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Pursuant to Rule 424(b)(3)
File Number 333-80593
PROSPECTUS
3,575,000 SHARES
[LOGO]
COMMON STOCK
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This is an initial public offering of our common stock. We are selling all of
the 3,575,000 shares offered under this prospectus.
Our common stock has been approved for quotation on the Nasdaq National Market
under the symbol "IWIN."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C> <C>
Public offering price........................................................... $ 14.00 $50,050,000
Underwriting discounts and commissions.......................................... $ 0.98 $ 3,503,500
Proceeds, before expenses, to us................................................ $ 13.02 $46,546,500
</TABLE>
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The underwriters may purchase up to an additional 536,250 shares from us at the
initial public offering price less the underwriting discount to cover
over-allotments.
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BEAR, STEARNS & CO. INC.
ING BARINGS
THOMAS WEISEL PARTNERS LLC
WIT CAPITAL CORPORATION
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 23, 1999.
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PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. NEITHER WEBSTAKES.COM, INC. NOR ANY UNDERWRITER HAS AUTHORIZED
ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH DIFFERENT OR ADDITIONAL
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER
TO BUY THE SECURITIES IN ANY JURISDICTION WHERE SUCH OFFER OR SALE IS NOT
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS
PROSPECTUS OR ANY SALE OF THESE SECURITIES.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary............................... 1
Risk Factors..................................... 5
Use of Proceeds.................................. 12
Dividend Policy.................................. 12
Capitalization................................... 13
Dilution......................................... 14
Selected Financial Data.......................... 15
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 16
Business......................................... 22
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Management....................................... 34
Certain Transactions............................. 39
Principal Stockholders........................... 40
Description of Capital Stock..................... 42
Shares Eligible for Future Sale.................. 44
Underwriting..................................... 46
Legal Matters.................................... 48
Experts.......................................... 48
Where You Can Get More Information............... 48
Index to Financial Statements.................... F-1
</TABLE>
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UNTIL OCTOBER 18, 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the risks of
investing in our common stock discussed under "Risk Factors," before investing
in our common stock.
OUR BUSINESS
Webstakes.com, Inc. is a leading online sweepstakes promotion company. We
integrate sweepstakes, contests and similar promotional events with direct
marketing tools and a proprietary membership database of more than 1.7 million
consumers. We make our promotions available without charge to consumers through
our web site, webstakes.com, our clients' web sites and consumers' personal home
pages. We generate revenues through the sale of promotion services that allow
our clients to cost-effectively identify and communicate with potential
customers, increase sales and foster brand awareness. We are building on our
sweepstakes expertise to provide an integrated, comprehensive online promotion
solution. We have recently entered into agreements with NBC and Excite, which we
believe will increase awareness of the Webstakes.com brand and attract
additional visitors to webstakes.com. Our current top 25 clients measured by
revenues include CBS Sportsline, Citibank, CDW, Disney, iMall, MapQuest.com,
PC World and ShopNow.com.
We believe that our promotions are informative and entertaining, creating
an engaging online experience for consumers. Our sweepstakes run continuously,
providing consumers with the opportunity to enter each day to win more than 100
prizes with retail values typically between $150 and $400. Since 1996, consumers
have entered our sweepstakes more than 58 million times and we have awarded over
6,000 prizes with a total retail value of more than $1,000,000. Once consumers
enter any of our sweepstakes by providing required demographic information, they
become lifetime Webstakes.com members and can enter additional sweepstakes
without having to resubmit this information. We believe that eliminating
requests for redundant information increases the likelihood that consumers will
participate more often in our promotions. We currently have approximately
1.7 million members and, over the last three months, we have added new members
at an average rate of over 3,000 per day.
Our technology enables us to present tailored direct marketing offers to
our members based upon their demographic profiles each time they enter one of
our promotions. We respect the privacy rights of our members. Our privacy policy
precludes the sale of any individual member information collected from
promotions hosted on webstakes.com without the consent of our members. Members
may choose to receive our weekly electronic newsletter, the Webstakes Update.
Our members control whether and how often they receive email from our clients or
us.
We believe that the Internet is a compelling medium for direct marketing
promotions. The Internet enables marketers to collect extensive demographic
information and feedback from consumers and to use this information to tailor
and quickly adjust campaigns. According to Forrester Research, Inc., online
promotions generate three to five times the response rates of traditional
promotions. Forrester also reports that 88% of retailers and marketers surveyed
found that online promotional efforts have met or exceeded their expectations
and 80% of those surveyed planned to increase their online promotional spending
in the next year. Based on this survey, Forrester estimates that 50% to 70% of
total Internet marketing budgets will be spent on promotions over the next five
years, compared to less than 15% of Internet marketing budgets currently being
spent on promotions.
To date, substantially all of our revenues have been derived from the sale
of promotion services. We have incurred substantial costs and expenses to
create, launch and enhance webstakes.com and to grow our business. We expect
losses from operations and negative cash flow from operating activities to
continue for the forseeable future.
OUR STRATEGY
Our objective is to be the leading full-service online promotion company
and to make webstakes.com the leading Internet promotion destination. Key
elements of our strategy include:
o building on our sweepstakes expertise to provide an integrated,
comprehensive online promotion solution, including points and
loyalty programs, coupons, samples, premium incentives and instant
win games;
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o growing our membership base;
o building strong brand awareness through online and traditional
marketing campaigns;
o enhancing our database of information about our members; and
o expanding internationally.
RECENT DEVELOPMENTS
In March 1999, we entered into an agreement with NBC Multimedia, Inc. Under
this agreement, we have served as the exclusive third-party provider of online
sweepstakes and contests for the NBC.com and NBC Interactive Neighborhood web
sites and have the right to continue to serve in that capacity for the term of
the agreement. In addition, under the agreement we have agreed to provide four
sweepstakes to NBC.com. If NBC.com wishes to run additional sweepstakes, they
must negotiate with us on an exclusive basis for five days. Thereafter, NBC.com
may contract with another party. In exchange for these services, a link to
Webstakes-managed promotions is and will continue to be displayed on the NBC.com
home page and the NBC Interactive Neighborhood menu for the term of the
agreement. We receive no cash revenues from this agreement. The term of the
agreement is one year with an automatic one year renewal term unless terminated
prior to the renewal period. We also entered into an agreement with NBC to
advertise on national television.
In June 1999, we entered into an agreement with Excite, Inc., a wholly
owned subsidiary of At Home Corporation, allowing us to market our promotions on
Excite.com. Given the similarity between the topical channels of Excite and
webstakes.com, we believe this relationship will enhance our visibility and
membership base.
In connection with the Excite agreement, we also entered into a services
agreement with its subsidiary, MatchLogic. Under this agreement, MatchLogic will
provide services to us which will enable us to more effectively conduct our
promotions and analyze information regarding webstakes.com visitors and members.
In June 1999, we redeemed all outstanding shares of class A mandatorily
redeemable convertible preferred stock and 1,714,608 shares of common stock for
an aggregate amount of $24.0 million. To finance the redemption and to provide
working capital, we issued shares of class B mandatorily redeemable convertible
preferred stock to a group of investors, including, among others, At Home
Corporation, XL Ventures, a subsidiary of Big Flower Holdings, and Travelers
Insurance Company, for an aggregate purchase price of $40.0 million. At the same
time as the closing of this offering, the outstanding class B mandatorily
redeemable convertible preferred stock will automatically convert into
6,666,668 shares of common stock. After the closing of this offering, the
class A mandatorily redeemable convertible preferred stock and the class B
mandatorily redeemable convertible preferred stock will be unavailable for
reissue.
CORPORATE INFORMATION
We were incorporated in New York on January 8, 1996 as Webstakes, Inc. We
reincorporated in Delaware as Netstakes, Inc. on June 5, 1996 and we continued
doing business under the name Webstakes. We changed our name to Webstakes.com,
Inc. on June 11, 1999. Our principal executive offices are at 11 West 19th
Street, 10th Floor, New York, New York 10011. Our telephone number at that
location is (212) 242-8800. INFORMATION CONTAINED ON OUR WEB SITE DOES NOT
CONSTITUTE PART OF THIS PROSPECTUS.
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THE OFFERING
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Common stock offered.................................... 3,575,000 shares
Common stock outstanding after this offering............ 14,241,244 shares
Use of proceeds......................................... We intend to use a portion of the net proceeds to make
aggregate payments of $12.4 million to Excite and
MatchLogic, and the balance of the net proceeds for
working capital and general corporate purposes. See "Use
of Proceeds."
Nasdaq National Market symbol........................... IWIN
</TABLE>
You should be aware that we may issue additional shares of our common stock
after this offering upon the exercise of options and warrants. If and when we
issue these shares or any other shares, the percentage of common stock that you
own will be diluted. The following is a summary of the additional shares of
common stock that we may issue:
o 1,587,800 shares issuable upon the exercise of options outstanding at a
weighted average exercise price of $8.80;
o 64,000 shares issuable upon the exercise of options to be granted to our
non-employee directors at the closing of this offering at an exercise
price equal to the initial public offering price;
o 798,200 additional shares available for issuance under our equity
compensation plans; and
o 221,683 shares issuable upon the exercise of warrants outstanding at an
exercise price of $6.00.
