTHERS

 

CREDIT SUISSE FIRST BOSTON

 

UBS INVESTMENT BANK

 

                    , 2004


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TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   8

Special Note Regarding Forward-Looking Statements

   23

Use of Proceeds

   24

Dividend Policy

   24

Capitalization

   25

Dilution

   26

Selected Consolidated Financial Data

   27

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   30

Business

   47

Management

   61

 

     Page

Certain Relationships and Related Transactions

   69

Principal Stockholders

   72

Description of Capital Stock

   75

Shares Eligible For Future Sale

   80

Material U.S. Federal Tax Considerations for Non-U.S. Holders of Our Common Stock

   83

Underwriting

   85

Notice to Canadian Residents

   89

Legal Matters

   91

Experts

   91

Where You Can Find Additional Information

   91

Index to Consolidated Financial Statements

   F-1

 


 

Until                     , 2004 (25 days after the commencement of this offering), all dealers that effect transactions in our shares, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. This prospectus is not an offer to sell or a solicitation of an offer to buy shares in any jurisdiction where such offer or any sales of shares would be unlawful. The information in this prospectus is complete and accurate only as of the date of the front cover regardless of the time of delivery of this prospectus or of any sale of shares.

 


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PROSPECTUS SUMMARY

 

This summary highlights key aspects of the information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors” beginning on page 8.

 

PRN Corporation

 

Overview

 

We are the fifth largest broadcast network, after ABC, CBS, Fox and NBC, and the largest in-store television network in the United States based on monthly reach. Through our proprietary broadcasting network, the PRN Network, we enable national and local advertisers to target consumers in over 5,000 retail stores in all of the 210 designated market areas, or DMAs, in the United States. Based on information provided by several third-party research firms and retailers, we estimate that the PRN Network delivers approximately 180 million monthly gross impressions to consumers in the stores of leading national retailers including Best Buy, Circuit City, Costco, Ralphs, SAM’s Club, Sears and Wal-Mart Stores. For the year ended December 31, 2003, we generated $112 million of revenues and $10 million of net income.

 

The PRN Network is aired on video displays located in retail stores where we estimate consumers purchased over $250 billion in products and services in 2003. Programming on the PRN Network is targeted to a captive audience of shoppers in the stores of our retailers. Consumers can view and listen to our programming in high traffic areas, key departments, areas where consumers wait for service and check-out lanes. Over the last ten years, we have developed a television programming format that we believe improves the shopping experience by providing relevant, informative and entertaining content to consumers in the retail environment. Our programming consists primarily of traditional television advertising, custom advertising segments and other content supplied by leading media companies including Discovery, ESPN, the Food Network and Lifetime.

 

In 2003, more than 150 advertisers purchased airtime on the PRN Network, including consumer product companies such as Procter & Gamble, entertainment companies such as Walt Disney, consumer electronics companies such as Sony, satellite service providers such as DIRECTV and television networks such as NBC. The PRN Network enables advertisers to target busy, purchase-oriented consumers with relevant and timely advertising messages resulting in significant brand recall. In a March 2002 custom study of a major U.S. retailer, Nielsen Media Research reported average aided plus unaided brand recall of 66.4%, as a percentage of Modeled Claimed Commercial Audience, among viewers ten years of age and older.

 

We have developed software and other proprietary technologies for operating the PRN Network for which we have received eight patents. Our network consists of a media management center that is connected, primarily via a satellite network, to media servers in each retail store location that carries the PRN Network. Our patented technology enables us to cost-effectively manage, distribute and air thousands of media elements on a regular basis and manage media by store, by department and by day in order to reach our advertisers’ desired audience.

 

We believe our target addressable market is the $53 billion television advertising market, the largest segment of the $149 billion U.S. major media advertising market as defined by Zenith Optimedia. We believe the effectiveness of traditional network television advertising is weakening due to evolving viewing habits, emerging technologies and additional at-home entertainment alternatives. As television advertisers are seeking alternative and more effective ways to reach consumers, the PRN Network provides a solution to the challenges facing traditional broadcast television.

 

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Factors Driving Advertiser Adoption of the PRN Network

 

We believe we are well-positioned to take advantage of the anticipated shift of advertising dollars away from traditional broadcast television. The following factors should lead to increased adoption of the PRN Network:

 

    National Reach.    Through the PRN Network, we enable national and local advertisers to target consumers in over 5,000 retail stores in all of the 210 DMAs in the United States.

 

    Captive Audience.    We estimate that each month there are more than 680 million shopping visits to retailers carrying the PRN Network. Unlike viewers of at-home broadcast television, viewers of our network do not have the ability to change channels, skip commercials or time-shift their viewing.

 

    Relevant Content.    Our programming integrates advertisers’ messages in a relevant, informative and entertaining context that is specifically tailored to consumers in the retail environment. According to a Point-Of-Purchase Advertising International study, approximately 70% of brand decisions are made while consumers are in stores.

 

    Targeted Media.    Our network has the capability to deliver highly targeted messages for our advertisers based on demographics, product distribution, geography, type of retail store and location within the store.

 

    Timely Delivery.    We believe the PRN Network enables advertisers to deliver their messages at the precise time when they create the most value.

 

Our Competitive Strengths

 

First Mover Advantage.    The PRN Network is the largest in-store network in the U.S. based on audience. In our retail locations there are over 5,000 installed media servers and approximately 34,000 consumer viewing areas, or CVAs, comprised of an estimated 250,000 video displays, and, generally, satellite equipment to receive our programming.

 

Established Advertiser Base.    In 2003, more than 150 advertisers spanning most major advertising categories, including apparel, consumer packaged goods, electronics, entertainment, financial services, office supplies, pharmaceutical, retail and telecommunication services, purchased airtime on the PRN Network.

 

Media Management Expertise.    Over the past ten years, we have invested in software and other proprietary technologies for operating the PRN Network. These technologies combined with our management know-how enable us to produce, manage and distribute thousands of media elements on a regular basis across the PRN Network.

 

Operating Leverage.    We believe our established retail distribution infrastructure and low variable cost operating model will lead to an increase in our operating income margin if we succeed in growing our revenues.

 

Acquisition and Integration Experience.    We have successfully completed three acquisitions in the past eight years, through which we have broadened our retailer base to include Best Buy, Circuit City, Ralphs and Sears.

 

Our Strategy

 

Our objective is to be the broadcast network that consumers look for while they shop, advertisers rely upon to build their brands, and retailers feature to differentiate the shopping experience. We believe that our strategy of expanding our reach, driving adoption of the PRN Network, investing in new network deployments and developing localized programming content will enable us to increase the distribution and viewership of our network, generate additional advertising revenues, enhance our profitability and maintain our position as the leading in-store broadcaster in the U.S.

 

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Corporate Information

 

We were incorporated in Delaware in February 1992 as JMC Acquisitions, Inc. We changed our name to PICS Previews, Inc. in January 1994, to Qorvis Media Group in April 1997 and to PRN Corporation in June 2000. Our principal executive offices are located at 600 Harrison Street, 4th Floor, San Francisco, California 94107 and our telephone number is (415) 808-3500. We maintain a web site at www.prn.com. The reference to our web address does not constitute incorporation by reference of the information contained on this web site.

 

PRN®, and the PRN name and design logo are our registered trademarks. We also use the following trademarks, some of which are pending registration as intent-to-use applications: Interactive Department, Redefining Mass Media, Digital Department, The Mass Channel, Aisles vs. Miles, Premier Retail Networks, Media Where It Matters, HD A to Z, This is HD and Design, Supermarket Network and Design, and Sample Size. Other trade names, trademarks and service marks appearing in this prospectus are the property of their respective holders.

 


 

In this prospectus, “PRN,” “we,” “us” and “our” refer to PRN Corporation and its consolidated subsidiaries.

 

This prospectus contains statistical data that we obtained from industry publications and reports generated by IDC, Jack Myers Report, National Cable & Telecommunications Association, Nielsen Media Research, Point-Of-Purchase Advertising International, Veronis Suhler Stevenson and Zenith Optimedia. These industry publications generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. While we believe these publications are reliable, we have not independently verified their data.

 

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The Offering

 

Common stock offered by PRN

                     shares

 

Common stock to be outstanding after this offering

                     shares

 

Use of proceeds

We intend to use approximately $44.6 million of the net proceeds from this offering to redeem 2,361,276 shares of our currently outstanding series E redeemable convertible preferred stock. From this redemption consideration, consistent with a prior agreement with holders of our series E redeemable convertible preferred stock, approximately $1.1 million will be further distributed to holders of our series B, C and D redeemable convertible preferred stock and approximately $1.1 million will be further distributed to members of our management and other key employees. We intend to use the remaining $             of the net proceeds from this offering for general corporate purposes, including working capital, and possible acquisitions of businesses, products or technologies that we believe complement our business. See “Use of Proceeds” and “Certain Relationships and Related Transactions.”

 

Proposed Nasdaq National Market symbol

PRNC

 

The number of shares of common stock that will be outstanding immediately after this offering is based on the number of shares outstanding on March 31, 2004 and excludes:

 

    917,150 shares of common stock subject to warrants outstanding as of March 31, 2004, with a weighted average exercise price of $8.10 per share;

 

    3,867,849 shares of common stock subject to options outstanding as of March 31, 2004, with a weighted average exercise price of $4.55 per share; and

 

    2,780,231 shares of common stock available for future issuance under our stock option plans and employee stock purchase plan.

 

Unless otherwise stated, all information in this prospectus:

 

    assumes an initial public offering price of $             per share, the midpoint of the initial public offering price range indicated on the cover of this prospectus;

 

    reflects the filing, prior to the completion of this offering, of our amended and restated certificate of incorporation, referred to in this prospectus as our certificate of incorporation, and the adoption of our amended and restated bylaws, referred to in this prospectus as our bylaws, implementing the provisions described under “Description of Capital Stock;”

 

    assumes the issuance to the holders of series E redeemable convertible preferred stock of warrants to purchase 1,400,000 shares of common stock and, at the completion of this offering, the exercise of these warrants and of other outstanding warrants to purchase 1,141,898 shares of common stock;

 

    assumes the redemption of 2,361,276 shares of our series E redeemable convertible preferred stock at the completion of this offering;

 

    reflects the automatic conversion of all of our outstanding shares of series A convertible preferred stock and all of our remaining outstanding shares of redeemable convertible preferred stock, except for all shares of our series D redeemable convertible preferred stock which will remain outstanding, into shares of common stock, and the automatic conversion of all of our outstanding shares of class A common stock into shares of common stock; and

 

    assumes no exercise of the over-allotment option granted to the underwriters.

 

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Summary Consolidated Financial Data

 

The following table provides summary historical consolidated financial data for the periods indicated. You should read this information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

The summary consolidated statement of operations data for each of the fiscal years ended December 31, 2001, 2002 and 2003 and the summary consolidated balance sheet data as of December 31, 2002 and 2003 are derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The summary consolidated statements of operations data for each of the three-month periods ended March 31, 2003 and 2004 and the summary consolidated balance sheet data as of March 31, 2004 are derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. The summary consolidated balance sheet data as of December 31, 2001 are derived from our audited consolidated financial statements not included in this prospectus and as of March 31, 2003 are derived from our unaudited consolidated financial statements not included in this prospectus.

 

    Year Ended December 31,

    Three Months Ended
March 31,


 
    2001

    2002

    2003

    2003

    2004

 
    ($ in thousands, except per share and per CVA data)  

Consolidated statements of operations data:

                                       

Revenues

  $ 58,146     $ 82,164     $ 112,082     $ 21,616     $ 26,691  

Impairment of PRN Network equipment

          10,866                    

Other operating costs and expenses

    59,501       77,539       102,937       21,022       25,771  
   


 


 


 


 


Income (loss) from operations

    (1,355 )     (6,241 )     9,145       594       920  

Other income, net

    185       442       1,083       964       257  
   


 


 


 


 


Income (loss) before provision for income taxes

    (1,170 )     (5,799 )     10,228       1,558       1,177  

Provision for income taxes

          225       140       21       210  
   


 


 


 


 


Net income (loss)

  $ (1,170 )   $ (6,024 )   $ 10,088     $ 1,537     $ 967  
   


 


 


 


 


Less: Accretion of redeemable convertible preferred stock and warrants

    (6,584 )     (18,605 )     (25,955 )     (6,004 )     (7,683 )
   


 


 


 


 


Net loss attributable to common stockholders

  $ (7,754 )   $ (24,629 )   $ (15,867 )   $ (4,467 )   $ (6,716 )
   


 


 


 


 


Net income (loss) per common share attributable to common stockholders:

                                       

Basic and diluted

  $ (1.75 )   $ (4.33 )   $ (2.79 )   $ (0.79 )   $ (1.15 )

Pro forma basic (1)

                  $               $    

Pro forma diluted (1)

                  $               $    

Weighted average common shares used in per share calculations (in thousands):

                                       

Basic and diluted

    4,438       5,690       5,681       5,671       5,847  

Pro forma basic (1)

                                       

Pro forma diluted (1)

                                       

Balance sheet data (at end of period):

                                       

Cash and equivalents

  $ 28,699     $ 19,070     $ 16,119     $ 26,549     $ 13,459  

Short-term investments

                10,400             17,503  

Total assets

    60,442       60,845       79,543       65,252       77,036  

Redeemable convertible preferred stock

    63,485       88,577       114,532       94,581       122,215  

Total stockholders’ deficit

    (27,439 )     (51,225 )     (67,253 )     (55,665 )     (73,918 )

Other financial and operating data:

                                       

EBITDA (2)

  $ 838     $ 7,526     $ 13,907     $ 1,630     $ 1,938  

EBITDA margin (3)

    1.4 %     9.2 %     12.4 %     7.5 %     7.3 %

Average number of CVAs (4)

    31,151       31,484       33,772       32,764       34,794  

Advertising revenues per CVA (5)

  $ 986     $ 1,692     $ 2,279     $ 416     $ 482  

 

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Various factors affect the comparability of the above summary consolidated financial data. As described further in Note 1 to the consolidated financial statements included elsewhere in this prospectus, in 2002 we recorded a $10.9 million impairment loss on PRN Network equipment. Also, as described further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the first quarter of 2003, we recorded a $900,000 gain in other income related to a short-term equipment financing arrangement with a retailer. Upon determination of the price range of this offering, we may effect a potential split of our common stock. The effect of such a potential stock split is not reflected in the accompanying share and per share data or consolidated financial statements.


(1)   The unaudited pro forma basic and diluted net income per share data is adjusted for:

 

    the assumed redemption of 2,361,276 shares of series E redeemable convertible preferred stock for an aggregate amount of approximately $44.6 million and the related sale of              shares of common stock at a per share amount of $             in connection with the offering to generate the redemption funds;

 

    the assumed conversion of all outstanding shares of series B and C redeemable convertible preferred stock and 2,361,284 shares of series E redeemable convertible preferred stock with an aggregate accreted redemption value of $74.4 million into common stock; and

 

    the conversion of all outstanding shares of series A convertible preferred stock into common stock.

 

(2)   We define EBITDA as net income (loss) excluding other income, net, income taxes, impairment of PRN Network equipment, stock-based compensation, depreciation and amortization. This definition may not be comparable to similarly titled measures reported by other companies. We are presenting EBITDA because it provides an additional way to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss), which we believe provides a more complete understanding of our business than could be obtained without this disclosure. EBITDA is presented solely as a supplemental disclosure because we believe it is a useful tool for investors to assess the operating performance of our business without the effect of other income, net, income taxes, non-cash impairment, stock-based compensation, depreciation and amortization expenses, and because we use EBITDA internally to evaluate the performance of our personnel and also as a benchmark to evaluate our operating performance or compare our performance to that of our competitors. The use of EBITDA has limitations and you should not consider EBITDA in isolation from or as an alternative to GAAP measures, such as net income, cash flows from operating activities and consolidated income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. The following table sets forth the reconciliation of EBITDA, a non-GAAP financial measure, from net income (loss), our most directly comparable financial measure presented in accordance with GAAP.

 

     Year Ended December 31,

    Three Months
Ended March 31,


 
     2001

    2002

    2003

    2003

    2004

 
     ($ in thousands)  

Net income (loss)

   $ (1,170 )   $ (6,024 )   $ 10,088     $ 1,537     $ 967  

Other income, net

     (185 )     (442 )     (1,083 )     (964 )     (257 )

Provision for income taxes

           225       140       21       210  

Impairment of PRN Network equipment

           10,866                    

Stock-based compensation

     391                          

Depreciation and amortization

     1,802       2,901       4,762       1,036       1,018  
    


 


 


 


 


EBITDA

   $ 838     $ 7,526     $ 13,907     $ 1,630     $ 1,938  
    


 


 


 


 


EBITDA margin

     1.4 %     9.2 %     12.4 %     7.5 %     7.3 %
(3)   We define EBITDA margin as our EBITDA expressed as a percentage of our revenues.

 

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(4)   We define a consumer viewing area, or CVA, as a discreet shopping area of the retail store, in which one or more video displays are installed and the PRN Network is aired. Examples of individual CVAs include the television department of an electronics retailer, the entrance of a mass merchant retailer or a single check-out lane in a grocery store. Because store environments and consumer shopping patterns vary by retailer, CVAs may contain multiple video displays, and we may define CVAs differently based on configuration and programming. Average number of CVAs is calculated quarterly using the number of stores airing the PRN Network and the typical CVA configuration within these stores. Configurations of stores airing the PRN Network change from time to time based on the estimated in-service dates of CVAs.

 

(5)   We define our advertising revenues per CVA as our advertising revenues in a given period divided by the average number of CVAs for that same period.

 

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RISK FACTORS

 

You should carefully consider the risks described below before making a decision to buy our common stock. If any of the following risks actually occur, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock. You should also refer to the other information set forth in this prospectus, including our consolidated financial statements and the related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also negatively impact us.

 

Risks Related to Our Business

 

We are highly dependent upon Wal-Mart, and our failure to maintain our relationship with Wal-Mart would substantially harm our business and prospects.

 

We are highly dependent on our relationship with Wal-Mart Stores, Inc., our largest retailer relationship, and we expect our reliance on this relationship to continue for the foreseeable future. Our dependence on Wal-Mart consists of two principal elements: (1) revenues earned under contracts entered into directly with Wal-Mart for media management services, advertising airtime and creative services and (2) revenues earned under contracts with third-party advertisers purchasing airtime or creative services for the PRN Network in Wal-Mart stores. Revenues from contracts entered into directly with Wal-Mart accounted for 35% of our total revenues for the year ended December 31, 2003 and 37% of our total revenues for the three months ended March 31, 2004. Revenues from contracts entered into with third-party advertisers purchasing airtime or creative services for the PRN Network in Wal-Mart stores accounted for an additional 54% of our total revenues for the year ended December 31, 2003 and 50% of our total revenues for the three months ended March 31, 2004.

 

As of March 31, 2004, Wal-Mart aired the PRN Network in 2,621 of its stores located throughout the United States, representing almost half of the aggregate number of retail stores where the PRN Network is aired. Our current agreement with Wal-Mart expires on March 31, 2005 followed by a six-month ramp-down period. Wal-Mart is under no obligation to renew its agreement with us, and we cannot assure you that our relationship with Wal-Mart will be maintained on satisfactory terms or at all. Wal-Mart may terminate the agreement prior to the end of the term upon the occurrence of certain events that are not remedied within a specific cure period. Changes within Wal-Mart, such as strategic or management changes, could cause Wal-Mart to not renew the agreement or be unwilling to renew the agreement on terms that are acceptable to us. A decision by Wal-Mart not to renew its agreement with us, to terminate its agreement with us, or to reduce the services that we provide related to the PRN Network, would cause our revenues to decline substantially and seriously harm our business. Any termination of the Wal-Mart relationship would also severely and adversely affect the revenues we receive from other advertisers that purchase advertising on the PRN Network aired in Wal-Mart stores. Termination of this relationship may also discourage advertisers from purchasing advertising on the PRN Network aired in the stores of our other retailers and may make it more difficult for us to attract new retailers and retain existing retailers. We cannot be certain if, when or to what extent Wal-Mart might terminate its agreement with us, cancel advertisement orders or elect not to renew the agreement upon the expiration of the term. In addition, SAM’s Club, one of our other retailer relationships operated under the terms of a separate agreement, is affiliated with Wal-Mart Stores, Inc., and decisions made by either entity or their parent company may affect our relationship with SAM’s Club or Wal-Mart Stores, Inc.

 

Our failure to maintain relationships with existing retailers or obtain new retailer relationships would harm our business and prospects.

 

Our ability to generate revenues from advertising sales and services depends upon our ongoing relationships with a limited number of retailers. In addition to our relationship with Wal-Mart Stores, Inc., we also maintain significant retailer relationships with other leading retailers, including Best Buy, Circuit City, Costco, Ralphs,

 

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SAM’s Club and Sears. Although we have entered into agreements with these retailers, we cannot assure you that the agreements will be renewed when the terms of the agreements expire or that our relationships with these retailers will be maintained on satisfactory terms or at all. Changes within our retailers, such as strategic or management changes, could cause them to not renew their agreements or be unwilling to renew their agreements on terms that are acceptable to us. If one or more of our existing retailers terminates its agreement with us, advertisers may find advertising on the PRN Network to be unattractive and may become unwilling to purchase advertising on the PRN Network, causing our revenues to decline and damage to our business and prospects. The loss of a retailer relationship would also eliminate any service revenues we receive from that retailer.

 

The loss of one or more retailer relationships may also impair our ability to secure new retailer relationships. As part of our business strategy, we intend to expand our retail distribution by adding other leading retailers. Our failure to maintain existing retailer relationships or to obtain new retailer relationships would harm our business.

 

The retail industry is highly competitive, and a substantial weakening of, or business failure by, any of our retailers could negatively affect our revenues and jeopardize any investment we make in deploying the PRN Network in our retailers’ stores.

