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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 000-27329
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CYBERGOLD, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7311 94-3212392
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE) IDENTIFICATION NUMBER)
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1330 BROADWAY, 12TH FLOOR
OAKLAND, CALIFORNIA 94612
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(510) 302-3000
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $0.00015 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 27, 2000 was approximately $90,441,248 (based on the last
reported sale price on the NASDAQ National Market on that date). The number of
shares outstanding of the registrant's common stock as of March 27, 2000 was
19,325,996.
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CYBERGOLD, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submissions of Matters to a Vote of Security Holders........ 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 17
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure........................................ 51
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 51
Item 11. Executive Compensation...................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 51
Item 13. Certain Relationships and Related Transactions.............. 51
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form
8-K......................................................... 51
Signatures............................................................ 52
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PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT CYBERGOLD AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
CYBERGOLD'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. CYBERGOLD UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
ITEM 1. BUSINESS
We were incorporated under the name Cyber-Bucks, Inc. in California in
October 1994. We subsequently changed our name to CyberGold, Inc. and
reincorporated under the name Cybergold, Inc. in Delaware in August 1999.
Reference in this Report to "Cybergold", "we", "our", and "us" refer to
Cybergold, Inc. Cybergold's principal offices are located at 1330 Broadway, 12th
Floor, Oakland, California 94612, and its telephone number at that location is
(510) 302-3000.
We are a leading provider of online direct marketing and advertising
solutions. We combine Internet-based direct marketing and advertising services
with programs that reward consumers with cash when they perform actions desired
by our advertising and marketing clients. These cash-based online incentives
programs are intended to provide flexible, incentive-marketing solutions for our
clients. For our incentive program, our advertising and marketing clients are
only charged when our members execute specific predefined actions, providing
these clients with a known cost to achieve the desired response to their
advertising campaigns. By leveraging our member database and our targeting
capabilities, we are able to offer our clients customized, targeted advertising
solutions designed to improve advertisement response rates and reduce the cost
of acquiring new customers.
We serve three main constituencies: advertising and marketing clients,
consumer members and merchants. Advertising and marketing clients use Cybergold
to cost-effectively acquire new customers with offers and cash incentives.
Consumer members use Cybergold to earn cash rewards for responding to offers on
our Web site, on third-party Web sites and through e-mail campaigns. Merchants
use Cybergold as a cost-effective means to sell inexpensive digital content,
services and products on a pay-per-transaction basis to the Cybergold membership
base.
Our business revolves around what we call the Earn & Spend Community -- a
place on the Internet where consumers can earn cash incentives for responding to
online marketing offers presented by our advertising and marketing clients and
then spend the cash with merchants. By opening a Cybergold account, a consumer
can become a member of the Earn & Spend Community. The cash earned by our
consumer members can be credited to either their VISA or bank accounts from
their Cybergold account or be used to purchase content, services and products,
including software, music, games, credit reporting services and original
artistic works and publications through our Earn & Spend Community. As of
December 31, 1999, we had approximately 4.0 million consumer members.
Advertising and marketing clients that use our service include autobytel.com,
inc., The Walt Disney Company, Doubleday, yesmail.com, inc., Uproar (E-Pub
Services Ltd.) and MBNA America Bank.
INDUSTRY BACKGROUND
Growth of the Internet and Online Commerce
The Internet has emerged rapidly as an important medium for facilitating
communication, disseminating information and conducting commerce. International
Data Corporation estimates that the number of Internet users worldwide exceeded
200 million in 1999 and will grow to approximately 600 million by the end of
2003. Jupiter Communications estimates that e-commerce in the United States will
reach approximately $78 billion by the end of 2003, up from approximately $15
billion in 1999. The availability of a broad range of content and the acceptance
of electronic commerce has driven rapid Internet adoption by businesses and
consumers alike, which has in turn stimulated the proliferation of additional
content and electronic commerce.
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Online Advertising and Direct Marketing
The Internet possesses unique and commercially powerful characteristics
that differentiate it from traditional forms of media, including a lack of
geographic or temporal limitations, real time access to dynamic interactive
content and instantaneous connections between advertisers, marketers and
consumers. Advertisers and marketers are particularly attracted to the Internet
because it enables them to distribute information efficiently, reach potential
customers globally and engage in one-to-one customer interaction. These
capabilities create significant opportunities for advertisers, marketers and
merchants to develop direct relationships with consumers. The Internet also
facilitates the efficient collection of valuable customer data and demographic
information, enabling advertisers and marketers to develop targeted marketing
campaigns directed to existing and potential customers.
These characteristics have resulted in the rapid growth of Internet
advertising. Jupiter Communications estimates that worldwide Internet
advertising expenditures in 1999 were approximately $3.2 billion and projects
Internet advertising expenditures to increase to approximately $11.5 billion in
2003. The majority of Internet advertising to date has been in the form of
passive banner advertising. However, as the number of Web sites and amount of
advertising on the Internet has proliferated, we believe decreasing consumer
response to banner advertising has led advertisers and marketers to question the
effectiveness of such advertising and marketing campaigns. Jupiter
Communications estimates that click-through rates, used by advertisers to
measure the effectiveness of their online efforts, will declined from just under
1.0% in 1999 to 0.05% in 2000.
These trends are causing marketers to consider alternative marketing
solutions that encourage consumers not only to pay greater attention to
marketing messages but also to increase response rates to those messages.
Conversely, many consumers prefer to limit the number of advertisements to which
they are exposed and prefer to be exposed only to those advertisements for
products or services in which they are interested. We believe that the inability
of traditional banner advertising to maximize the powerful one-to-one
relationships enabled by the Internet has led advertisers to place greater
emphasis on online direct marketing as a more effective means to convert
Internet users into customers. The Direct Marketing Association estimates that
spending on Internet direct marketing will grow from $1.3 billion in 1999 to
$8.6 billion in 2004, representing a compound annual growth rate of 46%.
Online Incentive Programs
As advertisers and marketers seek to increase the effectiveness and
efficiency of their online marketing efforts, they are turning to
incentives-based programs, which reward consumers for their attention or
specific response to ads and promotions. Because advertisers are charged on a
cost-per-action basis in these programs, advertisers are provided with a
predictable cost for the desired response. In contrast, banner advertisers pay
simply for the number of times a banner appears on a Web site page, regardless
of how many consumers actually view or click on the banners or whether they take
additional actions based on what they read.
Most incentives-based programs offer consumers the ability to earn "points"
that are redeemable only for limited products, frequent flyer miles or other
non-cash rewards. These non-cash incentive programs often have significant
limitations on redemption due to the limited items for which rewards can be
redeemed as well as various program restrictions. For example, programs offering
frequent flyer miles are often restrictive and generally only appeal to
consumers who otherwise actively participate in frequent flyer programs. In
addition, rewards for participation in online direct marketing programs mostly
come in small increments and the redemption opportunities generally require
large outlays of points. Therefore, while these programs have the potential to
provide significant benefits to advertisers and marketers, they remain limited
to a subset of Internet users.
Online Payment Mechanisms
Traditionally, Internet companies have chosen either to fund the free
distribution of content or services through selling banner advertising on their
Web sites or to sell their content or services on a subscription basis. Although
banner ad rates have declined in past years, Jupiter Communications reports that
effective CPM
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rates (i.e. cost per thousand impressions multiplied by the percentage of
inventory sold) rose in 1999 to $3.20 from $2.60 in 1998 and are expected to
rise to $4.80 by 2003. This rise can be attributed to better targeting, more
sophisticated online media planning, and higher demand for available inventory.
Despite this rise, in order to offset an increasingly competitive marketplace,
Internet content and service providers will continue to search for other revenue
sources, including the sale of content or services on a per transaction basis.
While credit cards have traditionally been the dominant form of payment for
Internet transactions, the relatively high costs of processing credit card
payments makes them less suitable for small Internet purchases. In addition,
consumers have traditionally been reluctant to use credit cards for purchases.
As a result, the absence of a broadly accepted online payment system has left
sales of some content, services and products economically impractical. In
addition, a significant subset of customers do not possess credit cards for
cultural or economic reasons or are unwilling to use credit cards on-line due to
perceived security risks. These consumers are effectively shut out from
e-commerce transactions today.
Market Opportunity
Advertisers, marketers and merchants need more effective means to induce
consumers to respond to online advertising and marketing and facilitate the
online purchase of some content, goods and services. While there have been
several attempts to address these needs, current incentives-based online
advertising and marketing and payment solutions have a number of significant
limitations. Current incentives-based online advertising and marketing campaigns
impose significant limitations on consumer choice, limiting consumers' ability
to monetize their time spent online. These shortcomings limit the utility and
flexibility of incentives-based online marketing programs and, therefore,
consumers' desire to participate. In addition, current transaction processing
methods for the distribution of some content, services and products are
prohibitively expensive. There is a need for online incentives-based advertising
and marketing and payment solutions, which effectively target consumers and
provide consumers with greater flexibility and purchasing opportunities.
THE CYBERGOLD SOLUTION
We are a leading provider of online direct marketing and cash-based
incentive advertising solutions. We believe that we are the first online company
to combine a cash-based incentive program with a direct marketing approach that
provides extensive benefits for our advertising and marketing clients, consumer
members and merchants. As of December 31, 1999, our Earn & Spend Community has
approximately 4.0 million consumer members, which enables our advertising and
marketing clients to offer cost-per-action incentive programs either to our
entire member database or to a targeted subset. Members are compensated for
responding to online advertisements or promotions by performing client-specified
actions, such as filling out online surveys or purchasing products or services.
Internet users become Cybergold members at no cost by completing a short online
registration form on our Web site or on a co-marketer or co-registration Web
site.
In order to manage these cash-based incentive programs on our Web site and
on other sites, we have developed a proprietary transaction system that enables
the cost-effective management of cash-based incentive reward programs and
payment transactions. Our Earn & Spend Community allows our members to earn cash
by interacting with offers that appeal to their interests. For example, under a
current promotion, members can earn $3.00 for requesting a quote for a new car
from our marketing client, autobytel.com, inc. The cash earned by our members is
deposited in their Cybergold accounts and can then be credited to either their
VISA cards or bank accounts or be used to purchase content, services and
products, including software, music, games and original artistic works and
publications.
Benefits of our unique incentive programs include:
Advertising and Marketing Client Benefits
- Flexible and Effective Marketing Solution. We provide a variety of
advertising and marketing services for our clients, including incentive
offers on our Earn & Spend Community site, targeted and untargeted
e-mails, and ad campaigns that offer cash incentives directly on
third-party sites. We
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believe our services provide our clients with more effective advertising
tools to induce desired consumer behavior, including purchasing, product
evaluation and subscriptions.
- Cost-Per-Action Payment Structure. We provide a cost-per-action incentive
marketing solution, in which our clients are only charged when our
members take pre-defined actions specified by our clients. In addition,
we offer integrated campaigns which include a fee for each email sent in
addition to a fixed cost-per-action incentive at our website. Our
cost-per-action solution provides our clients with both a known cost per
yield for each advertising and marketing campaign, the costs of acquiring
new customers and risk.
- Measurable Results. Member actions in response to client marketing
messages are instantly recorded in our database, allowing clients to
measure the effectiveness of their advertising campaigns on an ongoing
basis. Clients are able to review and modify their campaigns at any time
to react to customer response rates.
- Targeting Capability. By leveraging our database of approximately 4.0
million consumer members, we are able to provide customized, targeted
campaigns for our clients. This targeting capability enables our clients
to focus on specific demographic segments or groups of users that exhibit
desirable online behavioral patterns. We believe that by focusing on a
specific target audience, our clients should increase response rates and
reduce their customer acquisition costs.
Member Benefits
- Cash Rewards. Unlike other online incentive programs that reward the
customer with "points" redeemable for frequent flyer miles, specified
products or other non-cash rewards, we reward our members with cash. One
Cybergold dollar equals one U.S. dollar. The dollars our members earn are
accumulated in a Cybergold account and can be credited to their VISA
cards or bank accounts. We also offer a number of online spending
opportunities to our members, such as the ability to purchase digital
content, services and products, including software, music, games, credit
reporting services, original artistic works and publications, and gift
certificates as well as donations to charitable organizations.
- Member Choice. Our online incentives programs provide two primary
benefits for members. First, members may choose to respond only to
advertising and marketing that interests them and provides a reward to
induce their participation. Second, members earn cash rewards, which they
can choose to spend on online purchases or have credited to their VISA
cards or bank accounts. This enables members to pursue advertising and
marketing that interests them, increasing the quality of their online
experience.
Merchant Benefits
- New Revenue Opportunity. With Cybergold's Mint Transactions System, our
merchant's sales teams, brand managers and entrepreneurs possess a
powerful e-commerce tool that expands the interactivity and targeting
abilities of the Internet. It also allows low cost product trials and
promotions to merchants and gives on-line merchants a chance to get
creative with cash rebates and co-marketing opportunities on a new site.
All the emerging consumer markets can benefit from the Mint's ability to
work as an Internet "currency".
- The most unique revenue opportunity Cybergold offers is the Earn and
Spend Community. This community brings together our consumer members, the
advertiser and the online merchants through the exchange of Cybergold
dollars. Any new web site who chooses to install the Mint Transactions
System to add Cybergold as a method of payment instantly accesses
Cybergold consumer members who more than likely already have money
sitting in their accounts. Merchants gain customers, simply by adding
additional functionality to their web site.
- In addition, if Cybergold members wish to purchase items that cost more
than the amount of Cybergold dollars in their accounts, they can deposit
additional funds into their Cybergold accounts
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from their VISA cards. Our broad membership community gives merchants an
established base of potential customers.
Value-Added Services. We provide merchants with "non-hosted" and "hosted"
value-added services. In "non-hosted" solutions, our payment transaction system
enables merchants to sell inexpensive digital content, services and products on
their own Web sites. In "hosted" solutions, we provide the merchants with a
complete suite of Web site hosting, systems administration, transaction
processing and integration services, while the merchant only provides the
content.
STRATEGY
Our objective is to enhance our position in online direct marketing and
incentives-based advertising. We intend to achieve our objective through the
following key strategies:
Increase Size of Membership Base. We intend to continue to expand our
membership base through membership acquisition activities such as
co-registration programs, co-marketing programs and advertising on third-party
Internet sites. We also plan to initiate offline branding and promotional
campaigns using broadcast, print and outdoor advertising in order to attract new
members. In addition, we intend to explore international opportunities,
including potential strategic alliances, in order to extend the reach of the
Cybergold brand.
Increase Number of Advertising and Marketing Clients. We are seeking to
broaden our advertising and marketing client base by increasing our direct and
indirect sales and marketing efforts. We plan to increase significantly the size
of our direct sales force and to open additional regional sales offices. In
addition, we are seeking to take advantage of existing distribution channels,
such as advertising networks, to expand the number of advertisers using our
incentive marketing system.
Increase Brand Awareness. We are focused on increasing brand awareness to
attract and retain members, advertising and marketing clients and merchants. We
intend to use a combination of online and offline advertising, direct marketing,
public relations and other marketing programs designed to promote the Cybergold
brand and build loyalty among our members, clients and merchants. We also intend
to develop promotional and media campaigns with well-known Internet companies
and offline marketers of branded consumer products and services.
Expand Earn & Spend Opportunities to Other Web Sites. Although we currently
are primarily a site-centric service, our payment technology enables our Earn &
Spend capabilities to function on third-party Web sites. To date, a number of
Web sites have installed the Cybergold Mint Transactions System, our electronic
commerce payment software, on their servers. We are seeking to aggressively
expand Cybergold Mint Transactions System installations on other Web sites to
increase the number of Internet users who are exposed to the Cybergold Earn &
Spend Community and establish additional sources of revenue. We are also
pursuing strategic relationships with electronic commerce infrastructure vendors
to further expand the distribution of the Cybergold Mint Transactions System
technology.
Enhance Cybergold Earn & Spend Community. We intend to continue to enhance
the Cybergold Earn & Spend Community by increasing the number and variety of
incentive offers provided and the breadth of online purchasing opportunities.
During the fourth quarter of 1999, Cybergold added cash-back shopping to the
Earn and Spend Community, allowing Cybergold members to earn Cybergold cash
rewards for shopping with 85 on-line merchants. We believe that the Cybergold
Earn & Spend Community and our technology enable individuals and businesses to
sell inexpensive digital content, services and products that were previously not
cost-effective to offer online.
Pursue Strategic Acquisitions and Relationships. We intend to continue to
enter into strategic relationships in order to build our Earn & Spend Community,
generate additional traffic to our Web site, increase membership and establish
additional sources of revenue. We have entered into strategic relationships with
the First National Bank of Omaha, MBNA America Bank, Earthlink Network, Inc. and
others, which have enabled us to offer our clients and members a broader
selection of advertising opportunities, expanded content and more online
services. In addition, we intend to pursue strategic acquisitions of
complementary technologies and services in order to expand and enhance our
current offering of products and services.
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CYBERGOLD SERVICES
Cybergold serves three main constituencies: advertising and marketing
clients, consumer members and merchants. Advertising and marketing clients use
Cybergold to cost-effectively acquire new customers with offers and cash
incentives. Consumer members use Cybergold to earn cash rewards for responding
to offers on our Web site, on third-party Web sites and through e-mail
campaigns. Merchants use Cybergold technology as a cost-effective means to sell
inexpensive digital content, services and products on a pay-per-transaction
basis to the Cybergold membership base.
Advertising and Marketing Client Services. We work closely with our
advertising and marketing clients to develop marketing campaigns that are
tailored to their customer acquisition needs. These programs include:
- incentives-based offers and promotions on the Cybergold Web site;
- targeted and untargeted e-mail campaigns conducted by us on behalf of our
advertising and marketing clients;
- programs introduced on our marketing clients' Web sites; and
- banner ads placed on various targeted Web sites.
Our membership database technology enables us to maintain and track
information about our members. We are able to track aspects of member online
activity, such as marketing programs in which specific members have participated
and online purchases initiated through Cybergold. In addition, we have access to
member information gathered by a number of our advertising and marketing
clients. We believe that our database of membership information allows us to
carefully tailor marketing campaigns to maximize their effectiveness for our
clients.
Member Services. Internet users become Cybergold members at no cost by
completing a short online registration form on our Web site or on a co-marketer
or co-registration Web site. Our members earn cash rewards for completing
various desired actions, such as viewing an incentive offer, completing a survey
or registration form or downloading software. Members can also earn rebates and
incentives by purchasing a variety of products or services offered through our
Web site or third-party Web sites.
Existing members are notified of new programs and promotions through
periodic e-mail distributions. In contrast to other incentive programs, our
members have the opportunity not only to earn cash rewards that are transferable
to their VISA cards or bank accounts, but also to spend their Cybergold cash
rewards for a variety of goods and services. Cash is transferable to a member's
bank account in a minimum amount of $5.00 and to a VISA card in a minimum amount
of $10.00. Members are also able to transfer money from VISA cards to their
Cybergold accounts to enable them to use our payment system to purchase
additional content, goods and services from merchants.
We are committed to maintaining the privacy and security of our members. We
keep all personal information about our members confidential. Cybergold is a
member of TRUSTe, a non-profit organization dedicated to the protection of user
privacy and promotion of security online.
Merchant Services. We offer merchants the ability to sell digital content,
products and services over the Internet in transactions of any size. By lowering
the high transaction costs typically associated with very small credit card
transactions, we enable the cost-effective delivery of content such as articles
or music for cents rather than dollars. We believe that our payment system
enables new business models for merchants of content, products and services. We
offer merchants with two payment environment options:
- Non-hosted -- Cybergold's Mint Transaction System enables merchants to
sell inexpensive digital content, services and products on their own Web
sites.