Unless otherwise indicated, all information in this prospectus gives effect
to the issuance upon the closing of this offering of options to purchase 64,000
shares of common stock at an exercise price equal to the initial public offering
price to non-employee directors and the conversion of 6,666,668 shares of
class B mandatorily redeemable convertible preferred stock into common stock at
the same time as the closing of this offering.
In addition, unless otherwise indicated, all information in this prospectus
assumes that the underwriters do not exercise their option to purchase 536,250
additional shares from us after the closing of this offering.
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SUMMARY FINANCIAL DATA
The following table sets forth our summary financial data. This table does
not present all of our financial information. You should read this information
together with our financial statements and the notes to those statements
beginning on page F-1 of this prospectus and the information under "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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SIX MONTHS ENDED
JANUARY 8, 1996 YEAR ENDED DECEMBER 31, JUNE 30,
(INCEPTION) TO ------------------------ ------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 80 $1,618 $4,799 $2,263 $3,054
Loss from operations................. (213) (190) (1,338) (223) (4,445)
Net loss............................. (221) (227) (1,414) (248) (4,393)
Net loss attributable to common
stockholders...................... (221) (227) (1,414) (248) (13,105)
Basic and diluted net loss per share
attributable to common
stockholders ..................... $(0.06) $(0.05) $(0.27) $(0.05) $(2.36)
Weighted average shares of common
stock used in computing basic and
diluted net loss per share........ 3,999,576 4,278,916 5,181,356 4,999,176 5,562,617
Pro forma basic and diluted net loss
per share......................... $(0.12) $(1.23)
Shares of common stock used in
computing pro forma basic and
diluted net loss per share........ 11,848,023 10,666,244
</TABLE>
The following table is a summary of our balance sheet as of June 30, 1999.
The as adjusted column gives effect to the sale of the 3,575,000 shares of
common stock in this offering after deducting underwriting discounts and
commissions and estimated offering expenses and the initial application of the
net proceeds as described under "Use of Proceeds."
<TABLE>
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AS OF JUNE 30, 1999
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ACTUAL AS ADJUSTED
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash.................................................................................. $ 12,973 $42,493
Working capital....................................................................... 15,445 51,635
Total assets.......................................................................... 18,311 62,857
Notes payable (excluding current portion)............................................. 33 33
Class B mandatorily redeemable convertible preferred stock............................ 40,000 --
Total stockholders' equity (deficit).................................................. (23,349) 61,697
</TABLE>
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This prospectus contains forward-looking statements that are not based on
historical facts. The outcome of the events described in these forward-looking
statements is subject to risks and uncertainties. There are important factors
that could cause actual results to differ materially from those expressed or
implied by these forward-looking statements, including those discussed under
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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Webstakes, iDialog and our logo are our trademarks. Each other trademark,
trade name or service mark appearing in this prospectus belongs to its holder.
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RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before you decide to
purchase our common stock. If any of the following risks actually occur, our
business, results of operations and financial condition would likely suffer. In
this case, the market price of our common stock could decline, and you may lose
all or part of the money you paid to purchase our common stock.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT.
We were incorporated, and launched our first promotion, in January 1996.
Accordingly, we have a limited operating history upon which to evaluate our
operations and future prospects. In addition, our revenue model is evolving and
relies substantially upon the growth of promotion spending on the Internet and
our ability to become a full-service Internet promotion company. As an early
stage company in a new and rapidly evolving market, we face risks and
uncertainties relating to our ability to successfully implement our business
plan, which are described in more detail below. We may not successfully address
these risks.
WE HAVE NOT BEEN PROFITABLE AND MAY NOT BECOME PROFITABLE, IN WHICH EVENT OUR
BUSINESS AND STOCK PRICE WOULD BE ADVERSELY AFFECTED.
To date, we have not been profitable. We may never be profitable, or, if we
become profitable, we may be unable to sustain profitability. We expect to
continue to incur losses for the foreseeable future because we expect to
continue to spend significant resources to expand our business. Although we have
experienced revenue growth in recent periods, these growth rates may not be
sustainable or indicative of future growth. We reported a loss of $4.4 million
for the six months ended June 30, 1999. As of June 30, 1999, our accumulated
deficit was approximately $6.3 million. For us to make a profit, our revenues
will need to increase sufficiently to cover our costs and expenses.
A SIGNIFICANT PORTION OF OUR REVENUES HAVE BEEN DERIVED FROM BARTER
TRANSACTIONS, AND WE MAY NOT BE SUCCESSFUL IN GENERATING SUFFICIENT CASH
REVENUES TO COVER OUR COSTS AND EXPENSES IN THE FUTURE.
For the year ended December 31, 1998, approximately 42% of our revenues
were derived from the trading of promotion services for advertising and prizes.
For the six months ended June 30, 1999, approximately 29% of our revenues were
derived from these barter agreements. We do not receive cash for sales involving
barter agreements. We expect that barter agreements will continue to account for
a significant portion of our revenues in the future and we may not generate
sufficient cash to pay our cash expenses.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE, WHICH MAY CAUSE THE PRICE OF OUR
COMMON STOCK TO DECREASE.
We expect our operating results to vary significantly from quarter to
quarter due to many factors discussed in this Risk Factors section, some of
which are beyond our control. It is possible that in future periods our results
of operations will be below the expectations of public market analysts and
investors. In this event, the price of our common stock would likely decrease.
You should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance.
The rapidly evolving market in which we operate and potential seasonal
fluctuations in promotional spending and Internet use make it difficult to
forecast our revenues accurately. Our operating expenses are based on our
expectations of future revenues and are relatively fixed in the short term.
Accordingly, we may not be able to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. If we have a shortfall in
revenues in relation to our expenses, or if our expenses precede expected
revenues, then our results of operations and financial condition would be
materially adversely affected.
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IF THE DEMAND FOR INTERNET PROMOTION SERVICES DOES NOT INCREASE, OUR BUSINESS
WILL BE HARMED.
Our success depends in part on the increased acceptance of online promotion
services. The market for Internet promotion services has only recently begun to
develop and is evolving rapidly. Most businesses have little or no experience
using the Internet for promotion purposes. As a result, many businesses have
allocated only a limited portion of their marketing budgets to Internet
promotion spending. An increase in the demand for these services is dependent in
part on the effectiveness of the promotions and the recognition of this
effectiveness by clients and potential clients. The market for Internet
promotion services may not grow and any growth may not be sustained.
IF WE ARE UNABLE TO ATTRACT VISITORS TO WEBSTAKES.COM AND THE WEB SITES OF OUR
CLIENTS, THE EFFECTIVENESS OF OUR PROMOTIONS WOULD BE REDUCED, AND OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION WOULD BE MATERIALLY ADVERSELY
AFFECTED.
Our future success depends upon our ability to continue to attract and
retain visitors with demographic characteristics desired by our clients to
webstakes.com and the web sites of our clients. In addition, we guarantee our
clients that visitors will view their pages and/or link to their web sites a
minimum number of times. If we are unable to meet these minimum guarantees, we
will be required to defer recognition of the related revenues until the
guaranteed minimum is achieved. In addition, we will be required to provide
services to the client for free until we are able to meet our guaranteed
minimum, which may reduce our promotion inventory in future periods.
IF WE ARE UNSUCCESSFUL IN BROADENING OUR PRODUCT OFFERINGS, OUR REVENUE GROWTH
WILL BE LIMITED.
To date, substantially all of our revenues have been derived from
conducting sweepstakes on the Internet. Our growth is largely dependent upon our
ability to leverage our sweepstakes expertise to become a full-service Internet
promotion company. In the event that we are unable to successfully implement our
growth strategy, our business, results of operations and financial condition
would be materially adversely affected.
WE FACE SIGNIFICANT COMPETITION, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
The market for Internet promotion services is intensely competitive. We
expect competition in our market to continue to intensify as a result of
increasing market size, greater visibility of the market opportunity for
Internet promotion services and minimal barriers to entry. Industry
consolidation may also increase competition. We compete with many types of
companies, including both online and offline promotion companies, large Internet
publishers, search engine and other Internet portal companies, a variety of
Internet-based advertising networks and other companies that facilitate the
marketing of products and services on the Internet. Many of our existing
competitors, as well as a number of potential new competitors, have longer
operating histories, greater name recognition, larger client bases and
significantly greater financial, technical and marketing resources than we do.
This may allow them to compete more effectively and be more responsive to
industry and technological change than us. We may not be able to compete
successfully and competitive pressures may reduce our revenues and result in
increased losses or reduced profits.
Our ability to compete depends on many factors both within and beyond our
control. These factors include:
o the success of the sales and marketing efforts of us and our
competitors;
o the ease of use, performance, price and reliability of promotions
offered by us and our competitors; and
o the timing and market acceptance of new promotion services developed
by us and our competitors.
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IF OUR CLIENTS DO NOT RENEW THEIR AGREEMENTS OR TERMINATE THEM PRIOR TO THEIR
SCHEDULED EXPIRATIONS, OUR REVENUES WILL BE REDUCED.
Our agreements with clients generally have terms ranging from one to
12 months. In addition, substantially all of our agreements permit our clients
to terminate their relationships with us on relatively short notice. Our clients
may not remain clients for the full term of their agreements or renew such
agreements when they expire.