 

The retail industry is highly competitive and has experienced substantial consolidation. Because our ability to generate revenues from advertising sales and services depends upon our ongoing relationships with a limited number of retailers, any substantial weakening or failure of the business of one or more of our existing retailers, or the consolidation of one or more of our retailers with a third party, could cause our revenues to decline, damaging our business and prospects.

 

We have in the past and plan in the future to make significant investments in the equipment, installation and support of the PRN Network within our retailers’ stores. We intend to pursue opportunities where we may invest in new retailer relationships, and the weakening, failure or acquisition of any of our retailers in the future could result in a loss of our investment and/or a negative return on our investment. In addition, we may incur additional expenses in recovering PRN Network equipment from these retailers.

 

For example, in 2001, we entered into an agreement with a national retailer to install the PRN Network in selected store locations throughout the United States. In connection with the planned deployment, we invested over $15 million in PRN Network equipment. In January 2002, and prior to the installation of the PRN Network, the retailer filed for Chapter 11 bankruptcy protection. After the retailer’s bankruptcy filing, the retailer rejected our distribution agreement, and as a result, we recorded an impairment charge of $10.9 million in 2002. If any of our other current or future retailers suffer any business failures, we could have negative returns on our investments and our business would suffer.

 

The process to develop a relationship with a retailer initially, and then to install the PRN Network throughout a retailer’s chain of stores, can be time-consuming and requires us to expend a substantial amount of resources, from which we may never recognize the anticipated benefits.

 

Our success depends in large part on our ability to establish relationships with large retailers that have a meaningful number of stores. The process to establish these relationships can be lengthy because in-store television is a relatively new form of media, and we often must inform retailers about the benefits of the PRN Network to the retailer and its customers. Potential retailer partners also typically engage in extensive internal reviews and analyses, including pilot programs, before making purchase decisions. We can expend a substantial amount of resources during this decision-making process, and a retailer may decide not to proceed with deployment. If retailers do not accept the PRN Network as effective media for their stores, we may not be able to grow our business or our revenues.

 

Once a retailer has agreed to install the PRN Network in a number of their stores, we must invest a substantial amount of time and resources in installation prior to the receipt of any revenues from such efforts. We

 

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may experience increased distribution and operations costs during or after deployment. We may also experience delays in the generation of revenues, if any, due to deployment delays or difficulties in selling advertising to be aired in these stores to new or current advertisers. We may be unable to generate sufficient revenues, if any, from advertising packages in these stores to offset the cost of securing a new retailer relationship and deploying and operating the PRN Network in the retailer’s stores.

 

We have relied, and expect to continue to rely, on a limited number of advertisers for a significant portion of our revenues, and our revenues could decline due to the delay of orders from, or the loss of, one or more significant advertisers.

 

In addition to the advertising relationship we have with Wal-Mart, we have relationships with other major advertisers, five of whom together accounted for approximately 18% of our revenues for the year ended December 31, 2003, and five of whom together accounted for approximately 27% of our revenues for the three months ended March 31, 2004. We expect that a small number of advertisers will constitute a significant portion of our revenues for the foreseeable future. Our relationships with these advertisers may not expand or may be disrupted. If a major advertiser purchases less advertising or defers orders in any particular period, or if a relationship with a major advertiser is terminated, our revenues could decline and our operating results may suffer.

 

If advertisers do not accept the PRN Network as a necessary component of their overall advertising strategies and budgets, our revenues may be negatively affected and our business may not expand or be successful.

 

The market for in-store television networks is relatively new and its potential is uncertain. We compete for advertising spending with many forms of major media advertising. Our success depends on the acceptance of the PRN Network by advertisers. Advertisers may elect not to participate if they believe that consumers are not receptive to the PRN Network or that the PRN Network does not provide sufficient value as an advertising medium. An advertiser visiting a store airing the PRN Network may not be satisfied with the experience provided to consumers, may not witness any consumers watching the PRN Network or may see a segment containing a technical error in presentation. This may lead the advertiser to cancel or not renew its advertising commitment with us. If advertisers do not consider advertising on the PRN Network as part of their overall advertising strategies and budgets, we may be unable to generate sufficient revenues for our business.

 

If consumers do not accept the PRN Network as a part of the shopping experience, we will be unable to grow or maintain our business.

 

The success of our business is dependent upon the long-term acceptance of in-store television by consumers. If consumer viewership of the PRN Network, or sentiment towards advertising in general, shifts such that consumers become less receptive to the PRN Network, advertisers may reduce their spending on the PRN Network and retailers may determine not to carry the PRN Network in their stores.

 

Advertisers may not accept our measurements of the PRN Network audience or the methodologies may change, which could negatively impact our ability to market and sell our advertising packages.

 

We engage third-party research firms to study the number of people viewing the PRN Network, consumer viewing habits and brand recall. Because the PRN Network is different from at-home broadcast media, third-party research firms have developed measuring standards and methodologies that differ from those used to measure the amount and characteristics of viewers for other broadcast media. We market and sell advertising packages to advertisers based on these measurements. If third-party research firms were to change the way they measure the viewers on the PRN Network or their viewing habits, it could have an adverse effect on our ability to sell advertising on the PRN Network. In addition, if advertisers do not accept or challenge the way third parties measure our viewers or their viewing habits, advertisers may be unwilling to purchase advertising at prices acceptable to us, if at all, and our revenues and operating results could be negatively impacted.

 

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We have a history of losses, have only recently become profitable and may not sustain or increase profitability in the future.

 

Although we first became profitable in the second quarter of 2002, as a result of a non-recurring impairment of PRN Network equipment, we had a net loss in the fourth quarter of 2002. Since that time, we have achieved profitability in each subsequent quarter. However, as of March 31, 2004, we had an accumulated deficit of approximately $95.8 million, the majority of which is related to non-operating accretion charges of $64.2 million related to our redeemable convertible preferred stock. We may not sustain or increase the profitability of our business on a quarterly or annual basis in the future. Our ability to remain profitable will be contingent, in part, on the amount of our operating expenses, which we plan to increase as we expand our business. If we fail to increase our revenues at historical or anticipated rates or our operating expenses increase without a commensurate increase in our revenues, our business, results of operations and financial condition will be negatively affected and the market price of our common stock will likely decline.

 

Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly in the future, which may cause the market price of our common stock to decline.

 

Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter as a result of a variety of factors, many of which are beyond our control. It is possible that our operating results in some quarters will be below market expectations, which would likely cause the market price of our common stock to decline. Our quarterly operating results may be adversely affected by many factors, including:

 

    our inability to renew contracts with existing retailers when expected;

 

    our inability to establish the PRN Network in a timely manner with additional retailers and in new stores opened by retailers with whom we already have a relationship;

 

    our inability to sell advertising on the PRN Network in current and new stores;

 

    the length of our advertising sales cycles;

 

    the unpredictable volume and timing of purchases of advertising;

 

    changes in the timing, size and other aspects of advertising commitments;

 

    declines in the viewership of the PRN Network;

 

    the availability and timeliness of delivery of media and content used in our programming;

 

    changes in available advertising inventory;

 

    competition from major media and other advertising outlets;

 

    decreases in demand for and pricing of advertising, media management and creative services;

 

    seasonality in our revenues, which are generally higher in the second half of the calendar year;

 

    infrastructure obsolescence and our ability to manage transitions to new technologies; and

 

    the market and general economic conditions.

 

We base our planned operating expenses in part on our expectations of future revenues and our expenses are relatively fixed in the short term. If revenues for a particular quarter are lower than we expect, we may be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results for that quarter.

 

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The nature of advertising sales cycles and shifting needs of advertisers makes it difficult for us to forecast revenues and increases the variability of quarterly fluctuations, which could cause us to improperly plan for our operations and miss any guidance we provide, and could cause the market price of our common stock to decline.

 

A substantial amount of our advertising commitments are made months in advance of when the advertising airs on the PRN Network, resulting in a backlog of future advertising and creative services revenues not yet recorded. Between the time at which advertising commitments are made and the advertising is aired, the needs of our advertisers can change. Advertisers may desire to change the timing, level of commitment and other aspects of their advertising placements. As a result, our backlog at any particular date is not necessarily indicative of actual revenues for any succeeding period, making it more difficult to predict our financial performance. These changes could also negatively impact our financial performance, including quarterly fluctuations.

 

If we fail to manage our future growth to meet advertiser and retailer demands, our operations may be disrupted and our business may be harmed.

 

We have been expanding and plan to continue to expand our operations in the United States. We may also expand to include international operations in the future. We must continue to expand our operations in order to meet demands of advertisers for advertising packages and the demand of current and future retailers for installing and configuring in-store infrastructure for the PRN Network. This expansion has resulted and will continue to result in substantial demands on our management resources. To manage our growth, we must implement and improve additional and existing administrative, financial and operations systems, procedures and controls and expand, train and manage our work force. Our failure to manage growth could disrupt our operations and limit our ability to pursue potential market opportunities.

 

We may expand the PRN Network to include international operations, and if our revenues from these efforts do not exceed the expenses of establishing and maintaining international operations, our business could suffer.

 

We may consider expanding the PRN Network into international markets, including Canada, Europe and Latin America. We would incur costs and expend resources in connection with any expansion of our operations into international markets. We do not have experience in international operations and may not be able to compete effectively in international markets. If we do not generate enough revenues from any international operations to offset the expense of these operations, our business and our ability to increase revenues and enhance our operating results could suffer. Any expansion efforts would be subject to various risks associated with international operations, including:

 

    different technology standards and legal considerations and unexpected changes in regulatory requirements;

 

    differing media perceptions, cultures, languages and consumer habits;

 

    longer sales cycles and greater difficulty in accounts receivable collection;

 

    dependence on local vendors;

 

    difficulties and costs of staffing and managing international operations, including the difficulty in managing a geographically dispersed workforce in compliance with diverse local laws and custom;

 

    potential adverse tax consequences;

 

    reduced protection of intellectual property rights in some countries;

 

    changes in currency exchange rates and controls;

 

    restrictions on repatriation of earnings from our international operations;

 

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    anti-U.S. sentiment in the international community or in particular countries; and

 

    the effects of external events such as terrorist acts and any related conflicts or similar events worldwide.

 

If we are unable to adapt to changing technology and the needs of retailers, advertisers and consumers, we will not be able to compete effectively and we will be unable to increase or maintain our revenues.

 

The market for in-store television advertising requires constant change and innovation in technology, including programming features. This requires us to continuously identify trends in advertiser, retailer and consumer needs, and to develop new features and enhancements for the PRN Network and the advertising that we offer to keep pace with these needs. Examples include the development of high definition television programs and advanced audio technologies. We will likely incur substantial development and acquisition costs in order to keep pace with these changing needs, and we may not have the financial resources necessary to fund future innovations. Furthermore, we may not be successful in responding to these needs or to competitive advertising offerings. If we are unsuccessful in enhancing the PRN Network and our advertising packages and defining, developing and introducing new features on a timely and cost-effective basis, the demand for the PRN Network by advertisers may decrease, we may not be able to compete effectively and we may be unable to increase or maintain our revenues.

 

If more shoppers make purchases outside of retail stores or if customers change the way they shop within stores, our revenues may decline and our business may suffer.

 

Our success in selling advertising depends, in part, on high traffic in retail stores, which increases the number of potential viewers for the PRN Network. The price at which we sell advertising aired on the PRN Network is a direct result of the number of viewers on our network. If the number of shoppers visiting retail stores and making purchases in retail stores decreases, advertisers may decide not to advertise on the PRN Network, may purchase less advertising on the PRN Network or may not be willing to pay for advertising at price points necessary for us to succeed. If alternative methods of out-of-store shopping such as the Internet and other forms of in-home shopping continue to increase in popularity, fewer consumers may visit retail stores. If consumers change the way they shop within stores, such as with shopping cart guides or other in-store services, they may not be receptive to our programming. In either case, our ability to generate revenues from advertisers could decrease and our operating results could decline.

 

The failure of our service providers to provide, install and maintain our in-store equipment could result in service interruptions and damage to our business.

 

We are and will continue to be significantly dependent upon third-party service providers to provide, install and maintain relevant computer and video display equipment at each retail location. The failure of any third-party provider to continue to perform these services adequately and timely could interrupt our business and damage our relationship with our retailers and their relationship with consumers.

 

If third-party content and programming costs increase significantly or become unavailable, our business and our operating results may be negatively impacted.

 

Our ability to access quality programming on a regular, long-term basis on terms favorable to us is important to our future success and profitability. We have entered into relationships with various third-party programming providers and have developed some internal content production and editing capabilities. Our planned expansion of the PRN Network into additional stores and new retailers will create greater demands on our third-party content relationships and our internal resources for content creation, editing and management. Our existing third-party content relationships are generally made pursuant to short-term written agreements or without contracts and most of our programming suppliers could stop providing us their programming with very little or no advance notice. Termination of our programming relationships or our inability to expand third-party content relationships or internal content capabilities adequately would harm our business.

 

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In addition, a significant amount of our programming from network and cable programmers, video news release providers and independent producers is currently provided to us at no charge or for a nominal charge. Should the costs of either externally produced or internally produced programming significantly increase in the future, our operating results would be adversely affected.

 

We rely on third parties for data transmission, and the interruption or unavailability of adequate bandwidth for transmission could prevent us from distributing our programming as planned.

 

We transmit the majority of the content that is aired on the PRN Network using satellites through a variety of third-party network providers, such as Echostar and Hughes. We also rely on the networks of some of our retailers to transmit content to individual stores. If we or our retailers experience failures or limited capacity in the satellite or other networks, we may be unable to maintain programming and meet our advertising commitments. Problems with data transmission may be due to hardware failures, operating system failures or other causes beyond our control. Although we currently have agreements with satellite providers to provide transmission services, we may have limited access, or no access at all, to adequate bandwidth or satellite technology in the future. If such bandwidth and technology is available to us, it may not be available on terms favorable to us, such as pricing. The equipment we must use for satellite transmission is specifically designed for each satellite provider and cannot be used with other satellite providers; therefore, any change in satellite provider would require significant time, technical support and expense. In addition, there are a limited number of satellite providers with whom we could contract, and we may be unable to replace our current providers on favorable terms, if at all. If the transmission of data over our networks becomes unavailable, limited due to bandwidth constraints or is interrupted or delayed because of necessary equipment changes, our relationship with retailers and our ability to obtain revenues from current and new advertisers would suffer.

 

We may not obtain sufficient patent protection for our systems, processes and technology, which could harm our competitive position and increase our expenses.

 

Our success and ability to compete depends to a significant degree upon the protection of our proprietary technology. As of March 31, 2004, we held eight issued patents in the United States. Any patents issued may provide only limited protection for our technology and the rights that may be granted under any future issued patents may not provide competitive advantages to us. Any patent applications may not result in issued patents. Also, patent protection in foreign countries may be limited or unavailable where we need this protection. It is possible that competitors may independently develop similar technologies, design around our patents or successfully challenge any issued patent that we hold.

 

We rely upon trademark, copyright and trade secret laws and contractual restrictions to protect our proprietary rights, and if these rights are not sufficiently protected, our ability to compete and generate revenues could be harmed.

 

We rely on a combination of trademark, copyright and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Our ability to compete and expand our business could suffer if these rights are not adequately protected. We seek to protect our source code for our software, design code for our networks, documentation and other written materials under trade secret and copyright laws. We license our software under signed license agreements, which impose restrictions on the licensee’s ability to utilize the software. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements. The steps taken by us to protect our proprietary information may not be adequate to prevent misappropriation of our technology. Our proprietary rights may not be adequately protected because:

 

    laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and

 

    policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use.

 

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The laws of other countries in which we may extend the PRN Network in the future may offer little or no protection of our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for doing so, which would harm our competitive position and market share.

 

We may face intellectual property infringement claims that could be time-consuming, costly to defend and result in our loss of significant rights.

 

Other parties may assert intellectual property infringement claims against us, and our products may infringe the intellectual property rights of third parties. From time to time, we receive letters alleging infringement of intellectual property rights of others. We may also initiate claims against third parties to defend our intellectual property. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. If there is a successful claim of infringement against us, we may be required to pay substantial damages to the party claiming infringement, develop non-infringing technology or enter into royalty or license agreements that may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business. Also, we may be unaware of filed patent applications that relate to our products. Parties making infringement claims may be able to obtain an injunction, which could prevent us from operating the PRN Network or using technology that contains the allegedly infringing intellectual property. Any intellectual property litigation could have a material adverse effect on our business, operating results or financial condition.

 

We may be held liable for information made available on the PRN Network.

 

The information we make available on the PRN Network could subject us to claims for defamation, negligence, copyright or trademark infringement or other theories of liability based on the nature and content of the information provided. We may not prevail in any of these claims. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against them and in implementing measures to reduce our exposure to this kind of liability. Our insurance may not cover potential claims of this type or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for any liability that may be imposed. If we violate the content standards of our retailer relationships or if consumers find the content aired on the PRN Network to be offensive, retailers may seek to hold us responsible for any consumer claims or may terminate their relationship with us. Computer hackers invading our network with inappropriate content could harm our relationship and reputation with retailers and consumers. If we use content in our broadcasts for which we or our retailers are not authorized, we may face claims and potentially be liable.

 

The law relating to the liability of the operators of media networks for information carried on, stored on or disseminated through their networks is evolving and few clear legal precedents have been established. Similarly, the law regarding in-store media remains unsettled. Claims for defamation, negligence, copyright and trademark infringement have been brought, sometimes successfully, against operators in the past. We could be exposed to liability because of third-party content that may be broadcast on the PRN Network, including broadcasts by our advertisers, retailers or other third parties. For example, if any third-party content provided through the PRN Network contains errors, consumers who view this content could make claims against us for losses incurred in reliance on this content.

 

If retailers determine that the PRN Network should not include audio elements, we may be unable to grow or maintain our business.

 

The success of our business is dependent upon retailers carrying the PRN Network and advertisers purchasing air-time on the PRN Network. If retailers, whether as a result of consumer sentiment or otherwise, determine that audio elements should be eliminated from the PRN Network, the advertising opportunities that we present to advertisers and their agencies will be fundamentally different. If advertisers and agencies do not view the PRN Network as a dynamic and valuable advertising medium, they may reduce or cease their spending on the

 

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PRN Network. As a result, our revenues would decline, and we would be unable to grow or maintain our business.

 

Computer viruses could cause significant downtime for the PRN Network, decreasing our revenues and damaging our relationships with retailers, advertisers and consumers.

 

We generate revenues from the sales of advertising that is aired in our retailers’ stores. Computer hackers infecting our network, or the networks of the stores in which our network is integrated, with viruses could cause our network to be unavailable. Significant downtime could decrease our revenues and harm our relationships and reputation with retailers, advertisers and consumers.

 

The PRN Network within some retailers’ stores operates on the same network used by the retailers for other aspects of the retailers’ businesses, and we may be held responsible for defects or breakdowns in our retailers’ networks caused by the PRN Network.

 

In some cases, the PRN Network is operated across a retailer’s proprietary network, which is used to operate other aspects of the retailer’s business, such as check-out cashier systems. In these circumstances, any defect or virus that occurs on the PRN Network may enter a retailer’s network, which could impact other aspects of the retailer’s business. The impact on a retailer’s business could be severe, and if we were held responsible, it could have an adverse affect on our retailer relationships and on our operating results.

 

Defects in our in-store infrastructure could result in a loss of advertisers and retailers, unexpected expenses and a decrease in our market share.

 

The in-store infrastructure of the PRN Network is complex and must meet stringent quality and reliability requirements. We have in the past discovered defects and errors in certain elements of our infrastructure. Due to the complexity of our infrastructure and our inability to test all possible operating scenarios prior to implementation, we may not be able to detect certain errors or defects until we establish the in-store infrastructure or initially broadcast content. This may result in loss of, or delay in, acceptance of the PRN Network by retailers and consumers. In addition, our retailers could cancel their agreements with us if we experience sustained downtime. Any errors or defects in our in-store infrastructure could also damage our reputation, result in lost revenues, divert development resources and increase service and support costs and warranty claims.

 

Because competition for qualified personnel is intense in our industry and in our geographic regions, we may not be able to recruit and retain necessary personnel, which could negatively impact the growth of our business.

 

Our success will depend on our ability to attract and retain senior management, engineering, sales, marketing and other key personnel. Because of the intense competition for these employees, particularly in the San Francisco Bay Area, we may be unable to attract and retain key technical and managerial personnel. If we are unable to retain our existing personnel, or attract, train and assimilate additional qualified personnel, our growth may be limited. All of our key employees are employed on an “at will” basis. The loss of any of these key employees could slow our programming, distribution and sales efforts or harm the perception of advertisers, retailers and investors. We may also incur increased operating expenses and be required to divert the attention of other senior executives to recruit replacements for key personnel. Also, we may experience more difficulty attracting personnel after we become a public company because of the perception that the stock option component of our compensation package may not be as valuable.

 

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Shortages of components or a loss of, or problems with, a supplier could result in a disruption in the installation or operation of the PRN Network.

 

From time to time, we have experienced delays in configuring and maintaining the in-store infrastructure of the PRN Network for several reasons, including component delivery delays, component shortages and component quality deficiencies. Component shortages, including video displays and video cards, delays in the delivery of components, and supplier product quality deficiencies may occur in the future. These delays or problems have in the past and could in the future result in installation delays, reduced revenues, strained relations with retailers and advertisers and loss of business. Also, in an effort to avoid actual or perceived component shortages, we may purchase more components than we may otherwise require. Excess inventory resulting from over-purchases, obsolescence, installation cancellations or a decline in the demand for the PRN Network by retailers could result in PRN Network equipment impairment, which in the past has had and in the future would have a negative effect on our financial results.