- Hosted -- a full-service solution where Cybergold provide the merchants
with a complete suite of Web site hosting, systems administration,
transaction processing and integration services, while the merchant only
provides the content. This is attractive to potential merchant because
Cybergold handles the customer service, security and technical
components.
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SALES AND MARKETING
Our primary sales strategy is to sell our services directly to advertisers,
direct marketers, ad agencies and electronic commerce merchants. We currently
sell our services in the United States through a direct sales organization, with
ten employees located in the San Francisco Bay Area, metropolitan Dallas,
metropolitan New York and metropolitan Washington, D.C. Our sales force is
dedicated to establishing and maintaining relationships with advertising and
marketing clients. Our sales force uses industry directories, press, personal
contacts, industry knowledge and Internet search engines to seek likely sales
prospects. We also receive sales leads from advertising agencies that recommend
Cybergold to their clients.
Our marketing organization is composed of marketing communications, product
management, product marketing and membership marketing groups. In addition, we
also use consultants such as public relations agencies and graphic design firms
to assist with marketing activities. Marketing communications is responsible for
external public relations activities, managing relationships with the press and
industry analysts and creating marketing collateral materials, such as sales
brochures. Product management is responsible for working with our engineering
department and our clients to define new products as well as enhancements to
existing products and services. Product management also contributes to
management development efforts, assists customers with special requirements, and
provides additional resources as needed throughout our company. Product
marketing is responsible for the content and graphics on our Web site, including
the production and implementation of advertising and merchant offers. Product
marketing also determines which additional services may be of interest to
members, clients and merchants.
Membership marketing is focused on expanding our membership base. We use a
variety of methods to generate new members, including e-mail campaigns,
advertising, and co-registration agreements with some of our affiliate partners,
as well as referrals by current members and public relations. Currently, we
attract the majority of our members through co-registration agreements with
online partners, whereby registrants for those sites have the option to
concurrently sign up for the Cybergold Earn & Spend Community. We believe that
the convenience afforded by this co-registration capability is a significant
factor in attracting new members. As of December 31, 1999, we have a network of
approximately 75 affiliate partners through which we can attract new members. In
addition to these online methods of increasing our membership base, we are
currently planning a range of offline marketing campaigns designed to attract
new members.
ADVERTISING AND MARKETING CLIENTS
Our advertising and marketing clients pay us commissions each time a member
takes an action in response to some online advertising or promotion in a manner
pre-established by our client. Since inception, a total of 268 advertising and
marketing clients have offered incentives using our system. In 1999, no client
accounted for more than 10% of our revenue. Determined as a percentage of total
revenue for the fiscal year ended December 31, 1998, the following two customers
represented revenues in excess of 10%:
YEAR ENDED DECEMBER 31, 1998
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Qwest Communications International, Inc. ................... 22%
Interactive Coupon Network (Cool Savings)................... 16%
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As of December 31, 1999, we have 158 advertising and marketing clients who
are currently offering incentives using our system, including:
- American Homeowners Association
- Dynamic Trade (Discover)
- Quintel Communications ,Inc.
- autobytel.com, inc.
- Financial Engines (Media Plex)
- Uproar (E-Pub Services Ltd.)
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- HealthShop.com and Petstore.com (Media Book, Inc.)
- MBNA America Bank
- Netmarket Group Inc.
- The Walt Disney Company (Disney Daily Blast, Disney Store Online,
Doubleday)
- yesmail.com, inc.
- MotherNature.com, inc.
STRATEGIC RELATIONSHIPS
As of December 31, 1999, we have entered into a number of strategic
relationships to build our Earn & Spend Community, generate additional traffic
to our Web site, increase our membership and generate additional revenue.
These strategic relationships include:
The First National Bank of Omaha. Our relationship with the First
National Bank of Omaha enables consumers to directly credit their personal
VISA accounts with money earned through Cybergold and to credit their
Cybergold accounts with funds from their VISA account. Cybergold pays a
monthly minimum fee to the First National Bank of Omaha, along with a
transaction fee for each transfer from a Cybergold account to a VISA
account.
MBNA America Bank. Together with MBNA America Bank, we launched the
co-branded Cybergold MBNA VISA card, which provides convenient and easy
Internet shopping, MBNA's state-of-the-art fraud protection, VISA Platinum
Plus cardholder benefits and the potential for cash incentives. Cybergold
receives a fee for each co-branded card generated and transaction fees for
all purchases made on these cards.
Earthlink. We launched a private-label loyalty program with Earthlink
under which Earthlink will utilize our transaction processing and account
management technology to implement an incentives-based loyalty program for
its members that use their Earthlink credit cards for shopping both on the
Internet and offline. Cybergold receives a monthly minimum fee as well as
transaction fees for Cybergold transactions that occur on Earthlink's Web
site.
yesmail.com. yesmail.com pays Cybergold for each member who signs up
to receive permission emails from yesmail.com. In addition, yesmail.com
pays Cybergold a percentage of the revenue it generates from sending emails
to these members on behalf of advertising clients on a revenue share basis.
TECHNOLOGY
We have developed a scaleable technology infrastructure that executes both
incentive reward transactions and online payments for consumer purchases. There
are two proprietary components to our infrastructure:
- The Cybergold Mint Transaction System is our electronic commerce payment
software, which runs on either our servers or the servers of our clients
or merchants. The Cybergold Mint Transaction System executes both
Cybergold incentive reward transactions and online payments for consumer
purchases. To make worldwide distribution possible, the Cybergold Mint
Transaction System employs a cryptographic system called HMAC-MD5 that
offers full 128-bit security without export controls.
- The Cybergold payment server is our real-time transaction-processing
engine. This engine is optimized for high-volume financial transactions
and is designed to scale by simply adding additional hardware to our
system. The Cybergold payment server communicates with consumer browsers
using SSL, the industry-standard Web security protocol, to safeguard all
private user information.
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<PAGE> 11
Our payment server includes property modules for handling:
- interactive transactions;
- background transactions for off-line incentive programs;
- consumer account management and online statements;
- VISA and bank (ACH) transfers and charity donations;
- transaction reversal and dispute management;
- real-time risk management with velocity checking and fraud detection;
- context-sensitive help; and
- automated customer assistance with escalation to our separate customer
service system.
Cybergold transactions begin when consumer members encounter advertisements
offering incentive and/or purchases on our Web site or on third-party Web sites.
The merchant Web servers use the Cybergold Mint Transactions System to generate
rewards and payments. The transactions are sent over the Internet to the
Cybergold payment servers, which move incentive funds from merchant accounts to
member accounts and move payment funds from member accounts to merchant
accounts. The payment servers incorporate a database of user, merchant and offer
information.
Our technology consists of proprietary programs integrated with third-party
hardware and software. Our third-party hardware includes Sybase SQL Servers, Sun
Solaris platforms and Apache Web servers, which members access with standard Web
browsers such as Netscape Navigator and Microsoft Internet Explorer. We do not
require consumers to download any software to process or store payments and
rewards.
We internally developed our systems for maintaining our Web site processing
transactions and maintaining member accounts. If, in the future, we cannot
modify these systems to accommodate increased traffic and an increased volume of
transactions and orders, we could suffer slower response time, problems with
customer service and delays in reporting accurate financial information. See
"Risk Factors -- If we fail to adapt to rapid change in our industry or our
internally developed systems cannot be modified properly for increased traffic
or volume, our products and services may become obsolete."
COMPETITION
The market for online direct advertising and marketing is extremely
competitive. In addition, while the market for services that facilitate
small-scale electronic commerce transactions is very new, we expect competition
in that area to increase dramatically in the near future. We cannot assure you
that we will compete successfully in this environment. Our ability to compete in
these marketplaces depends on many factors, some of which are beyond our
control. Please see "Risk Factors -- We face significant competition from online
incentives-based advertising and marketing programs and providers of payment
systems" for a list of these factors. Our failure to compete in these
marketplaces could have a material adverse effect on our business, results of
operations and financial condition.
We believe that the principal competitive factors in the online
incentives-based advertising market are:
- brand recognition;
- breadth and depth of content and services;
- number and quality of advertising clients;
- size of membership base;
- ease of use;
- transaction speed and security;
- quality of service; and
- technical expertise.
11
<PAGE> 12
We face significant competition from online incentives-based advertising
and marketing programs and providers of payment systems. We expect competition
to increase due to the lack of significant barriers to entry for online business
generally and for online incentives-based direct marketing programs and payment
transactions in particular. Currently, several companies offer competitive
online incentives programs, including MyPoints.com, Inc. and Netcentives Inc. We
may also face competition from established Internet portals and community Web
sites that engage in direct marketing, as well as from traditional advertising
agencies and direct marketing companies that may seek to offer online products
or services. In addition, financial service organizations, such as banks and
credit card companies or similarly situated large financial institutions may
develop competitive payment systems and incentives-based advertising and
marketing programs.
Some of our current and potential competitors have longer operating
histories, greater brand recognition, larger client and member bases and
significantly greater financial, technical and marketing resources than we do.
These advantages may enable them to respond more quickly to new or emerging
technologies and changes in customer preferences. These advantages may also
allow them to engage in more extensive research and development, undertake
extensive far-reaching marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to potential employees, strategic
partners and advertisers. As a result, it is possible that our existing
competitors or new competitors may rapidly acquire significant market share.
Increased competition may result in price reductions, reduced gross margin and
loss of market share. We may not be able to compete successfully, and
competitive pressures may affect our business, results of operations and
financial condition.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our technology or business model.
Monitoring unauthorized use of our technology and business model is difficult,
and we cannot be certain that the steps we have taken will prevent unauthorized
use of our technology and business model. In addition, our business activities
may infringe upon the proprietary rights of others, and from time to time we
have received, and may continue to receive, claims of infringement against us.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. We have selected a limited set of companies
against which we plan to assert our rights as an initial matter. If these claims
cannot be resolved through licenses or similar arrangements, we could become a
party to litigation with companies we consider to be infringing our intellectual
property rights. In addition, we may elect to pursue claims of infringement
against other entities it believes are infringing on the patents covering its
business method.
Any litigation could subject us to significant liability for damages and
invalidation of our proprietary rights. These lawsuits, regardless of their
success, would likely be time consuming and expensive to resolve and would
divert management's time and attention away from our business. Any potential
intellectual property litigation could also force us to do one or more of the
following:
- make significant changes to the structure and operation of our business;
- attempt to design around a third party's patent; or
- license alternative technology from another party.
Implementation of any of these alternatives could be costly and time
consuming, and may not be possible. Accordingly, an adverse determination in any
litigation that we are a party to would have a material adverse effect on our
business, results of operations and financial condition.
The U.S. Patent and Trademark Office has issued the following patents
covering our business method and software architecture:
- Patent #5,794,210, which expires on December 11, 2015, covers Attention
Brokerage, in which users are compensated, whether through cash, frequent
flier points or other forms of compensation, for
12
<PAGE> 13
paying attention online to advertisements, promotions and similar
information, and Orthogonal Sponsorship, in which users can apply their
earned compensation to purchase digital content or other intellectual
property; and
- Patent #5,855,008, which expires on December 11, 2015, for Consumer
Controlled Privacy Management, in which users establish criteria by which
their personal information is released to others, those requesting access
to personal data provide their identity, intentions for using the
personal data, and may offer compensation to the user for access to the
personal data, and the user or an automated process decides whether to
release the requested personal data based on the user's criteria and the
requester's information.
We also have U.S. and foreign pending patent applications. "Cybergold" is our
only registered trademark, although we have applied to register additional
trademarks in the United States. We cannot assure you that our patents or
trademarks will not be successfully challenged by others or invalidated. As in
the case of any patent covering a business method, it is possible that some
third party was using or had published business methods the same as or similar
to those claimed in our patent applications before they were filed, which might
render our patents invalid. In addition, we cannot assure you that our pending
patents will be issued or that our trademark registrations will be approved. If
our trademark registrations are not approved because third parties own these
trademarks, our use of these trademarks would be restricted unless we entered
into arrangements with the third-party owners, which might not be possible on
reasonable terms.
We generally enter into confidentiality or license agreements with our
employees and consultants, and control the access to and distribution of our
technologies, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights from unauthorized use or disclosure,
parties may attempt to disclose, obtain or use our solutions or technologies. We
cannot assure you that the steps we have taken will prevent misappropriation of
our solutions or technologies, particularly in foreign countries where laws or
law enforcement practices may not protect our proprietary rights as fully as in
the United States.
EMPLOYEES
As of December 31, 1999, we had a total of 124 employees. Of those, 77 are
in sales and marketing, 30 are in engineering and 17 are in general and
administrative. We believe that we have good relationships with our employees.
We have never had a work stoppage, and none of our employees is represented
under a collective bargaining agreement. We believe that our future success will
depend in part on our ability to attract, integrate and retain highly motivated
sales, marketing, production and technical personnel and upon the continued
service of our senior management. Competition for qualified personnel in our
industry and geographical locations is intense, and there can be no assurance
that we will be successful in attracting, integrating, retaining and motivating
a sufficient number of qualified personnel to conduct our business in the
future.
ITEM 2. PROPERTIES
Our headquarters occupy approximately 28,494 square feet of leased office
space at 1330 Broadway, Oakland, California. That lease extends through November
2004, with an option to lease the space for an additional three-year term, and
includes a right of first refusal on additional space, which may become
available in the building. We believe our office space is adequate to meet our
needs for the next six months, and we expect our growth for the next 24 months
to be accommodated by our right of first refusal on additional office space. We
have sales personnel located in the metropolitan areas of Dallas, New York and
Washington, D.C. These individuals work out of home-based offices and do not
receive any additional compensation for the use of their home offices other than
reimbursement for direct expenses such as telephone, office equipment and
supplies. We anticipate adding additional field personnel in the future; such
personnel may or may not work out of home-based offices, and therefore, we may
or may not incur additional expenses relating to the rental of additional office
space.
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<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS
Cybergold is not a party to any material legal proceedings.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company has not yet held an Annual Meeting of the Company's
stockholders. The Company intends to hold its first Annual Meeting of the
Company's stockholders in the third quarter 2000. The Company has not yet
determined what matters, if any, it will submit to the Company's stockholders
for a vote.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY*
The name, age and positions of each of the Company's executive officers are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
A. Nathaniel Goldhaber........ 51 President, Chief Executive Officer and Chairman of the Board
Steven M. Farber.............. 40 Chief Operating Officer
John D. Steuart............... 38 Chief Financial Officer
Gary Fitts.................... 53 Chief Technology Officer
Daniel W. Berger.............. 41 Senior Vice President and General Manager, Incentives
Michael Koifman............... 51 Vice President, Engineering
Larry Weinstein............... 52 Vice President, Strategic Relationships
Pieter Hartsook............... 52 Vice President, Membership Marketing and Analysis
</TABLE>
- ---------------
* Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
A. Nathaniel Goldhaber has served as President, Chairman of the Board and
Chief Executive Officer since October 1994. Prior to joining Cybergold, Mr.
Goldhaber was self-employed as a venture capitalist. Prior to that Mr. Goldhaber
was the Chief Executive Officer of Kaleida Labs, Inc., a multimedia joint
venture between IBM and Apple Computer, and the Chief Executive Officer of
Centram Systems West, a developer of local area networks. Mr. Goldhaber is a
Member of the Executive Board of the University of California, Berkeley, College
of Letters and Sciences. Mr. Goldhaber received a B.A. from Maharishi
International University and an M.A. from the University of California,
Berkeley.
Steven M. Farber has served as Chief Operating Officer since August 1998.
Prior to joining Cybergold, Mr. Farber was the Chief Executive Officer of
Interwoven, a provider of open systems for enterprise Web production for
Internets and intranets, from March 1997 to March 1998. From 1996 to 1997, he
was self-employed as a consultant. From 1995 to 1996, Mr. Farber was a Vice
President of Summit Integration Group, a software consulting firm. Prior to
that, Mr. Farber served as a Vice President of The Vantive Corporation, a
customer relationship management software company. Mr. Farber received a B.S.
from Tufts University. Mr. Farber resigned his position on February 10,2000.
John D. Steuart has served as Chief Financial Officer since June 1996.
Prior to joining Cybergold, Mr. Steuart acted as the Chief Financial Officer of
Alafi Capital, a venture capital firm, from October 1988 to June 1996. He is a
member of the Board of Directors of a number of privately held companies. Mr.
Steuart received a B.A. in Economics from the University of California, Berkeley
and an M.S. in Business from Golden Gate University.
Gary Fitts has served as Chief Technology Officer since July 1995. Prior to
joining Cybergold, Mr. Fitts was self-employed as a consultant. He has also
served as the Directors of TOPS Technology for SunSelect, a personal computer
networking business unit of Sun Microsystems, Inc., and as Vice President,
Technology, of Sitka Corporation, a networking subsidiary of Sun Microsystems,
Inc. Mr. Fitts received a B.A. from Dartmouth College.
Daniel W. Berger was promoted to Senior Vice President and General Manager,
Incentives in November 1999. From November 1998 to November 1999 he served as
Vice President, Sales. From April 1998 to October 1998, Mr. Berger was Vice
President, Sales, at Conduct Software Technologies, Inc., a network
14
<PAGE> 15
software company. From April 1997 to March 1998 Mr. Berger was Vice President,
Sales, at Make Systems, Inc., a network design tool vendor. From August 1995 to
March 1997, Mr. Berger was self-employed as a software and Internet consultant.
Prior to that Mr. Berger was Vice President, Sales, at Seagate Software, a
network software company. Mr. Berger received a B.A. from Colby College.
Michael Koifman has served as Vice President, Engineering since November
1998. From October 1997 to November 1998, Mr. Koifman was Vice President of
Engineering at Blue Pumpkin Software, a developer of workforce management
software for call centers. From September 1996 to October 1997, Mr. Koifman
served as Manager of Advanced Applications at Siebel Systems, a sales force
automation company. Prior to that, Mr. Koifman was a Senior Principal at AMS, a
computer consulting company. Mr. Koifman holds an M.S. in Mathematics from St.
Petersburg University in St. Petersburg, Russia and an M.S.E.E. in Computer
Design from the Institute of Electrical Engineering in St. Petersburg, Russia.
Larry Weinstein has served as Vice President, Strategic Relationships since
February 1999. From February 1998 to February 1999, Mr. Weinstein was the
Executive Vice President of Greenleaf Technologies, an encryption technology
company. From January 1996 to February 1998, Mr. Weinstein was self-employed as
a consultant. Prior to that Mr. Weinstein was a Producer for Frankfurt Balkind
Partners, a strategic communications agency.
Pieter Hartsook was promoted to Vice President, Membership Marketing and
Analysis in December 1999. From July 1998 to December 1999 he served as Vice
President, Business Development. From June 1997 to April 1998, Mr. Hartsook was
Vice President, Business Development, at IPT, Inc., a computer software firm.
From November 1996 to April 1997, Mr. Hartsook was Vice President, Marketing
Analysis, at Apple Computer, Inc., a maker of personal computing products. Prior
to joining Apple, Mr. Hartsook was the President of the Hartsook Letter, a
market research consulting firm. Mr. Hartsook received a B.A. and an M.L.S. from
the University of California, Berkeley.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
CGLD since September 22, 1999. The table below sets forth, for the periods
indicated, the high and low sales prices per share of the common stock as
reported on the Nasdaq National Market. These prices do not include retail
markups, markdowns or commissions.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1999
Third Quarter (from September 22, 1999)..................... $12.00 $9.50
Fourth Quarter.............................................. $24.00 $5.25
</TABLE>
On December 31, 1999, the last reported sale price of the common stock on
the Nasdaq National Market was $17.69. On March 27, 2000 the last reported sale
price of the common stock on the Nasdaq National Market was $14.75. As of March
27, 2000, there were approximately 55 holders of record of the common stock.