OUR BRAND MAY NOT ACHIEVE THE RECOGNITION NECESSARY TO INCREASE OUR MEMBERSHIP
BASE AND ATTRACT CLIENTS.
To be successful, we must continue to build our brand identity. We believe
that the importance of brand recognition will increase as more companies enter
our market. We may not be successful in our marketing efforts or in increasing
our brand awareness.
SWEEPSTAKES REGULATIONS MAY LIMIT OUR ABILITY TO CONDUCT SWEEPSTAKES OR LIMIT
PARTICIPATION IN OUR SWEEPSTAKES, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
The sweepstakes industry is subject to extensive regulation on the local,
state and national levels, regardless of whether promotions are conducted online
or offline. Congress and many state attorneys general and legislatures recently
have announced regulatory initiatives aimed at the sweepstakes industry due to
recently reported deceptive industry practices. The publicity generated by these
initiatives may adversely affect demand for our services. Although we believe
that additional laws and regulations are likely to be enacted, we cannot predict
what they will be. Any new sweepstakes regulations may have a material adverse
affect on our business, results of operations and financial condition.
Additionally, the Internet is a new medium for sweepstakes, and it is difficult
to predict how existing laws and regulations will be interpreted. See
"Business--Government Regulation and Legal Uncertainties."
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD ADVERSELY AFFECT OUR
BUSINESS.
In order to successfully implement our business plan, we must grow
significantly. Our anticipated future growth will likely place a significant
strain on our management resources and systems. To manage our growth
effectively, we will need to continue to improve our operational, financial and
managerial controls and reporting systems and procedures, and we will need to
continue to expand, train and manage our workforce. If we do not manage our
growth effectively, our business, results of operations and financial condition
would be materially adversely affected.
WE MAY BE UNABLE TO INCREASE OUR SALES FORCE, WHICH WOULD HAVE A MATERIAL
ADVERSE EFFECT ON THE GROWTH OF OUR BUSINESS.
We need to substantially expand our sales force to increase market
awareness and sales of our promotion services. Competition for qualified sales
personnel is intense, and we might not be able to hire the quality and number of
sales personnel we require. New hires require extensive training and typically
take several months to achieve productivity. If we fail to effectively increase
our sales force, our business, results of operations and financial condition
would be materially adversely affected.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO RETAIN KEY PERSONNEL.
Our future success is substantially dependent upon the continued service of
our founders, Steven H. Krein, Chief Executive Officer, and Daniel J. Feldman,
President, and other executive officers. The loss of the services of any of our
executive officers could have a material adverse affect on our business. Many of
our executive officers, including our Chief Financial Officer, have only been
employed by us for a short time. We do not currently have "key person" life
insurance policies on any of our employees. We have employment agreements only
with Messrs. Krein and Feldman. Competition for senior management is intense,
and we may not be successful in attracting and retaining key personnel.
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THE INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND ANY INFRINGEMENT
ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, COULD ADVERSELY AFFECT OUR
BUSINESS AND FINANCIAL CONDITION.
Third parties may infringe or misappropriate our patents, trademarks or
other intellectual property rights, which could have a material adverse effect
on our business, results of operations or financial condition. The actions we
take to protect our trademarks and other proprietary rights may not be adequate.
In addition, the validity, enforceability and scope of protection of proprietary
rights in Internet-related industries is uncertain and still evolving. We have
one patent application and one trademark application pending, but neither have
been granted.
Third parties may assert infringement claims against us. Any claims and any
resulting litigation, should they occur, could subject us to significant
liability for damages. In addition, even if we prevail, litigation could be
time-consuming and expensive to defend, and could result in the diversion of our
time and attention. Any claims from third parties may also result in limitations
on our ability to use the intellectual property subject to these claims unless
we are able to enter into contractual arrangements with the third parties making
these claims, which arrangements may not be available on commercially reasonable
terms.
ANY ACQUISITIONS THAT WE MAKE MAY NOT BE SUCCESSFUL.
We have no experience in making acquisitions. If we make an acquisition, we
could have difficulty in assimilating the acquired company's personnel and
operations. In addition, the key personnel of the acquired business may not
continue to work for us. These difficulties could disrupt our ongoing business,
distract our management and employees, increase our expenses and adversely
affect our results of operations. In addition, effecting acquisitions could
require use of a significant portion of our available cash. Alternatively, 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. Any indebtedness incurred to pay for acquisitions may contain
covenants that limit our operations or our ability to pay dividends.
INTERNATIONAL EXPANSION INVOLVES CERTAIN RISKS.
Our growth strategy depends, in part, on international expansion. We may
not be successful in expanding our operations internationally. We currently have
no experience in developing localized versions of webstakes.com or in marketing
or selling our promotion services internationally. International operations are
subject to risks that may materially adversely affect our business, results of
operations and financial condition. In particular, privacy regulations in some
other countries, including the European Union, are more stringent than in the
United States. These regulations may prohibit the collection of demographic data
on visitors to our promotions, which would have a material adverse affect on our
business. Other risks of international operations are:
o regulatory requirements;
o reduced protection for intellectual property rights in some
countries;
o difficulties and costs of staffing and managing foreign operations;
o political and economic instability; and
o fluctuations in currency exchange rates.
WE FACE A NUMBER OF RISKS ASSOCIATED WITH THE YEAR 2000 PROBLEM, WHICH MAY HARM
OUR BUSINESS.
The failure of our internal systems, or any material third-party systems,
to be Year 2000 compliant would have a material adverse effect on our business,
results of operations and financial condition. Although Frontier GlobalCenter,
Inc., our production server provider, has represented to us that its internal
systems are Year 2000 compliant, their failure to be compliant would adversely
affect our ability to deliver our service. We have not yet devised a Year 2000
contingency plan. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impact of the Year 2000."
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WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR PRODUCTS GIVEN AS PRIZES IN
OUR PROMOTIONS AND FOR PRODUCTS SOLD BY OUR CLIENTS OVER THE INTERNET.
Consumers may sue us if any of the products we give as prizes are
defective, fail to perform properly or injure the user. We may also be sued by
consumers who purchase products that are offered or marketed through
webstakes.com. Although our agreements with our clients typically contain
provisions intended to limit our exposure to these product liability claims,
these limitations may not eliminate our liability. Liability claims could
require us to spend significant time and money in litigation or pay significant
damages. We do not carry product liability insurance. As a result, any of these
claims, whether or not successful, could have a material adverse effect on our
business, results of operations and financial condition.
RISKS RELATED TO THE INTERNET
PRIVACY AND SECURITY CONCERNS MAY CAUSE CONSUMERS NOT TO PARTICIPATE IN OUR
PROMOTIONS, WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
An important feature of the services we provide our clients is our ability
to develop and maintain demographic and other information about consumers
participating in our promotions. Privacy and other security concerns may cause
consumers to resist providing us with personal data, which would reduce the
value of our services. Moreover, privacy and security concerns may inhibit
consumer acceptance of the Internet as a means of commerce. If privacy and other
security concerns of consumers are not adequately addressed, our business would
be materially adversely affected.
OUR GROWTH WILL DEPEND ON THE GROWTH OF INTERNET USAGE.
We depend on continued growth in the use of the Internet by businesses and
consumers. If electronic commerce does not grow or grows more slowly than
expected, the use of the Internet by businesses may decline or grow more slowly
than anticipated. In addition, the acceptance and growth in the use of the
Internet by consumers could be negatively affected by consumer concerns about
the security of electronic commerce transactions and privacy. Even if Internet
usage grows, the Internet infrastructure may not be able to support the demands
placed on it and its performance or reliability may decline.
WE MAY BE UNABLE TO RESPOND TO TECHNOLOGICAL CHANGE EFFECTIVELY.
Our industry is characterized by rapid technological change, frequent new
service introductions, changing consumer demands and evolving industry standards
and practices. Our inability to anticipate and effectively respond to these
changes on a timely basis would materially adversely affect our business,
results of operations and financial condition. Our future success will depend,
in part, on our ability to cost-effectively adapt to rapidly changing
technologies, to enhance existing services and to develop and introduce a
variety of new services to address changing demands of consumers and our clients
on a timely basis.
THE FAILURE OF OUR COMPUTER OR COMMUNICATIONS SYSTEMS MAY ADVERSELY AFFECT OUR
BUSINESS.
Our business depends on the efficient and uninterrupted operation of our
computer and communications systems. Any system failure, including network,
software or hardware failure, that causes an interruption in our service or
decreases the responsiveness of webstakes.com or the web sites of our clients
could materially adversely affect our business. webstakes.com could also be
affected by computer viruses, electronic break-ins or other similar disruptions.
Our insurance policies have coverage limits of $775,000 per occurrence and
therefore may not adequately compensate us for any losses that may occur due to
any interruptions in our service.
Frontier GlobalCenter, Inc. maintains all of our production servers at
their Manhattan Data Center. Our operations depend on Frontier's ability to
protect its own systems and our systems against damage from fire, power loss,
water, telecommunications failures, vandalism and other malicious acts, and
similar unexpected adverse events. Any disruption in the Internet access
provided by Frontier could have a material adverse effect on our business,
results of operations and financial condition.
9
<PAGE>
WE DEPEND ON THE CONTINUED VIABILITY OF THE INTERNET INFRASTRUCTURE.