 

We obtain several of the components used in the in-store infrastructures of the PRN Network, including video cards, audio equipment and other equipment, from single or limited sources. We rarely have guaranteed supply arrangements with our suppliers, and we cannot be sure that suppliers will be able to meet our current or future component requirements. If component manufacturers do not allocate a sufficient supply of components to meet our needs or if current suppliers do not provide components of adequate quality or compatibility, we may have to obtain these components at a higher cost from distributors or on the spot market. If we are forced to use alternative suppliers of components, we may have to alter our in-store infrastructure to accommodate these components. Modification of our in-store infrastructure to use alternative components could cause significant delays and reduce our ability to generate revenues.

 

We may make acquisitions or investments in technologies, products and businesses, and we may not realize the anticipated benefits of these acquisitions or investments.

 

As part of our business strategy, we may make acquisitions of, or investments in, technologies, products and businesses that we believe could complement or expand our business, enhance our technical capabilities or offer growth opportunities. We may be unable to identify suitable acquisition candidates in the future or make these acquisitions on a commercially reasonable basis, or at all. In addition, we may spend significant management time and resources in analyzing and negotiating acquisitions or investments that do not come to fruition. Any future acquisitions and investments would have several risks, including:

 

    our inability to successfully integrate acquired technologies or operations;

 

    diversion of management’s attention;

 

    potentially dilutive issuances of equity securities or the incurrence of debt or contingent liabilities;

 

    expenses related to amortization of intangible assets;

 

    potential write-offs of acquired assets;

 

    adverse effects on our existing business relationships with our advertisers and retailers;

 

    loss of key employees, customers or distribution partners of acquired businesses; and

 

    our inability to recover the costs of acquisitions or investments.

 

If we are unable to integrate acquired companies or businesses successfully or to create new or enhanced services, we might not achieve the anticipated benefits from our acquisitions. If we fail to achieve the anticipated benefits from acquisitions, we might incur increased expenses and experience a shortfall in our anticipated revenues and we might not obtain a satisfactory return on our investment.

 

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Our ability to raise capital in the future may be limited and our failure to raise capital when needed could materially impact our business.

 

We believe that our existing cash and equivalents together with the net proceeds from this offering, will be sufficient to meet our anticipated cash needs for at least the next 12 months. The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:

 

    market acceptance of the PRN Network;

 

    the need to adapt to changing advertiser, retailer and consumer preferences, as well as changing technologies and technical requirements;

 

    the existence of opportunities for expansion, including investing in PRN Network infrastructure for stores added to the PRN Network; and

 

    access to and availability of sufficient management, technical, marketing and financial personnel.

 

If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain debt financing. The sale of additional equity securities or convertible debt securities could result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain additional financing and there is no assurance that financing, if required, will be available in amounts or on terms acceptable to us, if at all.

 

Our operations are primarily located in California and, as a result, could be negatively impacted by earthquakes and other catastrophes.

 

Our business operations depend on our ability to maintain and protect our facilities, computer systems, and personnel, which are primarily located in San Francisco, California. In addition, we create, compile and distribute our programming material and manage our networks from our headquarters in San Francisco, California. San Francisco exists on or near known earthquake fault zones. Should an earthquake or other catastrophes, such as fires, floods, power loss, communication failure, terrorist acts or similar events, disable our facilities, our operations would be disrupted because we do not have readily available alternative facilities from which to conduct our business.

 

Changes to financial accounting standards may affect our results of operations and cause us to change our business practices.

 

We prepare our financial statements to conform with generally accepted accounting principles, or GAAP. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in those policies could have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, accounting policies affecting many aspects of our business, including rules relating to employee stock option grants, have recently been revised or are under review. There has been ongoing public debate regarding whether shares granted under employee stock option and employee stock purchase plans should be treated as a compensation expense and, if so, how to properly value such charges. If we elected or were required to record an expense for our stock-based compensation plans using the fair value method, we could have significant accounting charges. Although standards have not been finalized and the timing of a final statement has not been established, FASB has announced its support for recording expense for the fair value of stock options granted. We have computed pro forma amounts that take current accounting pronouncements into account in valuing pro forma stock-based compensation. See Note 1 to our consolidated financial statements.

 

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Risks Related to Our Industry

 

We must compete successfully against major media companies and a variety of companies that provide in-store media products and services to retailers.

 

The major media advertising market, including the television segment in particular, is highly competitive, and the market for in-store media networks is rapidly developing and marked by intense competition and change. We compete for advertising commitments with a number of established media outlets, including ABC, CBS, Fox and NBC in the television segment. As we expand our sales efforts to include regional and local advertisers, we expect to compete for television revenues with regional and local broadcasters and for other local advertising dollars allocated to radio and outdoor media. We may also compete with print, Internet and other major media outlets.

 

The weakening or elimination of our retailer relationships by the actions of competitors will harm our ability to maintain and continue to attract advertisers. We compete with vendors that may offer in-store media products and services to retailers with features that compete with specific elements of our in-store media networks. With respect to programming services we provide retailers, there are a number of companies that provide customized programs for retail stores. Media companies that currently purchase advertising from us could establish and offer their own in-store media networks to our current or potential retailers. In addition, our current and potential retailers have developed or may develop their own in-store media networks or choose other forms of in-store advertising.

 

Increased competition may result in price reductions, reduced margins or loss of market share. Many of our competitors have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do and we, therefore, may be unable to compete successfully against current or future competitors.

 

Declines in market demand for advertising media may cause our prices to decline, which could reduce our revenues and profitability.

 

Market demand in the advertising industry is difficult to predict and can be affected by general economic and other conditions. If advertisers spend less money on major media or if major media supply significantly exceeds advertisers’ demand, we may be unable to obtain favorable pricing for our advertising packages, particularly for premiums we charge for targeted audience advertising packages. Our financial results will suffer if we experience reductions in our prices or in the amount of advertising we are able to sell and are unable to offset these reductions by reducing our costs.

 

Government regulation of the telecommunications and advertising industries could require us to change our business practices and expose us to legal action.

 

The Federal Communications Commission, or the FCC, has broad jurisdiction over the telecommunications industry. FCC licensing, program content and related regulations generally do not currently affect us because we operate a private network within retail locations. However, the FCC could promulgate new regulations that impact our business directly or indirectly or interpret existing laws in a manner that would cause us to incur significant compliance costs or force us to alter our business strategy.

 

FCC regulations also affect many of our content providers and satellite providers and, therefore, these regulations may indirectly affect our business. In particular, the satellite industry is highly regulated by the FCC and, in the United States, the operation and use of satellites require licenses from the FCC. Our satellite access providers may not be able to obtain all U.S. licenses and authorizations necessary to operate effectively. The failure of our satellite providers to obtain some or all necessary licenses or approvals could impose significant additional costs and restrictions on our business or require us to change our operating methods.

 

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In addition, the advertising industry is subject to regulation by the Federal Trade Commission, the Food and Drug Administration and other federal and state agencies, and to review by various civic groups and trade organizations, including the National Advertising Division of the Council of Better Business Bureaus. New laws or regulations governing advertising could have a material adverse effect on our business.

 

We may also be required to obtain various regulatory approvals from local, state or federal governmental bodies before we are permitted to expand the PRN Network in particular industries. We may not be able to obtain any required approvals, and any approval may be granted on terms that are unacceptable to us or that adversely affect our business.

 

We may experience a decrease in market demand due to declines in the advertising industry and uncertain economic conditions in the United States and in international markets, which have been further exacerbated by terrorism, war and social and political instability.

 

Economic growth in the United States and international markets has slowed significantly and the United States economy has recently been in a recession. The timing of a full economic recovery is uncertain. In addition, the terrorist attacks in the United States and turmoil in the Middle East and around the world have increased the uncertainty and instability in the United States economy and may contribute to a decline in economic conditions, both domestically and internationally. Terrorist acts and similar events, or war in general, could contribute further to a slowdown of the market demand for goods and services, including demand for the products of our advertisers and our retailers. The PRN Network operates in large retail chains where we are dependent on high-volume foot traffic by shoppers. Shopping habits and consumer comfort in high-density shopping environments may be adversely affected by terrorist attacks should they begin to occur in similar venues. If the economy declines as a result of the recent economic, political and social turmoil, or if there are further terrorist attacks in the United States or elsewhere, we may experience decreases in the demand for advertising packages on the PRN Network and our related services and decreases in the willingness of retailers to carry the PRN Network, any of which may harm our operating results.

 

Risks Related to this Offering

 

Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid, or at all.

 

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price for our common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. See the section of this prospectus entitled “Underwriting” for a discussion of the factors considered in determining the initial public offering price. The trading price of our common stock could be subject to wide fluctuations due to the factors discussed in this risk factors section and elsewhere in this prospectus. In addition, the stock markets in general, and the Nasdaq National Market and technology and media companies in particular, have experienced extreme price and volume fluctuations. The trading price and volume of our common stock may also be affected by research reports and analyst recommendations. These broad market and industry factors may decrease the market price of our common stock regardless of our actual operating performance.

 

Substantial future sales of our common stock in the public market could cause our stock price to decline.

 

Additional sales of our common stock in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. Upon completion of this offering, we will have              shares of common stock outstanding. All shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933. The remaining shares of common stock outstanding after this offering will be available for sale, assuming the effectiveness of lock-up

 

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agreements under which our directors, executive officers and most of our stockholders have agreed not to sell or otherwise dispose of their shares of common stock in the public market, as follows:

 

Number of Shares


  

Date of Availability for Sale


     Date of Prospectus
     180 Days After Prospectus

 

Any or all of these shares may be released prior to expiration of the 180-day lockup period at the discretion of Lehman Brothers. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our common stock could decline. Immediately following the 180-day lockup period,            shares of our common stock outstanding after this offering will become available for sale. The remaining shares of our common stock will become available for sale at various times thereafter upon the expiration of one-year holding periods.

 

After this offering, we intend to register 6,648,080 shares of our common stock that are reserved for issuance upon the exercise of options granted or reserved for grant under our 1992 stock option plan, 1997 stock option plan, 2004 stock incentive plan and 2004 employee stock purchase plan. Once we register these shares of our common stock, stockholders can sell them in the public market upon issuance, subject to restrictions under the securities laws and any applicable lock-up agreements.

 

In addition, after this offering, the holders of 11,305,001 shares of common stock will be entitled to rights to cause us to register the sale of those shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares, other than shares purchased by our affiliates, becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration.

 

Purchasers in this offering will immediately experience substantial dilution in net tangible book value.

 

Because our common stock has in the past been sold at prices substantially lower than the initial public offering price that you will pay, you will suffer immediate dilution of $             per share in pro forma net tangible book value, based on an assumed initial offering price of $             per share of common stock, the mid-point of the initial public offering price range. The issuance of additional common stock in the future or the exercise of outstanding options may result in further dilution.

 

Our corporate actions are substantially controlled by officers, directors, principal stockholders and affiliated entities.

 

After this offering, our directors, executive officers and their affiliated entities will beneficially own approximately         % of our outstanding common stock. These stockholders, if they acted together, could exert substantial influence over matters requiring approval by our stockholders, including electing directors and approving mergers or other business combination transactions. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by our other stockholders, including those who purchase shares in this offering.

 

Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

 

Provisions in our certificate of incorporation, as amended and restated upon the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

 

    the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors;

 

    the prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of stockholders to elect director candidates;

 

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    the ability of our board of directors to authorize the issuance of undesignated preferred stock to increase the number of shares outstanding and to discourage a takeover attempt;

 

    the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

 

    the ability of the board of directors to alter our bylaws without obtaining stockholder approval;

 

    the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action;

 

    the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to remove directors without cause; and

 

    the elimination of the right of stockholders to take action by written consent.

 

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation, bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than they would without these provisions.

 

We will incur increased costs as a result of being a public company.

 

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission and the Nasdaq Stock Market, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, as a result of becoming a public company, we are required to create additional board committees and adopt policies regarding internal controls and disclosure controls and procedures. In addition, we will incur additional costs associated with our public company reporting requirements. We also expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

 

We may spend or invest a substantial portion of the net proceeds of this offering in ways with which you might not agree.

 

We have broad discretion to determine how we spend or invest the net proceeds from this offering, other than the approximately $44.6 million to be used to redeem 2,361,276 shares of our series E redeemable convertible preferred stock. You will not have an opportunity to evaluate the economic, financial or other information upon which we base our decisions regarding how to use these proceeds, and, subject to certain exceptions, we will be able to use and allocate the net proceeds without first obtaining stockholder approval.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that involve risks and uncertainties. Many of these statements appear, in particular, in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Forward-looking statements include, but are not limited to, statements about:

 

    our expectations regarding our cash flows and capital and other expenditures;

 

    our anticipated needs for additional financing;

 

    plans for future products and services and for enhancements of existing products and services;

 

    our ability to manage and sustain growth;

 

    our intellectual property;

 

    anticipated trends and challenges in our business and the markets in which we currently or plan to operate;

 

    our legal proceedings;

 

    our ability to attract new advertisers and retailer relationships;

 

    our ability to retain existing advertisers and retailer relationships; and

 

    sources of new revenues.

 

In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” “is designed to” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to known and unknown risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from any future expressed or implied by forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from our sale of the              shares of common stock in this offering will be approximately $             million based on an assumed initial public offering price of $             per share, the midpoint of the initial public offering price range indicated on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $             million. We intend to use approximately $44.6 million to redeem an aggregate of 2,361,276 outstanding shares of our series E redeemable convertible preferred stock. From this redemption consideration, consistent with a prior agreement with holders of our series E redeemable convertible preferred stock, approximately $1.1 million will be further distributed to holders of our series B, C and D redeemable convertible preferred stock and approximately $1.1 million will be further distributed to members of our management and other key employees. See “Certain Relationships and Related Party Transactions.”

 

We intend to use the remaining $             of the net proceeds from this offering for general corporate purposes, including working capital. We do not otherwise have more specific plans for the net proceeds from this offering. We may also use a portion of the net proceeds to acquire businesses, products and technologies that we believe will complement our business. We are not currently engaged in any negotiations for any acquisitions.

 

The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. We will retain broad discretion in the allocation of the net proceeds of this offering.

 

Pending the uses described above, we will invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities. We may not invest the proceeds to yield a favorable return.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our common stock in the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination related to dividend policy will be made at the discretion of our board of directors.

 

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CAPITALIZATION

 

The following table summarizes our capitalization as of March 31, 2004:

 

    on an actual basis;

 

    on a pro forma basis to reflect the following upon completion of this offering:

 

    the exercise of warrants to purchase 2,541,898 shares of our common stock;

 

    the redemption of 2,361,276 shares of our series E redeemable convertible preferred stock; and

 

    the automatic conversion of all of our outstanding shares of series A convertible preferred stock and all of our remaining outstanding shares of redeemable convertible preferred stock, except for all shares of our series D redeemable convertible preferred stock which will remain outstanding, into shares of common stock, and the automatic conversion of all of our outstanding shares of class A common stock into shares of common stock; and

 

    on a pro forma as adjusted basis to further reflect receipt of the net proceeds from the sale by us in this offering of              shares of common stock at an assumed initial public offering price of $             per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

You should read this table in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    As of March 31, 2004

    Actual

    Pro Forma

  Pro Forma
As Adjusted


   

(in thousands, except share

and per share data)

Cash and equivalents

  $ 13,459     $     $  
   


 

 

Redeemable convertible preferred stock, $0.01 par value per share; 9,145,725 shares authorized, 7,223,681 shares issued and outstanding, actual; 200,000 shares authorized, issued and outstanding, pro forma and pro forma as adjusted

    122,215              

Stockholders’ equity (deficit):

                   

Convertible preferred stock, $0.01 par value per share; 1,309,306 shares authorized, 1,279,306 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

    13              

Preferred stock, $0.01 par value per share; no shares authorized, issued and outstanding, actual; 5,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                 

Common stock, $0.001 par value per share; 27,000,000 shares authorized, 5,857,598 shares issued and outstanding, actual; 100,000,000 shares authorized,              shares issued and outstanding, pro forma; 100,000,000 shares authorized,              shares issued and outstanding, pro forma as adjusted

    6              

Additional paid-in capital

    21,871              

Accumulated deficit

    (95,808 )            
   


 

 

Total stockholders’ equity (deficit)

    (73,918 )            
   


 

 

Total capitalization

  $ 48,297     $                $             
   


 

 


The actual, pro forma and pro forma as adjusted information set forth in the table:

 

    assumes no exercise of warrants to purchase 917,150 shares of our common stock at a weighted average exercise price of $8.10 per share;

 

    excludes 3,867,849 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2004, at a weighted average exercise price of $4.55 per share; and

 

    excludes 2,780,231 shares of common stock available for future issuance under our stock option plans and employee stock purchase plan.

 

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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 immediately after this offering. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number of shares of our common stock outstanding. Our pro forma net tangible book value as of March 31, 2004 was approximately $             million, or $             per share of common stock, after giving effect to the issuance of warrants to purchase 1,400,000 shares of our common stock before the completion of this offering and, upon the completion of this offering, the exercise of these warrants, the exercise of warrants to purchase 1,141,898 shares of our common stock, the redemption of 2,361,276 shares of our series E redeemable convertible preferred stock, the automatic conversion of all of our outstanding shares of series A convertible preferred stock and all of our remaining shares of redeemable convertible preferred stock outstanding, except for all shares of our series D redeemable convertible preferred stock which will remain outstanding, into shares of our common stock and the automatic conversion of all of our outstanding shares of class A common stock into shares of common stock.

 

Assuming the sale by us of the shares of common stock offered in this offering at an assumed initial public offering price of $             per share, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of March 31, 2004 would have been $            , or             per share of common stock. This amount represents an immediate increase in net tangible book value of $             per share of common stock to existing common stockholders and an immediate dilution of $             per share to the new investors purchasing shares in this offering. The following table illustrates the dilution in pro forma net tangible book value per share to new investors:

 

Assumed initial public offering price per share

          $             
               

Pro forma net tangible book value per share as of March 31, 2004

   $                    

Increase in pro forma net tangible book value per share attributable to this offering

             
    

      

Pro forma as adjusted net tangible book value per share after the offering

             
           

Dilution in pro forma net tangible book value per share to new investors

          $  
           

 

The following table sets forth on a pro forma as adjusted basis, as of March 31, 2004, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing holders of common stock and by the new investors purchasing shares of common stock in this offering, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased

    Total Consideration

    Average Price
Per Share


     Number

   Percent

    Amount

   Percent

   

Existing holders of common stock

            %     $                     %     $             

New investors

                              
    
  

 

  

     

Total

        100.0 %          100.0 %      
    
  

 

  

     

 

The table above assumes no exercise of any outstanding stock options, or the exercise of warrants to purchase 917,150 shares of our common stock at a weighted average exercise price of $8.10 per share. As of March 31, 2004, there were 3,867,849 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $4.55 per share and there were 380,231 shares of common stock available for future issuance under our 1997 stock option plan. In April 2004, our board of directors approved a 2004 employee stock purchase plan under which they reserved 300,000 shares for future issuance. In May 2004, our board of directors approved a new 2004 stock incentive plan under which they reserved 2,100,000 shares for future grant or issuance. To the extent that any of these options or warrants are exercised, there will be further dilution to new investors.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes, which are included elsewhere in this prospectus. The selected consolidated statements of operations data for each of the fiscal years ended December 31, 2001, 2002 and 2003 and the selected consolidated balance sheet data as of December 31, 2002 and 2003 are derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The selected consolidated statements of operations data for the three-month periods ended March 31, 2003 and 2004 and the selected consolidated balance sheet data as of March 31, 2004 are derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. The selected consolidated statements of operations data for the fiscal years ended December 31, 1999 and 2000 and the selected consolidated balance sheet data as of December 31, 1999, 2000 and 2001 are derived from our audited consolidated financial statements not included in this prospectus. The selected consolidated balance sheet data as of March 31, 2003 are derived from our unaudited consolidated financial statements not included in this prospectus.