DIVIDEND POLICY
We never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends for the foreseeable
future.
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<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to our statements
of operations for the years ended December 31, 1999, 1998 and 1997 and with
respect to our balance sheet as of December 31, 1999 and 1998, are derived from
our financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants, and which are included elsewhere herein. The
selected financial data set forth below is qualified in its entirety by, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
the notes to those statements included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES:
Transaction.......................................... $ 457,074 $ 628,350 $ 3,315,871
Custom marketing services and other.................. 74,342 376,583 1,987,090
----------- ----------- ------------
Total revenues............................... 531,416 1,004,933 5,302,961
COST OF REVENUES:
Transaction.......................................... 256,123 292,865 1,593,811
Custom marketing services and other.................. 37,048 173,253 278,628
----------- ----------- ------------
Total cost of revenues....................... 293,171 466,118 1,872,439
----------- ----------- ------------
Gross margin................................. 238,245 538,815 3,430,522
----------- ----------- ------------
OPERATING EXPENSES:
Product development.................................. 1,190,047 1,700,421 2,670,737
Sales and marketing.................................. 2,162,413 2,694,601 8,312,130
General and administrative........................... 739,816 791,837 2,515,787
Amortization of deferred compensation................ -- 198,288 734,614
----------- ----------- ------------
Total operating expenses..................... 4,092,276 5,385,147 14,233,268
----------- ----------- ------------
Loss from operations......................... (3,854,031) (4,846,332) (10,802,746)
Interest Income (Expense), net......................... (15,292) 78,381 739,930
----------- ----------- ------------
Net loss..................................... (3,869,323) (4,767,951) (10,062,816)
Dividend Attributable to Preferred Stockholders........ -- (660,430) (1,570,307)
----------- ----------- ------------
Net Loss Attributable to Common Stockholders........... $(3,869,323) $(5,428,381) $(11,633,123)
=========== =========== ============
NET LOSS PER COMMON SHARE:
Basic and diluted(1)................................. $ (0.97) $ (1.35) $ (1.40)
=========== =========== ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted(1)................................. 3,979,489 4,020,393 8,308,482
=========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 3,175,008 $17,217,060
Working capital............................................. 1,879,405 41,604,465
Total assets................................................ 4,040,272 48,390,282
Total stockholders' equity (deficit)........................ (4,276,608) 42,587,116
</TABLE>
- ---------------
(1) See note 1 of the notes to our financial statements.
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion of the financial condition and
results of operations of Cybergold together with the financial statements and
the notes to such statements included elsewhere in this report. This discussion
contains forward-looking statements based on our current expectations,
assumptions, estimates and projections about Cybergold and our industry. These
forward-looking statements involve risks and uncertainties. Cybergold's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, as more fully described in the "Risk
Factors" section and elsewhere in this report. We undertake no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
OVERVIEW
We are a leading provider of Internet-based direct marketing and
advertising solutions. We were incorporated in October 1994 and from inception
through the second quarter of 1996, we were in an early stage of development,
and had no sales and limited operating activities. From the second quarter of
1996 through the first quarter of 1997, operating activities related primarily
to developing necessary infrastructure, recruiting personnel, raising capital,
initial strategic planning and developing our Web site. In March 1997, we
launched our initial service and enrolled our first Cybergold members. In March
1999, we introduced our micropayments system, and launched our Earn & Spend
Community. Our membership base increased from approximately 250,000 at December
31, 1997 to approximately 1.0 million at December 31, 1998 and to approximately
4.0 million at December 31, 1999. Although our membership has grown in prior
periods, we cannot be certain that our membership growth will continue at
current rates or increase in the future. See "Risk Factors -- Our success
depends on our ability to maintain and expand an active membership base."
We completed our initial public offering on September 22, 1999 and received
net proceeds of approximately $40.7 million. The net proceeds of this public
offering were added to our working capital and, pending their use, we have
invested such funds in short-term, interest-bearing investment grade
obligations.
On February 28, 2000 we signed a definitive agreement to acquire
itarget.com in exchange for 1.85 million shares of our common stock. itarget.com
is a permission based e-mail marketing company that rewards its members with
premium products, delivered on-line. The acquisition is to be completed by March
31, 2000 and is expected to be accounted for as a pooling of interests.
Our revenues consist of transaction revenues and custom marketing services
and other revenues. Transaction revenues represent fees paid to us each time a
member earns incentive rewards within our system and for payment transactions.
Our members earn rewards by responding to online advertisements with a specific
action such as filling out a survey or registering for services. We are paid a
transaction fee by advertisers or marketers and we pay a portion of this fee to
our members as a cash reward. We also earn a transaction fee when our members
spend their cash rewards or use cash transferred to their account from a VISA
card to purchase inexpensive digital content, services or products through our
site or other sites using our system. These transaction revenues are not
recognized until the transaction has been completed. In the case of prepayments
by the advertising or marketing client, amounts not yet recognized are included
in deferred revenue on the balance sheet. To date, our transaction revenues have
been primarily generated from per-transaction fees received from our advertising
and marketing clients for incentive programs. Revenues from payment transactions
have not been material.
Our transaction revenues are driven by a number of factors, including:
- the number of our advertising and marketing clients;
- the number, variety and quality of offers to our members from our
advertising and marketing clients;
- the size and growth of our membership base;
- the number of transactions performed by each member; and
- the average revenue per transaction.
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<PAGE> 18
Custom marketing services and other revenues include fees received for
delivering targeted e-mail to our members, placement and licensing fees,
production and development fees received for customization of marketing
programs, and fees received for other advertising and marketing services.
Production and development fees represent HTML design services, graphic
services, engineering and database development and related services. We charge
clients for production and development fees on either a fixed price or time and
materials basis. Revenue is recognized as these services are performed. These
revenues fluctuate based on the number of new programs initiated, type of
services, and scope and complexity of each program. In 1999 e-mails accounted
for $1,463,000 in revenues compared to $0 in 1998; placement fees accounted for
$153,000 in revenues in 1999 compared to $0 in 1998; and custom engineering and
production fees accounted for $371,000 in revenues in 1999 compared to $377,000
in 1998.
The cost of revenues associated with our transaction revenues represent
cash rewards paid to our members for completing transactions or actions. We pay
our members a portion of the amount received from the advertiser or marketer in
return for completing a specified response or action. Cash rewards to our
members are recorded as a current liability in the members payable account of
the balance sheet until transferred by a member to a bank account or a VISA card
or spent in a payment transaction. Gross margin on transaction revenues may
fluctuate based on the nature of the incentive programs and the advertisers and
marketers in any given period.
The cost of revenues associated with custom advertising and marketing
services and other revenues primarily consist of costs for production and
marketing personnel and independent contractors, including associated payroll
tax, benefits and other indirect costs. Gross margin associated with e-mails and
placement fee revenue were 94% in 1999. Gross margin associated with custom
engineering and production revenue varies from contract to contract depending on
the specific terms of the individual contract, and may also fluctuate
significantly based on the number and size of fixed price contracts that we
undertake in any period and our ability to complete them within the anticipated
budget.
We incurred a net loss of approximately $10.1 million in 1999. As of
December 31, 1999 we had a retained deficit of approximately $23.8 million. We
plan to increase our operating expenses as we continue to build brand and
infrastructure, including expenses for online and offline advertising, expanding
programs for membership recruitment, and for additional computer hardware and
software, and consequently, our losses will increase in the future. Our limited
operating history makes it difficult to forecast future operating results.
Although we have experienced revenue growth in recent quarters, we cannot be
certain that revenues will increase at a rate sufficient to achieve and maintain
profitability. Even if we were to achieve profitability in any period, we may
not be able to sustain or increase profitability on a quarterly or annual basis.
In connection with the granting of options to purchase our common stock to
employees, directors and consultants during 1998 and 1999, we recorded deferred
compensation of $1,279,995 representing the difference between the exercise
price of options granted and the deemed fair market value of our common stock at
the time of grant. We will amortize this deferred compensation as an expense
over the vesting periods of the related options. Total deferred compensation
expenses recognized during the year ended December 31, 1998 and 1999 were
$198,288, and $734,614, respectively.
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<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth the results of operations of Cybergold
expressed as a percentage of revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
REVENUES:
Transaction............................................... 86.0% 62.5% 62.5%
Custom marketing services and other....................... 14.0 37.5 37.5
------ ------ ------
Total revenues.................................... 100.0 100.0 100.0
COST OF REVENUES:
Transaction............................................... 48.2 29.2 30.1
Custom marketing services and other....................... 7.0 17.2 5.3
------ ------ ------
Total cost of revenues............................ 55.2 46.4 35.4
------ ------ ------
Gross margin...................................... 44.8 53.6 64.6
------ ------ ------
OPERATING EXPENSES:
Product development....................................... 223.9 169.2 50.4
Sales and marketing....................................... 406.9 268.1 156.7
General and administrative................................ 139.2 78.8 47.4
Amortization of deferred compensation..................... -- 19.7 13.9
------ ------ ------
Total operating expenses.......................... 770.0 535.8 268.4
------ ------ ------
Loss from operations.............................. (725.2) (482.2) (203.8)
Interest Income (Expense), net.............................. (2.9) 7.8 14.0
------ ------ ------
Net loss.......................................... (728.1)% (474.4)% (189.8)%
====== ====== ======
</TABLE>
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues
Total Revenues were $5.3 million, $1.0 million and $531,000 for the years
ended December 31, 1999, 1998 and 1997, respectively, representing increases of
428% from 1998 to 1999 and 89% from 1997 to 1998.
Transaction Revenues. Transaction revenues were $3.3 million, $628,000 and
$457,000 for the years ended December 31, 1999, 1998 and 1997, respectively,
representing increases of 428% from 1998 to 1999 and 37% from 1997 to 1998. All
transaction revenues earned for the years ended December 31, 1999, 1998 and
1997, related to members earning cash rewards by performing specified actions in
response to advertisements. The increase in transaction revenues is primarily
the result of an increased number of transactions driven by growth in our
membership base. Total membership was approximately 4,040,000, 1,066,000 and
254,000 for the years ended December 31, 1999, 1998 and 1997, respectively,
representing increases of 279% from 1998 to 1999 and 320% from 1997 to 1998.
Custom Marketing Services and Other Revenues. Custom marketing services and
other revenues were $1.99 million, $377,000 and $74,000 for the years ended
December 31, 1999, 1998 and 1997, respectively, representing increases of 428%
from 1998 to 1999 and 407% from 1997 to 1998. All custom marketing services
revenues earned for the years ended December 31, 1999, 1998 and 1997, related to
custom engineering and production fees. The increase in custom marketing
services and other revenues resulted primarily from the increase in e-mail
revenue, which represented 75% of total custom marketing service revenue in 1999
compared to 0% in 1998.
Cost of Revenues
Overall cost of revenues were $1.9 million, $466,000 and $293,000 for the
years ended December 31, 1999, 1998 and 1997, respectively, representing
increases of 302% from 1998 to 1999 and 59% from 1997 to 1998. Cost of revenues
for the year ended December 31, 1999 was comprised of $1.6 million of cash
incentives
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earned by members and $279,000 of personnel costs associated with custom
marketing Cost of revenues for the year ended December 31, 1998 was comprised of
$293,000 of cash incentives earned by members and $173,000 of personnel costs
associated with custom marketing services. Cost of revenues for the year ended
December 31, 1997 was comprised of $256,000 of cash incentives earned by members
and $37,000 of personnel costs associated with custom marketing services. Gross
margin was 65%, 54% and 45% for the years ended December 31, 1999, 1998 and
1997, respectively. The increase in gross margin between 1998 and 1999 was
primarily due to an increase in high margin e-mail and placement revenue. We
expect overall gross margin to continue to fluctuate as a result of the overall
variation in the mix of custom marketing services we provide as well as from
fluctuations in gross margin for transaction revenue.
Product Development Costs
Product development costs were $2.7 million, $1.7 million and $1.2 million
for the years ended December 31, 1999, 1998 and 1997, respectively, representing
increases of 57% from 1998 to 1999 and 43% from 1997 to 1998. Product
development costs decreased as a percentage of revenues to 50%, 169% and 224%
for the years ended December 31, 1999, 1998 and 1997, respectively. The decrease
in product development expenses as a percentage of revenues is primarily
attributable to an increase in revenues as we increased our membership and
advertising and marketing clients. In addition, the fixed nature of some of our
development costs also contributed to the decrease in expense as a percentage of
revenues. We expect product development costs to continue to increase as we
continue to build features and functionality into our system.
Sales and Marketing Expenses
Sales and marketing expenses were $8.3 million, $2.7 million and $2.2
million for the years ended December 31, 1999, 1998 and 1997, respectively,
representing increases of 208% from 1998 to 1999 and 25% from 1997 to 1998.
Sales and marketing costs decreased as a percentage of revenues to 157%, 268%
and 407% for the years ended December 31, 1999, 1998 and 1997, respectively. The
increase in sales and marketing expenses is primarily attributable to additional
hiring of sales and marketing personnel, increased sales commissions resulting
from higher revenues, increased expenses associated with member acquisition, and
increased advertising and promotion expenses. The decrease in sales and
marketing expenses as a percentage of revenues is attributable primarily to an
increase in revenues as we increased our membership and advertising and
marketing clients. We expect sales and marketing expenses to increase as we
continue to increase our marketing efforts, expand our direct sales force and
open additional regional sales offices.
General and Administrative Expenses
General and administrative expenses were $2.5 million, $792,000 and
$740,000 for the years ended December 31, 1999, 1998 and 1997, respectively,
representing increases of 218% from 1998 to 1999 and 7% from 1997 to 1998.
General and administrative costs decreased as a percentage of revenues to 47%,
79% and 139% for the years ended December 31, 1999, 1998 and 1997, respectively.
The increase in general and administrative expenses resulted from higher
professional fees as well as an increase in payroll expenses due to hiring
additional administrative personnel. The decrease in general and administrative
expenses as a percentage of revenues is primarily attributable to an increase in
revenues as we increased our membership and advertising and marketing clients.
In addition, the fixed nature of a portion of our general and administrative
costs also contributed to the decrease in expense as a percentage of revenues.
We expect that general and administrative expenses will continue to increase as
we expand our operations and incur additional costs related to being a public
company.
Amortization of Deferred Compensation Expense
In connection with the granting of options to purchase our common stock to
certain employees, directors and consultants during the year ended December 31,
1998, we recorded deferred compensation representing the difference between the
exercise price of options granted and the deemed fair market value of our common
stock at the time of grant. Amortization of deferred compensation in the years
ended December 31, 1998 and
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1999 were $198,000 and $735,000, respectively. For the year ended December 31,
1997 we recorded no deferred compensation.
Interest Income (Expense), Net
Interest income (expense), net was $740,000, $78,000 and $(15,000) for the
years ended December 31, 1999, 1998 and 1997. The increase in net interest
income from 1998 to 1999 is due to the increase in cash and cash equivalents
resulting from the Company's initial public offering in September 1999.
Dividends Attributable to Preferred Stockholders
Dividends attributable to preferred stockholders were $(1,570,000) and
$(660,000) for the years ended December 1999 and 1998. After the company went
public, the accrual of dividends attributable to preferred stockholders ceased
as the preferred stock was converted into common stock.
Income Taxes
We recorded a net loss of $10.1 million for the year ended December 31,
1999. For federal and state tax purposes, no provision for income taxes was
recorded, and no tax benefit has been recognized due to the uncertainty of
realizing future tax deductions for these losses.
As of December 31, 1999, we had net operating loss carryforwards of
approximately $20.18 million for federal and state income tax purposes. The
federal and state net operating loss carryforwards begin to expire in the years
2011 and 2005, respectively. Our ability to utilize our net operating loss
carryforwards to offset future taxable income, if any, may be restricted as a
result of equity transactions that give rise to changes in ownership as defined
in the Tax Reform Act of 1986.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from the sale of
equity securities to venture capital firms and other individuals, institutional
and strategic investors. We have also borrowed funds under long-term capital
lease and equipment financing facilities. As of December 31, 1999, we had
$590,200 outstanding under capital lease and equipment financing facilities.
Net cash used in operating activities was $7.4 million, $3.5 million, and,
$3.2 million in 1999, 1998 and 1997, respectively. In 1999, the net cash used in
operating activities consisted primarily of our net loss, amortization of
deferred compensation, imputed compensation and accounts receivable, offset in
part by an increase in accounts payable, members payable, membership acquisition
payable, accrued liabilities, and deferred revenue.
In 1998, the net cash used in operating activities consisted primarily of
our net loss, offset in part by an increase in accounts payable, members
payable, membership acquisition payable, depreciation and amortization, and
deferred revenue.
In 1997, the net cash used in operating activities consisted primarily of
our net loss, offset by an increase in depreciation, members payable, membership
acquisition payable, and deferred revenue.
Net cash used in investing activities was $28.5 million, $153,000 and
$58,000 in 1999, 1998, and 1997, respectively. In 1999, the net cash used in
investment activities consisted primarily of the purchase of short-term
investments related to the investing of the proceeds of the initial public
offering. The amounts in 1998 and 1997 were used to acquire property and
equipment.
Net cash provided by financing activities was $49.96 million, $5.6 million
and $4.3 million, in 1999, 1998 and 1997, respectively. In 1999, this amount
included $40.7 million in net proceeds from the closing of its public offering
in 1999, less payments on capital leases plus the proceeds from the exercise of
stock options, net of repurchases. In 1998, this amount included $5.8 million in
proceeds from the issuance of preferred stock, less payments on capital leases.
In 1997, this amount included primarily $3.1 million in net proceeds from the
issuance of preferred stock, $1.0 million in proceeds from stockholder loans
that were subsequently
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converted into preferred stock, and $250,000 in proceeds from a sale-leaseback
transaction related to items of computer equipment, less payments on capital
leases.
In 1997, 1998 and 1999, we entered into various non-cancelable capital
lease agreements for some of our capital expenditures. As a result of these
capital lease agreements, we had lease payment obligations of approximately
$110,000, $143,000 and $0 in 1997, 1998, and 1999, respectively. Borrowings
under these capital lease arrangements have terms ranging from 36 to 48 months
with monthly payments and interest rates ranging from 10.5% to 11.5%.
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements through the end of 2000.
However, we may need to raise additional funds sooner to fund more rapid
expansion, to develop new or enhance existing services or products, to respond
to competitive pressures or to acquire complementary products, businesses or
technologies. If adequate funds are not available on acceptable terms, our
business, results of operations and financial condition could be harmed. See
"Risk Factors -- We may need more working capital to expand our business, and
our prospects for obtaining additional financing are uncertain."
Recent Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee issued SOP
98-5, "Reporting on the Costs of Start-Up Activities." This SOP provides
guidance on the financial reporting of start-up costs and organization costs. It
requires the costs of the start-up activities and organization costs to be
expensed as incurred. The SOP is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company adopted the SOP during the
year ended December 31, 1998. The adoption of the SOP did not have a material
impact on our financial statements.
During 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income." We
have no other comprehensive income amounts for any of the periods presented.