Our success depends upon the development and maintenance of a viable
Internet infrastructure. The current Internet infrastructure may be unable to
support an increased number of users. The timely development of products such as
high-speed modems and communications equipment will be necessary to continue
reliable Internet access. Furthermore, the Internet has experienced outages and
delays as a result of damage to portions of its infrastructure. Such outages and
delays, including those relating to Year 2000 problems, could adversely affect
webstakes.com and the level of traffic on our customers' web sites. The
effectiveness of the Internet may decline due to delays in the development or
adoption of new standards and protocols designed to support increased levels of
activity. If such new infrastructure, standards or protocols are developed, we
may be required to incur substantial expenditures to adapt our services to the
new technologies.
LAWS AND REGULATIONS PERTAINING TO THE INTERNET MAY ADVERSELY AFFECT OUR
BUSINESS.
There are an increasing number of laws and regulations pertaining to the
Internet. These laws and/or regulations may relate to liability for information
retrieved from or transmitted over the Internet, online content regulation, user
privacy, taxation and the quality of products and services. Moreover, the
applicability to the Internet of existing laws governing intellectual property
ownership and infringement, copyright, trademark, trade secret, obscenity,
libel, employment, personal privacy and other issues is uncertain and
developing. Any new law or regulation pertaining to the Internet, or the
application or interpretation of existing laws, could decrease the demand for
our promotion services, increase our cost of doing business or otherwise have a
material adverse effect on our business, results of operations and financial
condition. Please see "Business--Government Regulation and Legal Uncertainties."
RISKS RELATED TO THIS OFFERING
THIS OFFERING WILL BENEFIT OUR CURRENT STOCKHOLDERS.
Our current stockholders, including members of management, will benefit
from this offering. This offering will result in the creation of a public market
for our common stock, which will enable existing stockholders to liquidate their
investments. Upon the closing of this offering, the unrealized appreciation in
the value of the common stock held by existing stockholders will be
$109.3 million.
AFTER THIS OFFERING, OUR OFFICERS AND DIRECTORS MAY STILL CONTROL US.
Our executive officers and directors will, in the aggregate, beneficially
own approximately 40.6% of the common stock following this offering. These
stockholders may be able to effectively exercise control 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 us,
which could have a material adverse effect on our stock price.
WE MAY REQUIRE ADDITIONAL FINANCING TO EXPAND OUR BUSINESS, AND WE MAY NOT BE
ABLE TO OBTAIN ADDITIONAL FINANCING.
We may need to raise additional funds in the future in order to fund more
aggressive brand promotion or more rapid expansion, to develop new or enhanced
services, to respond to competitive pressures or to make acquisitions.
Additional financing may not be available on terms favorable to us, and may not
be available at all. If adequate funds are not available on acceptable terms, we
may be unable to fund our expansion, successfully promote our brand, take
advantage of acquisition opportunities, develop or enhance services or respond
to competitive pressures, any of which could have a material adverse effect on
our business, results of operations and financial condition. If additional funds
are raised by our issuing equity securities, stockholders may experience
dilution of their ownership interest and the newly issued securities may have
rights superior to those of the common stock. If additional funds are raised by
our issuing debt, we may be subject to limitations on our operations, including
limitations on the payment of dividends. Please see
10
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
FUTURE SALES OF OUR COMMON STOCK BY OUR EXISTING STOCKHOLDERS MAY ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
The market price of our common stock could decline as a result of sales of
shares of common stock by our existing stockholders after this offering, or the
perception that these sales could occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. Please see "Shares Eligible for Future Sale."
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE, AND INVESTORS MAY NOT BE
ABLE TO SELL THEIR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest will lead to the development of a trading
market or how liquid that market might become. The initial public offering price
of the shares will be determined by negotiations between us and the
representatives of the underwriters and may not be indicative of prices that
will prevail in the trading market. The stock market has experienced significant
price and volume fluctuations and the market prices of securities of technology
companies, particularly Internet-related companies, have been highly volatile.
Investors may not be able to resell their shares at or above the initial public
offering price. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against the company issuing the securities. This type of litigation
could result in substantial costs and a diversion of our management's attention
and resources.
11
<PAGE>
USE OF PROCEEDS
The net proceeds from this offering will be approximately $45.0 million, or
$52.6 million if the underwriters exercise their over-allotment option in full,
after deducting underwriting discounts and commissions and estimated expenses of
this offering.
We will use approximately $12.4 million of the net proceeds from this
offering to make payments due to Excite and MatchLogic. Payments to Excite are
for banner advertising on the Excite network and payments to MatchLogic are for
ad serving and targeting and data processing, analysis and enhancement services.
Excite and MatchLogic are subsidiaries of At Home Corporation, one of our
principal shareholders. Please see "Management's Discussion and
Analysis--Liquidity and Capital Resources," "Certain Transactions" and
"Principal Stockholders." We expect to use the balance of the net proceeds for
working capital and general corporate purposes, including advertising and
marketing our brand and expanding our sales and marketing capabilities. A
portion of the net proceeds may be used to acquire or invest in complementary
businesses, technologies, products or services or to invest in geographic
expansion. Although we are not contemplating any specific acquisitions at this
time and no portion of the net proceeds has been allocated for any acquisition,
we evaluate acquisition opportunities on an ongoing basis. Our management will
have broad discretion in the application of the net proceeds. Pending use, we
intend to invest the net proceeds in interest-bearing, investment-grade
instruments, certificates of deposit or direct or guaranteed obligations of the
United States.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will be dependent upon our
financial condition, operating results, capital requirements and other factors
that the board of directors deems relevant.
12
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. Our
capitalization is presented:
o on an actual basis; and
o on an as adjusted basis to reflect the sale of 3,575,000 shares of
common stock in this offering, after deducting underwriting
discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Notes payable (excluding current portion)....................................... $ 33 $ 33
Class B mandatorily redeemable convertible preferred stock, par value $.01,
6,700,000 shares authorized; and 6,666,668 shares issued and outstanding
(actual), 0 shares authorized or issued (as adjusted)......................... 40,000 --
Stockholders' equity (deficit):
Preferred stock, no par value, 1,000,000 shares authorized (actual and as
adjusted); 0 shares issued (actual and as adjusted)........................ -- --
Common stock, par value $.01, 50,000,000 shares authorized (actual and as
adjusted); 3,999,576 shares issued and outstanding (actual);
14,241,244 shares issued and outstanding (as adjusted)..................... 40 142
Additional paid-in capital.................................................... (16,977) 67,967
Accumulated deficit........................................................... (6,255) (6,255)
Deferred compensation......................................................... (157) (157)
------- -------
Total stockholders' equity (deficit)....................................... (23,349) 61,697
------- -------
Total capitalization..................................................... $16,684 $61,730
------- -------
------- -------
</TABLE>
We expect there to be 14,241,244 shares of common stock outstanding after
this offering. In addition to the shares of common stock to be outstanding after
this offering, we may issue additional shares of common stock. See "Prospectus
Summary--The Offering."
13
<PAGE>
DILUTION
As of June 30, 1999, our net tangible book value was $16.7 million, or
$1.56 per share of common stock. "Net tangible book value" per share equals our
total tangible assets minus our total liabilities, divided by the number of
shares of common stock outstanding. As of June 30, 1999, our pro forma net
tangible book value, as adjusted for the sale of the 3,575,000 shares in this
offering, after deducting the underwriting discounts and commissions and
estimated offering expenses, would have been approximately $61.7 million, or
$4.33 per share. This represents an immediate increase of $2.77 per share to
existing stockholders and an immediate dilution of $9.67 per share to new
investors purchasing shares in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.................................... $14.00
Net tangible book value per share as of
June 30, 1999......................................................... $ 1.56
Increase per share attributable to new investors......................... 2.77
------
Net tangible book value per share after this offering...................... 4.33
------
Dilution per share to new investors........................................ $ 9.67
------
------
</TABLE>
The following table summarizes, as of June 30, 1999, the differences
between the total consideration paid and the average price per share paid by
existing stockholders (excluding purchasers of the class B mandatorily
redeemable convertible preferred stock), purchasers of the class B mandatorily
redeemable convertible preferred stock as converted into common stock upon the
completion of this offering and new investors purchasing shares in this offering
with respect to the number of shares of common stock purchased from us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------------------ ------------------------------------------
NUMBER PERCENT AMOUNT PERCENT
---------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Existing stockholders (excluding
class B purchasers)............. 3,999,576 28.1% $ 30,029 0.1%
Purchasers of class B mandatorily
redeemable convertible preferred
stock........................... 6,666,668 46.8 40,000,000 44.3
New investors..................... 3,575,000 25.1 50,050,000 55.6
---------- ------ ----------- -----
Total........................... 14,241,244 100.0% $90,080,029 100.0%
---------- ------ ----------- -----
---------- ------ ----------- -----
<CAPTION>
AVERAGE PRICE
PER SHARE
-------------
<S> <C>
Existing stockholders (excluding
class B purchasers)............. $ 0.01
Purchasers of class B mandatorily
redeemable convertible preferred
stock........................... $ 6.00
New investors..................... $ 14.00
Total...........................