 

     Year Ended December 31,

   

Three Months Ended

March 31,


 
     1999

    2000

    2001

    2002

    2003

    2003

    2004

 
     ($ in thousands, except per share data)  

Consolidated statements of operations data:

                                                        

Revenues

   $ 30,184     $ 47,202     $ 58,146     $ 82,164     $ 112,082     $ 21,616     $ 26,691  

Operating costs and expenses:

                                                        

Distribution and operations

     21,038       33,192       41,299       54,884       72,821       14,311       18,263  

Selling and marketing

     6,604       10,009       9,764       13,089       17,276       3,815       4,616  

General and administrative

     3,312       5,452       4,535       4,454       4,767       1,127       953  

Research and development

     1,492       2,291       1,710       2,211       3,311       733       921  

Depreciation and amortization

     1,468       1,369       1,802       2,901       4,762       1,036       1,018  

Stock-based compensation

     5,803             391                          

Impairment of PRN Network equipment

                       10,866                    
    


 


 


 


 


 


 


Total operating costs and expenses

     39,717       52,313       59,501       88,405       102,937       21,022       25,771  

Income (loss) from operations

     (9,533 )     (5,111 )     (1,355 )     (6,241 )     9,145       594       920  

Other income (expense):

                                                        

Interest income

     466       440       428       331       252       64       97  

Interest expense

     (738 )     (383 )     (243 )                        

Other, net

                       111       831       900       160  
    


 


 


 


 


 


 


Total other income (expense), net

     (272 )     57       185       442       1,083       964       257  
    


 


 


 


 


 


 


Income (loss) before provision for income taxes

     (9,805 )     (5,054 )     (1,170 )     (5,799 )     10,228       1,558       1,177  

Provision for income taxes

                       225       140       21       210  
    


 


 


 


 


 


 


Net income (loss) from continuing operations

     (9,805 )     (5,054 )     (1,170 )     (6,024 )     10,088       1,537       967  

Loss from discontinued operations

     (382 )                                    

Gain on sale of discontinued operations

     3,258                                      
    


 


 


 


 


 


 


Net income (loss)

   $ (6,929 )   $ (5,054 )   $ (1,170 )   $ (6,024 )   $ 10,088     $ 1,537     $ 967  
    


 


 


 


 


 


 


Less: accretion of redeemable convertible preferred stock and warrants

     (1,741 )     (2,965 )     (6,584 )     (18,605 )     (25,955 )     (6,004 )     (7,683 )
    


 


 


 


 


 


 


Net loss attributable to common stockholders

   $ (8,670 )   $ (8,019 )   $ (7,754 )   $ (24,629 )   $ (15,867 )   $ (4,467 )   $ (6,716 )
    


 


 


 


 


 


 


Net income (loss) per common share attributable to common stockholders:

                                                        

Basic and diluted

   $ (2.89 )   $ (2.43 )   $ (1.75 )   $ (4.33 )   $ (2.79 )   $ (0.79 )   $ (1.15 )

Pro forma basic (1)

                                                        

Pro forma diluted (1)

                                                        

Weighted average common shares used in per share calculations (in thousands):

                                                        

Basic and diluted

     3,001       3,299       4,438       5,690       5,681       5,671       5,847  

Pro forma basic (1)

                                                        

Pro forma diluted (1)

                                                        

 

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     Year Ended December 31,

   

Three Months Ended

March 31,


 
     1999

    2000

    2001

    2002

    2003

    2003

    2004

 
     (in thousands, except CVA data)  

Balance sheet data (at end of period):

                                                        

Cash and equivalents

   $ 10,480     $ 10,284     $ 28,699     $ 19,070     $ 16,119     $ 26,549     $ 13,459  

Short-term investments

                             10,400             17,503  

Total assets

     24,667       30,650       60,442       60,845       79,543       65,252       77,036  

Redeemable convertible preferred stock

     20,922       28,861       63,485       88,577       114,532       94,581       122,215  

Total stockholders’ deficit

     (11,054 )     (19,028 )     (27,439 )     (51,225 )     (67,253 )     (55,665 )     (73,918 )

Other financial and operating data:

                                                        

EBITDA (2)

   $ (2,262 )   $ (3,742 )   $ 838     $ 7,526     $ 13,907     $ 1,630     $ 1,938  

EBITDA margin (3)

     (7.5 )%     (7.9 )%     1.4 %     9.2 %     12.4 %     7.5 %     7.3 %

Average number of CVAs (4)

     9,068       17,541       31,151       31,484       33,772       32,764       34,794  

Advertising revenues per CVA (5)

   $ 1,244     $ 1,408     $ 986     $ 1,692     $ 2,279     $ 416     $ 482  

 

Various factors affect the comparability of the above selected consolidated financial data. In 1999, we disposed of a subsidiary and related financial data are presented as components of discontinued operations for that year. As described further in Note 1 to the consolidated financial statements included elsewhere in this prospectus, in 2002 we recorded a $10.9 million impairment loss on PRN Network equipment. Also, as described further in management’s discussion and analysis, in the first quarter of 2003, we recorded a $900,000 gain in other income related to a short-term equipment financing arrangement with a retailer. Upon determination of the price range of this offering, we may effect a potential split of our common stock. The effect of such a potential stock split is not reflected in the accompanying share and per share data or consolidated financial statements.


(1)   The unaudited pro forma basic and diluted net income per share data is adjusted for:

 

    the assumed redemption of 2,361,276 shares of series E redeemable convertible preferred stock for an aggregate amount of approximately $44.6 million and the related sale of              shares of common stock at a per share amount of $             in connection with the offering to generate the redemption funds;

 

    the assumed conversion of all outstanding shares of series B and C redeemable convertible preferred stock and 2,361,284 shares of series E redeemable convertible preferred stock with an aggregate accreted redemption value of $74.4 million into common stock; and

 

    the conversion of all outstanding shares of series A convertible preferred stock into common stock.

 

(2)  

We define EBITDA as net income (loss) excluding other income, net, income taxes, impairment of PRN Network equipment, stock-based compensation, depreciation and amortization. This definition may not be comparable to similarly titled measures reported by other companies. We are presenting EBITDA because it provides an additional way to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss), which we believe provides a more complete understanding of our business than could be obtained without this disclosure. EBITDA is presented solely as a supplemental disclosure because we believe it is a useful tool for investors to assess the operating performance of our business without the effect of other income, net, income taxes non-cash impairment, stock-based compensation, depreciation and amortization expenses, and because we use EBITDA internally to evaluate the performance of our personnel and also as a benchmark to evaluate our operating performance or compare our performance to that of our competitors. The use of EBITDA has limitations and you should not consider EBITDA in isolation from or as an alternative to GAAP measures, such as net income, cash flows from operating activities and consolidated income or cash flow statement data prepared in accordance with GAAP, or as a measure of

 

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profitability or liquidity. The following table sets forth the reconciliation of EBITDA, a non-GAAP financial measure, from net income (loss), our most directly comparable financial measure presented in accordance with GAAP.

 

     Year Ended December 31,

    Three Months
Ended March 31,


 
     1999

    2000

    2001

    2002

    2003

    2003

    2004

 
     ($ in thousands)  

Net income (loss)

   $ (9,805 )   $ (5,054 )   $ (1,170 )   $ (6,024 )   $ 10,088     $ 1,537     $ 967  

Other (income) loss, net

     272       (57 )     (185 )     (442 )     (1,083 )     (964 )     (257 )

Provision for income taxes

                       225       140       21       210  

Impairment of PRN Network equipment

                       10,866                    

Stock-based compensation

     5,803             391                          

Depreciation and amortization

     1,468       1,369       1,802       2,901       4,762       1,036       1,018  
    


 


 


 


 


 


 


EBITDA

   $ (2,262 )   $ (3,742 )   $ 838     $ 7,526     $ 13,907     $ 1,630     $ 1,938  
    


 


 


 


 


 


 


EBITDA margin

     (7.5 )%     (7.9 )%     1.4 %     9.2 %     12.4 %     7.5 %     7.3 %

 

(3)   We define EBITDA margin as our EBITDA expressed as a percentage of our revenues.
(4)   We define a consumer viewing area, or CVA, as a discreet shopping area of the retail store, in which one or more video displays are installed, and the PRN Network is aired. Examples of individual CVAs include the television department of an electronics retailer, the entrance of a mass merchant retailer or a single check-out lane in a grocery store. Because store environments and consumer shopping patterns vary by retailer, CVAs may contain multiple video displays, and we may define CVAs differently based on configuration and programming. Average number of CVAs is calculated quarterly using the number of stores airing the PRN Network and the typical CVA configuration within these stores. Configurations of stores airing the PRN Network change from time to time based on the estimated in-service dates of CVAs.
(5)   We define our advertising revenues per CVA as our advertising revenues in a given period divided by the average number of CVAs for that same period.

 

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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 related notes on pages F-1 through F-25 of this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those discussed in “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements.”

 

General

 

Our Business

 

We are the fifth largest broadcast network, after ABC, CBS, Fox and NBC, and the largest in-store television network in the United States based on monthly reach. Through our proprietary broadcasting network, the PRN Network, we enable national and local advertisers to target consumers in over 5,000 retail stores in all of the 210 designated market areas, or DMAs, in the United States. Based on information provided by several third-party research firms and retailers, we estimate that we deliver approximately 180 million monthly gross impressions to consumers in the stores of leading national retailers. Retailers carrying the PRN Network include Best Buy, Circuit City, Costco, Ralphs, SAM’s Club, Sears and Wal-Mart Stores. We enable advertisers and retailers to deliver high impact and relevant marketing and merchandising messages to customers within large retail stores through a dynamic and targeted medium, which we believe improves the in-store shopping experience.

 

Our History

 

We were incorporated in Delaware in February 1992 as JMC Acquisitions, Inc. We changed our name to PICS Previews, Inc. in January 1994, to Qorvis Media Group in April 1997 and to PRN Corporation in June 2000. We have been selling in-store media for over ten years, and we believe we have developed an excellent reputation for in-store media within the advertising industry.

 

Our business has grown through a combination of our own development of relationships with retailers and a series of acquisitions of businesses with existing retailer relationships. Our Costco, SAM’s Club and Wal-Mart relationships were developed by our internal retail development team. In 1996, we acquired AdVenture Media, a company that provided in-store media to Sears. In 1997, we acquired BBK International Corporation, DBA Stopwatch Entertainment Network, a company that provided in-store media to Best Buy and Circuit City. In 2003, we acquired certain net assets of Impli, a company that provided in-store media to Ralphs. We expect that our future growth will result from a combination of internal development and external acquisition.

 

Historically, we have entered into relationships with retailers where the retailers funded the capital requirements for expansion of the PRN Network in their stores and on an ongoing basis, pay us fees for media management of the PRN Network. Under these arrangements, including our relationship with Wal-Mart Stores, we pay distribution fees to the retailers representing a large portion of the advertising revenues generated through broadcast of the PRN Network in their stores. More recently, as a result of our established advertising base and media management and operations expertise, we have pursued, and intend to continue to pursue, alternative business arrangements with retailers. These alternatives include establishing retailer relationships whereby we fund some or all of the capital requirements for expansion and some or all of the ongoing costs of the PRN Network. We believe this approach will allow us to pay substantially lower distribution fees, sign long-term contracts more quickly and realize substantially greater operating cash flows over time.

 

Regardless of the structure of our retailer relationships, our technology infrastructure is highly scalable and can support incremental advertising without proportionately increasing our distribution and operations costs.

 

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Quarterly Revenue Growth

 

We have experienced significant growth in our revenues. Starting with a base in annual revenues of $58.1 million in 2001, our revenues grew to $112.1 million for the year ended December 31, 2003. The following depicts growth of our revenues on a quarterly basis from January 1, 2001 through March 31, 2004:

 

LOGO

 

Our revenues are subject to seasonality due to general retail trends. Consequently, our revenues are generally highest in the third and fourth quarters of the calendar year.

 

Sources of Revenues

 

We derive revenues from services related to the operation of the PRN Network from three sources, which are advertising, media management and creative.

 

Advertising revenues are generated from the sale of media placements on the PRN Network to advertisers and agencies. Media management revenues consist of fees paid by retailers to us for our management of the PRN Network in their stores. Creative services revenues are generated from fees paid by advertisers and retailers for our creation of programming.

 

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The following table provides a comparative summary of revenues by service (in thousands):

 

     Year Ended December 31,

   Three Months Ended
March 31,


     2001

   2002

   2003

   2003

   2004

Advertising

   $ 30,718    $ 53,275    $ 76,965    $ 13,627    $ 16,774

Media management

     24,955      26,412      26,584      6,481      6,846

Creative

     2,473      2,477      8,533      1,508      3,071
    

  

  

  

  

     $ 58,146    $ 82,164    $ 112,082    $ 21,616    $ 26,691
    

  

  

  

  

 

Our revenues are driven by our relationships with retailers, our sales of airtime and creative services to advertisers and the distribution of the PRN Network. We measure the distribution of the PRN Network in terms of consumer viewing areas. We define a consumer viewing area, or CVA, as a discreet shopping area of the retail store, in which one or more video displays are installed, and the PRN Network is aired. Examples of individual CVAs include the television department of an electronics retailer, the entrance of a mass merchant retailer or a single check-out lane in a grocery store. Because store environments and consumer shopping patterns vary by retailer, CVAs may contain multiple video displays, and we may define CVAs differently based on configuration and programming. Average number of CVAs is calculated quarterly using the number of stores airing the PRN Network and the typical CVA configuration within these stores. Configurations of stores airing the PRN Network change from time to time based on the estimated in-service dates of CVAs. We expect that there will be a lag between when we deploy new CVAs and when we begin to realize revenues related to those new CVAs. We expect that this lag will result in lower short-term advertising revenues per CVA. High growth in new CVA deployment may exacerbate these downward pressures on advertising revenues per CVA.

 

Our Pilot Programs

 

Pilot programs represent an important element of our effort to establish new retailer relationships because the programs allow new potential customers to test the PRN Network in their retail locations with a low upfront commitment. The majority of our existing retailer relationships began as pilot programs. We are currently conducting pilot programs with several retailers. We do not generate significant advertising revenues during pilot programs, and therefore experience short-term pressures on our operating margins. Pilot programs do not necessarily lead to long-term retailer relationships.

 

Backlog

 

Backlog represents the future advertising and creative services revenues not yet recorded from agreements with advertisers and retailers. We believe our backlog allows us to more accurately forecast revenues for future periods. As of March 31, 2004, backlog amounted to $43.1 million, compared to $27.6 million at March 31, 2003. Of our backlog at March 31, 2004, $41.9 million related to revenues that we plan to recognize in the year ending December 31, 2004. Due to unexpected cancellations of our agreements with advertisers and retailers and other unforeseen events, our backlog at any particular date could decline and is not necessarily indicative of actual revenues for any future period.

 

Distribution and Operations

 

Our distribution and operations expenses are comprised of distribution fees paid to retailers and expenses related to acquiring and assembling programming and maintenance and support of the PRN Network. These expenses include staffing, outside services and facilities related to distribution and operation of the PRN Network. Our retailer relationships often provide for varying distribution fees as a percentage of advertising revenues as we achieve certain annual revenue milestones. We believe that over time our distribution and operations expenses will increase in absolute dollars but decline as a percentage of revenues.

 

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Selling and Marketing

 

Selling and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, marketing programs, travel, facilities overhead and bonuses and commissions for sales representatives. Marketing expenses also include the costs of developing relationships with new retailers, including some costs related to our test or pilot programs with retailers. These costs also include our viewership studies, which are comprised of third-party research fees and travel-related expenses. We anticipate that our selling and marketing expenses will increase as we hire additional personnel, increase revenues and related commissions and market additional retailer advertising opportunities.

 

General and Administrative

 

General and administrative expenses consist primarily of compensation and related costs for finance and accounting, human resources, patent and corporate legal expenses and facilities overhead. We anticipate that our general and administrative expenses will increase over time as we hire additional personnel and incur additional costs of being a publicly traded company.

 

Research and Development

 

Research and development expenses consist primarily of compensation and related personnel costs as well as software maintenance and facilities costs related to our research and development activities. All research and development costs are expensed in the period incurred. We intend to continue to invest in research and development and believe that these expenses may increase over time, but not necessarily in direct correlation with increases in revenues.

 

Impairment of PRN Network Equipment

 

In 2001, we entered into an agreement with a retailer to install the PRN Network in selected store locations. In January 2002, this retailer filed for Chapter 11 bankruptcy protection. In order to fulfill our agreement with this retailer, we purchased property and equipment in advance of installation totaling approximately $15.3 million. Subsequent to this retailer’s bankruptcy filing, the retailer rejected its contract with us.

 

As further described in Note 5 to our audited consolidated financial statements, we recorded an impairment charge of approximately $10.9 million in 2002 to reduce the related PRN Network equipment to its estimated fair value. No further impairment occurred. The estimates used in calculating the amount of impairment were based on the best information available to management. It is reasonably likely that these estimates could change and that the result of such a change in estimate could be material to the accompanying consolidated financial statements.

 

Provision for Income Taxes

 

We recognize deferred tax assets and liabilities on differences between the book and tax basis of assets and liabilities using currently effective rates. Further, deferred tax assets are recognized for the expected realization of available net operating loss carryforwards. A valuation allowance is recorded to reduce a deferred tax asset to an amount that we expect to realize in the future. We continually review the adequacy of the valuation allowance and recognize these benefits if a reassessment indicates that it is more likely than not that these benefits will be realized. In addition, we continuously evaluate our tax contingencies and recognize a liability when we believe that it is probable that a liability exists.

 

At December 31, 2003, we had net operating loss carryforwards for federal income tax purposes of approximately $12.2 million, which expire in varying amounts from 2018 through 2020, and net operating loss carryforwards for state income tax purposes of approximately $7.2 million, which expire in varying amounts from 2004 through 2017. Because of the “change in ownership” provisions of the Tax Reform Act of 1986, a

 

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portion of our net operating loss carryforwards and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. At December 31, 2003, we also had $326,000 of California Enterprise Zone credits that carry forward indefinitely.

 

Net Income

 

We first became profitable in the second quarter of 2002. If not for the non-recurring impairment of PRN Network equipment, as described above, we would have been profitable in each of the last eight quarters. One of our key objectives is to maintain and increase our profitability going forward.

 

Non-GAAP Financial Measures

 

EBITDA and EBITDA Margin

 

We define EBITDA as net income (loss) excluding other income, net, income taxes, impairment of PRN Network equipment, stock-based compensation, depreciation and amortization. This definition may not be comparable to similarly titled measures reported by other companies. We are presenting EBITDA because it provides an additional way to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss), which we believe provides a more complete understanding of our business than could be obtained without this disclosure. EBITDA is presented solely as a supplemental disclosure because we believe it is a useful tool for investors to assess the operating performance of our business without the effect of other income, net, income taxes, non-cash impairment, stock-based compensation, depreciation and amortization expenses, and because we use EBITDA internally to evaluate the performance of our personnel and also as a benchmark to evaluate our operating performance or compare our performance to that of our competitors. The use of EBITDA has limitations and you should not consider EBITDA in isolation from or as an alternative to GAAP measures, such as net income, cash flows from operating activities and consolidated income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. The following table sets forth the reconciliation of EBITDA, a non-GAAP financial measure, from net income (loss), our most directly comparable financial measure presented in accordance with GAAP. We define EBITDA margin as our EBITDA expressed as a percentage of our revenues.

 

     Year Ended December 31,

    Three Months
Ended March 31,


 
     2001

    2002

    2003

    2003

    2004

 
     ($ in thousands)  

Net income (loss)

   $ (1,170 )   $ (6,024 )   $ 10,088     $ 1,537     $ 967  

Other income, net

     (185 )     (442 )     (1,083 )     (964 )     (257 )

Provision for income taxes

           225       140       21       210  

Impairment of PRN Network equipment

           10,866                    

Stock-based compensation

     391                          

Depreciation and amortization

     1,802       2,901       4,762       1,036       1,018  
    


 


 


 


 


EBITDA

   $ 838     $ 7,526     $ 13,907     $ 1,630     $ 1,938  

EBITDA margin

     1.4 %     9.2 %     12.4 %     7.5 %     7.3 %

 

Advertising Revenues per CVA

 

We define our advertising revenues per CVA as our advertising revenues in a given period divided by the average number of CVAs for that same period. We plan to expand the number of CVAs where we broadcast the PRN Network. We expect that there will be a lag between when we deploy new CVAs and when we begin to realize revenues related to those new CVAs. We expect that this lag will result in lower short-term advertising revenues per CVA before reverting back to or exceeding our pre-deployment levels. This effect can be seen in our “Selected Consolidated Financial Data” from 2000 to 2002. High growth in new CVA deployment may exacerbate these downward pressures on advertising revenues per CVA.

 

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Critical Accounting Policies and Use of Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The application of GAAP requires our management to make estimates that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our consolidated financial condition or results of operations will be affected.

 

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Our management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our audit committee. Refer to Note 1 to the consolidated financial statements for a further description of our accounting policies.

 

Revenue Recognition

 

We generate revenues from services related to the operation of the PRN Network. These services include advertising, media management and creative. Advertising revenues are recognized ratably over the period of the related broadcast campaigns. Revenues relating to media management are recognized as related services are performed. For creative services, revenues are recognized in the period in which the creative is complete and the related programming begins to air.

 

In many cases, customers purchase multiple services from us at one time. In these cases, we follow the guidance of Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Each time that a customer purchases multiple services from us, objective evidence of the fair market value of undelivered services exists. As a result, we either recognize revenues for delivered services based on fair market value of those services, when known, or the residual method, using the known fair market value of the undelivered services, when such delivered fair market value is unknown.

 

We generally bill in advance for our services and in such cases, billed amounts are recorded as deferred revenue until such time that we recognize them according to the foregoing methods.

 

Distribution and Operations

 

We generally recognize distribution and operations expenses in the period in which they are incurred. To the extent that expenses arise related to discreet revenue earning events, we recognize those expenses in the periods in which the related revenues are recognized.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

We perform ongoing credit evaluations of our customers and generally do not require collateral. We make provisions for potential credit losses at the time revenues are recognized and provide an allowance for losses on receivables based on a review of the current status of existing receivables and our historical collection experience. Receivables are charged to the allowance accounts when the accounts are deemed uncollectible. Credit losses have been within management’s expectation.

 

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Stock-Based Compensation

 

We have a stock-based employee compensation plan, which is described more fully in Note 1 to our consolidated financial statements. We account for this plan under the recognition and measurement principles of the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations. Under the intrinsic value method, compensation cost is the excess, if any, of the fair market value of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. In conjunction with this certain options granted under this plan in 1999 and certain warrant issuances for services in 2001, we recorded stock-based compensation expense. No stock-based employee compensation after 2001 is reflected in net income, as all options granted under our plan after December 31, 2001 had an exercise price equal to or greater than the estimated fair market value of the underlying common stock on the date of grant.

 

Accounting for equity instruments granted or sold by us requires fair value estimates of the equity instrument granted or sold. If our estimates of the fair value of these equity instruments are too high or too low, our expenses may be over- or under-stated. Equity instruments granted or sold in exchange for the receipt of goods or services and the value of those goods or services cannot be readily estimated, as is true in connection with most stock options and warrants granted to employees and non-employees, and we estimated the fair value of the equity instruments based upon consideration of factors which we deemed to be relevant at the time.

 

The fair market value of our common stock is determined by our board of directors contemporaneously with the grant of a stock option. Prior to the existence of a public trading market for our common stock, our board of directors considered numerous objective and subjective factors in determining the fair market value of our common stock. At the time of option grants and other stock issuances, our board of directors considered the redemption rights, liquidation preferences, dividend rights, voting control and anti-dilution protection attributable to our then-outstanding redeemable convertible preferred stock, the status of private and public financial markets, valuations of comparable private and public companies, the likelihood of achieving a liquidity event, our existing financial resources, our anticipated capital needs, dilution to common stockholders from anticipated future financings and a general assessment of future business risks, as such conditions existed at the time of the grant. Subsequent events or conditions that differ from these factors could have a material impact on stock-based compensation expense in our consolidated financial statements.