The Company also adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." As of December 31, 1998, management has
concluded that the Company only operates in one segment and exclusively in the
United States.
In March 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-1, "Software for Internal Use." The adoption of SOP No. 98-1
has not had a material impact on our financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." We do not expect the adoption of SFAS No.
133 to have a material impact on our financial position or results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. We will adopt
SAB 101 as required in the first quarter of 2000 and are evaluating the effect
that such adoption may have on our results of operations and financial position.
YEAR 2000 ISSUES
During 1999, the Company conducted an overall assessment of the software
underlying our Web-based programs as well as our Web site and related technology
infrastructure and determined it to be Year 2000 compliant. The Company also
contacted the vendors of third-party hardware and software we use in order to
gauge their Year 2000 compliance. Based on these vendors' representations and
the activities we have conducted, we believe that the third-party hardware and
software we use are Year 2000 compliant.
As of 12:01 AM January 1, 2000, we executed a full security check and
validation of our site, as well as our partner merchants. There were no Year
2000 issues found within our site or the sites of our partner
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merchants. In cases where there was a potential Year 2000 problem, we removed
the merchant from our site until the potential problem was corrected. This
affected less than 1 percent of our merchants.
Since January 1, 2000, we have not encountered any material issues relating
to the Year 2000. The costs associated with correcting reported issues have not
been and are not expected to be material. However, some Year 2000 issues may not
be discovered until well after January 1, 2000. The Company intends to continue
to prioritize reports of such issues and correct significant related problems.
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in or incorporated by reference into this
Annual Report on Form 10K, including, but not limited to, those regarding our
financial position, business strategy, acquisition strategy and other plans and
objectives for future operations and any other statements that are not
historical facts constitute "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or achievements, or
industry results, to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Although
we believe that the expectations reflected in these forward-looking statements
are reasonable, there can be no assurance that the actual results or
developments that we anticipate will be realized or, even if substantially
realized, that they will have expected effects on our business or operations.
These forward-looking statements are based on management's expectations and
beliefs concerning future events impacting our business and operations and are
subject to uncertainties and factors (including, but not limited to, those
specified under the heading "Risk Factors" below) that are difficult to predict
and, in many instances, are beyond our control. As a result, our actual results
may differ materially from those expressed or implied by any such
forward-looking statements.
Cybergold's investments are classified as held-to-maturity securities
therefore changes in the market's interest rates effect the value of the
investment as recorded by Cybergold and are recorded as unrealized gains and
losses on the financial statements. At December 31, 1999, our cash and cash
equivalents consisted primarily of demand deposits and money market funds held
by large institutions in the United States and our short-term investments were
invested in U.S. Government agency debt and equity securities maturing in less
than one year. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure.
RISK FACTORS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT CYBERGOLD AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. WE UNDERTAKE NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
RISKS RELATED TO OUR BUSINESS
LIMITED OPERATING HISTORY
We were incorporated in January 1996 and have a limited operating history.
An investor in our common stock must consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, including the Internet advertising market. These risks include our:
- ability to sustain historical revenue growth rates;
- need to manage our expanding operations;
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- competition;
- ability to attract, retain and motivate qualified personnel;
- ability to maintain our current, and develop new, strategic
relationships;
- ability to anticipate and adapt to the changing Internet market; and
- ability to attract and retain a large number of advertisers from a
variety of industries.
We also depend on the growing use of the Internet for advertising, commerce
and communication, and on general economic conditions. We cannot assure you that
our business strategy will be successful or that we will successfully address
these risks. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our limited
operating history.
WE HAVE A HISTORY OF LOSSES AND EXPECT CONTINUED LOSSES FOR THE FORESEEABLE
FUTURE
We have not achieved profitability in any previous quarter, and given our
planned level of operating expenses, we expect to continue to incur operating
losses for the foreseeable future. We incurred net losses of $3.9 million for
the year ended December 31, 1997, $4.8 million for the year ended December 31,
1998 and $10.1 million for the year ended December 31, 1999. Our retained
deficit as of December 31, 1999 was approximately $23.8 million.
We plan to increase our operating expenses as we continue to build brand
and infrastructure and consequently, our losses will increase in the future.
Although we have experienced revenue growth in recent quarters, we cannot be
certain that revenues will increase at a rate sufficient to achieve and maintain
profitability. If our revenue growth is slower than we anticipate or our
operating expenses exceed our expectations, our losses will significantly
increase. We may never achieve profitability. Even if we were to achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. See "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
more information on our operating history and results of operations.
WE CANNOT ASSURE YOU THAT WE WILL BE PROFITABLE BECAUSE WE HAVE OPERATED OUR
BUSINESS ONLY FOR A SHORT PERIOD OF TIME AND HAVE ONLY A LIMITED OPERATING
HISTORY UPON WHICH TO EVALUATE OUR BUSINESS
We were incorporated in October 1994 but did not begin to generate
meaningful revenues until March 1997. Accordingly, we have only a limited
operating history upon which to evaluate our business and prospects. The
revenues and income potential of our business and the markets for online
incentives-based direct marketing programs and for making small payments over
the Internet are unproven. We will encounter risks and difficulties that are
frequently encountered by early stage companies in new and rapidly evolving
markets. Many of these risks are described in more detail in this "Risk Factors"
section.
If we are unsuccessful in addressing these risks and uncertainties, our
business, results of operations and financial condition may be harmed. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" for detailed information on our historical operating results.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS OF OPERATIONS MAKES IT DIFFICULT
TO PREDICT OUR FINANCIAL PERFORMANCE AND MAY ADVERSELY AFFECT THE TRADING PRICE
OF OUR COMMON STOCK
Our quarterly results of operations have varied in the past and are likely
to vary significantly from quarter to quarter. A number of factors are likely to
cause these variations, some of which are outside of our control. These factors
include:
- changes in revenue levels resulting from the advertising and marketing
budget cycles of individual advertisers and marketers;
- changes in advertising and marketing costs that we incur to attract and
retain members;
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- changes in our pricing policies, the pricing policies of our competitors
or the pricing policies for Internet advertising and marketing generally;
- our rate of member acquisition and the level of activity of new and
existing members;
- the number and type of programs and development contracts established
with our advertising and marketing clients as well as the impact of the
fixed price portion of development contracts, which accounted for 17% and
7% of total revenues in the years ended December 31, 1998 and 1999,
respectively, on gross margin;
- the introduction of new products and services by us or by our
competitors;
- unexpected costs and delays resulting from the expansion of our
operations; and
- the occurrence of technical difficulties or unscheduled system downtime.
We believe that our revenues will be subject to seasonal fluctuations as a
result of general patterns of retail advertising and marketing and consumer
purchasing, which are typically higher during the fourth calendar quarter and
lower in the following quarter. In addition, expenditures by advertisers and
marketers tend to be cyclical, reflecting overall economic conditions and
consumer buying patterns. Consequently, our results of operations could be
harmed by a downturn in the general economy or a shift in consumer buying
patterns.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results may not be meaningful and you should not
rely upon them as an indication of our future performance. Our operating
expenses are based on expected future revenues and are relatively fixed in the
short term. If our revenues are lower than expected, we would incur greater than
expected losses. In addition, during future periods our operating results likely
will fall below the expectations of public market analysts and investors. In
this event, the market price of our common stock likely would decline. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
IF ONLINE INCENTIVES-BASED DIRECT MARKETING PROGRAMS DO NOT GAIN INCREASED
ACCEPTANCE BY MEMBERS, ADVERTISING AND MARKETING CLIENTS AND MERCHANTS, WE WOULD
HAVE SLOWER REVENUE GROWTH THAN EXPECTED AND WOULD INCUR GREATER THAN EXPECTED
LOSSES
Our success depends in part on the increased acceptance of online
incentives-based direct marketing programs. Although incentive programs have
been used extensively in traditional marketing and sales channels, they have
only recently begun to be used online.
The success of online incentives-based direct marketing programs will
depend on the ability of these programs to attract and retain members,
advertising and marketing clients and merchants. Our ability to attract and
retain members, clients and merchants will depend on our marketing efforts and
on the quality of each member, client or merchant experience with our system.
The number and relevance of the direct marketing offers we provide and the
perceived value of the incentives we offer will be necessary to achieve future
success. Our ability to generate revenue from clients and merchants will depend
on our ability to differentiate ourselves through the services we provide and
technology solutions we offer, as well as our success in generating adequate
participation from consumers in our online incentives-based direct marketing
programs. The attractiveness of our program to consumers depends in large part
on the attractiveness of the incentives we offer. To the extent that our online
incentives-based direct marketing program does not achieve market acceptance
among members, clients and merchants, we would have slower revenue growth than
expected and would incur greater than expected losses, and our business, results
of operations and financial condition would be harmed.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MAINTAIN AND EXPAND AN ACTIVE MEMBERSHIP
BASE
Our success largely depends on our ability to maintain and expand an active
membership base. Although we currently have approximately 4.0 million members,
we generate the majority of our revenues from a small percentage of our members,
and we cannot assure you that the percentage of active members will increase. In
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addition, approximately 2.2 million of our members have requested not to receive
e-mail from us. Because our revenues are primarily driven by commissions paid by
advertisers and direct marketers based on specific actions taken by our members,
if we are unable to induce existing and new members to actively participate in
the Cybergold Earn & Spend Community, our business, results of operations and
financial condition will be harmed. Although our membership has grown in prior
periods, we cannot be certain that our membership growth will continue at
current rates or increase in the future. Currently, we attract the majority of
our members through co-registration agreements with online partners, whereby
registrants for those sites have the option to concurrently sign up for the
Cybergold Earn & Spend Community. We believe that the convenience afforded by
this co-registration capability is a significant factor in attracting new
members. If we were to lose these relationships with our online co-registration
partners, we would lose a significant source of new members, and our business,
results of operations and financial condition would be harmed.
IF OUR RELATIONSHIP WITH THE FIRST NATIONAL BANK OF OMAHA WERE TO DETERIORATE OR
TERMINATE OR IF THE FIRST NATIONAL BANK OF OMAHA WERE TO ENTER INTO SIMILAR
RELATIONSHIPS WITH OUR COMPETITORS, OUR ABILITY TO DEPOSIT TO AND TRANSFER FUNDS
FROM VISA ACCOUNTS COULD BE DISCONTINUED OR WE COULD FACE INCREASED COMPETITION
Cybergold has a relationship with the First National Bank of Omaha, an
acquiring bank for VISA, which enables the transfer of funds from individual
Cybergold member accounts to their VISA accounts, as well as from their VISA
accounts to their Cybergold accounts. This transaction processing capability
required re-engineering of the First National Bank of Omaha's VISA transaction
processing system, and would be difficult to replicate with another financial
service provider if our relationship with the First National Bank of Omaha were
to deteriorate or terminate. The First National Bank of Omaha can terminate the
contract at any time with 30 days notice. Currently, under the conditions of our
contract, we cannot enter into similar relationships with other credit card
providers such as MasterCard, American Express or Discover. However, the First
National Bank of Omaha can at its own discretion freely offer similar services
to our existing and potential competitors. If we were to lose this relationship
with the First National Bank of Omaha, or if they were to extend similar
services to our competitors, our business, results of operations and financial
condition would be harmed.
IF WE ARE UNABLE TO ESTABLISH THE CYBERGOLD BRAND, OUR ABILITY TO ATTRACT
ADVERTISING AND MARKETING CLIENTS, MEMBERS AND MERCHANTS WOULD BE HARMED
Developing a strong brand is critical to our business. The reputation of
the Cybergold brand will largely depend on our ability to provide a high-quality
experience for our clients, members and merchants. We cannot assure you that we
will be successful in developing our brand. Any client, member or merchant
dissatisfaction with the quality of an experience with our company for reasons
within or outside of our control could damage our reputation. Any damage to our
reputation could have a material adverse effect on our business, results of
operations and financial condition. We intend to spend a portion of the proceeds
of this offering to further develop our brand. If we expend additional resources
to build the Cybergold brand and do not generate a corresponding increase in
revenues as a result of our branding efforts, or if we otherwise fail to promote
our brand successfully, our business, results of operations and financial
condition would be harmed.
IF THE INTERNET FAILS TO GAIN FURTHER ACCEPTANCE AS A MEDIUM FOR ADVERTISING AND
MARKETING, WE WOULD HAVE SLOWER REVENUE GROWTH THAN EXPECTED AND WOULD INCUR
GREATER THAN EXPECTED LOSSES
Our business depends on market acceptance of the Internet as a medium for
advertising and marketing. Advertisers, marketers and advertising and marketing
agencies that have historically relied on traditional forms of advertising and
marketing may be reluctant or slow to adopt online advertising and marketing.
Many advertisers and marketers have limited or no experience using the Internet
as an advertising and marketing medium. In addition, these advertisers and
marketers may have allocated only a limited portion of their budgets to online
advertising and marketing, or may find online advertising and marketing to be
less effective for promoting their products and services than traditional
advertising and marketing media, including television, radio and print.
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Advertisers, marketers, and advertising and marketing agencies that have
invested substantial resources in traditional methods of advertising and
marketing may also be reluctant to reallocate their resources to online
advertising and marketing. The market for online advertising and marketing also
depends on the overall growth and acceptance of electronic commerce. If the
markets for online advertising and marketing and electronic commerce fail to
develop or develop more slowly than we expect, we would have slower revenue
growth than expected and would incur greater than expected losses, and our
business, results of operations and financial condition would be harmed.
THE MARKET FOR MAKING SMALL PAYMENTS OVER THE INTERNET IS NEW AND WE CANNOT BE
CERTAIN THAT A VIABLE MARKET FOR OUR PRODUCTS WILL EMERGE OR BE SUSTAINABLE
We cannot assure you that the demand for and market acceptance of Internet
payment services will develop to a sufficient level to support our continued
operations or planned expansion, and we also cannot assure you that consumers,
Web sites or merchants will utilize a system for payment transactions over the
Internet. Currently, Internet content and service providers typically use a
subscription model to charge for content or services they provide, if they
charge consumers directly for their content or services at all. We cannot assure
you that these entities will ever adopt a method for accepting small payments
for their content or services over the Internet. In addition, the development of
a market for payments on the Internet may depend on the eventual adoption of a
standard payment system. There can be no assurance that our payment system will
be the system adopted by consumers, Web sites, or merchants. If a widespread
demand for payments does not develop or if another method for payments is
adopted as a standard, our business, results of operations and financial
condition will be harmed.
WE FACE SIGNIFICANT COMPETITION FROM ONLINE INCENTIVES-BASED ADVERTISING AND
MARKETING PROGRAMS AND PROVIDERS OF PAYMENT SYSTEMS
We face significant competition from online incentives-based advertising
and marketing programs and providers of payment systems. We expect competition
to increase due to the lack of significant barriers to entry for online business
generally and for online incentives programs and payment transactions in
particular. Currently, several companies offer competitive online incentives
programs, including MyPoints.com, Inc. and Netcentives, Inc. We may also face
competition from established Internet portals and community Web sites that
engage in direct marketing, as well as from traditional advertising agencies and
direct marketing companies that may seek to offer online products or services.
In addition, financial service organizations, such as banks and credit card
companies, or other large organizations may develop competitive payment systems
and incentives-based advertising and marketing programs.
Some of our current and potential competitors have longer operating
histories, greater brand recognition, larger client and member bases and
significantly greater financial, technical and marketing resources than we do.
These advantages may enable them to respond more quickly to new or emerging
technologies and changes in customer preferences. These advantages may also
allow them to engage in more extensive research and development, undertake
extensive far-reaching marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to potential employees, strategic
partners and advertisers. As a result, it is possible that our existing
competitors or new competitors may rapidly acquire significant market share.
Increased competition may result in price reductions, reduced gross margin and
loss of market share. We may not be able to compete successfully, and
competitive pressures may adversely affect our business, results of operations
and financial condition. See "Business -- Competition."
SIGNIFICANT PORTION OF OUR QUARTERLY REVENUES IS RECOGNIZED FROM A LIMITED
NUMBER OF ADVERTISING AND MARKETING CLIENTS
Significant portions of our revenues to date have been recognized from a
limited number of advertising and marketing clients. Our five largest clients
accounted for approximately 65% and 24% of our revenues for the years ended
December 31, 1998 and 1999, respectively and our ten largest clients accounted
for approximately 84% and 40% of our revenues for the years ended December 31,
1998 and 1999, respectively. We generally do not have long-term contracts with
any of our clients, and clients can generally terminate their
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relationships with us upon specified notice and without penalties. Our client
base fluctuates significantly from quarter to quarter primarily as a result of
the advertising and marketing budget cycles of individual clients. In addition,
to date this fluctuating client base has been expanded from a concentrated group
of companies. Revenues from significant clients as a percentage of total
revenues are as follows:
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Qwest Communications International, Inc..................... 22%
Interactive Coupon Network (Cool Savings)................... 16%
</TABLE>
YEAR ENDED DECEMBER 31, 1999
No individual customer exceeded 10 percent of total revenue for the year
ended December 31, 1999.
We expect that the majority of our revenues will continue to depend on
sales to a relatively small number of clients and that our client base will
continue to vary significantly from quarter to quarter. Any negative change in
our relationship with or downturn in the business of clients or any general
downturn in the businesses of the concentrated group of companies from which our
client base is drawn could seriously harm our results of operations.
IF WE FAIL TO ADAPT TO RAPID CHANGE IN OUR INDUSTRY OR OUR INTERNALLY DEVELOPED
SYSTEMS CANNOT BE MODIFIED PROPERLY FOR INCREASED TRAFFIC OR VOLUME, OUR
PRODUCTS AND SERVICES MAY BECOME OBSOLETE
Our industry is characterized by rapid change. The introduction of products
and services embodying new technologies, the emergence of new industry standards
and changing consumer needs and preferences could render our existing services
obsolete and unmarketable. Our future success will depend in part on our ability
to respond effectively to rapidly changing technologies, industry standards and
customer requirements by adapting and improving the performance features and
reliability of our services. We may experience technical difficulties that could
delay or prevent the successful development, introduction or marketing of new
products and services. In addition, any new enhancements to our products and
services must meet the requirements of our current and prospective users. We
could incur substantial costs to modify our services or infrastructure to adapt
to rapid change in our industry.
We internally developed our systems for maintaining our Web site processing
transactions and maintaining member accounts. If, in the future, we cannot
modify these systems to accommodate increased traffic and an increased volume of
transactions and orders, we could suffer slower response time, problems with
customer service and delays in reporting accurate financial information. During
1999, we experienced instances of unscheduled system downtime, which resulted in
our Web site being inaccessible for periods ranging from several minutes to
several hours and could experience such unscheduled system downtime in the
future.
WE RELY ON OUR INTELLECTUAL PROPERTY RIGHTS AND IF WE ARE UNABLE TO PROTECT
THESE RIGHTS, WE MAY FACE INCREASED COMPETITION OR GREATER DIFFICULTY IN
SUCCESSFULLY ESTABLISHING THE CYBERGOLD BRAND
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our technology or business model.
Monitoring unauthorized use of our technology and business model is difficult
and we cannot be certain that the steps we have taken will prevent unauthorized
use of our technology and business model. In addition, our business activities
may infringe upon the proprietary rights of others, and, from time to time, we
have received, and may continue to receive, claims of infringement against us.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Cybergold has selected a limited set of companies
against which it plans to assert its rights as an initial matter. If these
claims cannot be resolved through licenses or similar arrangements, we could
become a party to litigation with companies we consider to
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<PAGE> 29
be infringing our intellectual property rights. In addition, Cybergold may elect
to pursue claims of infringement against other entities it believes are
infringing on the patents covering its business method.