</TABLE>
None of the foregoing tables or calculations assume that any options or
warrants outstanding as of June 30, 1999 will be exercised. As of June 30, 1999,
we had 1,126,100 options and 221,683 warrants outstanding with a weighted
average exercise price of $6.63 and $6.00, respectively, per share. New
investors in this offering will suffer further dilution to the extent that these
options or warrants are exercised. If all outstanding options and warrants were
exercised on the date of the closing of this offering, new investors purchasing
shares in this offering would suffer total dilution of $10.06 per share.
14
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read together with the
financial statements and the notes to those statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this prospectus. The statement of operations data for the period
from January 8, 1996 (inception) through December 31, 1996 and for the years
ended December 31, 1997 and 1998, and the balance sheet data as of December 31,
1997 and 1998, are derived from our audited financial statements included in
this prospectus. The balance sheet data as of December 31, 1996 has been derived
from our audited financial statements not included in this prospectus. Our
historical financial statements for the six months ended June 30, 1998 and 1999
are unaudited, and in our opinion include all adjustments, consisting of normal
and recurring adjustments, necessary for a fair presentation of the results for
the unaudited period. You should not rely on interim results as being indicative
of results for the full year. Historical results are not necessarily indicative
of the results to be expected in the future.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 8, 1996 YEAR ENDED DECEMBER 31, JUNE 30,
(INCEPTION) TO ------------------------ -----------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ---------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 80 $1,618 $ 4,799 $ 2,263 $ 3,054
Operating expenses:
Product development.................. 59 181 549 222 236
Sales and marketing.................. 125 1,091 3,619 1,491 4,194
General and administrative........... 109 536 1,969 773 2,273
Non-cash financial advisory
services........................... -- -- -- -- 796
------- ------ -------- ------- --------
Total operating expenses........ 293 1,808 6,137 2,486 7,499
------- ------ -------- ------- --------
Loss from operations.................... (213) (190) (1,338) (223) (4,445)
Other income (expense).................. (8) (37) (76) (25) 52
------- ------ -------- ------- --------
Net loss................................ $ (221) $ (227) $ (1,414) $ (248) $ (4,393)
Deemed dividend on redemption of Class A
mandatorily redeemable convertible
preferred stock...................... (8,712)
------- ------ -------- ------- --------
Net loss attributable to common
stockholders......................... $ (221) $ (227) $ (1,414) $ (248) $(13,105)
------- ------ -------- ------- --------
------- ------ -------- ------- --------
Basic and diluted net loss per share
attributable to common
stockholders......................... $(0.06) $(0.05) $ (0.27) $ (0.05) $ (2.36)
------- ------ -------- ------- --------
------- ------ -------- ------- --------
Weighted average shares of common stock
used in computing basic and diluted net
loss per share.......................... 3,999,576 4,278,916 5,181,356 4,999,176 5,562,617
------- ------ -------- ------- --------
------- ------ -------- ------- --------
Pro forma basic and diluted net loss per
share................................ $ (0.12) $ (1.23)
-------- --------
-------- --------
Shares of common stock used in computing
pro forma basic and diluted net loss per
share................................... 11,848,024 10,666,244
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------- JUNE 30,
1996 1997 1998 1999
------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................................. $ 24 $ 85 $ 18 $ 12,973
Working capital...................................................... (249) (149) (1,124) 15,445
Total assets......................................................... 134 476 1,196 18,311
Notes payable (excluding current portion)............................ -- -- 67 33
Class B mandatorily redeemable convertible preferred stock........... -- -- -- 40,000
Stockholders' equity (deficit)....................................... (191) 125 (753) (23,349)
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements included
in this prospectus. This discussion includes forward-looking statements that
involve risks and uncertainties. Please see "Risk Factors."
OVERVIEW
To date, substantially all of our revenues have been derived from the sale
of promotion services. We expect to derive substantially all of our revenues
from the sale of promotion services for the foreseeable future.
We recognize revenues from promotion services ratably over the period
during which we provide promotion services, provided that no significant
obligations remain and collection of the resulting receivable is reasonably
assured. Payments received from clients prior to providing promotion services
are recorded as deferred revenue and are recognized as revenue ratably as the
services are provided. We generally guarantee a minimum number of impressions,
or times that the client's name, logo or other identifier appears in pages
viewed by visitors to webstakes.com, and/or times that our visitors are
delivered to our client's web site. To the extent that these minimum guarantees
are not met, we defer recognition of the corresponding revenues until the
guaranteed levels are achieved.
Revenues include revenues from barter transactions in which we exchange
promotion services for advertising and prizes. Revenues from these barter
transactions are recorded as promotion revenues at the lower of the estimated
fair value of the goods or services received or delivered and are recognized
when we deliver the promotion services. Advertising expenses related to barter
are recognized when our advertisements are run on the reciprocal web site, which
is typically in the same period as the corresponding barter revenues are
recognized. Prize expenses related to barter are recognized when prizes are
awarded. In 1998, barter revenues were 42% of our total revenues, and for the
six months ended June 30, 1999, 29% of total revenues. We expect that, as our
cash revenues grow, barter as a percentage of our revenues will decrease.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Revenues. Revenues primarily result from the sale of promotion services.
Revenues increased from approximately $2.3 million for the six months ended
June 30, 1998 to $3.1 million for the six months ended June 30, 1999. We
recorded $945,000 and $877,000 of barter revenues during these same periods,
representing approximately 42% and 29% of total revenues during those periods.
The period-to-period growth in revenues was primarily attributable to an
increase in promotion services sold.
Product Development Expenses. Product development expenses include the
personnel costs associated with the design and development of webstakes.com, our
promotions infrastructure and technology, as well as software licensing costs.
Product development costs were $222,000 for the six months ended June 30, 1998,
or 9.8% of total revenues, as compared to approximately $236,000 for the six
months ended June 30, 1999, or 7.7% of total revenues. Historically, we expensed
our product development costs as incurred. However, in the first quarter of
1999, we began to capitalize the labor costs of improvements and betterments to
our software under Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Such improvements and
betterments include improving the functionality and navigability of
webstakes.com. Therefore, we have capitalized $196,000 of product development
expenses for the six months ended June 30, 1999 and are amortizing these costs
over three years. We believe that timely deployment of new and enhanced
promotion tools and technology is critical to attaining our strategic
objectives. Accordingly, we intend to continue recruiting and hiring experienced
product development personnel and to make additional investments in product
development.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of online advertising costs, salaries and commissions of sales and
marketing personnel, public relations costs and other marketing
16
<PAGE>
expenses. Sales and marketing expenses were approximately $1.5 million for the
six months ended June 30, 1998, or 65.9% of total revenues, and approximately
$4.2 million for the six months ended June 30, 1999, or 137.3% of total
revenues. The period-to-period increase in sales and marketing expenses was
primarily attributable to the expansion of online advertising and other
promotional expenditures, as well as an increase in the number of sales and
marketing personnel and related expenses. We expect that sales and marketing
expenses will continue to increase in absolute dollars for the foreseeable
future as we increase expenditures for sales, marketing and brand promotion, and
we hire additional sales and marketing personnel. We expect that sales and
marketing expenses will follow the pattern for a growth company, increasing
initially and then, once a certain revenue base is achieved, decreasing, as a
percentage of revenue.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for general corporate functions,
including finance, accounting and facilities, and fees for professional
services. General and administrative expenses were approximately $773,000 for
the six months ended June 30, 1998, or 34.2% of total revenues, and
$2.3 million for the six months ended June 30, 1999, or 74.4% of total revenues.
The increase in general and administrative expenses was primarily attributable
to increased salaries and related expenses associated with hiring additional
personnel in the finance and operations departments, and increased professional
fees and facilities expenses to support the growth of our operations. The
increase was also due in part to an increase in the allowance for doubtful
accounts. This increase was the result of an increase in cash revenues, an
increase in the percentage of cash revenues reserved for doubtful accounts and
the establishment of a reserve for one account for which collection is in doubt.
We expect to incur additional general and administrative expenses as we hire
additional personnel and to incur additional costs related to the growth of our
business and operation as a public company. We expect these expenses to include
facilities expansion, directors' and officers' liability insurance, investor
relations programs and professional service fees. In addition, we will incur
bonus expenses of $350,000 in the quarter in which this offering is completed.
See "Management--Employment Agreements." Accordingly, we anticipate that general
and administrative expenses will continue to increase in absolute dollars. We
expect that general and administrative expenses will follow the pattern for a
growth company, increasing initially and then, once a certain revenue base is
achieved, decreasing, as a percentage of revenue.
Non-Cash Financial Advisory Services Expenses. Non-cash financial advisory
services expenses relate to stock options and warrants granted to third parties
for consulting and financial advisory services in the six months ended June 30,
1999. These stock options and warrants were fully vested at the date of
issuance. The expenses were calculated using the Black Scholes method.
Interest, Net. Interest income, net of expense, consists primarily of
interest earned on cash balances and the interest expense on our outstanding
debt. We incurred net interest expense of $25,000 for the six months ended
June 30, 1998 and net interest income of $52,000 for the six months ended
June 30, 1999.
INCEPTION PERIOD AND YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1998
Revenues. Revenues were approximately $80,000 for the period from January
8, 1996 to December 31, 1996 (the "Inception Period"), $1.6 million for 1997 and
$4.8 million for 1998. We recorded no barter revenues during the Inception
Period and approximately $485,000 and $2.0 million of barter revenues during
1997 and 1998, representing approximately 30% and 42% of total revenues during
those periods. The period-to-period growth in revenues was primarily
attributable to an increase in promotion services sold.