 

Accounting for Income Taxes

 

We account for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method, we determine deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s consolidated financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenue, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in the consolidated financial statements. Because it is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, hence giving rise to a deferred tax asset. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance.

 

As of December 31, 2003, we had recorded a full valuation allowance of $8.9 million against our deferred tax assets, due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward, before they expire. As part of the process of preparing our

 

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consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our actual current tax exposure together with assessing temporary differences that may result in deferred tax assets. Management judgment is required in determining any valuation allowance recorded against our net deferred tax assets. Any such valuation allowance would be based on our estimates of taxable income and the period over which our deferred tax assets would be recoverable.

 

Results of Operations

 

Three Months Ended March 31, 2004 Versus Three Months Ended March 31, 2003

 

The following table sets forth our results of operations based on the amounts and percentage relationship of the items listed to revenues for the periods presented.

 

     Three Months Ended March 31,

 
     2003

    2004

 
     Amount

   %

    Amount

   %

 
     ($ in thousands)  

Revenues

   $ 21,616    100.0 %   $ 26,691    100.0 %

Operating costs and expenses:

                          

Distribution and operations

     14,311    66.2       18,263    68.4  

Selling and marketing

     3,815    17.6       4,616    17.3  

General and administrative

     1,127    5.2       953    3.6  

Research and development

     733    3.4       921    3.5  

Depreciation and amortization

     1,036    4.8       1,018    3.8  
    

  

 

  

Total operating costs and expenses

     21,022    97.3       25,771    96.6  

Income from operations

     594    2.7       920    3.4  

Other income:

                          

Interest income

     64    0.3       97    0.4  

Other income, net

     900    4.2       160    0.6  
    

  

 

  

Total other income, net

     964    4.5       257    1.0  
    

  

 

  

Income before provision for income taxes

     1,558    7.2       1,177    4.4  

Provision for income taxes

     21    0.1       210    0.8  
    

  

 

  

Net income

   $ 1,537    7.1 %   $ 967    3.6 %
    

  

 

  

 

Revenues

 

Revenues for the three months ended March 31, 2004 were $26.7 million, compared to $21.6 million for the three months ended March 31, 2003, an increase of $5.1 million, or 23.5%. Revenues increased primarily due to an increase in the utilization of available advertising inventory on the PRN Network, as demonstrated by the increase in advertising revenue per CVA from $416 in 2003 to $482 in 2004. Increased fees for media management services and increased creative services on behalf of our advertising customers further contributed to our revenue growth.

 

Distribution and Operations

 

Distribution and operations expense for the three months ended March 31, 2004 was $18.3 million, compared to $14.3 million for the three months ended March 31, 2003, an increase of $4.0 million, or 27.6%.

 

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Distribution and operations expense increased primarily due to an increase in retailer distribution fees of approximately $1.8 million as a result of growth in our advertising revenues. In the three months ended March 31, 2004, we also incurred expenses of approximately $1.0 million related to temporary staffing and other costs associated with expanded retailer relationships ahead of pursuing advertising sales. We expect to continue to make investments in new retailer relationships where there may be a lag between our investments and the realization of revenues related to this expansion.

 

Selling and Marketing

 

Selling and marketing expense for the three months ended March 31, 2004 was $4.6 million, compared to $3.8 million for the same period of 2003, an increase of $801,000, or 21.0%. The majority of this increase was related to increased staffing and higher costs associated with market studies in 2004 over 2003. Overall, selling and marketing expense decreased in relation to revenues to 17.3% for the three months ended March 31, 2004 as compared to 17.6% for the three months ended March 31, 2003, reflecting an increase in operating leverage.

 

General and Administrative

 

General and administrative expense decreased to $953,000 during the three months ended March 31, 2004 from $1.1 million in the same period of 2003, primarily as a result of lower professional service fees and increased corporate efficiencies. As a percentage of revenues, general and administrative costs decreased to 3.6% for the three months ended March 31, 2004 from 5.2% for the three months ended March 31, 2003.

 

Research and Development

 

Research and development expense for the three months ended March 31, 2004 was $921,000 compared to $733,000 for the three months ended March 31, 2003, an increase of $188,000, or 25.6%. Research and development expense as a percentage of revenues increased slightly to 3.5% for the three months ended March 31, 2004 from 3.4% for the three months ended March 31, 2003. This increase was primarily attributable to increased staffing to address new PRN Network features.

 

Depreciation and Amortization

 

Depreciation and amortization expense for the three months ended March 31, 2004 and 2003 was relatively constant at $1.0 million.

 

Other Income, Net

 

Other income, net for the three months ended March 31, 2004 was $257,000, compared to $964,000 for the three months ended March 31, 2003, a decrease of $707,000, or 73.3%. The decrease was primarily due to a $900,000 gain that we realized in the first quarter of 2003 from a short-term equipment financing arrangement with a retailer whereby we advanced funds to the retailer for equipment purchased by the retailer in exchange for a return on the funds that we advanced. This transaction was a non-standard retailer arrangement, and we do not expect similar arrangements to occur in the future. Other income in the first quarter of 2004 was primarily related to a settlement with a former service provider.

 

Provision for Income Taxes

 

We recorded an income tax provision for the three months ended March 31, 2004 of $210,000, compared to $21,000 for the three months ended March 31, 2003. These tax provisions were primarily related to income taxes that could not be offset by net operating loss carryforwards. The increase in income tax provision for the first quarter of 2004 was related to the increase in our income from operations during that period.

 

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Net Income

 

Our net income for the three months ended March 31, 2004 was $967,000, compared to $1.5 million for the three months ended March 31, 2003. The decrease in net income was primarily the result of the non-recurring $900,000 gain in the first quarter of 2003 that is described above, and a general increase in operating expenses as a result of expansion, partially offset by the increase in revenues.

 

Year Ended December 31, 2003 Versus Year Ended December 31, 2002

 

The following table sets forth our results of operations based on the amounts and percentage relationship of the items listed to revenues for the periods presented.

 

     Years Ended December 31,

 
     2002

    %

    2003

   %

 
     ($ in thousands)  

Revenues

   $ 82,164     100.0 %   $ 112,082    100.0 %

Operating costs and expenses:

                           

Distribution and operations

     54,884     66.8       72,821    65.0  

Selling and marketing

     13,089     15.9       17,276    15.4  

General and administrative

     4,454     5.4       4,767    4.3  

Research and development

     2,211     2.7       3,311    3.0  

Depreciation and amortization

     2,901     3.5       4,762    4.2  

Impairment of PRN Network equipment

     10,866     13.2          0.0  
    


 

 

  

Total operating costs and expenses

     88,405     107.6       102,937    91.8  

Income (loss) from operations

     (6,241 )   (7.6 )     9,145    8.2  

Other income:

                           

Interest income

     331     0.4       252    0.2  

Other income, net

     111     0.1       831    0.7  
    


 

 

  

Total other income, net

     442     0.5       1,083    1.0  
    


 

 

  

Income (loss) before provision for income taxes

     (5,799 )   (7.1 )     10,228    9.1  

Provision for income taxes

     225     0.3       140    0.1  
    


 

 

  

Net income (loss)

   $ (6,024 )   (7.3 )%   $ 10,088    9.0 %
    


 

 

  

 

Revenues

 

Revenues for the year ended December 31, 2003 were $112.1 million, compared to $82.2 million for the year ended December 31, 2002, an increase of $29.9 million, or 36.4%. Revenues increased primarily due to an increase in the utilization of available advertising inventory on the PRN Network, as demonstrated by the increase in advertising revenue per CVA from $1,692 in 2002 to $2,279 in 2003. Increased fees for media management services and increased creative services on behalf of our advertising customers further contributed to our revenue growth.

 

Distribution and Operations

 

Distribution and operations expense for the year ended December 31, 2003 was $72.8 million, compared to $54.9 million for the year ended December 31, 2002, an increase of $17.9 million, or 32.7%. Distribution and operations expense increased primarily due to an increase in retailer distribution fees of approximately $15.1 million as a result of growth in our advertising revenues.

 

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Table of Contents

Distribution and operations expense as a percentage of revenues decreased from 66.8% in 2002 to 65.0% in 2003 due primarily to a decrease in distribution fees to retailers as a percentage of revenues combined with other improvements in operating efficiencies.

 

Selling and Marketing

 

Selling and marketing expense for the year ended December 31, 2003 was $17.3 million, compared to $13.1 million for the prior year, an increase of $4.2 million, or 32.0%. Selling and marketing expenses, primarily personnel costs and related commissions, increased primarily as a result of higher revenues and additional sales support resources. Our sales personnel and commission costs increased by $2.4 million while overall, selling and marketing expense remained relatively constant in relation to revenues, decreasing to 15.4% in 2003 as compared to 15.9% in 2002 as a result of increased efficiencies.

 

General and Administrative

 

General and administrative expense increased to $4.8 million in 2003 from $4.5 million in 2002, primarily as a result of increased compensation and corporate overhead expenses. As a percentage of revenues, general and administrative costs decreased to 4.3% in 2003 from 5.4% in 2002.

 

Research and Development

 

Research and development expense for the year ended December 31, 2003 was $3.3 million compared to $2.2 million for the year ended December 31, 2002, an increase of $1.1 million, or 49.8%. Research and development increased primarily due to increased staffing to address the development of new PRN Network features. Research and development expense as a percentage of revenues increased from 2.7% in 2002 to 3.0% in 2003.

 

Depreciation and Amortization

 

Depreciation and amortization expense for the year ended December 31, 2003 was $4.8 million, compared to $2.9 million for the year ended December 31, 2002, an increase of $1.9 million, or 64.2%. The increase was primarily due to the deployment of additional PRN Network equipment in 2003. In 2003, we also recorded depreciation and amortization expense related to our acquisition of certain assets from Impli.

 

Impairment of PRN Network Equipment

 

As discussed above, our $10.9 million charge in 2002 for impairment of PRN Network equipment related to an agreement that we had with a retailer that entered bankruptcy protection. This was a non-recurring expense that we reported to write the related assets down to our expected recovery value. While we do not expect further impairments of this kind, we have made estimates in arriving at our conclusions and we could experience further such impairments in the future that could have a material impact on our consolidated results of operations. We have had no such further impairments since 2002.

 

Other Income, Net

 

Other income, net for the year ended December 31, 2003 was $1.1 million, compared to $442,000 for the year ended December 31, 2002, an increase of $641,000, or 145.0%. The increase was primarily due to a $900,000 gain that we realized from a short-term financing equipment financing arrangement with a retailer whereby we advanced funds to the retailer for equipment purchased by the retailer in exchange for a return on the funds that we advanced. This transaction was a non-standard retailer arrangement, and we do not expect similar arrangements to occur in the future. The increase in 2003 was partially offset by lower interest income as a result of lower interest rates available in capital markets and disposal of equipment in connection with our move to our new facilities in 2003.

 

 

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Provision for Income Taxes

 

We recorded an income tax provision for the year ended December 31, 2003 of $140,000, compared to $225,000 for the year ended December 31, 2002. These 2002 tax provisions were primarily related to income taxes that could not be offset by net operating loss carryforwards. The increase in 2003 over 2002 was related to the increase in our income from operations, excluding currently non-deductible portion of our impairment losses in 2002.

 

Net Income (Loss)

 

Our net income for the year ended December 31, 2003 was $10.1 million, compared to a net loss of $6.0 million for the year ended December 31, 2002. The increase in net income was primarily the result of the $10.9 million impairment loss recorded in 2002 and the increase in revenues partially offset by the increase in other operating expenses, as more fully described above.

 

Year Ended December 31, 2002 Versus Year Ended December 31, 2001

 

The following table sets forth our results of operations based on the amounts and percentage relationship of the items listed to revenues for the periods presented.

 

     Years Ended December 31,

 
     2001

    %

    2002

    %

 
     ($ in thousands)  

Revenues

   $ 58,146     100.0 %   $ 82,164     100.0 %

Operating costs and expenses:

                            

Distribution and operations

     41,299     71.0       54,884     66.8  

Selling and marketing

     9,764     16.8       13,089     15.9  

General and administrative

     4,535     7.8       4,454     5.4  

Research and development

     1,710     2.9       2,211     2.7  

Depreciation and amortization

     1,802     3.1       2,901     3.5  

Stock-based compensation

     391     0.7           0.0  

Impairment of PRN Network equipment

         0.0       10,866     13.2  
    


 

 


 

Total operating costs and expenses

     59,501     102.3       88,405     107.6  

Loss from operations

     (1,355 )   (2.3 )     (6,241 )   (7.6 )

Other income (expense):

                            

Interest income, net

     185     0.3       331     0.4  

Other income, net

         0.0       111     0.1  
    


 

 


 

Total other income, net

     185     0.3       442     0.5  
    


 

 


 

Loss before provision for income taxes

     (1,170 )   (2.0 )     (5,799 )   (7.1 )

Provision for income taxes

         0.0       225     0.3  
    


 

 


 

Net loss

   $ (1,170 )   (2.0 )%   $ (6,024 )   (7.3 )%
    


 

 


 

 

Revenues

 

Revenues for the year ended December 31, 2002 were $82.2 million, compared to $58.1 million for the year ended December 31, 2001, an increase of approximately $24.0 million, or 41.3%. Revenues increased primarily due to an increase in the utilization of available advertising inventory on the PRN Network, as demonstrated by the increase in advertising revenue per CVA from $986 in 2001 to $1,692 in 2002. Increased fees for media management services and increased creative services on behalf of our advertising customers further contributed to our revenue growth.

 

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Table of Contents

Distribution and Operations

 

Distribution and operations expense for the year ended December 31, 2002 was $54.9 million, compared to $41.3 million for the year ended December 31, 2001, an increase of $13.6 million, or 32.9%. The increase is primarily due to higher retailer distribution fees. Distribution and operations expense as a percentage of revenues decreased from 71.0% in 2001 to 66.8% in 2002 due primarily to improved operating efficiencies.

 

Selling and Marketing

 

Selling and marketing expense for the year ended December 31, 2002 was $13.1 million, compared to $9.8 million for the prior year, an increase of $3.3 million, or 34.1%. This increase related to higher sales commissions, increased market studies and increased staffing to market the PRN Network to additional retailers. Despite these expansions, our overall selling and marketing expense decreased in relation to revenues to 15.9% in 2002 from 16.8% in 2001, due primarily to improvements in operating leverage.

 

General and Administrative

 

General and administrative expense remained substantially constant at $4.5 million in both 2002 and 2001. As a percentage of revenues, general and administrative expenses decreased to 5.4% in 2002 from 7.8% in 2001 as a result of higher revenues and improvements in administrative and facility cost control.

 

Research and Development

 

Research and development expense for the year ended December 31, 2002 was $2.2 million compared to $1.7 million for the year ended December 31, 2001, an increase of $501,000, or 29.3%. Research and development expense increased primarily due to expanded headcount and professional services related to the development of new PRN Network features. Research and development expense as a percentage of revenues remained relatively consistent at 2.9% in 2001 and 2.7% in 2002.

 

Depreciation and Amortization

 

Depreciation and amortization expense for the year ended December 31, 2002 was $2.9 million, compared to $1.8 million for the year ended December 31, 2001, an increase of $1.1 million, or 61.0%. The increase was primarily due to the placement in service of additional software related to the PRN Network.

 

Stock-Based Compensation

 

In 2001, we issued warrants to service providers and recorded compensation expense based on the fair value of those warrants, using the Black-Scholes option pricing model. We had no such expenses in 2002.

 

Impairment of PRN Network Equipment

 

As discussed above, our $10.9 million charge in 2002 for impairment of PRN Network equipment related to an agreement that we had with a retailer that filed for bankruptcy protection. This was a non-recurring expense to write the related assets down to their expected recovery value. While we do not expect further impairments of this kind, we have made estimates in arriving at our conclusions and we could experience further such impairments in the future that could have a material impact on our consolidated results of operations. We have had no such impairment in 2001 or in any year other than 2002.

 

Other Income, Net

 

Other income, net for the year ended December 31, 2002 was $442,000, compared to $185,000 for the year ended December 31, 2001, an increase of $257,000, or 138.9%. The increase was due primarily to decreased settlement costs in 2002.

 

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Table of Contents

Provision for Income Taxes

 

We recorded an income tax provision for the year ended December 31, 2002 of $225,000, compared to $0 for the year ended December 31, 2001. The 2002 tax provision was primarily related to income taxes that could not be offset by net operating loss carryforwards. The increase in 2002 was related to the improvement in our operating results, excluding currently non-deductible portion of our impairment losses.

 

Net Loss

 

Our net loss for the year ended December 31, 2002 was $6.0 million, compared to a net loss of $1.2 million for the year ended December 31, 2001. The increase in net loss is primarily the result of our impairment loss, offset by the net results of an increase in revenues and the increase in operating expenses, as more fully described above.

 

Selected Quarterly Financial Information

 

The following tables set forth our unaudited quarterly statements of operations data for each of the nine quarters ended March 31, 2004, as well as such data expressed as a percentage of our revenues for the quarters presented. This unaudited information has been prepared on a basis consistent with our audited consolidated financial statements appearing elsewhere in this prospectus and, in the opinion of our management, includes all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the information for the periods presented. The unaudited quarterly information should be read in conjunction with the financial statements and notes included elsewhere in this prospectus. Operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year.

 

    Three Months Ended

    Mar. 31,
2002


    Jun. 30,
2002


    Sept. 30,
2002


  Dec. 31,
2002


    Mar. 31,
2003


  Jun. 30,
2003


  Sept. 30,
2003


  Dec. 31,
2003


    Mar. 31,
2004


    (in thousands)
Consolidated statement of operations data:                                                              

Revenues

  $ 14,532     $ 15,560     $ 20,655   $ 31,417     $ 21,616   $ 25,776   $ 27,726   $ 36,964     $ 26,691

Operating costs and expenses:

                                                             

Distribution and operations

    9,893       9,843       13,389     21,759       14,311     17,189     17,932     23,389       18,263

Selling and marketing

    3,249       3,109       3,240     3,491       3,815     4,243     4,140     5,078       4,616

General and administrative

    927       1,377       1,274     876       1,127     965     1,231     1,444       953

Research and development

    494       510       565     642       733     858     797     923       921

Depreciation and amortization

    605       688       692     916       1,036     1,190     1,290     1,246       1,018

Impairment of PRN Network equipment

                    10,866                        
   


 


 

 


 

 

 

 


 

Total operating costs and expenses

    15,168       15,527       19,160     38,550       21,022     24,445     25,390     32,080       25,771

Income (loss) from operations

    (636 )     33       1,495     (7,133 )     594     1,331     2,336     4,884       920

Other income (expense):

                                                             

Interest income

    99       69       79     84       64     65     53     70       97

Other income, net

    (300 )     (1 )     2     410       900     —       —       (69 )     160
   


 


 

 


 

 

 

 


 

Total other income (expense), net

    (201 )     68       81     494       964     65     53     1       257
   


 


 

 


 

 

 

 


 

Income (loss) before provision for income taxes

    (837 )     101       1,576     (6,639 )     1,558     1,396     2,389     4,885       1,117

Provision for income taxes

    46       46       49     84       21     19     33     67       210
   


 


 

 


 

 

 

 


 

Net income (loss)

  $ (883 )   $ 55     $ 1,527   $ (6,723 )   $ 1,537   $ 1,377   $ 2,356   $ 4,818     $ 967
   


 


 

 


 

 

 

 


 

 

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Table of Contents
    Three Months Ended

 
    Mar. 31,
2002


    Jun. 30,
2002


    Sept. 30,
2002


    Dec. 31,
2002


    Mar. 31,
2003


    Jun. 30,
2003


    Sept. 30,
2003


    Dec. 31,
2003


    Mar. 31,
2004


 
As a percent of revenues:                                                      

Revenues

  100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Operating costs and expenses:

                                                     

Distribution and operations

  68.1     63.3     64.8     69.3     66.2     66.7     64.7     63.3     68.4  

Selling and marketing

  22.4     20.0     15.7     11.1     17.6     16.5     14.9     13.7     17.3  

General and administrative

  6.4     8.8     6.2     2.8     5.2     3.7     4.4     3.9     3.6  

Research and development

  3.4     3.3     2.7     2.0     3.4     3.3     2.9     2.5     3.5  

Depreciation and amortization

  4.2     4.4     3.4     2.9     4.8     4.6     4.7     3.4     3.8  

Impairment of PRN Network equipment

  0.0     0.0     0.0     34.6     0.0     0.0     0.0     0.0     0.0  
   

 

 

 

 

 

 

 

 

Total operating costs and expenses

  104.4     99.8     92.8     122.7     97.3     94.8     91.6     86.8     96.6  

Income (loss) from operations

  (4.4 )   0.2     7.2     (22.7 )   2.7     5.2     8.4     13.2     3.4  

Other income (expense):

                                                     

Interest income

  0.7     0.4     0.4     0.3     0.3     0.3     0.2     0.2     0.4  

Other income, net

  (2.1 )   0.0     0.0     1.3     4.2     0.0     0.0     (0.2 )   0.6  
   

 

 

 

 

 

 

 

 

Total other income (expense), net

  (1.4 )   0.4     0.4     1.6     4.5     0.3     0.2     0.0     1.0  
   

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes

  (5.8 )   0.6     7.6     (21.1 )   7.2     5.4     8.6     13.2     4.4  

Provision for incomes taxes

  0.3     0.3     0.2     0.3     0.1     0.1     0.1     0.2     0.8  
   

 

 

 

 

 

 

 

 

Net income (loss)

  (6.1 )%   0.4 %   7.4 %   (21.4 )%   7.1 %   5.3 %   8.5 %   13.0 %   3.6 %
   

 

 

 

 

 

 

 

 

 

Liquidity and Capital Resources

 

Since inception, we have financed our operations primarily through sales of equity and borrowings and other credit facilities. More recently, we have funded our business through cash flows from operations. We have received a total of approximately $77.0 million from private offerings of our equity and redeemable convertible preferred stock, before deduction of offering costs. At March 31, 2004, we had approximately $31.0 million in cash and short-term investments on hand.