Any litigation could subject us to significant liability for damages and
invalidation of our proprietary rights. These lawsuits, regardless of their
success, would likely be time consuming and expensive to resolve and would
divert management's time and attention away from our business. Any potential
intellectual property litigation could also force us to do one or more of the
following:
- make significant changes to the structure and operation of our business;
- attempt to design around a third party's patent; or
- license alternative technology from another party.
Implementation of any of these alternatives could be costly and time
consuming, and may not be possible. Accordingly, an adverse determination in any
litigation that we are a party to would have a material adverse effect on our
business, results of operations and financial condition.
Cybergold has two issued U.S. Patents covering its business model and
software architecture. We also have U.S. and foreign pending patent
applications. Cybergold is our only registered trademark, although we have
applied to register additional trademarks in the United States. We cannot assure
you that our patents or trademarks will not be successfully challenged by others
or invalidated. As in the case of any patent covering a business method, it is
possible that some third party was using or had published business methods the
same as or similar to those claimed in Cybergold's patents before Cybergold's
patent applications were filed, which might render Cybergold's patents invalid.
In addition, we cannot assure you that our pending patents will be issued or
that our trademark registrations will be approved. If our trademark
registrations are not approved because third parties own these trademarks, our
use of these trademarks would be restricted unless we entered into arrangements
with the third-party owners, which might not be possible on reasonable terms.
We generally enter into confidentiality or license agreements with our
employees and consultants, and control access to and distribution of our
technologies, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights from unauthorized use or disclosure,
parties may attempt to disclose, obtain or use our solutions or technologies. We
cannot assure you that the steps we have taken will prevent misappropriation of
our solutions or technologies, particularly in foreign countries where laws or
law enforcement practices may not protect our proprietary rights as fully as in
the United States. See "Business -- Intellectual Property" for more information
on our intellectual property.
ANY FAILURE OF OUR NETWORK INFRASTRUCTURE COULD AFFECT OUR ABILITY TO OPERATE
OUR WEB SITE AND OUR BUSINESS
Our success depends on the capacity, reliability and security of our
networking hardware, software and telecommunications infrastructure. We use
network servers that are housed at an Internet co-location service provider's
data center in San Jose, California. Despite precautions taken by us and the
host of our Web site, our system is susceptible to natural and man-made
disasters such as earthquakes, fires, floods, power loss and vandalism.
Telecommunications failures, computer viruses, electronic break-ins or other
similar disruptive problems could adversely affect the operation of our systems.
In addition, any technical failure or security problems at our Internet service
provider and co-location facility could harm our business, financial condition
and results of operations. Our insurance policies may not adequately compensate
us for any losses that may occur due to any damages or interruptions in our
systems. Accordingly, we could be required to make capital expenditures in the
event of unanticipated damage. We do not currently have redundant systems or a
formal disaster recovery plan.
In addition, our members depend on Internet service providers for access to
our Web site. Internet service providers and Web sites have experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to our systems. These problems
could harm our business, results of operations and financial condition.
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<PAGE> 30
IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, OUR BUSINESS, RESULTS OF OPERATIONS
AND FINANCIAL CONDITION COULD BE HARMED
Our success will depend in part on our ability to manage our growth and
expansion effectively. We plan to expand our technology, sales, administrative
and marketing organizations. Our anticipated future expansion may place a
significant strain on our management systems and resources. We will need to
continue to improve our financial and managerial controls and reporting systems
and procedures and to expand, train and manage our workforce. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In addition, we are in the process of moving our operations to new
facilities. During this move our technology infrastructure could be more
susceptible to technical failures or other disruptive problems. Any of these
problems could diminish or halt our ability to provide services to our
customers, which could harm our business, results of operations and financial
condition.
MANY OF OUR KEY PERSONNEL ARE NEW TO CYBERGOLD AND MAY NOT WORK TOGETHER
SUCCESSFULLY
A number of people on our management team and sales force have joined
Cybergold in the last 12 months. Our management team has limited experience
working together. Our future performance will depend, in part, on our ability to
integrate successfully our newly hired executive officers into our management
team, and our ability to develop an effective working relationship among
management. Our executive officers, who have worked together for only a short
time, may not be successful in working together or managing our company. Any
dissent among executive officers, or between our officers and our board of
directors, could affect our ability to make strategic decisions. See
"Management." In addition, the majority of our sales force has joined Cybergold
in the last six months and they have limited experience marketing our services
and working together. If our key personnel are unable to market our services and
work together successfully, our business, results of operations and financial
condition could be harmed.
COMPETITION FOR EMPLOYEES IN OUR INDUSTRY AND IN OUR GEOGRAPHIC REGION IS
INTENSE, AND WE MAY NOT BE ABLE TO HIRE OR RETAIN KEY EMPLOYEES
Our future success will depend, in part, on our ability to attract and
retain highly skilled employees, particularly management, sales and technical
personnel. Competition for employees in our industry and in our geographic
region is intense. We may be unable to retain our key employees or to attract
other highly qualified employees in the future. We have experienced difficulty
from time to time in retaining and attracting the personnel necessary to support
the growth of our business, particularly engineering and sales personnel, and we
may experience similar difficulty in the future. If we are unable to hire or
retain key employees, our business, results of operations and financial
condition will be harmed.
POTENTIAL ACQUISITIONS MAY BE DIFFICULT TO ASSIMILATE INTO OUR OPERATIONS, USE A
SIGNIFICANT AMOUNT OF OUR AVAILABLE CASH, RESULT IN DILUTION TO OUR STOCKHOLDERS
AND ADVERSELY AFFECT OUR REPORTED RESULTS OF OPERATIONS
We may acquire or make investments in businesses, products, services, or
technologies to carry out our business strategy. We do not have any present
understanding, nor are we having any discussions relating to any acquisition or
investment. We have not made a significant acquisition or investment to date. If
we acquire businesses, products, services or technologies, we could have
difficulty in assimilating them into our operations. These difficulties could
disrupt our ongoing business, distract our management and employees and increase
our expenses. In addition, effecting acquisitions could require use of a
significant amount of our available cash. Furthermore, we may have to issue
equity or equity-linked securities to pay for future acquisitions, and any of
these issuances could be dilutive to existing and future stockholders. In
addition, acquisitions and investments may have negative effects on our reported
results of operations due to acquisition-related charges and amortization of
acquired technology and other intangibles. Any of these acquisition-related
risks or costs could harm our business, financial condition and operating
results.
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<PAGE> 31
IF WE EXPAND OUR BUSINESS INTERNATIONALLY WE MAY BE SUBJECT TO FOREIGN
GOVERNMENT REGULATION AND TAXATION, CURRENCY ISSUES, DIFFICULTIES IN MANAGING
FOREIGN OPERATIONS AND FOREIGN POLITICAL AND ECONOMIC INSTABILITY
An element of our growth strategy is to introduce our services in
international markets. Our participation in international markets will be
subject to a number of risks, including foreign government regulations, export
license requirements, tariffs and taxes, fluctuations in currency exchange
rates, introduction of the European Union common currency, difficulties in
managing foreign operations and political and economic instability. To the
extent our potential international members are impacted by currency
devaluations, general economic crises or other macroeconomic events, the ability
of our members to utilize our services could be diminished. In order to help us
address some of the risks associated with introducing our services
internationally, we believe it will be necessary to establish strategic
relationships with international partners. To date, we have not entered into any
strategic relationship with any international partners. We cannot assure you
that we will be able to establish international relationships, or that if
established, they will be successful. In addition, we cannot assure you that
electronic commerce will develop successfully in international markets or that
potential members in these foreign markets will utilize incentives-based
marketing programs. Furthermore, we cannot assure you that we will be able to
develop banking relationships with foreign banks or overcome any legal
restrictions related to offering cash rewards and incentives that exist in
foreign jurisdictions. Any failure to develop our business internationally may
harm our competitive position and consequently our business.
WE MAY NEED MORE WORKING CAPITAL TO EXPAND OUR BUSINESS, AND OUR PROSPECTS FOR
OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated
capital expenditures and working capital requirements through the end of 2000.
However, we may need to raise additional funds sooner to fund more rapid
expansion, to develop new or enhance existing services or products, to respond
to competitive pressures or to acquire complementary products, businesses, or
technologies. If additional funds are raised through the issuance of equity or
equity-linked securities, the percentage ownership of our stockholders would be
reduced. In addition, these securities may have rights, preferences or
privileges senior to those of our stockholders. We cannot assure you that
additional financing will be available on terms favorable to us, or at all. If
adequate funds are not available or are not available on acceptable terms, our
ability to fund our expansion, take advantage of potential opportunities,
develop or enhance services or products, or otherwise respond to competitive
pressures would be significantly limited. Our business, results of operations
and financial condition could be harmed by this limitation. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for a discussion of
working capital and capital expenditures.
RISKS RELATED TO THE INTERNET INDUSTRY
IF WE ARE UNABLE TO SECURELY MAINTAIN OUR MEMBERSHIP DATABASE, MEMBERS MAY BE
DETERRED FROM USING OUR SERVICES
An important feature of our program is our ability to develop and maintain
individual member profiles. Security and privacy concerns may cause consumers to
resist providing the personal data necessary to support this profiling
capability. As a result of these security and privacy concerns, we may incur
significant costs to protect against the threat of security breaches or to
alleviate problems caused by such breaches. Use of our Cybergold Earn & Spend
Community could decline if any compromise of security occurred. In addition, if
unauthorized third parties gain access to our system and alter or destroy
information in our database, our ability to target direct marketing offers to
members would be harmed. We could also be subject to legal claims from members.
Any public perception that we engaged in unauthorized release of member
information would adversely affect our ability to attract and retain members.
Any of these events could have a material adverse effect on our business,
results of operations and financial condition.
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<PAGE> 32
We maintain a database containing information on our members, including
their account balances. Our database may be accessed by unauthorized users
accessing our systems remotely. If we experience a security breach, the
integrity of our database may be jeopardized. Any breach of this type could lead
to financial losses through the unauthorized redemption of monies.
WE COULD BE SUBJECT TO LIABILITY FOR ONLINE CONTENT THAT MAY NOT BE COVERED BY
OUR INSURANCE
The nature and breadth of information disseminated on our Web site could
expose us to liability in various areas, including claims relating to:
- programs and promotions we offer;
- content and publication of various materials posted on our Web site based
on defamation, libel, negligence, personal injury and other legal
theories; and
- copyright or trademark infringement and wrongful action due to the
actions of third parties.
Claims of this kind against us would result in our incurring substantial
costs and would have a negative impact on our financial and other resources. If
there were numerous claims, or if the claims were severe, we would need to
implement measures to reduce our exposure and potential liability. Accordingly,
we may be required to change our services in such a way that would be less
attractive to our advertisers, marketers, merchants and members. This in turn
could reduce traffic to our Web site, negatively impact our membership or reduce
our revenue from electronic commerce or advertising and marketing. Our general
liability insurance may be insufficient to cover expenses and losses in
connection with any claims against us. To the extent our insurance coverage does
not cover liability or expenses we incur, our business, financial condition and
results of operations would be harmed.
IF THE INTERNET INFRASTRUCTURE FAILS TO DEVELOP OR BE ADEQUATELY MAINTAINED, OUR
BUSINESS WOULD BE HARMED BECAUSE MEMBERS MAY NOT BE ABLE TO ACCESS OUR SERVICES
We depend on the Internet infrastructure to provide the performance,
capacity and reliability needed to support the anticipated expansion of
electronic commerce on the Internet. If Internet usage grows, the Internet
infrastructure may not be able to support the demands placed on it by this
growth, and its performance and reliability may decline. Among other things,
continued development of the Internet infrastructure will require a reliable
network backbone with necessary speed, data capacity and security. Currently,
there are regular failures of the Internet network infrastructure, and there are
likely to be more in the future. These failures may undermine our marketing
clients' and our members' confidence in the Internet as a viable commercial
medium. Any actual or perceived degradation in the performance of the Internet
as a whole could undermine the benefits of our services. In addition, the
Internet could lose its viability as a commercial medium due to delays in the
development or adoption of new technology required to accommodate increased
levels of Internet activity or due to government regulation. If outages or
delays occur frequently in the future, electronic commerce and the use of our
services could grow more slowly or decline, which could harm our business,
results of operations and financial condition.
WE MAY BE VULNERABLE TO UNAUTHORIZED ACCESS, COMPUTER VIRUSES AND OTHER
DISRUPTION PROBLEMS THAT COULD REQUIRE INTERRUPTIONS, DELAYS OR CESSATION OF
SERVICE TO USERS ACCESSING OUR WEB SITE
Despite the implementation of security measures, our networks may be
vulnerable to unauthorized and illegal access, computer viruses and other
disruptive problems. Eliminating computer viruses and alleviating other security
problems may require interruptions, delays or cessation of service to users
accessing our Web site, which could have a material adverse effect on our
business, results of operations and financial condition. A party who is able to
circumvent security measures could misappropriate proprietary information or
cause interruptions in our Internet operations. Internet service providers and
online service providers have in the past experienced, and may in the future
experience, interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or others.
We may be required to expend significant capital or other resources to protect
against the threat of security breaches or to alleviate problems
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caused by breaches. Although we intend to continue to implement security
measures, we cannot be certain that measures implemented by us will not be
circumvented in the future.
INCREASED SECURITY RISKS OF TRANSMISSION OF CONFIDENTIAL INFORMATION OVER PUBLIC
NETWORKS MAY DETER USE OF OUR SERVICES
A necessity of online commerce and communications is the secure
transmission of confidential information over public networks. Our security
measures may not prevent security breaches. Any failure to prevent security
breaches could harm our business. We rely on encryption and authentication
technology licensed from third parties to provide the security and
authentication technology to effect secure transmission of confidential
information, including customer credit card numbers. Advances in computer
capabilities, new discoveries in the field of cryptography, or other
developments may result in a compromise or breach of the technology used by us
to protect customer transaction data. Any compromise of our security could harm
our reputation and, therefore, our business.
FUTURE REGULATION OF THE INTERNET COULD RESTRICT THE OPERATION AND GROWTH OF OUR
BUSINESS
Any new regulation of the Internet could inhibit growth of the Internet and
decrease the acceptance of the Internet as a communications and commercial
medium, which could have a material and adverse effect on our business. The laws
governing the Internet and e-mail services remain largely unsettled. There is no
single governmental body overseeing our industry, and many state laws enacted in
recent years have different and sometimes inconsistent application to our
business. In addition, industry standards and practices by e-mail providers,
including Internet service providers and other third-party e-mail providers,
vary. Some of these providers have blocked in the past and, at their discretion,
may in the future elect to block, all e-mails coming from a specific domain,
such as Cybergold. We have experienced limited blockages by some e-mail
providers of e-mail correspondence from us. These blockages have not had a
material effect on our business, results of operations or financial condition.
However, because our revenues are driven in part by the number of members to
whom we are able to deliver targeted e-mails, any blockage of e-mails by a
significant e-mail provider, or by a significant number of e-mail providers in
the aggregate, of e-mails coming from us could harm our business, results of
operations and financial condition.
POTENTIAL PRIVACY REGULATION
In addition, the Federal Trade Commission is considering the adoption of
regulations regarding the collection and use of personal information obtained
from individuals, especially children, when accessing Web sites. These
regulations could restrict our ability to provide demographic data to our
advertising and marketing clients. At the international level, the European
Union has adopted a directive that will impose restrictions on the collection
and use of personal data. This directive could affect U.S. companies that
collect information over the Internet from individuals in European Union member
countries and may impose restrictions that are more stringent than current
Internet privacy standards in the United States. These developments could have
an adverse effect on our business, results of operations and financial
condition.
POTENTIAL CURRENCY REGULATION
Our online incentive program rewards are not currently subject to currency
regulation in any jurisdiction. If any governmental agency deemed that our
rewards are subject to currency regulation, our business, financial condition
and results of operations could be harmed.
POTENTIAL FOREIGN REGULATION
Governments of foreign countries may also attempt to regulate electronic
commerce. New laws could stall the growth of the Internet and decrease the
acceptance of the Internet as a commercial medium. In addition, existing laws
such as those governing intellectual property and privacy may be interpreted to
apply to the Internet. In the event that foreign governments, the federal
government, state governments or other governmental authorities adopt, modify or
re-interpret laws or regulations relating to the Internet, our business, results
of operations and financial condition could be harmed.
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POTENTIAL ELECTRONIC COMMERCE REGULATION
In 1998, the United States government enacted a three-year moratorium
prohibiting states and local governments from imposing new taxes on electronic
commerce transactions. Upon expiration of this moratorium, if it is not
extended, states or other governments may levy sales or use taxes on electronic
commerce transactions. An increase in the taxation of electronic commerce
transactions may make the Internet less attractive for consumers and businesses,
which would harm our business.
WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH THE YEAR 2000 PROBLEM, ANY OF
WHICH MAY HARM OUR BUSINESS
During 1999, the Company conducted an overall assessment of the software
underlying our Web-based programs as well as our Web site and related technology
infrastructure and determined it to be Year 2000 compliant. The Company also
contacted the vendors of third-party hardware and software we use in order to
gauge their Year 2000 compliance. Based on these vendors' representations and
the activities we have conducted, we believe that the third-party hardware and
software we use are Year 2000 compliant.
As of 12:01 AM January 1, 2000, we executed a full security check and
validation of our site, as well as our partner merchants. There were no Year
2000 issues found within our site or the sites of our partner merchants. In
cases where there was a potential Year 2000 problem, we removed the merchant
from our site until the potential problem was corrected. This affected less than
1 percent of our merchants
Since January 1, 2000, we have not encountered any material issues relating
to the Year 2000. The costs associated with correcting reported issues have not
been and are not expected to be material. However, some Year 2000 issues may not
be discovered until well after January 1, 2000. The Company intends to continue
to prioritize reports of such issues and correct significant related problems.
SUBSTANTIAL INFLUENCE BY OFFICERS AND DIRECTORS
The executive officers, directors and entities affiliated with them
beneficially own approximately a significant percentage of our outstanding
common stock. These stockholders may be able to exercise substantial influence
over all matters requiring approval by our stockholders, including the election
of directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in control of Cybergold.
POSSIBLE VOLATILITY OF STOCK PRICE
Prior to September 22, 1999, there was no public market for the Common
Stock, and there can be no assurance that an active trading market will be
sustained or that the market price of the Common Stock will not decline below
its current price. The stock market historically has experienced volatility
which has affected the market price of securities of many companies and which
has sometimes been unrelated to the operating performance of such companies. The
trading price of the Common Stock could also be subject to significant
fluctuations in response to variations in quarterly results of operations,
announcements of new products or acquisitions by the Company or its competitors,
governmental regulatory action, other developments or disputes with respect to
proprietary rights, general trends in the industry and overall market
conditions, and other factors. The market price of the Common Stock may be
significantly affected by factors such as announcements of new products by the
Company's competitors, as well as variations in the market conditions in the
medical cost containment or software industries in general. The market price may
also be affected by movements in prices of equity securities in general.