Product Development Expenses. Product development expenses were
approximately $59,000 for the Inception Period, or 74.2% of total revenues,
$181,000 for 1997, or 11.2% of total revenues, and $549,000 for 1998, or 11.4%
of total revenues. The increase in these expenses was primarily attributable to
increased staffing levels required to support the development and enhancement of
webstakes.com and related back-office systems.
Sales and Marketing Expenses. Sales and marketing expenses were
approximately $125,000 for the Inception Period, or 156.8% of total revenues,
$1.1 million for 1997, or 67.4% of total revenues, and $3.6 million for 1998, or
75.4% of total revenues. The period-to-period increases in sales and marketing
expenses were primarily attributable to the initiation and expansion of online
advertising and other
17
<PAGE>
promotional expenditures, as well as an increase in the number of sales and
marketing personnel and related expenses.
General and Administrative Expenses. General and administrative expenses
were approximately $109,000 for the Inception Period, or 136.5% of total
revenues, $536,000 for 1997, or 33.1% of total revenues, and $2.0 million for
1998, or 41.0% of total revenues. The increases in general and administrative
expenses were primarily attributable to increased salaries and related expenses
associated with hiring additional personnel, and increased professional fees and
facility expenses to support the growth of our operations.
Interest Expense, Net. We incurred net interest expense of approximately
$8,000 for the Inception Period, $37,000 for 1997 and $76,000 for 1998. The
increase was primarily attributable to the increase in the principal amount of
outstanding debt obligations incurred to fund our expanding operations.
Income Taxes. No income tax benefit is reflected in the financial
statements as a valuation allowance was provided for deferred tax assets
relating to net operating losses. As of December 31, 1998, we had approximately
$1.6 million of federal net operating loss carryforwards for tax reporting
purposes to offset future taxable income. Our federal net operating loss
carryforwards expire in the years 2011 through 2018.
QUARTERLY RESULTS OF OPERATIONS DATA
The following table sets forth certain unaudited quarterly statement of
operations data for each of the ten quarters in the period ended June 30, 1999.
In our opinion, this data has been prepared on the same basis as the audited
financial statements appearing in this prospectus, and reflect all necessary
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of this data. The results of operations for any quarter are
not necessarily indicative of the results of operations for a full year or any
future period. We expect our quarterly operating results to vary significantly
in the future. See "Risk Factors--Our quarterly operating results may fluctuate,
which may cause the price of our common stock to decrease."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998 1998 1998 1999 1999
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $130 $314 $281 $893 $ 1,067 $1,196 $ 1,250 $1,286 $ 1,319 $1,735
Operating expenses:
Product
development........... 46 12 24 99 102 120 166 161 13 223
Sales and marketing...... 130 217 266 478 691 800 1,094 1,034 1,371 2,823
General and
administrative........ 58 41 187 250 326 447 529 667 833 1,440
Non-cash financial
advisory services..... -- -- -- -- -- -- -- -- -- 796
----- ---- ----- ---- ------- ------ ------- ------ ------- --------
Total operating expenses... 234 270 477 827 1,119 1,367 1,789 1,862 2,217 5,282
----- ---- ----- ---- ------- ------ ------- ------ ------- --------
Income (loss) from
operations............... (104) 44 (196) 66 (52) (171) (539) (576) (898) (3,547)
Other income (expense),
net...................... (18) (15) (12) 8 (10) (15) (25) (26) 14 38
----- ---- ----- ---- ------- ------ ------- ------ ------- --------
Net income (loss).......... $(122) $ 29 $(208) $ 74 $ (62) $ (186) $ (564) $ (602) $ (884) $(3,509)
----- ---- ----- ---- ------- ------ ------- ------ ------- --------
----- ---- ----- ---- ------- ------ ------- ------ ------- --------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the
private placement of equity securities and the incurrence of indebtedness. As of
June 30, 1999, we had $13.0 million in cash and cash equivalents.
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Net cash used in investing activities was approximately $203,000 for 1997,
$301,000 for 1998 and $352,000 for the six months ended June 30, 1999. As of
June 30, 1999, our principal capital commitments consisted of obligations
outstanding under operating and capital leases. All net cash used in investing
activities was used for capital expenditures, primarily the acquisition of
equipment. We have spent approximately $1.1 million on capital expenditures
since inception through June 30, 1999. We estimate that our capital expenditures
will be approximately $7.0 million for 1999. We currently expect that our
principal capital expenditures through 1999 will relate to improvements to our
technical infrastructure and expansion of our headquarters.
Net cash provided by financing activities was approximately $1.7 million
for 1998 and $19.6 million for the six months ended June 30, 1999. Net cash
provided by financing activities in 1998 was primarily attributable to
incurrence of indebtedness and, to a lesser extent, borrowings under a secured
credit facility related to equipment financing. We borrowed $200,000 available
under a credit facility in December 1997 to purchase equipment. The loan bears
interest at an annual rate equal to the prime rate plus 3%. Payments of
principal and any accrued interest are due and payable in 36 monthly
installments beginning January 1, 1998. To date, we have made all payments due
under this equipment loan.
In March 1999, we entered into a financing agreement with a leasing company
for the leasing of equipment in an amount up to $1.0 million in operating and/or
capital leases, secured by certain accounts receivable and the equipment
purchased pursuant to the agreement. To date, we have leased approximately
$812,000 of equipment under the agreement. We expect the leases to have terms of
up to three years and the interest rates under the leases to range from 8 1/2%
to 13%. We are required to make monthly payments of interest and principal under
the leases.
In June 1999, we entered into a two-year sponsorship agreement with Excite
under which Excite agreed to promote webstakes.com through ad banner placements
and links to webstakes.com and its promotions on Excite.com, WebCrawler.com and
Classified2000.com and through the use of a webstakes.com personalized front
page made available by Excite. As part of this agreement, we received a
guarantee of a total number of impressions per year. The fee to be paid to
Excite under this agreement is $5.6 million, $1.3 million of which has been paid
and the balance of which is due 10 days following the completion of this
offering. See "Use of Proceeds." At Home Corporation, the parent company of
Excite, is one of our principal stockholders.
In June 1999, we entered into a services agreement with MatchLogic, Inc., a
wholly owned subsidiary of Excite, pursuant to which MatchLogic will provide ad
serving and targeting, data processing, analysis and enhancement services to
Webstakes.com. The term of the agreement is two years. The fee to be paid to
MatchLogic under this agreement is $13.1 million, $5.0 million of which has been
paid and the balance of which is due 10 days following completion of this
offering. See "Use of Proceeds."
In June 1999, we redeemed all outstanding shares of class A mandatorily
redeemable convertible preferred stock and 1,714,608 shares of common stock for
an aggregate amount of $24.0 million. To finance the redemption and to provide
working capital, we issued shares of new class B mandatorily redeemable
convertible preferred stock to a group of investors, including among others, At
Home Corporation, XL Ventures, a subsidiary of Big Flower Holdings, and
Travelers, for an aggregate purchase price of $40.0 million. Upon completion of
this offering, the class B mandatorily redeemable convertible preferred stock
will automatically convert into 6,666,668 shares of common stock. After this
offering, the class A mandatorily redeemable convertible preferred stock and
class B mandatorily redeemable convertible preferred stock will not be available
for reissue. The excess of the consideration paid to the holders of the class A
mandatorily redeemable convertible preferred stock over the carrying amount of
the class A mandatorily redeemable convertible preferred stock represents a
deemed dividend or return to the holders of the class A mandatorily redeemable
convertible preferred stock of $8,712,352.
Our ability to generate significant revenues is uncertain. We have incurred
substantial costs and expenses to create, launch and enhance webstakes.com and
to grow our business. We incurred net losses of approximately $221,000 for the
Inception Period, $227,000 for 1997, $1.4 million for 1998 and $4.4 million for
the six months ended June 30, 1999. At June 30, 1999, we had an accumulated
deficit of approximately $6.3 million. We expect losses from operations and
negative cash flow from operating activities to continue for the foreseeable
future. As a result of our expansion plans, we expect our operating expenses to
increase
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significantly in the next several years. Although we have experienced revenue
growth in recent periods, our revenues may not remain at their current level or
increase in the future. If our revenues do not increase and if our spending
levels are not adjusted accordingly, we may not generate sufficient revenues to
achieve profitability or obtain additional equity, debt or lease financing. Even
if we achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis in the future.
We engage in barter transactions to manage liquidity. Our focus to date has
been to build brand awareness without using cash resources since our available
cash resources have been limited. We expect to enter into fewer barter
transactions as we have greater cash resources.
We believe that the net proceeds of this offering, together with available
funds, will be sufficient to meet our anticipated needs for at least the next
12 months. Thereafter, we may need to raise additional funds in the future in
order to fund more aggressive brand promotion or more rapid expansion, to
develop new or enhanced promotional services, to respond to competitive
pressures or to make acquisitions. There can be no assurance that any required
additional financing will be available on terms favorable to us, or will be
available at all. If additional funds are raised through the issuance of our
equity securities, stockholders may experience dilution of their ownership
interest and the new securities may have rights superior to those of the holders
of the common stock. If additional funds are raised by the issuance of debt, we
may be subject to certain limitations on our operations and our ability to pay
dividends. If adequate funds are not available or not available on acceptable
terms, we may be unable to fund our expansion, successfully promote our brand
name, develop or enhance our services, respond to competitive pressures or take
advantage of acquisition opportunities. Any of these events could have a
material adverse effect on our business, results of operations or financial
condition.