 

Cash provided by operations for the three months ended March 31, 2004 was $6.3 million. Our cash provided by operations for the year ended December 31, 2003 was $12.2 million, compared to an amount used in operations of $7.0 million for the year ended December 31, 2002. Our cash flows from operations have improved as a result of our increasing revenues and management of expenses, contributing to growth in our overall operating income.

 

Cash used in investing activities was $9.0 million in the three months ended March 31, 2004, primarily as a result of our purchase of $7.1 million in marketable securities and $1.9 million in property and equipment. Our investments in marketable securities are highly liquid and are available for sale should we require the underlying funds for operating purposes. Our cash used in investing activities was $15.0 million for the year ended December 31, 2003, compared to $7.3 million for the year ended December 31, 2002. In 2003 as in the most recent three-month period, net cash used for investing activities was primarily comprised of net purchases of short-term marketable securities. On a net basis, these purchases amounted to $10.4 million for the year ended December 31, 2003. In 2003, we also used $2.6 million to purchase equipment and other property and $2.0 million to acquire certain net assets of Impli. In 2002, we used $7.3 million to purchase equipment and other property.

 

Cash provided from financing activities amounted to $51,000 during the three months ended March 31, 2004. During the year ended December 31, 2003, our cash used in financing activities was $161,000 as compared

 

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to cash provided from financing activities of $4.6 million for the year ended December 31, 2002. The difference was primarily the result of the sale of series E redeemable convertible preferred stock and warrants in 2002. In 2003, we also paid $219,000 as additional consideration to repurchase shares of our common stock.

 

Our working capital at March 31, 2004 was $34.0 million compared to $33.6 million and $24.0 million at December 31, 2003 and 2002, respectively. The progressive increase in working capital was primarily due to our improved profitability.

 

At December 31, 2003 and 2002, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

We intend to use approximately $44.6 million of the net proceeds of this offering to redeem an aggregate of 2,361,276 outstanding shares of our series E redeemable convertible preferred stock. From this redemption consideration, consistent with a prior agreement with holders of our series E redeemable convertible preferred stock, approximately $1.1 million will be further distributed to holders of our series B, C and D redeemable convertible preferred stock and approximately $1.1 million will be further distributed to members of our management and other key employees. See “Use of Proceeds” and “Certain Relationships and Related Transactions.”

 

Based on our current level of operations and anticipated growth, we believe that our cash and short-term investments on-hand, cash flows generated from operations and the net proceeds that we will receive from this offering, will be adequate to finance our working capital and other capital expenditure requirements through at least the next 12 months. Our future capital requirements will depend on a number of factors, including our rate of revenue growth, our expansion of sales and marketing efforts, our level of investment in infrastructure and continuing market acceptance of the PRN Network by advertisers and retailers.

 

If we require additional capital resources to expand our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities. The sale of additional equity or convertible debt securities could result in more dilution to our stockholders. Financing arrangements may not be available to us, or may not be available in amounts or on terms acceptable to us.

 

The following table summarizes our contractual obligations at March 31, 2004, and the effect these obligations are expected to have on our liquidity and cash flow in future periods, assuming a portion of net proceeds from this offering is used to redeem an aggregate of 2,361,276 outstanding shares of series E redeemable convertible preferred stock and the conversion into common stock of all remaining shares of redeemable convertible preferred stock, except series D redeemable convertible preferred stock which will remain outstanding:

 

        Years Ending December 31,

    Total

  Remaining
2004


  2005

  2006

  2007

  2008 and
Thereafter


    (In thousands)

Operating leases

  $ 6,765   $ 890   $ 1,007   $ 955   $ 938   $ 2,975

Series D redeemable convertible preferred stock (1)

    7,832             7,832        
   

 

 

 

 

 

Total contractual obligations

  $ 14,597   $ 890   $ 1,007   $ 8,787   $ 938   $ 2,975
   

 

 

 

 

 


(1)   Represents amounts redeemable beginning on March 31, 2006.

 

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Interest Rate Risk

 

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with an interest rate fixed at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 10% change in interest rates will have a significant impact on our interest income. As of March 31, 2004, all of our investments were in money market and bond funds.

 

Recently Issued Accounting Pronouncements

 

In November 2002, the Emerging Issues Task Force of the FASB issued EITF 00-21, Revenue Arrangements with Multiple Deliverables, which addresses certain aspects of the accounting for arrangements that involve the delivery of performance of multiple products, services, and/or rights to use assets. Under EITF 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables meet certain criteria, including whether the delivered items have stand alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. In addition, the consideration should be allocated among the separate units of accounting based on their fair values, and the applicable revenue recognition criteria should be considered separately for each of the separate units of accounting. EITF 00-21 was effective for revenue arrangements entered into after June 30, 2003. The application of EITF 00-21 did not have a material impact on our financial position, cash flows or results of operations for the year ended December 31, 2003.

 

In January 2003, the FASB issued Interpretation No. 46, or FIN 46, Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB issued a revision to FIN 46. FIN 46 is applicable to us in 2004, however, we do not expect the adoption of FIN 46 to have a material impact on our financial position, cash flows or results of operations.

 

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, or SFAS No. 146. SFAS No. 146 nullified EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002.

 

We adopted the provisions of SFAS No. 146, for exit or disposal activities initiated after December 31, 2002. The adoption of this standard did not have a material impact, however may affect the timing and recognition of any future restructuring costs.

 

Related Party Transactions

 

For a description of our related party transactions, see “Certain Relationships and Related Transactions.”

 

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BUSINESS

 

Overview

 

We are the fifth largest broadcast network, after ABC, CBS, Fox and NBC, and the largest in-store television network in the United States based on monthly reach. Through our proprietary broadcasting network, the PRN Network, we enable national and local advertisers to target consumers in over 5,000 retail stores in all of the 210 designated market areas, or DMAs, in the United States. Based on information provided by several third party research firms and retailers, we estimate that we deliver approximately 180 million monthly gross impressions to consumers in the stores of leading national retailers. Retailers carrying the PRN Network include Best Buy, Circuit City, Costco, Ralphs, SAM’s Club, Sears and Wal-Mart Stores. We enable advertisers and retailers to deliver high impact, relevant and targeted marketing and merchandising messages to consumers within large retail stores. For the year ended December 31, 2003, we generated $112 million of revenues and $10 million of net income.

 

The PRN Network is aired on video displays located in retail stores where we estimate consumers purchased over $250 billion in products and services in 2003. Programming on the PRN Network is targeted to a captive audience of shoppers in the stores of our retailers. Depending on the store configuration, consumers can view and listen to our programming in high traffic areas, key departments, areas where consumers wait for service and check-out lanes. Over the last ten years, we have developed a television programming format that we believe improves the shopping experience by providing relevant, informative and entertaining content to consumers in the retail environment. Our programming consists primarily of traditional television advertising, custom advertising segments and other content supplied by leading media companies including Discovery, ESPN, the Food Network and Lifetime.

 

In 2003, more than 150 advertisers purchased airtime on the PRN Network, including consumer product companies, such as Gillette, Kraft, Procter & Gamble, Reckitt Benckiser and Unilever, entertainment companies, such as MGM, Walt Disney and Warner Brothers, consumer electronics companies, such as Canon and Sony, satellite service providers, such as DIRECTV and Echostar, and television networks such as NBC. The PRN Network enables advertisers to target busy, purchase-oriented consumers with relevant and timely advertising messages resulting in significant brand recall. In a March 2002 custom study of a major U.S. retailer, Nielsen Media Research reported average aided plus unaided brand recall of 66.4%, as a percentage of Modeled Claimed Commercial Audience among viewers ten years of age and older.

 

We have developed software and other proprietary technologies, and have been issued eight patents, for operating the PRN Network. Our network consists of a media management center that is connected, primarily via a satellite network, to media servers in each retail store location that carries the PRN Network. Our patented technology enables us to cost-effectively manage, distribute and air thousands of media elements on a regular basis and manage media by store, by department and by day in order to reach our advertisers’ desired audience.

 

Our Market Opportunity

 

We believe our target addressable market is the $53 billion television advertising market, the largest segment of the $149 billion U.S. major media advertising market as defined by Zenith Optimedia. We believe the effectiveness of traditional network television advertising is weakening due to evolving viewing habits, emerging technologies and additional at-home entertainment alternatives. Specifically, we believe that a number of factors have contributed to a deterioration of primetime television ratings, a decline in the percentage of adults reached and a decrease in the effectiveness of traditional advertising aired on the four largest at-home television networks, including:

 

    the increasing number of at-home television channels in U.S. households;

 

    the adoption of digital video recorders, which enable viewers to skip commercials;

 

    changing television program formats that do not include traditional advertising, such as paid cable channels and video-on-demand services; and

 

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    the continued shift of entertainment hours toward other at-home entertainment alternatives, including DVDs, the Internet and video games.

 

Factors Driving Advertiser Adoption of the PRN Network

 

As television advertisers are seeking alternative and more effective ways to reach consumers, the PRN Network provides a solution to the challenges facing traditional broadcast television. We believe we are well-positioned to take advantage of the anticipated shift of advertising dollars away from traditional broadcast television. The following factors should lead to increased adoption of the PRN Network:

 

    National Reach.    Through our proprietary broadcasting network, the PRN Network, we enable national and local advertisers to target consumers in over 5,000 retail stores in all of the 210 DMAs in the United States. Our ability to offer measured media provides third-party validation of our reach to advertisers and their agencies.

 

    Captive Audience.    We estimate that each month there are more than 680 million shopping visits to retailers carrying the PRN Network. The PRN Network broadcasts continuously during store hours and is typically the exclusive television advertising vehicle in these retail stores. Unlike viewers of at-home broadcast television, viewers of our network do not have the ability to change channels, skip commercials or time-shift their viewing.

 

    Relevant Content.    Our programming integrates advertisers’ messages in a relevant, informative and entertaining context that is specifically tailored to consumers in the retail environment. According to a Point-Of-Purchase Advertising International study, approximately 70% of brand decisions are made while consumers are in stores. Because our viewers are actively engaged in shopping during our broadcasts, we believe they are more receptive to and influenced by the advertising messages aired over the PRN Network than viewers of at-home television.

 

    Targeted Media.    Our network has the capability to deliver highly targeted messages for our advertisers based on demographics, product distribution, geography, type of retail store and location within the store. We believe our ability to deliver the desired audience leads to a cost-effective advertising buy and a high-quality advertising impression. We believe that leading national advertisers are increasingly seeking to market their brand closer to where and when consumers make brand decisions.

 

    Timely Delivery.    We believe the PRN Network enables advertisers to deliver their messages at the precise time when they create the most value. For example, advertisers can market a new theatrical release or a prime-time television promotion at a specified time. The PRN Network can support new product launches in advance of a typical national campaign by airing advertising as the product “hits the shelf.”

 

Our Competitive Strengths

 

In addition to the factors that are driving advertiser adoption of the PRN Network, we believe the following competitive strengths differentiate us from our competitors:

 

First Mover Advantage.    The PRN Network is the largest in-store television network in the U.S. based on audience. In our retail locations there are over 5,000 installed media servers and approximately 32,000 consumer viewing areas, or CVAs, comprised of an estimated 250,000 video displays, and, generally, satellite equipment to receive our programming. We have signed exclusive multi-year distribution contracts with leading U.S. retailers. We have developed software and other proprietary technologies for operating the PRN Network and have been issued eight patents. We have over ten years of experience selling and broadcasting in-store media and believe we have developed an excellent reputation for in-store media within the marketing and advertising community. We believe there are no competitors that have established an in-store television network with the number of retail and advertising relationships, national reach and years of operating experience that we have.

 

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Established Advertiser Base.    In 2003, more than 150 advertisers spanning most major advertising categories, including apparel, consumer packaged goods, electronics, entertainment, financial services, office supplies, pharmaceutical, retail and telecommunication services, purchased airtime on the PRN Network. Recently, the renewal rate for advertisers spending more than $100,000 per year has been approximately 78%. We believe that continued participation by our current advertisers will accelerate the adoption of the PRN Network by new advertisers and lead to higher revenues per CVA.

 

Media Management Expertise.    Over the past ten years, we have invested in software and other proprietary technologies for operating the PRN Network. These technologies combined with our management know-how enable us to produce, manage and distribute thousands of media elements each month across the PRN Network. We believe that no other company possesses our level of understanding of digital media tailored to consumers in the retail environment.

 

Operating Leverage.    We believe our established retail distribution infrastructure and low variable cost operating model will lead to an increase in our operating income margin if we succeed in growing our revenues. Our network infrastructure is highly scalable and can support incremental advertising without proportionately increasing our network operations costs. In addition, only a portion of our operating costs increase as we add new stores to the PRN Network.

 

Acquisition and Integration Experience.    We have successfully completed three acquisitions in the past eight years, through which we have broadened our retailer base to include Best Buy, Circuit City, Ralphs and Sears. We integrated our programming, advertising, sales and technology expertise to enhance the capabilities of these networks. We believe that our past acquisition experience allows us to evaluate growth opportunities and integrate new distribution and technologies effectively into the PRN Network.

 

Our Strategy

 

Our objective is to be the broadcast network that consumers look for while they shop, advertisers rely upon to build their brands, and retailers feature to differentiate the shopping experience. We believe the following strategy will lead to further distribution and viewership of the PRN Network and increased advertising revenues and profitability, enabling us to maintain our position as the leading in-store broadcaster in the U.S.:

 

Expand Reach. We believe we can expand the reach of the PRN Network by:

 

    increasing viewership on existing CVAs through optimizing programming and configuration;

 

    deploying additional video displays within stores currently airing the PRN Network, including in-store locations such as high traffic areas, key departments, areas where consumers wait for service, and check-out lanes;

 

    growing with our existing retailers as they expand their base of stores;

 

    establishing exclusive, multi-year distribution contracts with additional retailers; and

 

    acquiring existing in-store television networks or retailer relationships.

 

Currently, we are focusing our growth efforts on mass merchant, consumer electronics, warehouse club, supermarket, chain drug and home improvement retailers. We target retailers that have a broad selection of nationally advertised brands and high shopping traffic from consumers with demographic characteristics and purchasing habits that are attractive to our advertisers. The objective of these efforts is to establish additional audience reach for the PRN Network.

 

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Drive Adoption of the PRN Network.    We intend to leverage our position as the leading broadcaster of in-store television to drive adoption of the PRN Network by:

 

    communicating the advantages of the PRN Network to major advertisers and agencies through targeted presentations, publicizing innovative ad campaigns carried on our network and increasing advertiser participation in our upfront events;

 

    offering new advertising packages that include custom creative elements;

 

    broadening advertising purchases from existing customers through increased penetration of their brand portfolios;

 

    targeting current sales resources toward new national advertisers; and

 

    expanding our local and regional sales efforts.

 

As part of the above strategy, we will continue to assist advertisers in tailoring their marketing messages for the retail environment, including collaboration with their agencies or producing custom creative.

 

Invest in New Network Deployments.    We intend to pursue alternative arrangements with retailers, including establishing retailer relationships whereby we fund some or all of the capital requirements for expansion and the ongoing management and operations costs. We believe this approach will allow us to pay substantially lower distribution fees, sign long-term retailer agreements more quickly, and realize substantially greater operating cash flows, if we succeed in growing our revenues.

 

Localize Programming Content.    We intend to develop and air programming content on the PRN Network that is increasingly localized to specific regions and markets. We believe that localized content will contribute to the attractiveness of the PRN Network to consumers, retailers and advertisers by:

 

    increasing the relevance of our programming;

 

    personalizing the shopping experience; and

 

    offering increased targeting of messaging to desired demographics.

 

Distribution

 

The PRN Network is carried within the stores of leading retailers, including Best Buy, Circuit City, Costco, Ralphs, SAM’s Club, Sears and Wal-Mart Stores, where we estimate consumers purchased over $250 billion worth of products and services in 2003. We have multi-year contracts with these retailers. Under these agreements, we provide programming relevant to the retail environment and exclusively sell advertising on the PRN Network. Our programming is currently aired on approximately 250,000 video displays deployed in over 5,000 retail stores in all of the 210 U.S. DMAs. We typically provide our retailers with additional services consisting of media distribution, network operations, technical support and project management. We may collect fees for these ongoing services depending on the terms of the retailer agreement.

 

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We believe our retailers will continue to value having the PRN Network in their stores as it enables them to:

 

    Improve the Shopping Experience.    The PRN Network entertains shoppers, informs them about products sold in-store and reduces perceived wait-time in locations such as check-out. We believe wait-time is one of the biggest factors influencing shopper satisfaction and the PRN Network differentiates the shopping experience for retailers that carry it. In a Nielsen Media Research custom study of a major U.S. retailer in March 2002, more than three quarters of viewers ten years of age and older agreed to each of the following statements regarding PRN’s programming and advertising:

 

Statement


   % of Viewers Agreeing

It’s a good thing for the retailer to offer its customers

   86%

It’s informative

   81%

It provides relevant advertising about products sold in this store

   77%

 

    Communicate with Customers.    The PRN Network can be an efficient and effective customer messaging vehicle for the retailer. Retailers use the PRN Network to reinforce their marketing messages, air seasonal campaigns, support departmental promotions and engage their shoppers. We believe that retailers value marketing campaigns because they spend significant amounts of money on traditional advertising media. We provide retailers the ability to communicate seasonal and relevant information that differentiates the shopping experience.

 

    Generate Additional Revenues.    We typically pay retailers a distribution fee for carrying the PRN Network in their stores. This fee may be fixed or may vary based on advertising revenues generated by the PRN Network in their stores. In addition, we believe that retailers benefit from incremental product sales generated through the targeted advertising of products sold in their stores.

 

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The following graphic depicts typical locations within a store where the PRN Network could air, including high traffic areas, key departments, areas where consumers wait for service, and check-out:

 

LOGO

 

The following table presents information regarding our retailer relationships as of March 31, 2004:

 

Retailer


  

Year Relationship
Established


   Installed Stores

   

Estimated
Percentage of Retailer’s

U.S. Stores


 

Sears

   1996    856     100 %

Best Buy

   1997    627     100  

Circuit City

   1997    599     100  

Wal-Mart Stores

   1997    2,621     85  

SAM’s Club

   2000    538     100  

Costco

   2003    5 *   2  

Ralphs

   2003    100     38  
         

     

Total

        5,346        
 
  *   We are in the process of installing the PRN Network in 309 additional Costco warehouse clubs.

 

The Wal-Mart Relationship.    The largest retailer in the world, Wal-Mart Stores, has been a customer of ours since 1997 and has renewed its distribution agreement with us three times. Originally, we aired programming only in the electronics department, and, over the past seven years, we have expanded to high-traffic locations throughout their stores. As of March 31, 2004, the PRN Network is aired in 2,621 Wal-Mart stores. As part of our agreement, Wal-Mart licenses proprietary software from us to manage media delivery and

 

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presentation in each store. In addition, we provide a wide variety of media management services including programming, targeting, standards, operations, support and engineering. We believe our relationship with Wal-Mart enhances our credibility in the marketplace, validates the effectiveness of the PRN Network and enables us to offer to advertisers a broader base of consumers. Total revenues from media management, advertising airtime purchased by Wal-Mart on its own behalf or for supplier-funded programs and creative services provided to Wal-Mart represented 35% of total revenues for the year ended December 31, 2003 and 37% for the three months ended March 31, 2004.

 

We intend to expand our retail distribution by adding leading major retail chains in the following categories: mass merchant, consumer electronics, warehouse club, supermarket, chain drug and home improvement. Prior to a broad deployment with a new retail distribution partner, we typically pilot the PRN Network in a small number of stores. We currently have pilot programs with a number of leading retailers that represent a potential of approximately 2,000 U.S. retail locations for the PRN Network.

 

The following table lists the number of stores airing the PRN Network in each of the top 25 DMAs:

 

DMA Number

  

DMA Name


   Store Count

1    New York    146
2    Los Angeles    283
3    Chicago    151
4    Philadelphia    105
5    San Francisco-Oakland-San Jose    62
6    Boston    102
7    Dallas-Ft. Worth    125
8    Washington, DC    96
9    Atlanta    113
10    Detroit    67
11    Houston    110
12    Seattle-Tacoma    55
13    Tampa-St. Petersburg    85
14    Minneapolis-St. Paul    76
15    Phoenix    70
16    Cleveland-Akron    69
17    Miami-Ft. Lauderdale    48
18    Denver    74
19    Sacramento-Stockton-Modesto    52
20    Orlando-Daytona Beach-Melbourne    69
21    St. Louis    67
22    Pittsburgh    54
23    Baltimore    51
24    Portland, OR    31
25    Indianapolis    63
         
     Subtotal for top 25 DMAs    2,224
     DMAs 26 through 210    3,122
         
     Total    5,346
         

 

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Programming

 

Programming on the PRN Network is designed for the retail environment and targeted to a captive audience shopping in the stores of our retailers. Our programming consists of traditional television advertising, custom advertising segments and other content supplied by leading media companies, including Discovery, ESPN, the Food Network and Lifetime. For example, Discovery provides us with high definition, or HD, programming content, healthy lifestyle segments from Discovery Health and other segments from TLC. In many cases, these media companies produce segments based on specifications that we provide to make their content relevant to the retail environment. In general, these segments are provided to us at no charge or a nominal charge because these media partners value their exposure on the PRN Network. A portion of the PRN Network has also aired live news broadcasts and entertainment events from time to time. We also integrate public service messages that are consistent with our retailers’ community outreach programs, such as content supplied by the Missing Children’s Network.