NEW ACCOUNTING PRONOUNCEMENTS
Cybergold continually assesses the effects of recently issued accounting
standards. The impact of all recently adopted and issued accounting standards
has been disclosed in the Financial Statements.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen, LLP, Independent Public
Accountants............................................... 36
Balance Sheet as of December 31, 1998 and 1999.............. 37
Statement of Operations for the years ended December 31,
1997, 1998 and 1999....................................... 38
Statement of Changes in Stockholders' Equity (Deficit) for
the years ended December 31, 1997, 1998 and 1999.......... 39
Statement of Cash Flows for the years ended December 31,
1997, 1998 and 1999....................................... 40
Notes to Financial Statements............................... 41
</TABLE>
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Cybergold, Inc.:
We have audited the accompanying balance sheets of Cybergold, Inc.(a
Delaware corporation) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity/(deficit) and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cybergold, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Francisco, California
February 7, 2000
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CYBERGOLD, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,175,008 $ 17,217,060
Short term investments.................................... -- 27,351,152
Accounts receivable, less allowance for doubtful accounts
of $30,000 and $164,000, respectively................... 390,701 1,757,522
Prepaid expenses and other current assets................. 26,347 693,009
Total current assets............................... 3,592,056 47,018,743
Property and equipment, net................................. 407,066 991,564
Intangible assets, net...................................... -- 316,824
Deposits and other assets................................... 41,150 63,151
------------ ------------
Total assets....................................... $ 4,040,272 $ 48,390,282
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 257,267 $ 900,061
Capital lease obligations, current maturities............. 136,639 135,793
Notes payable, current maturities......................... -- 65,518
Member payable............................................ 822,024 2,200,739
Membership acquisition payable............................ 175,653 625,242
Accrued liabilities....................................... 145,525 843,627
Deferred revenue.......................................... 175,543 643,298
Total current liabilities.......................... 1,712,651 5,414,278
Capital lease obligations, net of current maturities........ 225,550 89,756
Notes payable, net of current maturities.................... -- 299,132
Total liabilities.................................. 1,938,201 5,803,166
Commitments and contingencies
CONVERTIBLE REDEEMABLE PREFERRED STOCK:
Series C, 0.00015 par value: 5,333,353 shares authorized;
4,189,195 issued; 4,189,195 and 0 outstanding at
December 31, 1998 and 1999, respectively (preference in
liquidation of $5,718,251).............................. 6,378,679 --
------------ ------------
Total convertible redeemable preferred stock....... 6,378,679 --
STOCKHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock, 0.00015 par value:
Authorized shares -- 2,123,333; Issued and outstanding
shares -- 2,000,000 and 0, respectively................. 300 --
Preference in liquidation --$3,000,000
Series B convertible preferred stock, 0.00015 par value:
Authorized shares -- 1,429,981; Issued and outstanding
shares -- 1,394,981 and 0, respectively................. 209 --
Preference in liquidation -- $4,184,942
Common stock, 0.00015 par value:
Authorized shares -- 14,446,667 and 75,000,000,
respectively; Issued and outstanding shares -- 4,048,178
and 19,325,484, respectively............................ 607 2,899
Additional paid-in capital................................ 8,611,086 67,651,531
Deferred compensation..................................... (767,283) (1,312,664)
Retained earnings (deficit)............................... (12,121,527) (23,754,650)
------------ ------------
Total stockholders' equity (deficit)............... (4,276,608) 42,587,116
------------ ------------
Total liabilities and stockholders' equity
(deficit)........................................ $ 4,040,272 $ 48,390,282
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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CYBERGOLD, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES:
Transaction...................................... $ 457,074 $ 628,350 $ 3,315,871
Custom marketing services and other.............. 74,342 376,583 1,987,090
----------- ----------- ------------
Total revenues........................... 531,416 1,004,933 5,302,961
COST OF REVENUES:
Transaction...................................... 256,123 292,865 1,593,811
Custom marketing services and other.............. 37,048 173,253 278,628
----------- ----------- ------------
Total cost of revenues................... 293,171 466,118 1,872,439
Gross margin............................. 238,245 538,815 3,430,522
----------- ----------- ------------
OPERATING EXPENSES:
Product development.............................. 1,190,047 1,700,421 2,670,734
Sales and marketing.............................. 2,162,413 2,694,601 8,312,130
General and administrative....................... 739,816 791,837 2,515,787
Amortization of deferred compensation............ -- 198,288 734,614
----------- ----------- ------------
Total operating expenses................. 4,092,276 5,385,147 14,233,268
----------- ----------- ------------
Loss from operations..................... (3,854,031) (4,846,332) (10,802,746)
Interest Income (Expense), net..................... (15,292) 78,381 739,930
----------- ----------- ------------
Net loss................................. (3,869,323) (4,767,951) (10,062,816)
Dividend Attributable to Preferred Stockholders.... -- (660,430) (1,570,307)
----------- ----------- ------------
Net Loss Attributable to Common Stockholders....... $(3,869,323) $(5,428,381) $(11,633,123)
=========== =========== ============
NET LOSS PER COMMON SHARE:
Basic and diluted................................ $ (0.97) $ (1.35) $ (1.40)
=========== =========== ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted................................ 3,979,489 4,020,393 8,308,482
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
38
<PAGE> 39
CYBERGOLD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK
-----------------------------------------------
SERIES A SERIES B COMMON STOCK ADDITIONAL
--------------------- --------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ ---------- ------ ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........ 2,000,000 $ 300 -- $ -- 3,780,000 $ 567 $ 3,163,858
Issuance of Series B preferred
stock......................... -- -- 1,378,314 207 -- -- 4,134,732
Exercise of common stock
options....................... -- -- -- -- 270,375 41 15,644
Repurchase of stock options..... -- -- -- -- (38,333) (6) (4,157)
Imputed compensation............ -- -- -- -- -- -- 125,000
Net loss........................ -- -- -- -- -- -- --
---------- ----- ---------- ----- ---------- ------ -----------
BALANCE, DECEMBER 31, 1997........ 2,000,000 300 1,378,314 207 4,012,042 602 7,435,077
Issuance of Series B preferred
stock......................... -- -- 16,667 2 -- -- 49,998
Accretion of Series C redemption
premium....................... -- -- -- -- -- -- --
Exercise of common stock
options....................... -- -- -- -- 61,761 9 10,820
Repurchase of stock options..... -- -- -- -- (25,625) (4) (380)
Deferred compensation........... -- -- -- -- -- -- 965,571
Amortization of deferred
compensation.................. -- -- -- -- -- -- --
Imputed compensation............ -- -- -- -- -- -- 150,000
Net loss........................ -- -- -- -- -- -- --
---------- ----- ---------- ----- ---------- ------ -----------
BALANCE, DECEMBER 31, 1998........ 2,000,000 300 1,394,981 209 4,048,178 607 8,611,086
Accretion of Series C
redemption.................... -- -- -- -- -- -- --
Accretion of Series D
redemption.................... -- -- -- -- -- -- --
Exercise of common stock
options....................... -- -- -- -- 339,718 50 44,857
Deferred compensation........... -- -- -- -- -- -- 1,279,995
Amortization of deferred
compensation.................. -- -- -- -- -- -- --
IPO proceeds, net of $1,161,949
issuance costs................ -- -- -- -- 5,000,000 750 40,696,256
Exercise of Warrants............ -- -- -- -- 302,140 46 987,954
Imputed compensation............ -- -- -- -- -- -- 83,333
Net loss........................ -- -- -- -- -- -- --
Conversion of Series A
preferred..................... (2,000,000) (300) -- -- 2,000,000 300 --
Conversion of Series B
preferred..................... -- -- (1,394,981) (209) 1,394,981 209 --
Conversion of Series C
preferred..................... -- -- -- -- 4,189,192 629 5,717,621
Conversion of Series D
preferred..................... -- -- -- -- 2,051,275 308 7,999,692
Conversion of Series C
accretion..................... -- -- -- -- -- -- 1,759,330
Conversion of Series D
accretion..................... -- -- -- -- -- -- 471,407
---------- ----- ---------- ----- ---------- ------ -----------
DECEMBER 31, 1999................. -- $ -- -- $ -- 19,325,484 $2,899 $67,651,531
========== ===== ========== ===== ========== ====== ===========
<CAPTION>
DEFERRED RETAINED
COMPENSATION DEFICIT TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........ $ -- $ (2,823,823) $ 340,902
Issuance of Series B preferred
stock......................... -- -- 4,134,939
Exercise of common stock
options....................... -- -- 15,685
Repurchase of stock options..... -- -- (4,163)
Imputed compensation............ -- -- 125,000
Net loss........................ -- (3,869,323) (3,869,323)
----------- ------------ ------------
BALANCE, DECEMBER 31, 1997........ -- (6,693,146) 743,040
Issuance of Series B preferred
stock......................... -- -- 50,000
Accretion of Series C redemption
premium....................... -- (660,430) (660,430)
Exercise of common stock
options....................... -- -- 10,829
Repurchase of stock options..... -- -- (384)
Deferred compensation........... (965,571) -- --
Amortization of deferred
compensation.................. 198,288 -- 198,288
Imputed compensation............ -- -- 150,000
Net loss........................ -- (4,767,951) (4,767,951)
----------- ------------ ------------
BALANCE, DECEMBER 31, 1998........ (767,283) (12,121,527) (4,276,608)
Accretion of Series C
redemption.................... -- (1,098,900) (1,098,900)
Accretion of Series D
redemption.................... -- (471,407) (471,407)
Exercise of common stock
options....................... -- -- 44,907
Deferred compensation........... (1,279,995) -- --
Amortization of deferred
compensation.................. 734,614 -- 734,614
IPO proceeds, net of $1,161,949
issuance costs................ -- -- 40,697,006
Exercise of Warrants............ -- -- 988,000
Imputed compensation............ -- -- 83,333
Net loss........................ -- (10,062,816) (10,062,816)
Conversion of Series A
preferred..................... -- -- --
Conversion of Series B
preferred..................... -- -- --
Conversion of Series C
preferred..................... -- -- 5,718,250
Conversion of Series D
preferred..................... -- -- 8,000,000
Conversion of Series C
accretion..................... -- -- 1,759,330
Conversion of Series D
accretion..................... -- -- 471,407
----------- ------------ ------------
DECEMBER 31, 1999................. $(1,312,664) $(23,754,650) $ 42,587,116
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
39
<PAGE> 40
CYBERGOLD, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(3,869,323) $(4,767,951) $(10,062,816)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 190,859 269,158 353,854
Amortization of deferred compensation................... -- 198,288 734,614
Imputed compensation.................................... 125,000 150,000 83,333
Changes in assets and liabilities:
Accounts receivable................................... (161,165) (229,536) (1,357,967)
Prepaid expenses and other assets..................... (27,989) (17,133) (728,661)
Accounts payable...................................... (6,240) 115,197 642,794
Members payable....................................... 382,203 439,821 1,316,501
Membership acquisition payable........................ 69,775 217,694 449,589
Accrued liabilities................................... 50,101 (54,784) 685,100
Deferred revenue...................................... 43,134 132,409 467,755
----------- ----------- ------------
Net cash used in operating activities.............. (3,203,645) (3,546,837) (7,415,904)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (57,564) (152,922) (898,817)
Purchase of short-term investments........................ -- -- (27,351,151)
Purchase of business...................................... -- -- (250,000)
----------- ----------- ------------
Net cash used in investing activities.............. (57,564) (152,922) (28,499,968)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations...................... (114,549) (143,437) (136,640)
Borrowings under equipment financing...................... -- -- 399,444
Proceeds from equipment financing......................... -- -- (34,793)
Proceeds from sale leaseback transaction.................. 250,000 -- --
Proceeds from loans from stockholders..................... 1,000,000 -- --
Proceeds from issuance of common stock.................... -- -- 40,697,006
Proceeds from issuance of preferred stock................. 3,134,939 5,768,249 8,000,000
Proceeds from exercise of common stock warrants........... -- -- 988,000
Proceeds from exercise of stock options, net of
repurchases............................................. 11,522 10,445 44,907
----------- ----------- ------------
Net cash provided by financing activities.......... 4,281,912 5,635,257 49,957,924
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents........ 1,020,703 1,935,498 14,042,052
CASH AND CASH EQUIVALENTS:
Balance at beginning of period............................ 218,807 1,239,510 3,175,008
----------- ----------- ------------
Balance at end of period.................................. $ 1,239,510 $ 3,175,008 $ 17,217,060
=========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 35,800 $ 71,086 $ 91,727
Acquisition of property and equipment using capital
leases.................................................. 97,892 151,683 --
Conversion of stockholder loans into preferred stock...... 1,000,000 -- --
</TABLE>
The accompanying notes are an integral part of these statements.
40
<PAGE> 41
CYBERGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
CyberGold, Inc. was incorporated in California in 1994 and reincorporated
under the name Cybergold, Inc. (the Company) in Delaware in August 1999. The
Company did not have any significant operations prior to 1996. The Company was a
development-stage company through December 31, 1997.
The Company is engaged in the business of providing on-line direct
marketing and cash-based incentive advertising solutions for on-line advertisers
and marketers. Additionally, the Company provides custom marketing services,
which include production and development of marketing programs, delivery of
targeted e-mail to Company members, design of customer web sites, and
third-party engineering functions.
As of December 31, 1999, the Company had a retained deficit of
approximately $23.8 million and has continued to incur losses during 2000.
During May 1999, the Company issued redeemable convertible preferred stock, as
further discussed in Note 5, in the amount of $8 million. During September 1999,
the Company underwent its initial public offering of 5 million shares of common
stock, raising net proceeds of $40.7 million. Management believes its cash and
cash equivalent and short-term investment balances at December 31, 1999 will be
adequate to allow the Company to meet its cash needs through at least December
31, 2000.
The industry in which the Company operates is very specialized and is
subject to a number of industry-specific risk factors, including, but not
limited to, rapidly changing technologies, significant numbers of new entrants,
dependence on key individuals, competition from similar products and from larger
companies, customer preferences, the need for the continued successful
development, marketing and selling of its products and services, the need for
financing, and the need for positive cash flows from operations.
On February 28, 2000, the Company signed a definitive agreement to acquire
itarget.com in exchange for 1.85 million shares of the Company's stock.
itarget.com is a permission based e-mail marketing company that rewards its
members with premium products, delivered on-line. The acquisition is to be
completed by March 31, 2000 and is expected to be accounted for as a pooling of
interests.
Significant Customers
Two customers individually accounted for 22 percent and 16 percent,
respectively, of the Company's total revenue during the year ended December 31,
1998.
No individual customer exceeded 10 percent of total revenue during the year
ended December 31, 1999.
Concentration of Credit Risk
Financial instruments that may potentially subject the Company to
concentration of credit risk consist principally of cash, cash equivalents, and
short-term investments. All cash, cash equivalents, and short-term investments
are placed in financial institutions with strong credit ratings, which minimizes
the risk of loss due to nonpayment. The Company has not experienced any losses
due to credit impairment or other factors related to its financial instruments.
Cash Equivalents
For the statements of cash flows, the Company treats financial instruments
as cash equivalents if the original maturity of such instruments is three months
or less.
41
<PAGE> 42
CYBERGOLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Short-Term Investments
Short-term investments consist primarily of government securities that are
considered to be held-to-maturity and are accounted for in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Accordingly, these assets
are reported at their estimated fair market values. As of December 31, 1999, the
cost of the securities approximated their fair market value.
Financial Instruments
Financial instruments consist of cash equivalents, short-term investment,
accounts receivable, accounts payable, and debt. The estimated fair value of
these financial instruments approximates their carrying value.
Valuation Accounts
Below is a summary of the changes in the Company's valuation accounts for
1997, 1998 and 1999:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF ADDITIONS END OF
DESCRIPTION YEAR CHARGED EXPENSE DEDUCTIONS YEAR
----------- ------------ --------------- ---------- -----------
<S> <C> <C> <C> <C>
1999:
Allowance for Doubtful Accounts.......... $30,000 $144,000 $10,000 $164,000
1998:
Allowance for Doubtful Accounts.......... $50,000 $ 25,000 $45,000 $ 30,000
1997:
Allowance for Doubtful Accounts.......... $ 0 $ 50,000 $ 0 $ 50,000
</TABLE>
Property and Equipment
Property and equipment are carried at cost, and for financial reporting
purposes depreciation is computed using the straight-line method over estimated
useful lives of three years for all assets. Maintenance and repair expenditures
are charged to expense when incurred.
Intangibles
Intangibles include goodwill which represents the excess of cost over the
estimated fair value of the net tangible and intangible assets of acquired
businesses. Should events or circumstances occur subsequent to acquisition that
bring into question the realizable values or impairment of any component of
goodwill, the Company will evaluate the remaining useful life and balance of
goodwill and will make appropriate adjustments. The Company's principal
considerations in determining impairment include the strategic benefits to the
Company of the particular business related to the questioned component of
goodwill as measured by undiscounted current and expected future operating
income levels of that particular business and expected undiscounted future cash
flows.
Members Payable
Members payable represents amounts payable to the Company's members as a
result of their performing certain actions and completing transactions. These
amounts are cash rewards and are recorded on the Company's balance sheets until
the member elects to receive payment of the rewards or to use the rewards to
purchase items on-line.
42
<PAGE> 43
CYBERGOLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Member Acquisition Payable
Member acquisition payable represents amounts due to advertising partners
for new member sign-ups that are originated from a partner web site.
Revenue Recognition and Cost of Revenues
The Company earns revenue from certain member transactions and from custom
marketing and other services. Transaction revenues are earned each time a member
either earns or spends incentive rewards within the system and for micropayment
transactions. Transaction revenues are recognized as revenue upon completion of
the specific action related to the transaction fee.
Custom marketing services and other revenues include production and
development fees received for customization of marketing programs, fees received
for delivering targeted e-mail to the Company's members, and fees received for
other advertising and marketing services. Production and development fees
represent HTML design services, graphic services, engineering, and database
development and related services; revenue is recognized as these services are
performed. E-mail revenue is recognized in the month that the contract is
fulfilled. Other advertising and marketing services revenue is recognized as
these services are performed.
Prepayments by advertising or marketing clients for transaction fees or
custom marketing services are included in deferred revenue on the accompanying
balance sheets.
The cost of revenues associated with transaction revenues represents cash
rewards paid to members for completing transactions.
The cost of revenues associated with custom advertising and marketing
services and other revenues primarily consists of costs for production and
development personnel and independent contractors.
Any unpaid rewards due to members are recorded in members payable in the
accompanying balance sheets.
Product Development
Product development costs include expenses related to the development and
enhancement of the Company's product offerings. Product development costs are
expensed as incurred.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Actual results could differ from those estimates.
Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted
average common shares outstanding during the period. Diluted loss per share is
calculated by dividing the net loss by the weighted average common shares
outstanding adjusted for all potential common shares, which includes shares
issuable upon the exercise of outstanding common stock options, warrants, and
other contingent issuances of common stock. The Company has losses for all
periods presented and, accordingly, such potential common shares are excluded
from the computation of diluted net loss per share, as their effect is
antidilutive.
43
<PAGE> 44
CYBERGOLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Potentially dilutive securities include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Options to purchase common stock.......... 776,333 1,250,122 2,516,155
Warrants to purchase common stock......... 166,667 166,667 166,667
Warrants to purchase preferred stock...... 146,667 138,333 138,333
Series A preferred stock.................. 2,000,000 2,000,000 --
Series B preferred stock.................. 1,378,314 1,394,981 --
Redeemable preferred stock................ -- 4,189,195 --
--------- --------- ---------
Total........................... 4,467,981 9,139,298 2,821,155
========= ========= =========
</TABLE>
Stock Split
During June 1999, the Company approved a 2-for-3 reverse stock split. All
of the share amounts and per share amounts in these financial statements have
been restated to reflect this split for all periods presented.