IMPACT OF THE YEAR 2000
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software may need to be upgraded to
comply with Year 2000 requirements or risk system failure or miscalculations
causing disruptions of normal business activities.
State of Readiness. We have recently completed upgrading our technology
infrastructure. We consider all of our mission critical systems to be Year 2000
compliant. Mission critical systems are defined as those systems that impact the
delivery of services to our customers, members and internal business units. Many
of these systems rely on the readiness and Year 2000 compliance of our strategic
telecommunications partners, Frontier and Intermedia Communications. We have
received Year 2000 readiness disclosure statements from our telecommunications
partners and we are comfortable with the progress they have made toward
compliance. However, in the event there is a failure of service from our primary
facility located at Frontier, we are prepared to move our primary operations to
our internal hosting facility. This facility is located at our offices with
telecommunications services provided by Intermedia. We are in the process of
building an additional data center located on the west coast with
telecommunications provided by a different vendor. This process is scheduled to
be completed by the beginning of the fourth quarter of 1999. This will add an
additional layer of redundancy. We have requested Year 2000 readiness
disclosures from NBC and Excite and we are awaiting a response.
Costs. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the operating costs associated with
time spent by employees in the evaluation process and Year 2000 compliance
matters generally. At this time, we do not possess the information necessary to
estimate the potential costs of revisions to our software or the replacement of
third-party software, hardware or services that are determined not to be Year
2000 compliant. Although we do not anticipate that these expenses will be
material, such expenses, if higher than anticipated, could have a material
adverse effect on our business, results of operations or financial condition.
Risks. We are not currently aware of any Year 2000 compliance problems
relating to our systems that would have a material adverse effect on our
business, results of operations and financial condition. However,
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we may discover Year 2000 compliance problems in our systems that require
substantial revision. In addition, third-party software, hardware or services
incorporated into our material systems may need to be revised or replaced, all
of which could be time-consuming and expensive. Our failure to fix or replace
our internally developed proprietary software or third-party software, hardware
or services on a timely basis could result in lost revenues, increased operating
costs, the loss of customers and other business interruptions, any of which
could have a material adverse effect on our business, results of operations and
financial condition. Moreover, the failure to adequately address Year 2000
compliance issues in our internally developed proprietary software could result
in claims of mismanagement, misrepresentation or breach of contract and related
litigation, which could be costly and time-consuming to defend.
We are heavily dependent on a significant number of third-party vendors to
provide both network services and equipment. A significant Year 2000-related
disruption of the network, services or equipment that third-party vendors
provide to us could cause visitors to webstakes.com and our clients to consider
seeking alternate providers or cause an unmanageable burden on our technical
support, which in turn could materially adversely affect our business, financial
condition and results of operations.
In addition, governmental agencies, utility companies, Internet access
companies and others outside of our control may not be Year 2000 compliant. The
failure by these entities to be Year 2000 compliant could result in a systemic
failure beyond our control, such as a prolonged Internet, telecommunications or
electrical failure, which could also prevent us from delivering our services to
our clients and visitors, decrease the use of the Internet or prevent users from
accessing our web site, which could have a material adverse effect on our
business, results of operations and financial condition.
Contingency Plan. We have not yet fully developed a contingency plan to
address situations that may result if our systems fail. In the event there are
multiple failures among all of our telecommunications partners, our web site and
services will be unavailable to our members and clients until one of our three
telecommunications vendors resolves its Year 2000 problems.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities." Statement of Position 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. Since we have
historically expensed these costs as incurred, the adoption of this standard is
not expected to have a significant impact on our results of operations or
financial position.
In February 1998, FASB issued SFAS No. 132, "Employer's Disclosures about
Pension and Other Postretirement Benefits" ("SFAS No. 132"), which revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS No. 132 does not change the measurement or recognition of those plans. SFAS
No. 132 is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 132 has not had an impact on our results of operations,
financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Statement of Financial Accounting
Standards No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. We do not expect the adoption of this statement to have a
significant impact on our results of operations or financial position.
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BUSINESS
OVERVIEW
Webstakes.com, Inc. is a leading online sweepstakes promotion company. We
integrate sweepstakes, contests and similar promotional events with direct
marketing tools and a proprietary membership database of more than 1.7 million
consumers. We make our promotions available without charge to consumers through
our web site, webstakes.com, our clients' web sites and consumers' personal home
pages. We generate revenues through the sale of promotion services that allow
our clients to cost-effectively identify and communicate with potential
customers, increase sales and foster brand awareness. We are building on our
sweepstakes expertise to provide an integrated, comprehensive online promotion
solution. We have recently entered into agreements with NBC and Excite, which we
believe will increase awareness of the Webstakes.com brand and attract
additional visitors to webstakes.com.
INDUSTRY BACKGROUND
Promotions and Direct Marketing
Promotions and direct marketing are used to stimulate consumer spending.
Historically, most marketing communications dollars were spent on mass
advertising, but in recent years marketers have shifted their spending toward
direct marketing activities.
Promotions are designed to stimulate an immediate action which could
include a product sale, a request for further information or a visit to a place
of business for the purchase of a specific product or service. American
businesses spent $85.4 billion on promotion marketing in 1998, a 7.6% increase
over 1997, according to Promo Magazine. Promotions include:
o sweepstakes
o premium incentives
o product samples
o coupons
o points and loyalty programs
o rebates (cash incentives paid upon a purchase)
o games
o contests
Direct marketing is the delivery of a customized message to a defined
audience. Unlike mass advertising (such as television, print and radio), direct
marketing enables the measurement of the response to a message. Companies can
measure the response to specific direct marketing programs or promotions and
analyze the financial return on marketing expenditures. Direct marketing
programs can then be improved and tailored with a degree of precision that is
generally not possible with mass marketing.
According to the Direct Marketing Association, direct marketing
expenditures in the United States reached approximately $163 billion in 1998 and
are estimated to increase at a compound annual rate of over 6% from 1998 to
2003. Forrester Research, Inc. projects that by 2000 direct marketing
expenditures will be three times larger than expenditures for brand advertising.
Promotions and Direct Marketing on the Internet
The Internet has emerged as an important medium for collecting and
exchanging information, communicating and conducting business worldwide.
International Data Corporation estimates that the number of Internet users will
grow from approximately 159 million worldwide in 1998 to approximately 410
million worldwide by the end of 2002, and that the value of transactions on the
Internet will increase from approximately $50 billion in 1998 to approximately
$1.3 trillion in 2003.
We believe that the Internet is a compelling medium for direct marketing
promotions. The Internet has introduced tools for collecting consumer data,
measuring results, interacting with customers and marketing on a personalized
basis that are not available in traditional media. Direct marketing
traditionally has been
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conducted through telemarketing or printed mail, which require significant
investments in paper, printing, postage and/or personnel. Use of the Internet
reduces these costs. The Internet also allows marketers to track consumers'
demographic characteristics, purchasing histories and product preferences in
order to tailor their product offerings to consumers more likely to respond to
these offerings. We believe that marketers can achieve higher consumer response
rates online than through traditional media. The Internet enables marketers to
change promotional messages rapidly and cost-effectively. For example, online
marketers can measure the response rate of a promotion by sending out several
sample test promotions with variable prices, graphics and text to small groups
of consumers. Based on the responses to a sample, an online promotion can be
modified quickly for less than the cost to modify a printed promotion.
Forrester Research, Inc. estimates that online promotions generate three to
five times the consumer response rates of traditional promotions. Forrester also
reports that 88% of retailers and marketers surveyed found that online
promotional efforts have met or exceeded their expectations and 80% of those
surveyed planned to increase their online promotional spending in the next year.
Based on this survey, Forrester estimates that 50% to 70% of total Internet
marketing budgets will be spent on promotions over the next five years, compared
to less than 15% of Internet marketing budgets currently being spent on
promotions.
WEBSTAKES.COM SERVICES FOR CONSUMERS
We offer consumers the opportunity to win free merchandise and receive
discounts and special offers from our clients. Consumers can access these
opportunities from webstakes.com where a variety of weekly sweepstakes and
contests are available 24 hours a day, seven days a week. Consumers can also
access our promotions on the web sites of many of our clients. Additionally, our
Affiliate Program gives consumers the opportunity to offer visitors to their
personal home pages the chance to enter a special monthly sweepstakes.
Our Web Site
webstakes.com is our web site where consumers have an opportunity to
explore products and special offers presented by our clients and to enter
sweepstakes to win product and cash prizes, free travel, coupons and gift
certificates. At their request, consumers may also receive additional offers and
information about clients' products through our weekly electronic newsletter,
the Webstakes Update, and individual emails. Approximately 800,000 of our
members have opted to receive our newsletter. Our technology, which we have
branded "iDialog," allows us to tailor emails based on the demographic profiles
and interests of the members to whom they are sent.