 

Programming airing on the PRN Network follows programming guidelines we have developed and published for the retail environment. These programming standards consist of guidelines for content suitable for consumers in stores airing the PRN Network and technical specifications for video and audio quality. Our standards group conducts an independent review of substantially all programming before it is aired on the PRN Network.

 

Our Advertising Packages

 

We sell standard and customized advertising packages based on advertiser needs. Our sales are generally made pursuant to written contracts with commitments from less than a week to more than a year. Typical advertising contracts range in value from approximately thirty thousand to several million dollars and are based on the number of stores, location within the store where the advertisement is aired and the frequency of exposure. We obtain pricing premiums from our advertisers that purchase custom creative services and targeted distribution within the PRN Network.

 

Our creative services group develops custom creative elements for advertising campaigns on the PRN Network. The services provided can range from simple modifications of existing television commercials to full-service custom development. Frequently, our creative services group develops reusable templates for segments tailored to consumers in the retail environment. These creative services may be bundled with airtime on the PRN Network or billed separately to advertisers. We believe that the adoption by advertisers of the PRN Network is accelerated by our ability to provide custom creative elements for their advertising campaigns.

 

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The following table provides examples of the customization options that we provide to advertisers for their campaigns:

 

Attribute    Options

Reach

  

•     Full Distribution – all stores within the PRN Network

•     Store Format – stores carrying certain categories of products

•     Retail Chain – all stores with a specific retail brand

•     Regional/Local – stores within a DMA; stores within the southern U.S.


Audience Demographic

  

•     Age/Gender – persons 18 to 49; males 18 to 34; females 25 to 54

•     Spending Habits – households with children; high-income

•     Ethnicity – Hispanic


Location Within Store

  

•     Store-wide – seasonal programming in high traffic locations that promotes cross-shopping, key departments and product categories

•     Electronics – high definition television programming that promotes HDTV, DVDs and video game sales

•     Pharmacy – health and lifestyle programming that engages shoppers while waiting for prescriptions or selecting health and beauty aids

•     Check-out – entertaining and informative programming designed to reduce perceived wait-time


Exposure

  

•     Standard – advertising delivered periodically during the hour over a four-week flight

•     Custom Flight – programming aired during a time period specified by advertiser


Creative

  

•     Standard – reuse 15 or 30 second commercial aired on national television

•     Modified – modify 15 or 30 second commercial for a specific retail environment

•     Sponsorship – advertiser brand message and products are integrated into relevant program content

•     Template – PRN custom template that is available to multiple advertisers, but customized by brand

•     Custom – create custom advertising campaign

 

Recent examples of advertising that aired on the PRN Network include:

 

    a Maybelline Forever Lipcover marketing campaign conducted under the “What’s New” advertising package designed to coincide with the product’s actual launch within a retail chain using featured custom creative highlighting product features and in-store presentation;

 

    DIRECTV HD programming package promoted on an “HD A to Z” informational segment in electronics departments to highlight the benefits of HDTV with frequent DIRECTV brand exposure;

 

    the release of the Lion King on DVD as a Custom Launch Package, consisting of short-form pre-launch awareness campaign, a high level of exposure when the DVDs were first available in the store and continuing exposure for a period following the launch;

 

    SBC long distance service promoted through a combination of live action commercial footage and other media elements, including text of special offers; and

 

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    a promotional campaign for NBC’s syndicated Access Hollywood program which includes daily content updates to promote each evening’s show.

 

Industry Overview

 

We operate within the $53 billion television advertising market, the largest segment of the $149 billion U.S. major media advertising market, as measured by Zenith Optimedia. The following illustration shows the segments of major media advertising in 2003 (in billions):

 

LOGO

 

We believe we are well-positioned to further penetrate the $53 billion television advertising market due to the declining effectiveness of television advertising. The in-home television advertising model is changing based on a number of key factors:

 

    the number of cable television networks available for viewing by U.S. households has increased from 28 in 1980 to over 280 in 2002, according to the National Cable & Telecommunications Association, causing significant fragmentation of the television viewing audience;

 

    emerging technologies, such as digital video recorders, which enable viewers to skip commercials and, according to IDC, are expected to increase from 3.2 million households in 2003 to 34.3 million households in 2008, a compound annual growth rate of 60.6%;

 

    increasing availability and consumer adoption of television program formats that do not include traditional advertising, such as pay cable channels and video-on-demand services; and

 

    the proliferation of at-home entertainment alternatives, such as DVDs, the Internet and video games.

 

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We believe the factors listed above have contributed to a deterioration of primetime television ratings, a decline in the percentage of adults reached and a decrease in the effectiveness of traditional advertising aired on the four largest at-home television networks.

 

LOGO

 

We believe that continuation and acceleration of these trends, at-home media fragmentation, commercial viewership erosion and increasing CPMs will allow us to compete more effectively with traditional broadcast networks for national and local advertising spending.

 

Advertising and Sales

 

We have a national advertising sales force that offers advertising packages on the PRN Network to both advertisers and their agencies. Our sales executives have significant experience in at-home television, outdoor and in-store media. The members of our current sales team have been employed with us and selling advertising on the PRN Network for an average of four years. The typical compensation package for a member of our sales team consists of a base salary plus commissions. We plan to expand our sales force to add more national, regional and local advertisers. Our sales team is organized by region and key customer. We believe that our sales and marketing operations have substantial leverage, since new retail distribution can be offered to existing advertisers through our current sales executives who already have established business relationships. We believe that the incremental sales cost for new stores carrying the same products and having the same formats as existing stores airing the PRN Network will be a small percentage of incremental revenue.

 

Similar to traditional broadcast networks, we sell our inventory via our upfront sales cycle prior to the beginning of the year and through a scatter sales cycle throughout the year. Since we are selling inventory only for the following calendar year, our advertising proposals are generally aligned with the budget cycles of our advertisers. For this reason, nearly all of our upfront sales are firm advertising commitments. By contrast, according to an article in the March 2004 Jack Myers Report, a media trade publication, television networks currently permit cancellation of as much as 50% of upfront commitments from their advertisers. Based on the

 

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regularity of store traffic, our network viewership is highly predictable and we are rarely required to provide “make goods.” We believe the high percentage of firm advertising commitments and limited requirement for “make goods” gives us enhanced revenue visibility with respect to future quarters.

 

Our revenues are subject to seasonality due to general retail trends. Consequently, our revenues are generally highest in the third and fourth quarters of the calendar year. In addition to this factor, our relationships with retailers often provide for our retention of varying relative portions of advertising revenues as we achieve certain annual revenue milestones.

 

Backlog

 

We have a backlog of future advertising and creative services revenues not yet recorded from agreements with advertisers and retailers. We believe our backlog allows us to more accurately forecast revenues for future periods. As of March 31, 2004, backlog amounted to $43.1 million, compared to $27.6 million at March 31, 2003. Of our backlog at March 31, 2004, $41.9 million related to revenues that we plan to recognize in the year ending December 31, 2004. Due to unexpected cancellations of our agreements with advertisers and retailers and other unforeseen events, our backlog at any particular date may decline and is not necessarily indicative of actual revenues for any future period.

 

Network Management

 

Over the past ten years, we have invested in the development of software and other proprietary technologies for operating the PRN Network. Our network consists of a media management center that is connected to media servers in each retail store location, usually through a satellite network. The software tools that allow us to manage media, content distribution and in-store presentation are a combination of proprietary software and packaged software customized to our needs. Typically, we license the elements of our proprietary software that are installed on media servers in each retail store to our retailers for the term of our agreement. We hold eight patents covering the management of media, operations and technologies associated with the PRN Network. Our proprietary software enables us to cost-effectively manage, distribute and air thousands of media elements in over 5,000 stores on a daily basis. This technology allows us to target media by store, by department and by day.

 

The network infrastructure supports multiple media applications and is designed for reliable ongoing operation due to its distributed architecture and backup facilities. The infrastructure is highly scalable and based largely on tier one technology supplied by some of the world’s leading manufacturers, including Cisco Systems, Inc., Dell Inc., Oracle Corporation and Sun Microsystems, Inc. Content is typically delivered to each store location in advance of its in-store presentation. An equipment failure in one store will not affect other stores, and disruptions in satellite communications do not typically impact airing of programming on the PRN Network.

 

We operate the PRN Network with a staff of employees who are skilled in various aspects of network operations and technical support. Our employees use the technology tools we have developed to optimize the acquisition, production and management of digital media for the PRN Network. We believe that these tools, the scope of our current operations and our expertise make us highly efficient in managing media for in-store media networks. We contract with third-party companies for store installation and field services.

 

Competition

 

We operate in the highly competitive U.S. major media advertising market. In the television segment of the major media market, we compete for advertising spending with major television advertising networks such as ABC, CBS, Fox, NBC and major cable television networks. As we continue to expand our sales efforts to include regional and local advertisers, we expect to compete for television revenues with regional and local broadcasters and for other local advertising dollars currently allocated to radio and outdoor media. We also may compete with

 

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print, Internet and other major media outlets. The primary factors that drive advertising spending are size of audience, quality of advertising impression and the ability to deliver targeted demographics. We believe we compete favorably with respect to each of these factors.

 

Over the past ten years, we have tracked numerous start-up businesses that have attempted to build in-store broadcasting businesses like ours, although financial information is not generally available for these companies. We are not aware of any company that has established a large in-store television network like the PRN Network or enjoyed growth and financial performance comparable to ours. As in the past, there are currently small companies that are attempting to replicate our business model. We believe that our competitive strengths, the obstacles inherent in growing an advertising business distributed in the stores of large U.S. retailers, and funding needed for operations and new network investment give us substantial advantages over these competitors.

 

We may face competition from different types of companies that offer a specific type of service included in our broad offering. With respect to the programming services we provide retailers, there are a number of companies that provide customized programs for retailers and other out-of-home venues. There are also providers of media management and playback software and technologies that could enable retailers to manage media on their own networks. We may also face competition from our retail customers who might try to develop and operate in-store media networks on their own.

 

Intellectual Property

 

Our future success and competitive advantage depend in part upon our continued ability to develop and protect our intellectual property. To protect our intellectual property, we rely on a combination of patents, trade secrets and trademarks. We also attempt to protect our trade secrets and other proprietary information through confidentiality agreements with licensees, customers and potential customers and partners, and through proprietary information agreements with employees and consultants. Over the past ten years, we have developed a patent portfolio related to the processes and technologies involved in the PRN Network. We hold eight patents covering the management of media, operations and technologies associated with the PRN Network, with expiration dates ranging from 2009 to 2019. We also have a number of other patents pending. Notwithstanding these patents and patent applications, we cannot assure you that these patent rights will provide substantial protection or that others will not be able to develop products that are similar to or competitive with our products. To our knowledge, currently no third party has asserted a claim against us alleging that any element of our product infringes or otherwise violates any intellectual property rights of any third party.

 

Government Regulation

 

The Federal Communications Commission, or the FCC, has broad jurisdiction over the telecommunications industry. FCC licensing, program content and related regulations generally do not currently affect us because we operate a private network within retail locations.

 

Employees

 

As of March 31, 2004, we had 185 full-time employees, including 122 in distribution and operations, 44 in sales and marketing and 19 in general and administrative. None of our employees is covered by a collective bargaining agreement. We believe our relations with our employees are generally good.

 

Legal Proceedings

 

We are not currently a party to any material legal proceeding. From time to time, we may be subject to various claims and legal actions arising in the ordinary course of business.

 

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Facilities

 

Our corporate headquarters are located in San Francisco, California, where we occupy 45,842 square feet under a lease expiring in February 2011. We also lease 4,232 square feet of office space in Santa Monica, California, and 1,940 square feet of office space in New York, New York. These leases expire in January 2011 and March 2005, respectively. We believe that our current facilities are adequate for our needs for the foreseeable future. However, if we require additional space, additional space may not be available on commercially reasonable terms, if at all.

 

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MANAGEMENT

 

Executive Officers and Directors

 

The following table sets forth the names, ages and positions as of March 31, 2004 of our current executive officers and directors:

 

Name


   Age

  

Position(s)


Charles A. Nooney

   48   

Chief Executive Officer and Chairman of the Board

Eric S. Bindelglass

   43    President and Chief Operating Officer

Arthur J. Songey

   48    Chief Financial Officer

Mark Sean Moran

   41    Chief Strategy Officer

Nicholas J. Marquart

   49   

Senior Vice President and Chief Technology Officer

James A. Caccavo

   41    Director

Daniel W. O’Connor (2)

   49    Director

Stephen D. Royer (2)

   39    Director

Enrique F. Senior (2)

   60    Director

William J. Wynperle

   32    Director

(1)   Member of the Audit Committee
(2)   Member of the Compensation Committee
(3)   Member of the Nominating and Corporate Governance Committee

 

Charles A. Nooney has served as our Chairman of the Board since January 2002 and our Chief Executive Officer since September 2001. Mr. Nooney served as our president and a director from January 2000 to August 2001. Prior to joining us, from January 1985 to January 2000, Mr. Nooney served as executive vice president of affiliate sales and marketing at Disney/ABC Cable Networks, an international entertainment company. Mr. Nooney holds a B.A. degree in Urban Studies from the University of Alabama at Birmingham.

 

Eric S. Bindelglass has served as our President since April 2002 and our Chief Operating Officer since March 1996. Before joining us, Mr. Bindelglass served as vice president and general manager of The Quaker Oats Company, a packaged food company. Mr. Bindelglass holds a B.A. degree in Administrative Science from Yale University.

 

Arthur J. Songey has served as our Chief Financial Officer since February 1994. Mr. Songey served on our board of directors from 1996 to 1998. Prior to joining us, Mr. Songey served as chief financial officer of MobileDigital Corporation, a developer of wireless data communications software, and chief financial officer of Trans Tech Services, Inc., a developer of information systems for transportation operations and was an audit manager with KPMG Peat Marwick, a public accounting firm. Mr. Songey holds a B.S. degree in Business from California State University, Hayward.

 

Mark Sean Moran has served as our Chief Strategy Officer since January 2000. From April 1998 until January 2000, Mr. Moran served as our executive vice president of technology and operations. Prior to joining us, Mr. Moran served as the vice president and chief information officer of Florens Container Services, a container leasing company, from 1996 to 1998. From 1988 to 1996, Mr. Moran served as a management consultant for Andersen Consulting, a consulting firm. Mr. Moran holds a B.S. degree in Physics from Stanford University.

 

Nicholas J. Marquart has served as our Senior Vice President and Chief Technology Officer since March 2001. From January 2000 to March 2001, Mr. Marquart served as our vice president of technology and operations, and from June 1999 to January 2000 our vice president of product development and operations. From November 1997 to May 1999, Mr. Marquart served as vice president of global systems services for Dialog, formerly a business unit of Knight-Ridder, Inc., a newspaper publisher. Mr. Marquart holds a B.A. degree in Spanish Literature from California State University, Hayward.

 

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James A. Caccavo has served as one of our directors since January 2002. Since June 2003, Mr. Caccavo has served as chief executive officer of Valence Capital Management, LP, an investment firm that also serves as an investment advisor to Moore Capital Management, LLC, an investment firm. From December 1999 to May 2003, Mr. Caccavo served as the managing director of Moore Capital Management’s private equity group. From May 1999 to August 1999, Mr. Caccavo served as executive vice president and president of internet operations of Tickets.com, Inc. Prior to the merger of Tickets.com, Inc. with California Tickets.com, Inc. in May 1999, Mr. Caccavo had served as president and chief executive officer of California Tickets.com, Inc. since December 1997. Mr. Caccavo holds a B.S. degree in Economics and Finance from the University of Scranton.

 

Daniel W. O’Connor has served as one of our directors since February 2004. Since April 1998, Mr. O’Connor has served as the president and chief executive officer of Management Ventures, Inc., a research organization focused on large scale retail companies. Mr. O’Connor holds a B.S. degree in Economics and Accounting from Clarkson University.

 

Stephen D. Royer has served as one of our directors since December 2001. Since 1991, Mr. Royer has been with Shamrock Capital Advisors, Inc., a merchant banking company, where he has served as a managing director for more than five years. Mr. Royer also serves as a director of Netgear, Inc. Mr. Royer holds a B.A. degree in Quantitative Economics from Stanford University and an M.B.A. degree from the University of California at Los Angeles.

 

Enrique F. Senior has served as one of our directors since April 1999. Since July 1973, Mr. Senior has served as a managing director of Allen & Company Incorporated, an investment firm. Mr. Senior also serves on the board of directors of Coca-Cola FEMSA. Mr. Senior holds a B.S. degree in Electrical Engineering and Industrial Administration from Yale University and an M.B.A. degree from Harvard University.

 

William J. Wynperle has served as one of our directors since March 2004. Since 2000, Mr. Wynperle has served as a vice president of Shamrock Capital Advisors, Inc., a merchant banking company and was an associate at Shamrock Capital Advisors, Inc. from 1998 to 2000. Mr. Wynperle holds a B.A. degree in Economics and Government from Dartmouth College and an M.B.A. degree from the University of California at Los Angeles.

 

Board of Directors

 

Our bylaws currently provide for a board of directors consisting of nine members or such other number as may be determined by the board of directors subject to certain limitations. We currently have authorized nine directors.

 

Each of our executive officers and directors, other than non-employee directors, devotes his or her full time to our affairs. Our non-employee directors devote the amount of time to our affairs as is necessary to discharge their duties.

 

There are no family relationships among any of our directors or executive officers.

 

Committees of the Board of Directors

 

Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee, each of which has the composition and responsibilities described below:

 

Audit Committee.    The audit committee provides assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal accounting controls. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management. The audit committee currently consists of                         , each of whom is a non-management member of our board of directors. Mr.              is our audit committee financial expert as currently defined under Securities and Exchange Commission rules. We believe that the composition of our audit committee meets the criteria for independence under, and the functioning of our

 

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audit committee complies with the applicable requirements of, the Sarbanes-Oxley Act of 2002, the current rules of the Nasdaq Stock Market and Securities and Exchange Commission rules and regulations. We intend to comply with future audit committee requirements as they become applicable to us.

 

Compensation Committee.    The compensation committee determines our general compensation policies and the compensation provided to our directors and officers. The compensation committee also reviews and determines bonuses for our officers and other employees. In addition, the compensation committee reviews and determines equity-based compensation for our directors, officers, employees and consultants and administers our stock option plans and employee stock purchase plan. The current members of the compensation committee are Daniel W. O’Connor, Stephen D. Royer and Enrique F. Senior, each of whom is a non-management member of our board of directors. We believe that the composition of our compensation committee meets the criteria for independence under, and the functioning of our compensation committee complies with the applicable requirements of, the Sarbanes-Oxley Act of 2002, the current rules of the Nasdaq Stock Market and Securities and Exchange Commission rules and regulations. We intend to comply with future compensation committee requirements as they become applicable to us.

 

Nominating and Corporate Governance Committee.    The nominating and corporate governance committee is responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate governance matters. The current members of the nominating and governance committee are                         . We believe that the composition of our nominating and governance committee meets the criteria for independence under, and the functioning of our nominating and corporate governance committee complies with the applicable requirements of, the Sarbanes-Oxley Act of 2002, the current rules of the Nasdaq Stock Market and Securities and Exchange Commission rules and regulations. We intend to comply with future nominating and corporate governance committee requirements as they become applicable to us.

 

Director Compensation

 

Except as we otherwise describe below, we have not paid any cash compensation to members of our board of directors for their services as directors.

 

We reimburse the directors for reasonable expenses in connection with attendance at board and committee meetings, and following this offering non-employee directors will receive a fee of $2,500 for each regular meeting and $1,000 for each committee meeting attended. Directors also are eligible to receive and have received stock options under our 1997 stock option plan. The exercise price of stock options to directors is based on the fair market value as determined by our board of directors on the date of grant. Since January 1, 2003, non-employee directors have received stock options under our 1997 stock option plan as follows:

 

Name


   Number of Shares
Underlying Options
Granted


   Exercise Price
Per Share


   Date of Grant

Daniel W. O’Connor

   50,000    $ 9.50    1/30/2004

 

Following this offering, non-employee directors will receive nondiscretionary, automatic grants of nonstatutory stock options under our 2004 stock incentive plan. Existing and new non-employee directors who have not previously been granted a stock option will be granted an initial option to purchase 50,000 shares. The initial option vests and becomes exercisable ratably over 24 months. Beginning in 2006, immediately after each of our regularly scheduled annual meetings of stockholders, each non-employee director will be automatically granted a nonstatutory option to purchase 15,000 shares of our common stock, provided the director has served on our board for at least 18 months. Each annual option granted to non-employee directors shall vest and become exercisable ratably over 12 months. The options granted to non-employee directors will have a per share exercise price equal to 100% of the fair market value of the underlying shares on the date of grant, and will become fully vested if we are subject to a change of control. See “Employee Benefit Plans—2004 Stock Incentive Plan.”

 

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Compensation Committee Interlocks and Insider Participation

 

The members of our compensation committee are Daniel W. O’Connor, Stephen D. Royer and Enrique F. Senior. No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other entity, nor has any interlocking relationship existed in the past.

 

Stephen D. Royer, a member of our compensation committee, is managing director of Shamrock Capital Advisors, Inc., which is a related party to Shamrock Capital Growth Fund, L.P. Mr. Royer is also an executive vice president of Shamrock Capital Partners, L.L.C., the general partner of Shamrock Capital Growth Fund, L.P. Enrique Senior, a member of our compensation committee, is the managing director of Allen & Company Incorporated.