New Accounting Standards
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." The Company has no other comprehensive income amounts for any of the
periods presented.
The Company also adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." As of December 31, 1998, management has
concluded that the Company only operates in one segment and exclusively in the
United States.
In March 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-1, "Software for Internal Use." The adoption of SOP No. 98-1
has not had a material impact on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is not expected to have a
material impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
will adopt SAB 101 as required in the first quarter of 2000 and is evaluating
the effect that such adoption may have on the Company's results of operations
and financial position.
Reclassifications
Certain reclassifications have been made to the financial statements to
conform to the current year presentation.
44
<PAGE> 45
CYBERGOLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- ----------
<S> <C> <C>
Computer equipment and software..................... $ 923,127 $1,767,145
Furniture and fixtures.............................. 30,465 101,692
Leasehold improvements.............................. 14,541 --
--------- ----------
968,133 1,868,837
Accumulated depreciation............................ (561,067) (877,273)
--------- ----------
$ 407,066 $ 991,564
========= ==========
</TABLE>
Depreciation expense for property and equipment was $190,859, $269,158, and
$331,371 for the years ended December 31, 1997, 1998, and 1999, respectively.
Included in property and equipment at December 31, 1998 and 1999, are
depreciated amounts of approximately $278,000 and $125,948, respectively,
related to assets acquired under capital leases.
3. INTANGIBLE ASSETS:
Intangible assets represent goodwill and other intangibles related to the
1999 acquisition of Smartfrog.com (Note 10). This amount is being amortized on a
straight-line basis over five years. Total amortization expense for the year
ended December 31, 1999, was $22,500.
4. INCOME TAXES:
Significant components of net deferred tax assets as of December 31 were:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.......................... $ 3,744,037 $ 8,070,010
R&D credit carryforward................................... 274,163 485,436
Other..................................................... 25,028 77,060
----------- -----------
Gross deferred tax assets................................. 4,043,228 8,632,506
Deferred tax valuation allowance.......................... (4,043,228) (8,632,506)
----------- -----------
Net deferred tax asset.................................... $ -- $ --
=========== ===========
</TABLE>
As of December 31, 1999, the Company had tax net operating loss
carryforwards of approximately $20.18 million for federal and state income tax
purposes. These carryforwards begin to expire in 2011 and 2005, respectively. In
addition, the Company has research and development tax credit carryforwards of
$271,557 and $213,879 for federal and state income tax purposes, respectively,
which begin to expire in 2011. A valuation allowance has been provided to offset
gross deferred tax assets due to the uncertainty surrounding the realizability
of such assets.
45
<PAGE> 46
CYBERGOLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of the effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. statutory tax rate.......... $ 1,315,570 (34.0)% $ 1,621,103 (34.0)% $ 3,955,262 (34.0)%
State taxes, net of federal
income tax benefit............. 232,159 (6.0) 286,077 (6.0) 697,987 (6.0)%
Research and development tax
credit......................... 104,413 (2.7) 126,681 (2.7) 216,377 (2.0)%
Other............................ (111,496) 2.9 (75,258) 1.6 (290,641) 2.5%
Change in valuation allowance.... (1,540,646) 39.8 (1,958,603) 41.1 (4,578,985) 39.5%
----------- ----- ----------- ----- ----------- -----
Provision for income taxes....... $ -- --% $ -- --% $ -- --%
=========== ===== =========== ===== =========== =====
</TABLE>
The Tax Reform Act of 1986 contains provisions that may limit the net
operating loss carryforwards and research and development credits available to
be used in any given year should certain events occur, including the sale of
equity securities and other changes in ownership. There can be no assurance that
the Company will be able to utilize net operating loss carryforwards and credits
before expiration.
5. CONVERTIBLE REDEEMABLE PREFERRED STOCK:
During 1998 and 1999, the Company amended and restated its articles of
incorporation to allow for the issuance of 5,333,353 shares of Series C
Convertible Redeemable Preferred Stock (Series C Stock) and 2,566,667 shares of
Series D Convertible Redeemable Preferred Stock (Series D Stock).
During the period from May 1998 through August 1998, the Company issued
4,189,192 shares of Series C Stock at $1.37 per share. During May 1999, the
Company issued 2,051,275 shares of Series D Stock at $3.90 per share.
Each share of Series C Stock and Series D Stock was automatically converted
into shares of common stock during the Company's initial public offering.
For the years ended December 31, 1998 and 1999, redemption accretion
related to Series C and Series D stock was charged to retained deficit in the
amount of $660,430 and $1,570,307, respectively. This accumulated accretion was
recorded as an increase to additional paid in capital upon the closure of the
Company's initial public offering.
In connection with the issuance of Series D Stock, the Company also issued
warrants to purchase 302,140 warrants of Series D Stock at an exercise price of
$4.50. These warrants automatically converted into shares of common stock during
the Company's initial public offering.
6. STOCKHOLDERS' EQUITY:
Common Stock
The holders of common stock are entitled to one vote per share. The holders
of common stock are entitled to receive ratably such dividends, if any, as may
be declared by the Board of Directors. In the event of liquidation, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock.
The common stock has no preemptive, conversion, or other subscription rights.
Preferred Stock
In connection with the capital leases described in Note 7, the Company
issued warrants to the lessor to purchase 15,000 shares of Series B preferred
stock at $3.00 per share. The value of these warrants at the grant
46
<PAGE> 47
CYBERGOLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
dates (as determined using the Black-Scholes model) was determined not to be
material, based on the Black-Scholes pricing model.
7. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
During 1999, the Company moved its headquarters to Oakland, California, and
entered into an operating lease that expires in November 2004, with an option to
extend the lease for an additional three years. Subsequent to year-end, the
Company has entered into an additional operating lease for additional floor
space at their headquarters. This lease expires in June 2005, with an option to
extend the lease for an additional three years. The Company also leases certain
items of property and equipment under capital leases expiring at various dates
through 2002.
Future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASE LEASE
PAYMENTS PAYMENTS
---------- ---------
<S> <C> <C>
2000................................................ $ 883,200 $ 166,500
2001................................................ 1,071,000 83,500
2002................................................ 1,047,100 18,100
2003................................................ 1,134,400 --
2004 and thereafter................................. 1,307,200 --
---------- ---------
Total..................................... $5,442,900 268,100
==========
Less: Interest component............................ (42,500)
---------
Present value of minimum lease payments............. 225,600
Less: Current maturities............................ (135,800)
---------
Long-term capital obligations....................... $ 89,800
=========
</TABLE>
Interest expense on capital leases amounted to $35,800, $71,086, and
$59,375 for the years-ended December 31, 1997, 1998, and 1999, respectively.
Rent expense for the years ended December 31, 1997, 1998, and 1999, was
$150,730, $139,749, and $269,007, respectively.
Employment Agreements
During 1998, the Company entered into employment agreements with three
officers that provide for minimum annual base salaries, bonus entitlements, and
issuance of common stock options upon the achievement of certain objectives.
Should these objectives not be achieved, these options vest over five years. The
employment agreements were effective as of the hire date of each respective
officer and may be terminated by either party. As of December 31, 1998 and 1999,
the Company accrued approximately $32,000 and $25,000, respectively, in the
accompanying balance sheets for accrued bonuses in relation to these agreements.
Equipment Credit Line
During February 1999, the Company entered into an equipment credit line
agreement. This credit line is to be used solely for capital expenditures.
Maximum borrowings under this line are $400,000. Interest of approximately 20
percent and principal are payable monthly over a three-year period. At December
31, 1999, the Company had amounts outstanding under this line of $364,649. Of
this amount, $65,518 is included in current maturities of long-term obligations
in the accompanying balance sheets, with the remainder included in long-term
obligations, net of current maturities.
47
<PAGE> 48
CYBERGOLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLAN:
Under the terms of the Company's 1996 Employee Stock Option Plan (1996
Plan) adopted in June 1996, options to purchase shares of the Company's common
stock are granted to employees, consultants, and directors. Options currently
outstanding vest at 25 percent on the first anniversary of the grant date and
1/36 per month thereafter. Each option shall terminate 10 years after the date
of grant. In addition, the option holder is entitled to exercise prior to the
option's vesting as long as he or she is still an employee. Should the employee
subsequently leave, the Company has the right to repurchase the shares that had
not vested at the departure date. At December 31, 1998 and 1999, 56,771 and
18,646 shares of common stock were subject to repurchase, respectively, under
this provision.
The 1999 Omnibus Equity Incentive Plan was adopted in September 1999. The
provisions of this plan match the 1996 Plan, except that optionees may exercise
only those options they are vested in. All options granted from the effective
date of the initial public offering on September 22, 1999 were granted from the
1999 Plan.
A summary of the status of the Company's stock option plan at December 31,
1999, and changes during the years ended December 1997, 1998, and 1999, are
presented in the table below:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
OPTIONS OUTSTANDING AVERAGE AVERAGE
-------------------------- EXERCISE FAIR VALUE OF
QUALIFYING NONQUALIFYING TOTAL PRICE OPTIONS GRANTED
---------- ------------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996............. 690,375 -- 690,375 $0.05
Granted.............................. 334,333 106,667 441,000 0.41 $0.08
Canceled............................. (93,000) -- (93,000) 0.23
Exercised............................ (262,042) -- (262,042) 0.05
--------- ------- ---------
Balance, December 31, 1997............. 669,666 106,667 776,333 0.24
Granted.............................. 675,733 200,233 875,966 0.41 $1.02
Canceled............................. (279,305) (61,111) (340,416) 0.51
Exercised............................ (60,694) (1,067) (61,761) 0.18
--------- ------- ---------
Balance, December 31, 1998............. 1,005,400 244,722 1,250,122 0.29
Granted.............................. 1,806,898 138,899 1,945,797 5.53 $3.21
Canceled............................. (242,917) (91,696) (334,613) 1.71
Exercised............................ (290,375) (54,776) (345,151) 0.15
--------- ------- ---------
Balance, December 31, 1999............. 2,279,006 237,149 2,516,155 $4.17
========= ======= =========
</TABLE>
Options outstanding, exercisable, and vested by price range at December 31,
1999, are as follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AVERAGE
EXERCISE NUMBER CONTRACTUAL NUMBER NUMBER
PRICE OUTSTANDING REMAINING LIFE EXERCISABLE VESTED
-------- ----------- -------------- ----------- -------
<S> <C> <C> <C> <C>
$ 0.02 - 1.00 950,875 7.6 950,875 520,986
$3.90 507,359 9.4 507,359 66,087
$ 6.63 - 10.00 1,038,921 9.8 278,388 60,833
$10.01 - 18.13 19,000 10.0 0 0
--------- --------- -------
2,516,155 1,736,622 647,906
========= ========= =======
</TABLE>
During 1997, the Company entered into agreements that granted options to
purchase 123,333 shares of Series A preferred stock to consultants at $1.50 per
share. The options were fully vested at December 31,
48
<PAGE> 49
CYBERGOLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1998. The value of these options at the grant date (as determined using the
Black-Scholes model) was not material.
In connection with the granting of certain stock options to employees,
directors, and consultants during 1998 and 1999, the Company recorded deferred
compensation of $965,571 and $1,279,995 respectively. This deferred compensation
is being amortized over the expected service periods of the grantees, generally
four years. Amortization of deferred compensation for the years ended December
31, 1998 and 1999 was $198,288 and $734,614, respectively.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Had compensation expense for the Plan
been determined based on the fair value at the grant dates, as prescribed in
SFAS No. 123, the Company's net loss and net loss per share would have been as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss:
As reported.............................. $(3,869,323) $(5,428,381) $(11,633,123)
Pro forma................................ $(3,929,438) $(5,525,937) $(12,207,085)
Basic and diluted net loss per common
share:
As reported.............................. $ (0.97) $ (1.35) $ (1.40)
Pro forma................................ $ (0.99) $ (1.37) $ (1.47)
</TABLE>
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for the
grants: expected dividend yield of 0 percent in all periods; expected volatility
of 149 percent in all periods; weighted average risk-free interest rates ranging
from 3.91 percent to 6.05 percent for all periods presented in the table above;
and expected lives from one month to four years for all periods.
9. COMPENSATION AND RETIREMENT PLANS:
On May 18, 1999, the Board of Directors adopted the following plans:
1999 Omnibus Equity Incentive Plan -- The Company has reserved
1,500,000 shares of common stock for issuance under this plan. Options may
be granted under this plan to employees, directors, and consultants and
will not be granted at less than 100 percent of the fair market value of
the common stock on the option grant date. These options will generally
vest over four years and expire ten years after the date of grant. At
December 31, 1999, 780,000 options were outstanding under this plan.
1999 Employee Stock Purchase Plan -- The Company has reserved 300,000
shares of common stock for issuance under this plan, and only employees are
eligible. Employees can purchase stock through payroll deductions that may
not exceed 15 percent of the employee's cash compensation. The purchase
price per share of common stock will be no less than 85 percent of the fair
market value of the stock at the date of purchase. At December 31, 1999, 0
purchases had been made under this plan.
401(k) Defined Contribution Plan -- The Company also sponsors a
defined contribution 401(k) retirement plan for all employees who have
completed at least 30 days of service. Participants may elect to defer up
to 15 percent of their current annual salary, not to exceed $10,500. The
Company does not match contributions.
49
<PAGE> 50
CYBERGOLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. ACQUISITIONS:
In November 1999, the Company purchased substantially all of the assets and
assumed certain liabilities of Smartfrog.com, a Delaware corporation, for
$250,000 and has included Smartfrog.com's results of operations as of such date.
The Company accounted for this acquisition under the purchase method of
accounting. The allocation of the purchase price to the underlying net assets
acquired is based upon estimates of the fair value of the net assets. Of the net
assets acquired, $150,000 was allocated to employment contracts and is being
amortized over one year. The remainder was allocated to goodwill and is being
amortized over 5 years.
Smartfrog.com had no activity during 1998. Had the acquisition occurred as
of January 1, 1999, the Company's net loss would have increased by approximately
$100,000.
11. RELATED PARTIES:
During the years ended December 31, 1997, 1998 and through May 1999 the
president of the Company and majority common stockholder was not paid a salary.
The Company has imputed a salary of $125,000, $150,000, and $83,333 for the
years-ended December 31, 1997, 1998 and the period January 1, 1999 to May 1,
1999, respectively.
50
<PAGE> 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information regarding directors appearing under the caption "Election
of Directors" in our definitive proxy statement to be used in connection with
the Annual Meeting of Stockholders to be held in 2000 (the "2000 Proxy
Statement") is incorporated herein by reference, since the 2000 Proxy Statement
will be filed with the Securities and Exchange Commission not later than 120
days after the end of our fiscal year pursuant to Regulation 14A. Information
required by this item as to the executive officers of the Company is included as
Item 4a of Part I of this Annual Report on Form 10-K as permitted by Instruction
3 to Item 401(b) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference to
"Executive Compensation" in the 2000 Proxy Statement, since the 2000 Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of our fiscal year pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated herein by reference to
"Stock Ownership of Principal Holders and Management" in the 2000 Proxy
Statement, since the 2000 Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the end of our fiscal year
pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
To the extent applicable the information required by this item is
incorporated herein by reference to "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" in the 2000 Proxy Statement,
since the 2000 Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year pursuant to
Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.2 Registrant's Amended and Restated Certificate of
Incorporation (Incorporated by reference from Exhibit 3.2 to
Registration Statement No. 333-79067)
3.4 Amended and Restated Bylaws of the Registrant (Incorporated
by reference from Exhibit 3.4 to Registration Statement No.
333-79067)
3.5 Certificate of Correction to the Registrant's Certificate of
Incorporation (Incorporated by reference from Exhibit 3.5 to
Registration Statement No. 333-79067)
4.2 Specimen Common Stock Certificate (Incorporated by reference
from Exhibit 4.2 to Registration Statement No. 333-79067)
4.3 Amended and Restated Investors' Rights Agreement, dated May
18, 1999 (Incorporated by reference from Exhibit 4.3 to
Registration Statement No. 333-79067)
</TABLE>
51
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.1 Form of Indemnification Agreement (Incorporated by reference
from Exhibit 10.1 to Registration Statement No. 333-79067)
10.2 1996 Stock Plan (Incorporated by reference from Exhibit 10.2
to Registration Statement No. 333-79067)
10.3 1999 Omnibus Equity Incentive Plan (Incorporated by
reference from Exhibit 10.3 to Registration Statement No.
333-79067)
10.4 1999 Employee Stock Purchase Plan (Incorporated by reference
from Exhibit 10.4 to Registration Statement No. 333-79067)
10.5 Standard Office Lease, by and between Central Building LLC
and the Registrant, dated March 25, 1999. (Incorporated by
reference from Exhibit 10.5 to Registration Statement No.
333-79067)
10.6 Commercial Lease, by and between Weilman Treloar & Co. and
the Registrant, dated December 20, 1995. (Incorporated by
reference from Exhibit 10.6 to Registration Statement No.
333-79067)
10.7+ Merchant Transaction Processing Agreement between the First
National Bank of Omaha and the Registrant, as amended July
21, 1997. (Incorporated by reference from Exhibit 10.7 to
Registration Statement No. 333-79067)
10.8+ Letter of Agreement between Earthlink Network, Inc. and the
Registrant, dated August 10, 1998. (Incorporated by
reference from Exhibit 10.8 to Registration Statement No.
333-79067)
10.9 Master Lease Agreement, between the Registrant and LINC
Capital, Inc., dated March 17, 1997 (Incorporated by
reference from Exhibit 10.9 to Registration Statement No.
333-79067)
10.10 Senior Loan and Security Agreement No. 6209, between the
Registrant and Phoenix Leasing Incorporated, dated December
10, 1998. (Incorporated by reference from Exhibit 10.10 to
Registration Statement No. 333-79067)
10.11+ Agreement, between the Registrant and Audits & Surveys
Worldwide, Inc., dated March 17, 1997. (Incorporated by
reference from Exhibit 10.11 to Registration Statement No.
333-79067)
10.12+ Affinity Agreement between the Registrant and MBNA America
Bank, N.A., dated November 20, 1998. (Incorporated by
reference from Exhibit 10.12 to Registration Statement No.
333-79067)
10.13 Office Building Lease, between the Registrant and 1330
Broadway (Zimmerman Investments), dated July 5, 1999.
(Incorporated by reference from Exhibit 10.13 to
Registration Statement No. 333-79067)
10.14 Series C Preferred Stock Purchase Agreement, dated May 15,
1998 (Incorporated by reference from Exhibit 10.14 to
Registration Statement No. 333-79067)
10.15 Series C Preferred Stock Purchase Agreement, dated August
19, 1998 (Incorporated by reference from Exhibit 10.15 to
Registration Statement No. 333-79067)
10.16 Series D Preferred Stock and Warrant Purchase Agreement,
dated May 18, 1999 (Incorporated by reference from Exhibit
10.16 to Registration Statement No. 333-79067)
10.17 Amendment to Office Building Lease, between the Registrant
and Zimmerman Investments, dated November 16, 1999
10.18 Amendment to Office Building Lease, between the Registrant
and Zimmerman Investments, dated February 8, 2000
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedules.
</TABLE>
- ---------------
+ Specified portions of this agreement have been omitted and have been filed
separately with the Commission pursuant to a request for confidential
treatment.
52
<PAGE> 53
(b) The company did not file any reports on Form 8-K during the quarter
ended December 31, 1999.
53
<PAGE> 54
CYBERGOLD, INC.
FORM 10-K SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CYBERGOLD, INC.
Date: March 29, 2000 By: /s/ A. NATHANIEL GOLDHABER
------------------------------------
A. Nathaniel Goldhaber
Chairman and Chief Executive
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
By /s/ A. NATHANIEL GOLDHABER Chairman and March 29, 2000
-------------------------------------------------- Chief Executive Officer
A. Nathaniel Goldhaber (Principal Executive
Officer)
By /s/ JOHN D. STEUART Chief Financial Officer March 29, 2000
-------------------------------------------------- (Principal Financial and
John D. Steuart Accounting Officer)
By /s/ REGIS P. MCKENNA Director March 29, 2000
--------------------------------------------------
Regis P. McKenna
By /s/ ALAN SALZMAN Director March 29, 2000
--------------------------------------------------
Alan Salzman
By /s/ PETER S. SEALEY, PH.D. Director March 29, 2000
--------------------------------------------------
Peter S. Sealey, Ph.D.
</TABLE>
54
<PAGE> 55
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.2 Registrant's Amended and Restated Certificate of
Incorporation (Incorporated by reference from Exhibit 3.2 to
Registration Statement No. 333-79067)
3.4 Amended and Restated Bylaws of the Registrant (Incorporated
by reference from Exhibit 3.4 to Registration Statement No.
333-79067)
3.5 Certificate of Correction to the Registrant's Certificate of
Incorporation (Incorporated by reference from Exhibit 3.5 to
Registration Statement No. 333-79067)
4.2 Specimen Common Stock Certificate (Incorporated by reference
from Exhibit 4.2 to Registration Statement No. 333-79067)
4.3 Amended and Restated Investors' Rights Agreement, dated May
18, 1999 (Incorporated by reference from Exhibit 4.3 to
Registration Statement No. 333-79067)
10.1 Form of Indemnification Agreement (Incorporated by reference
from Exhibit 10.1 to Registration Statement No. 333-79067)
10.2 1996 Stock Plan (Incorporated by reference from Exhibit 10.2
to Registration Statement No. 333-79067)
10.3 1999 Omnibus Equity Incentive Plan (Incorporated by
reference from Exhibit 10.3 to Registration Statement No.
333-79067)
10.4 1999 Employee Stock Purchase Plan (Incorporated by reference
from Exhibit 10.4 to Registration Statement No. 333-79067)
10.5 Standard Office Lease, by and between Central Building LLC
and the Registrant, dated March 25, 1999. (Incorporated by
reference from Exhibit 10.5 to Registration Statement No.
333-79067)
10.6 Commercial Lease, by and between Weilman Treloar & Co. and
the Registrant, dated December 20, 1995. (Incorporated by
reference from Exhibit 10.6 to Registration Statement No.
333-79067)
10.7+ Merchant Transaction Processing Agreement between the First
National Bank of Omaha and the Registrant, as amended July
21, 1997. (Incorporated by reference from Exhibit 10.7 to
Registration Statement No. 333-79067)
10.8+ Letter of Agreement between Earthlink Network, Inc. and the
Registrant, dated August 10, 1998. (Incorporated by
reference from Exhibit 10.8 to Registration Statement No.
333-79067)
10.9 Master Lease Agreement, between the Registrant and LINC
Capital, Inc., dated March 17, 1997 (Incorporated by
reference from Exhibit 10.9 to Registration Statement No.
333-79067)
10.10 Senior Loan and Security Agreement No. 6209, between the
Registrant and Phoenix Leasing Incorporated, dated December
10, 1998. (Incorporated by reference from Exhibit 10.10 to
Registration Statement No. 333-79067)
10.11+ Agreement, between the Registrant and Audits & Surveys
Worldwide, Inc., dated March 17, 1997. (Incorporated by
reference from Exhibit 10.11 to Registration Statement No.
333-79067)
10.12+ Affinity Agreement between the Registrant and MBNA America
Bank, N.A., dated November 20, 1998. (Incorporated by
reference from Exhibit 10.12 to Registration Statement No.
333-79067)
10.13 Office Building Lease, between the Registrant and 1330
Broadway (Zimmerman Investments), dated July 5, 1999.
(Incorporated by reference from Exhibit 10.13 to
Registration Statement No. 333-79067)
10.14 Series C Preferred Stock Purchase Agreement, dated May 15,
1998 (Incorporated by reference from Exhibit 10.14 to
Registration Statement No. 333-79067)
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.15 Series C Preferred Stock Purchase Agreement, dated August
19, 1998 (Incorporated by reference from Exhibit 10.15 to
Registration Statement No. 333-79067)
10.16 Series D Preferred Stock and Warrant Purchase Agreement,
dated May 18, 1999 (Incorporated by reference from Exhibit
10.16 to Registration Statement No. 333-79067)
10.17 Amendment to Office Building Lease, between the Registrant
and Zimmerman Investments, dated November 16, 1999
10.18 Amendment to Office Building Lease, between the Registrant
and Zimmerman Investments, dated February 8, 2000
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedules.
</TABLE>
- ---------------
+ Specified portions of this agreement have been omitted and have been filed
separately with the Commission pursuant to a request for confidential
treatment.
<PAGE> 1
EXHIBIT 10.17
AMENDMENT NO. 1 TO LEASE
THIS AMENDMENT NO. 1 TO LEASE is entered into this 16th day of November,
1999, by and between 1330 BROADWAY, hereinafter called "Landlord", and
CYBERGOLD, INC., A DELAWARE CORPORATION, hereinafter called "Tenant".
WHEREAS, by Lease dated July 15, 1999 (the "Lease") between Landlord and
Tenant, Tenant leased office space on the 12th floor of the 1330 Broadway
Building known as Suite 1200, 1330 Broadway, Oakland, California, consisting of
approximately 14,247 rentable square feet and expiring on July 31, 2002, and,
WHEREAS, Landlord and Tenant wish to enlarge the area of the Premises,
and,
WHEREAS, Landlord and Tenant wish to extend the expiration date of the
Lease, and,
WHEREAS, Landlord and Tenant wish to amend the security deposit, and,
WHEREAS, Landlord and Tenant wish to amend the pro rata share, and,
WHEREAS, Landlord and Tenant wish to amend the base monthly rent, and,
WHEREAS, Landlord and Tenant wish to amend certain other provisions of the
Lease,
NOW, THEREFORE, FOR VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF
WHICH ARE HEREBY ACKNOWLEDGED, IT IS MUTUALLY AGREED AS FOLLOWS:
1. Effective as of November 15, 1999 (the "Effective Date"), Section
1.1 of the Lease is hereby amended in its entirety to read as follows:
1.1 Address of Premises: 1330 Broadway
Suites 1200 and 1300
Oakland, CA 94612
2. The Tenant's name and notice address, as set forth in Section 1.2(b)
of the Lease, is hereby amended to read as follows:
CYBERGOLD, INC., A DELAWARE CORPORATION
1330 Broadway, Suite 1200
Oakland, CA 94612
Attention: Nat Goldhaber, CEO
with a copy to:
<PAGE> 2
Kenneth S. Katzoff
Katzoff & Riggs
3088 Claremont Avenue
Berkeley, CA 94705
3. Effective as of the Effective Date, Section 1.3 of the Lease is
hereby amended in its entirety to read as follows:
1.3 Rentable Area of Premises: Approximately 28,494 square feet
4. Section 1.4 of the Lease is hereby amended in its entirety to read
as follows:
1.4 Term: (a) Commencement Date: July 15, 1999
(b) For a term of: Sixty-Four (64) months (expiring November
30, 2004)
(c) Option to Extend for Thirty-Six (36) months
5. Effective as of the Effective Date, Section 1.5 of the Lease is
hereby amended in its entirety to read as follows:
1.5 Base Rent: $51,289.20 per month.
6. Effective as of the Effective Date, Section 1.6 of the Lease is
hereby amended in its entirety to read as follows:
1.6 Security Deposit: $45,644.60
The difference between the initial Security Deposit, and the amended Security
Deposit, in the amount of $25,644.60, is to be deposited by Tenant with Landlord
prior to the Effective Date.
7. Effective as of the Effective Date, Section 1.7 of the Lease is
hereby amended in its entirety to read as follows:
1.7 Proportionate Share: 9.72 Percent
8. Section 1.8 ("Broker") of the Lease is hereby deleted in its
entirety.
9. The second sentence of Section 5.a. of the Lease (beginning with
"Notwithstanding the foregoing" and ending with "delivered to Tenant.") is
hereby deleted in its entirety.
10. Section 6.b. of the Lease is hereby amended in its entirety to read
as follows:
b. Effective as of the first day of the thirteenth (13th) full
calendar month of the initial term of this Lease and each twelve (12)
months thereafter during the initial term, and effective as of the first
day of the thirteenth (13th) full calendar
<PAGE> 3
month of the Option Period and each twelve (12) months thereafter, the
base monthly rent, exclusive of Tenant's share of Direct Expenses set
forth in Article 8, shall be increased by Three Percent (3%).
11. Section 18 ("Services and Utilities") of the Lease is hereby amended
so as to add the following language between the ninth (9th) sentence (ending
with "electric current consumed for such use.") and the tenth (10th) sentence
(beginning with "Provided Tenant is not in default hereunder"):
Tenant agrees to accept all existing equipment to the extent available
located in the 13th Floor computer room, including the two (2) Liebert air
conditioning units, raised floor and pre-action sprinkler systems (the
"13th Floor Computer Room Equipment") in as-is condition, and Landlord
makes no representations or warranties as to the condition of, or the
sufficiency for Tenant's purposes of, the 13th Floor Computer Room
Equipment. The parties agree and acknowledge that the 13th Floor Computer
Room Equipment is the property of Landlord. Tenant shall, at its sole cost
and expense, operate, maintain and repair, and at its election pay to
Landlord the cost of removal or replacement of, the 13th Floor Computer
Room Equipment. Tenant shall, at its sole cost and expense, pay for all
utilities consumed by the 13th Floor Computer Room Equipment and equipment
installed by Tenant in the 13th Floor Computer Room. Landlord, at Tenant's
expense, shall cause an electric current meter to be installed for the
13th Floor computer room so as to measure the amount of electric current
consumed by the 13th Floor Computer Room Equipment and equipment installed
by Tenant in the 13th Floor Computer Room, or may establish usage
calculations by means of a consultant selected by Landlord.
12. Section 31 of the Lease is hereby amended in its entirety to read as
follows:
31. BROKERS. Tenant warrants that it has had no dealing with any real
estate broker or agent in connection with the negotiation of its lease of
Suite 1200 excepting only the broker named in Section 1.8, and it knows of
no other real estate broker or agent who is entitled to a commission in
connection with its lease of Suite 1200. In the event any claim is made
for brokerage commissions, finder's fees or similar compensation by any
person or entity other than the broker named in Section 1.8 in connection
with Tenant's lease of Suite 1200 as the result of acts or action of
Tenant, Tenant hereby agrees to, and shall indemnify and hold Landlord
harmless for, from and against all
<PAGE> 4
such claims, including costs, expenses and attorneys fees incurred by
Landlord in connection with any such claim.
In the event any claim is made for brokerage commissions, finder's fees or
similar compensation by any person or entity other than the broker named
in Section 1.8 in connection with Tenant's lease of Suite 1300 as the
result of acts or action of Tenant, Tenant hereby agrees to, and shall
indemnify and hold Landlord harmless for, from and against all such
claims, including costs, expenses and attorneys fees incurred by Landlord
in connection with any such claim. In the event that Landlord is required
to pay a leasing commission to the broker named in Section 1.8 in
connection with Tenant's lease of Suite 1300, Tenant shall reimburse
Landlord for such commission payment. Such reimbursement shall be
amortized over the remainder of the initial term of this Lease, and shall
be paid as additional rent in equal monthly installments due on the first
day of each month.
13. Sections 33 ("Early Termination"), 34 ("Right of First Refusal") and
35 ("Option to Expand") of the Lease are hereby deleted in their entirety.
14. The first sentence of Section 36.a. of the Lease is hereby amended
in its entirety to read as follows:
Tenant shall have the right to extend the initial term hereof for One (1)
additional consecutive period of Thirty-Six (36) months ("Option Period"),
commencing immediately upon the expiration of the initial term hereof,
upon the same terms and conditions as are stated in this Lease except for
base rent.
15. Exhibit "B" to the Lease ("Floor Plan/Construction Obligations") is
hereby amended so as to include Exhibit "B-1" attached hereto.
16. After delivery of Suite 1300 to Tenant, Tenant shall execute a
written acknowledgement of the date of commencement of its tenancy of Suite
1300, in the form attached hereto as Exhibit "C" and by this reference it shall
be incorporated herein and in the Lease. In the event that the date identified
as "Term Commencement Date" depicted on Exhibit "C" hereof is different than
Effective Date stated in Section 1 of this Amendment 1, said Effective Date
shall be modified to the date depicted on Exhibit "C" hereto.
17. All terms used herein that are defined in the Lease shall have the
same meanings as therein defined, except as amended by this Amendment 1. Except
as amended by this Amendment 1, all the terms, covenants and conditions of the
Lease are hereby
<PAGE> 5
ratified and affirmed and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment 1 on
the day and year first written above.
LANDLORD: 1330 BROADWAY
By:
----------------------------------
Myron Zimmerman
TENANT: CYBERGOLD, INC., A DELAWARE CORPORATION
By: By:
---------------------------------- ----------------------------------
Print Name: Print Name:
-------------------------- --------------------------
Title: Title:
------------------------------- -------------------------------
g:\wp51\wrkgroup\amendmnt\1330\1200cybr.a1c
<PAGE> 6
EXHIBIT B-1
FLOOR PLAN / CONSTRUCTION OBLIGATIONS
CYBERGOLD, INC.
1330 BROADWAY, SUITE 1300
TENANT IMPROVEMENTS TO BE PERFORMED BY LANDLORD:
1. Champoo Carpet
2. Patch holes and touch up paint in some areas
<PAGE> 7
EXHIBIT C
ACKNOWLEDGMENT OF COMMENCEMENT
1.1 (a) Landlord: 1330 BROADWAY
(b) Tenant: CYBERGOLD, INC., A CALIFORNIA CORPORATION
1.2 Location of Premises: 1330 Broadway, Suite 1300
Oakland, California 94612
1.3 Date of Acceptance:
1.4 Term Commencement Date:
1.5 Rent Commencement Date:
The above terms are incorporated into this Acknowledgment of Commencement
as indicated above and referenced herein.
This Acknowledgment of Commencement is made with reference to that certain
lease agreement (the "Lease") between the party designated in Section 1.1(a) as
Landlord ("Landlord") and the party designated in Section 1.1(b) hereof as
Tenant ("Tenant") dated as of July 15, 1999, and Amendment No. 1 thereto dated
November 16, 1999, regarding the certain premises generally located as set forth
in Section 1.2 hereof all as is more particularly set forth in the Lease (the
"Premises"). Tenant certifies to Landlord and the holders of any indebtedness
secured by the Building the following:
2.1 Tenant accepted possession of the Premises on the date set forth in
Section 1.3 and acknowledges that the Premises are as represented by Landlord
and in good and sanitary order, condition and repair; and that the improvements,
if any, required to be constructed for Tenant by Landlord under the Lease have
been constructed and are satisfactorily completed in all respects.
2.2 That all conditions of the Lease to be performed by Landlord as a
prerequisite to its full effectiveness, except punchlist items per Exhibit B to
the Lease, have been satisfied and that Landlord has fulfilled all its duties of
an inducement nature.
2.3 That the Commencement Date with respect to the Premises is as set forth in
Section 1.4.
2.4 That the Lease is in full force and effect and the same represents the
entire agreement between Landlord and Tenant concerning the Premises. 2.5 That
there are no existing defenses or offsets which Tenant has against the
enforcement of the Lease by Landlord and no offsets or credits against rental.
2.6 That the minimum rental obligation of said Lease shall is presently in
effect and that all rentals, charges and other obligations on the part of Tenant
under the Lease commenced to
<PAGE> 8
accrue on the date specified in Section 1.5.
2.7 That the undersigned Tenant has not made any prior assignment,
hypothecation, or pledge of said Lease or the rents thereunder.
LESSEE: CYBERGOLD, INC., A DELAWARE CORPORATION
By:
----------------------------------
Print Name:
--------------------------
Title:
-------------------------------
<PAGE> 1
Exhibit 10.18
AMENDMENT NO. 2 TO LEASE
THIS AMENDMENT NO. 2 TO LEASE is entered into this 8th day of February,
2000, by and between 1330 BROADWAY, hereinafter called "Landlord", and
CYBERGOLD, INC., A DELAWARE CORPORATION, hereinafter called "Tenant".
WHEREAS, by Lease dated July 15, 1999, as amended by Amendment No. 1 to
Lease dated November 17, 1999 (the "Lease") between Landlord and Tenant, Tenant
leased office space on the 12th and 13th floors of the 1330 Broadway Building
known as Suites 1200 and 1300, 1330 Broadway, Oakland, California, consisting of
approximately 28,494 rentable square feet and expiring on November 30, 2004,
and,
WHEREAS, Landlord and Tenant wish to extend the expiration date of the
Lease, and,
WHEREAS, Landlord and Tenant wish to amend certain other provisions of the
Lease,
NOW, THEREFORE, FOR VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF
WHICH ARE HEREBY ACKNOWLEDGED, IT IS MUTUALLY AGREED AS FOLLOWS:
1. Section 1.4 of the Lease is hereby amended in its entirety to read
as follows:
1.4 Term: (a) Commencement Date: July 15, 1999
(b) For a term of: Seventy-One (71) months (expiring June
30, 2005)
(c) Option to Extend for Thirty-Six (36) months (until June
30, 2008)
2. The first sentence of Paragraph a. ("Option") of Section 36 ("Option
to Extend Term") of the Lease is hereby amended in its entirety to read as
follows:
Tenant shall have the right to extend the initial term hereof for One (1)
additional consecutive period of Thirty-Six (36) months ("Option Period"),
commencing immediately upon the expiration of the initial term hereof,
upon the same terms and conditions as are stated in this Lease.
3. Subparagraph (i) of Paragraph a. of Section 36 of the Lease is
hereby amended in its entirety to read as follows:
(i) Tenant shall exercise said option by written
notification to Landlord no later than Nine (9) months prior to the
expiration of the initial term.
1330 / CYBERGOLD - AMENDMENT NO. 2 TO LEASE
PAGE 1
<PAGE> 2
4. All terms used herein that are defined in the Lease shall have the
same meanings as therein defined, except as amended by this Amendment 2. Except
as amended by this Amendment 2, all the terms, covenants and conditions of the
Lease are hereby ratified and affirmed and shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment 2 on
the day and year first written above.
LANDLORD: 1330 BROADWAY
By:
----------------------------------
Myron Zimmerman
TENANT: CYBERGOLD, INC., A DELAWARE CORPORATION
By: By:
---------------------------------- ----------------------------------
Print Name: Print Name:
-------------------------- --------------------------
Title: Title:
------------------------------- -------------------------------
g:\wp51\wrkgroup\amendmnt\1330\1200cybr.a2
1330 / CYBERGOLD - AMENDMENT NO. 2 TO LEASE
PAGE 2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-88053) of Cybergold, Inc. of our report dated
February 7, 2000, relating to the financial statements for the year ended
December 31, 1999, which appears in this Form 10-K.
San Francisco, California
March 27, 2000
/s/ ARTHUR ANDERSEN LLP
-------------------------
Arthur Andersen LLP
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