 

The following table summarizes purchases made in August 2001, valued in excess of $60,000, of shares of our capital stock by Shamrock Capital Growth Fund, L.P. and Allen & Company Incorporated, funds affiliated with Mr. Royer and Mr. Senior, respectively:

 

Name of Purchaser:


   Warrants to
Purchase Class A
Common Stock


   Series E
Redeemable
Convertible
Preferred Stock


Shamrock Capital Growth Fund, L.P.    514,285    2,222,223
Allen & Company Incorporated    75,857    327,778

 

We also paid to Shamrock Capital Growth Fund, L.P. $400,000 in advisory fees and $175,000 as reimbursement for fees and expenses in connection with their purchase of series E redeemable convertible preferred stock in August 2001. In addition, we paid $1,741,681 to Allen & Company Incorporated in advisory fees in connection with our sale of series E redeemable convertible preferred stock in August 2001 and $200,000 in advisory fees in connection with strategic initiatives in December 2002.

 

In May 2004, we entered into an agreement with holders of our series E redeemable convertible preferred stock to modify some of their existing rights and obligations, including the redemption and conversion terms of the series E redeemable convertible preferred stock. Shamrock Capital Growth Fund, L.P. and Allen & Company Incorporated are holders of our series E redeemable convertible preferred stock. The holders of series E redeemable convertible preferred stock agreed to delay the date upon which they could request redemption of their series E redeemable convertible preferred stock from August 14, 2004 to March 31, 2006, to amend the price per share at which their shares of series E redeemable convertible preferred stock will automatically convert upon an initial public offering of our common stock and to modify certain other rights. In exchange for their agreement, we agreed to issue to holders of series E redeemable convertible preferred stock warrants to purchase an aggregate of 1,400,000 shares of our class A common stock at an exercise price of $0.01 per share. These warrants only become exercisable in the case of an initial public offering, in which case they will be automatically exercised at the closing of the offering. We also agreed to redeem upon an initial public offering half of the outstanding shares of series E redeemable convertible preferred stock, an aggregate of 2,361,276 shares, at a price equal to the greater of $18.90 per share or the price per share at which we sell our common stock in an initial public offering. Each share of series E redeemable convertible preferred stock not otherwise redeemed will automatically convert into one share of common stock upon completion of this offering. If series E redeemable convertible preferred shares are not redeemed by August 14, 2004, the redemption price increases at a rate of 15% per annum until we redeem the shares. Prior to this modification of redemption rights, the original price at which shares were to be redeemed by us was $19.80 per share of series E redeemable convertible preferred stock.

 

Consistent with the terms of a liquidation distribution agreement dated August 2001, as supplemented by an agreement dated May 2004, a portion of series E redemption amount equal to $0.90 per share having an aggregate value of $2,125,148 based on the number of shares of series E redeemable convertible preferred stock to be redeemed following the offering, will be retained by us and separately distributed 50% to holders of our series B, C and D redeemable convertible preferred stock based on their relative liquidation preferences and 50% to members of our management in the relative amounts provided for in the agreement.

 

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The following table summarizes the shares we intend to redeem from, and the warrants we intend to issue to Shamrock Capital Growth Fund, L.P. and Allen & Company Incorporated, funds affiliated with Mr. Royer and Mr. Senior, respectively:

 

Stockholder


   Shares of Series E
Redeemable
Convertible Preferred
Stock Currently Held


   Shares to be
Redeemed


   Warrant Shares to
be Received


Shamrock Capital Growth Fund, L.P.

   2,222,223    1,111,111    658,777

Allen & Company Incorporated

   327,778    163,889    97,170

 

Executive Compensation

 

The following table summarizes all compensation paid to our Chief Executive Officer and to our four other most highly compensated executive officers whose total annual salary and bonus exceeded $100,000, for services rendered in all capacities to us during the year ended December 31, 2003.

 

Summary Compensation Table

 

     Annual Compensation

      
     Salary

   Bonus

   All Other
Compensation


 

Charles A. Nooney

Chief Executive Officer and Chairman of the Board

   $ 387,600    $ 145,025    $ 36,069 (1)

Eric S. Bindelglass

President and Chief Operating Officer

     240,757      60,200      5,000 (2)

Arthur J. Songey

Chief Financial Officer

     233,305      56,400      5,000 (2)

Mark Sean Moran

Chief Strategy Officer

     187,969      44,100      5,000 (2)

Nicholas J. Marquart

Senior Vice President and Chief Technology Officer

     185,227      46,900      5,000 (2)

(1)   Consists of 401(k) matching contributions of $3,219 and housing allowance of $32,850.
(2)   Consists of 401(k) matching contributions.

 

Stock Options

 

We did not grant options to Mr. Nooney, Mr. Bindelglass, Mr. Songey, Mr. Moran or Mr. Marquart in fiscal year 2003.

 

Aggregated Option Exercises in 2003 and Year-End Option Values

 

The following table assumes a per-share fair market value equal to $             , the mid-point of the initial public offering price range indicated on the cover of this prospectus.

 

    

Shares
Acquired on
Exercise


  

Value
Realized


   Number of Unexercised
Options at Fiscal Year-End


   Value of Unexercised
In-the-Money Options at
Fiscal Year-End


Name


         Exercisable

   Unexercisable

   Exercisable

   Unexercisable

Charles A. Nooney

         780,228    152,772    $                   $            

Eric S. Bindelglass

         160,000             

Arthur J. Songey

         100,000             

Mark Sean Moran

         110,000             

Nicholas J. Marquart

         100,000             

 

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Benefit Plans

 

1992 Stock Option Plan

 

Our 1992 stock option plan was adopted by our board of directors in April 1992 and was subsequently approved by our stockholders.

 

As of March 31, 2004, options to purchase a total of 224,039 shares of common stock were outstanding under the 1992 stock option plan at a weighted average exercise price of $1.00 per share.

 

In February 1997, the 1992 stock option plan was terminated and 33,392 shares of our common stock were then available for future issuance. Shares subject to expired, terminated, cancelled or ungranted options under the 1992 stock option plan have become and will be available for option grants or share issuances under our 1997 stock option plan until its termination. Shares subject to expired, terminated, cancelled or ungranted options under the 1992 stock option plan that would become available for option grants or share issuances under our 1997 stock option plan will be available for option grants or share issuances under our 2004 stock incentive plan after this offering is completed.

 

1997 Stock Option Plan

 

Our 1997 stock option plan was adopted by our board of directors in February 1997 and was subsequently approved by our stockholders. Under the 1997 stock option plan, we were authorized to grant options to purchase an aggregate of 4,600,000 shares of our common stock plus any expired, terminated, cancelled or ungranted options under our 1992 stock option plan.

 

As of March 31, 2004, 4,024,041 shares of common stock have been reserved for issuance under the 1997 stock option plan. As of March 31, 2004, options to purchase a total of 3,643,810 shares of common stock were outstanding under the 1997 stock option plan at a weighted average exercise price of $4.77 per share.

 

Upon the completion of this offering, the 1997 stock option plan will be terminated and no shares of our common stock will remain available for future issuance under the 1997 stock option plan. Shares that are subject to expired, terminated, cancelled or ungranted options under the 1997 stock option plan will be available for option grants or share issuances under our 2004 stock incentive plan after this offering is completed.

 

2004 Stock Incentive Plan

 

General.    The 2004 stock incentive plan is intended to serve as the successor plan to our 1997 stock option plan. The 2004 stock incentive plan was adopted by our board of directors in May 2004 and, subject to stockholder approval, will become effective upon the completion of this offering.

 

Administration and Eligibility.    The 2004 stock incentive plan will be administered by our compensation committee. The compensation committee may delegate its administrative authority, subject to certain limitations, with respect to individuals who are not officers. The 2004 stock incentive plan provides for the grant of options to purchase shares of common stock, restricted stock, stock appreciation rights and stock units. Incentive stock options may be granted only to employees. Nonstatutory stock options and other stock-based awards may be granted to employees, non-employee directors, advisors and consultants.

 

Authorized Shares.    An aggregate of 2,100,000 shares of common stock have been authorized for issuance under the 2004 stock incentive plan. In addition, all shares available for issuance under our 1997 stock option plan that will cease to be available for future grant under that plan upon completion of this offering will instead be available for issuance under the 2004 stock incentive plan. This includes shares subject to outstanding options under our 1997 stock option plan and our 1992 stock option plan that expire, terminate or are cancelled before being exercised. As of March 31, 2004, there were 380,231 shares of common stock available for future issuance

 

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under the 1997 stock option plan and 3,867,849 outstanding options under the 1997 stock option plan and 1992 stock option plan that could become available for issuance under the 2004 stock incentive plan. The number of shares reserved for issuance under the 2004 stock incentive plan will be increased on the first day of each of our fiscal years from 2007 through 2014 by the lesser of 1,000,000 shares; 3% of our outstanding common stock on the last day of the immediately preceding fiscal year; or the number of shares determined by the board of directors.

 

Plan Features. Under the 2004 stock incentive plan:

 

    We currently expect that options granted to optionees other than outside directors will generally vest over a four-year period.

 

    Nondiscretionary, automatic grants of nonstatutory stock options will be made to outside directors. Existing and new outside directors who have not previously been granted a stock option will be granted automatically an initial option to purchase 50,000 shares upon an initial public offering or first becoming a member of our board of directors. These initial options vest over 24 months. Beginning in 2006, immediately after each of our regularly scheduled annual meetings of stockholders, each outside director will be automatically granted a nonstatutory option to purchase 15,000 shares of our common stock, provided the director has served on our board for at least 18 months. Each annual option to outside directors shall vest and become exercisable ratably over 12 months. The options granted to outside directors will have a per share exercise price equal to 100% of the fair market value of the underlying shares on the date of grant, and will become fully vested if we are subject to a change of control.

 

    Generally, if we merge with or into another corporation, we may accelerate the vesting or exercisability of outstanding options and terminate any unexercised options unless they are assumed or substituted for by any surviving entity or a parent or subsidiary of the surviving entity.

 

    The plan terminates ten years after its initial adoption, unless earlier terminated by the board. The board of directors may amend or terminate the plan at any time, subject to stockholder approval where required by applicable law. Any amendment or termination may not impair the rights of holders of outstanding awards without their consent.

 

2004 Employee Stock Purchase Plan

 

General.    The 2004 employee stock purchase plan was adopted by our board of directors in April 2004 and, subject to stockholder approval, will become effective upon completion of this offering. A total of 300,000 shares of common stock have been reserved for issuance under our employee stock purchase plan. The number of shares reserved for issuance under the 2004 employee stock purchase plan will be increased on the first day of each of our fiscal years from 2006 through 2014 by the lesser of 300,000 shares, 1% of our outstanding common stock on the last day of the immediately preceding fiscal year, or the number of shares determined by the board of directors.

 

Administration and Eligibility.    Our 2004 employee stock purchase plan, which is intended to qualify under Section 423 of the Internal Revenue Code, will be administered by our compensation committee. Employees, including our officers and employee directors but excluding 5% or greater stockholders, are eligible to participate if they are customarily employed for more than 20 hours per week and for more than five months in any calendar year. Our 2004 employee stock purchase plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 15% of an employee’s total compensation. The maximum number of shares a participant may purchase during a single purchase period is 750 shares.

 

Offering and Participation Periods.    The 2004 employee stock purchase plan will be implemented with offering periods of six months’ duration, with new offering periods, other than the first offering period, beginning on August 1 and February 1 of each year except as otherwise determined by our board of directors. During each offering period, payroll deductions will accumulate, without interest. On the purchase dates set by

 

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the board of directors for each offering period, accumulated payroll deductions will be used to purchase common stock. The initial offering period is expected to begin on the date of this offering and end on January 31, 2005.

 

The purchase price will be equal to 85% of the fair market value per share of common stock on either the first day of the offering period or on the last day of the purchase period, whichever is less. Employees may withdraw their accumulated payroll deductions at any time. Participation in our 2004 employee stock purchase plan ends automatically on termination of employment with us. Immediately before a corporate reorganization, the offering period and purchase period then in progress shall terminate and stock will be purchased with the accumulated payroll deductions, unless the 2004 employee stock purchase plan is assumed by the surviving corporation or its parent corporation under the plan of merger or consolidation.

 

The 2004 employee stock purchase plan terminates ten years after its initial adoption, unless earlier terminated by the board. The board of directors may amend or terminate the plan at any time, subject to stockholder approval where required by law.

 

401(k) Plan

 

We have established a tax-qualified employee savings and retirement plan for which our employees are generally eligible. Under our 401(k) plan, employees may elect to reduce their compensation and have the amount of this reduction contributed to the 401(k) plan. We make matching contributions of fifty cents for every dollar contributed by the employee up to a maximum of 2.5% of an employee’s earned compensation or $5,000, whichever is less. In order to receive the maximum matching contributions, an employee must contribute at least 5% of their total compensation per pay cycle into the 401(k) plan. The 401(k) plan is intended to qualify under Section 401 of the Internal Revenue Code, so that contributions to the 401(k) plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) plan, and so that contributions by us, if any, will be deductible by us when made.

 

Indemnification Agreements

 

We also enter into agreements to indemnify our directors and executive officers. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. Our certificate of incorporation and our bylaws contain provisions that limit the liability of our directors. A description of these provisions is contained under the heading “Description of Common Stock — Limitation of Liability and Indemnification Matters.”

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Other than compensation agreements and other arrangements, which are described in “Management,” and the transactions described below, since January 1, 2001 there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party:

 

    in which the amount involved exceeded or will exceed $60,000; and

 

    in which any director, executive officer, or holder of more than 5% of any class of our voting securities or any immediate family member of such person had or will have a direct or indirect material interest.

 

Equity Transactions and Related Matters

 

We issued and sold 4,722,560 shares of series E redeemable convertible preferred stock and warrants to purchase 1,092,844 shares of class A common stock at an exercise price of $0.01 per share in August 2001 and January 2002.

 

In May 2004, we entered into an agreement with holders of our series E redeemable convertible preferred stock to modify some of their existing rights and obligations, including the redemption and conversion terms of the series E redeemable convertible preferred stock. The holders of series E redeemable convertible preferred stock agreed to delay the date upon which they could request redemption of their series E redeemable convertible preferred stock from August 14, 2004 to March 31, 2006, to amend the price per share at which their shares of series E redeemable convertible preferred stock will automatically convert upon an initial public offering of our common stock and to modify certain other rights. In exchange for their agreement, we agreed to issue to holders of series E redeemable convertible preferred stock warrants to purchase an aggregate of 1,400,000 shares of our class A common stock at an exercise price of $0.01 per share. These warrants only become exercisable in the case of an initial public offering, in which case they will be automatically exercised at the closing of the offering. We also agreed to redeem upon an initial public offering half of the outstanding shares of series E redeemable convertible preferred stock, an aggregate of 2,361,276 shares, at a price equal to the greater of $18.90 per share or the price per share at which we sell our common stock in an initial public offering. Each share of series E redeemable convertible preferred stock not otherwise redeemed will automatically convert into one share of common stock upon completion of this offering. If series E redeemable convertible preferred shares are not redeemed by August 14, 2004, the redemption price increases at a rate of 15% per annum until we redeem the shares. Prior to this modification of redemption rights, the original price at which shares were to be redeemed by us was $19.80 per share of series E redeemable convertible preferred stock.

 

Consistent with the terms of a liquidation distribution agreement dated August 2001, as supplemented by an agreement dated May 2004, a portion of the series E redemption amount equal to $0.90 per share having an aggregate value of $2,125,148 based on the number of shares of series E redeemable convertible preferred stock to be redeemed following the offering, will be retained by us and separately distributed 50% to holders of our series B, C and D redeemable convertible preferred stock based on their relative liquidation preferences and 50% to members of our management and other key employees in the relative amounts provided for in the agreement. Of the $1,062,574 of series E redemption proceeds distributable to management and other key employees as a result of the redemption of series E redeemable convertible preferred stock at the offering, 14%, 12%, 12%, 6% and 6% will be distributed to Charles A. Nooney, our Chairman of the Board and Chief Executive Officer; Eric S. Bindelglass, our President and Chief Operating Officer; Arthur J. Songey, our Chief Financial Officer; Nicholas J. Marquart, our Senior Vice President and Chief Technology Officer; and Mark Sean Moran, our Chief Strategy Officer, respectively.

 

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The following table summarizes the shares we intend to redeem from, and the warrants we intend to issue to, stockholders who currently hold more than 5% of any class of our outstanding voting stock:

 

Stockholder


   Shares of Series E
Redeemable Convertible
Preferred Stock
Currently Held


   Shares to be
Redeemed


   Warrant
Shares to
be Received


Shamrock Capital Growth Fund, L.P. (1)

   2,222,223    1,111,111    658,777

Moore Macro Fund, L.P. (2)

   833,334    416,667    247,041

Equity Asset Investment Trust

   833,334    416,667    247,041

Allen & Company Incorporated (3)

   327,778    163,889    97,170

Stanley B. Shopkorn

   166,667    83,333    49,408

(1)   Stephen D. Royer and William J. Wynperle are members of our board of directors and affiliated with Shamrock Capital Growth Fund, L.P.
(2)   James A. Caccavo is a member of our board of directors and affiliated with Moore Macro Fund, L.P.
(3)   Enrique F. Senior is a member of our board of directors and affiliated with Allen & Company Incorporated.

 

Transactions with Management and 5% Stockholders

 

The table summarizes purchases, valued in excess of $60,000, of shares of our capital stock by our current directors, executive officers and holders of more than 5% of any class of outstanding voting stock:

 

Name of Purchaser


   Series E
Redeemable Convertible
Preferred Stock


   Shares Underlying
Warrants to
Purchase Class A
Common Stock


Shamrock Capital Growth Fund, L.P. (1)

   2,222,223    514,285

Equity Asset Investment Trust

   833,334    192,857

Moore Macro Fund, L.P. (2)

   833,334    192,857

Allen & Company Incorporated (3)

   327,778    75,857

Stanley B. Shopkorn

   166,667    38,571

(1)   Stephen D. Royer and William J. Wynperle, who are members of our board of directors, are affiliated with Shamrock Capital Advisors, Inc.
(2)   James A. Caccavo, who is a member of our board of directors, is affiliated with Moore Macro Fund, L.P.
(3)   Enrique F. Senior, who is a member of our board of directors, is affiliated with Allen & Company Incorporated.

 

We paid to Shamrock Capital Growth Fund, L.P. $400,000 in advisory fees and $175,000 as reimbursement for fees and expenses in connection with their purchase of series E redeemable convertible preferred stock in August 2001.

 

We paid $1,741,681 to Allen & Company Incorporated in advisory fees in connection with our sale of series E redeemable convertible preferred stock in August 2001 and $200,000 in advisory fees in connection with strategic initiatives in December 2002.

 

On August 3, 2001, we entered into a director retention and compensation agreement with Jeffrey M. Cohen, a holder of more than 5% of our outstanding stock and our former chief executive officer and chairman of the board under which Mr. Cohen was entitled to an annual salary of $360,000 and annual bonus compensation, in an amount determined by the board of directors, for his service as chairman of the board. In connection with the initial closing of our series E redeemable convertible preferred stock, we repurchased 912,408 shares of class B common stock from Mr. Cohen for an aggregate purchase price of $5,000,000, consisting of $3,000,000 in cash and a secured promissory note for $2,000,000 bearing an interest rate of 10% per annum, and Mr. Cohen

 

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converted the balance of his shares of class B common stock into shares of class A common stock. In September 2001, the director retention and compensation agreement was terminated, and pursuant to its terms, we repurchased 182,481 shares of class A common stock from Mr. Cohen for an aggregate purchase price $1,000,000 represented by an increase in the principal amount of the secured promissory note. Mr. Cohen received the monthly salary during the time he served as chairman of the board. In January 2002, upon the second closing of our series E redeemable convertible preferred stock, we repaid all remaining outstanding amounts under the promissory note.

 

Investors’ Rights Agreement

 

We have entered into an investors’ rights agreement with the purchasers of our preferred stock including those purchasers listed above and Jeffrey M. Cohen. Under this agreement, these and other stockholders are entitled to registration rights with respect to their shares of common stock issuable upon the conversion of their convertible preferred stock. For additional information, see “Description of Capital Stock — Registration Rights.”

 

Indemnification Agreements

 

We have entered into indemnification agreements with our directors and executive officers. We believe that these agreements are necessary to attract and retain qualified persons as directors and executive officers. These agreements require us to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. We also intend to enter into indemnification agreements with our future directors and executive officers.

 

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PRINCIPAL STOCKHOLDERS

 

The following table sets forth information as of March 31, 2004 about the number of shares of common stock beneficially owned and the percentage of common stock beneficially owned before and after the completion of this offering by:

 

    each person known to us to be the beneficial owner of more than 5% of our common stock;

 

    each executive officer named above under “Executive Compensation;”

 

    each of our directors; and

 

    all of our directors and executive officers as a group.

 

Unless otherwise noted below, the address of each beneficial owner listed in the table is c/o PRN Corporation, 600 Harrison Street, 4th Floor, San Francisco, California 94107.

 

We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.

 

Applicable percentage ownership is based on 14,422,939 shares of common stock outstanding on March 31, 2004, which assumes the exercise of warrants to purchase 1,141,898 shares of common stock, the issuance and exercise of warrants to purchase 1,400,000 shares of common stock, the redemption of 2,361,276 shares of series E redeemable convertible preferred stock, the automatic conversion of all of our outstanding shares of series A convertible preferred stock and all of our remaining outstanding shares of redeemable convertible preferred stock, except for all shares of our series D redeemable convertible preferred stock which will remain outstanding, into shares of common stock and the automatic conversion of all of our outstanding shares of class A common stock into shares of common stock. For purposes of the table below, we have assumed that              shares of common stock will be outstanding upon completion of this offering. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of March 31, 2004. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.

 

Name and Address of Beneficial Owner


   Shares of
Common Stock
Beneficially
Owned Prior
to This Offering


   Percentage of Shares of
Common Stock Outstanding


      Prior to This
Offering


    After This
Offering


5% Stockholders:

               

Shamrock Capital Growth Fund, L.P. (1)