Our Prize Club page on webstakes.com offers a variety of prizes in
different interest categories. Each category is designed to appeal to consumers
with a specific interest and includes sweepstakes for prizes related to the
theme of the interest category. Presently, there are 16 Prize Club interest
categories:
o Auto
o Books & Music
o Business & Finance
o Campus
o Computing Products
o Family & Kids
o Fashion & Beauty
o Games & Casino
o Gifts, Flowers & Food
o Home Sweet Home
o House & Home
o Mind Your Business
o Sports & Health
o Travel & Outdoors
o TV, Movies & Video
o Webstakes@The Movies
In addition, several special promotions run at different times throughout the
year on webstakes.com. These include promotions designed around holidays such as
Mother's Day and Christmas and events such as the Super Bowl, movie premiers and
the Academy Awards.
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Visitors to webstakes.com enter a sweepstakes either by selecting a prize,
by selecting a special promotion or by selecting an interest category and then
selecting a sponsor within that category. At any given time, there are typically
sweepstakes for over 100 prizes available on webstakes.com. The following is a
representative list of prizes in each category:
AUTO
$150 Eddie Bauer Gift Certificate
Jeep Boom Box
$150 Sharper Image Gift Certificate
Panasonic CD Player/Receiver
Blaupunkt Car Stereo
$150 CDNOW Gift Certificate
$150 Sears Gift Certificate
Kid's Pedal Car
BOOKS & MUSIC
Pilgrim Heights Bookcase
$150 Barnes & Noble Gift Certificate
Rocket eBook
$150 CDNOW Gift Certificate
Flat Fisher Stereo
Panasonic CD Player
JVC 200-Disk Changer
$150 Cybershop Gift Certificate
BUSINESS & FINANCE
Panasonic Cordless Phone
Sony CDR-W Drive
Canon Copier
$150 Staples Gift Certificate
Epson Printer
Palm III
Brother Fax Machine
HP OfficeJet All-In-One Printer
CAMPUS
$150 Amazon.com Gift Certificate
Panasonic TVCR
AIWA Stereo
Zip 250 Drive
Motorola Talk About Plus
Microtek Scanner
$150 Crate & Barrel Gift Certificate
Panasonic CD Radio Cassette Player
COMPUTING PRODUCTS
Minolta Digital Camera
Sony Digital Recorder
Epson Printer
Palm III
17" ViewSonic Color Monitor
HP Jornada Handheld PC
Microtek Scanner
Kodak Digital Video Camera
FAMILY & KIDS
$150 Sears Gift Certificate
$150 Home Depot Gift Certificate
$150 KB Toys Gift Certificate
Toshiba DVD Player
Brother Sewing Machine
Crosley Radio
Gfactory Watch
$150 Bed Bath & Beyond Gift
Certificate
FASHION & BEAUTY
Citizen Watch
$150 Eddie Bauer Gift Certificate
$150 Victoria's Secret Gift
Certificate
$150 Crabtree & Evelyn Gift
Certificate
$150 Fragrance Net Gift Certificate
$150 Express Gift Certificate
$150 Structure Gift Certificate
$150 Foot Locker Gift Certificate
GAMES & CASINO
Radio Controlled Submarine
Polaroid Camera
Samsung TV
Electronic Dart Board
Craps Professor
$150 Sharper Image Gift Certificate
Nintendo 64 with Air Racer
$150 Eddie Bauer Gift Certificate
GIFTS, FLOWERS & FOOD
Kitchen Aid Mixer
3 Months PC Flowers
Kosta Boda Giftware
Digital Espresso Machine
Harry and David Fruit
Omaha Steaks
Godiva Chocolates
HOME SWEET HOME
$3,000 Home Makeover Gift Certificate
Craftsman Cordless Drill
Garden Tote Bag and Gloves
HOUSE & HOME
Fuji Camera
Panasonic Microwave
Kitchen Aid Mixer
$150 Home Depot Gift Certificate
Krups Caffe
Air Conditioner
$150 Sears Gift Certificate
$150 Sharper Image Gift Certificate
MIND YOUR BUSINESS
Gateway Profile Computer with Printer
Sharp Mobile Organizer
Cobra Cordless Phone
SPORTS & HEALTH
Mongoose Crossway Bike
Samsung 27" TV
$150 Foot Locker Gift Certificate
Sony Radio/CD Player
Diablo Backpacks
Shockwave CD Jogger
Juiceman Juicer
$150 Sears Gift Certificate
TRAVEL & OUTDOORS
Sony Stereo
Minolta Binoculars
$150 Sears Gift Certificate
Kodak Digital Video Camera
GPS Tracker and Case
Large Hammock
Performer Grill
$150 Sports Authority Gift
Certificate
TV, MOVIES & VIDEO
Dual Deck VCR
Philips DVD
$150 Blockbuster Gift Certificate
JVC Cordless Headphones
Samsung Camcorder
JBL Home Theater System
RCA Handheld TV
9" Panasonic TVCR
WEBSTAKES@THE MOVIES
Sony DVD Player
GO Package
Panasonic DVD Player
DVD Movie A Day
The Savings Club is a section of webstakes.com that provides consumers with
savings opportunities in different interest categories. Recently, the Savings
Club has been expanded to integrate Prize Club
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promotions with special savings on products related to a particular theme, such
as an event or holiday. For example, when visitors entered a recent Mother's Day
prize promotion, they were taken to a collection of special offers for Mother's
Day products from a number of clients.
Membership Registration and Prize Entry
Visitors to webstakes.com must register as members to participate in our
promotions. Visitors become members by completing our one-time registration form
that requires them to provide certain demographic information. Once this
information is provided, a visitor becomes a lifetime member and never has to
provide the registration information again, other than to update any changed
information.
To enter a promotion, members click on an interest category, a prize or a
special promotion, and they are presented with a page that displays the logos
and text messages of our clients that are sponsoring the particular interest
category, prize or promotion. After selecting one of these logos, members are
offered the opportunity to enter a sweepstakes for any of the products in the
category. At this point in the entry process, members may be asked if they want
to receive offers for products or services from the client whose logo they
selected when entering the sweepstakes or another question related to the chosen
prize or client. Responses to these questions are stored in our database.
Members may enter the sweepstakes by answering the question and clicking on the
prize entry button. This final click takes members to the web site of the chosen
sponsoring client.
The Webstakes Update Newsletter, Email Offers and Tell-a-Friend
During registration, new members are asked if they want to receive the
weekly Webstakes Update newsletter, emails from our clients that relate to their
interests or occasional special offers. This information will be provided only
if it is requested by the member. During the process of entering sweepstakes,
members that meet certain demographic criteria may be asked if they want to
receive offers for products or services. When a member gives us permission, he
or she is sent an individual email message often containing a special product
offer. In addition, our Tell-a-Friend Program enables recipients of our email
and Webstakes Update, as well as visitors to webstakes.com, to forward any
promotion to friends and family via email, and provides incentives to members
who tell others about webstakes.com.
Affiliate Program
Our Affiliate Program allows a member to put a free link to the
webstakes.com Affiliate Program sweepstakes on their personal home page. Members
with their own personal web site can request the information necessary to
install a webstakes.com banner on their web page. We have received more than
12,000 requests for this information. A visitor to a member's personal home page
can click on the webstakes.com banner, register as a webstakes.com member and
enter a monthly $1,000 sweepstakes run exclusively for the Affiliate Program.
After entering the special sweepstakes, the visitor is taken to the
webstakes.com home page and can then enter other webstakes.com promotions. Every
affiliate is automatically entered into a special monthly $500 sweepstakes we
conduct to encourage participation in the Affiliate Program. This program can
make personal home pages more fun while at the same time increasing the exposure
of webstakes.com.
Privacy
We believe that it is important to build and maintain the trust of our
members. We are committed to maintaining the privacy of our members and their
personally identifiable information. We are a member of TRUSTe, an independent,
non-profit initiative whose mission is to build users' trust and confidence in
the Internet by promoting the principles of disclosure and informed consent. As
a member of TRUSTe, we disclose our information practices on webstakes.com and
in our promotions and we comply with specified information disclosure practices.
As a general policy, we do not sell individual member information collected from
promotions on webstakes.com. During the registration process and thereafter,
webstakes.com visitors must grant us permission to send them the Webstakes
Update and email offers from us or our clients. If users do not specifically
authorize us to send them information, they will not receive email from us. We
seek to
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ensure that our privacy policy satisfies consumer expectations and evolving
Internet practices. If a member grants us permission, we may share specific
information with our clients or service providers, but we strictly prohibit the
sale of this information.
WEBSTAKES.COM SERVICES FOR BUSINESSES
We provide clients with the ability to build relationships with consumers
through our promotions, direct emails, the Webstakes Update and the use of their
products as prizes for our sweepstakes. We can direct a client's product offer
based on either the demographic profile of a visitor or the visitor's responses
to personalized questions generated by our iDialog technology. We provide
promotional research and client service expertise before, during and after a
promotion to help clients effectively use these tools to meet their goals. We
use our membership database to help clients identify potential customers more
effectively and to enable them to use the results of their promotions in other
sales and marketing efforts.
We provide the technological, business and creative infrastructure
necessary to effectively produce and conduct online promotions, including
sweepstakes, on a cost-effective basis. These capabilities include the
following:
Creative Services
o Theme, naming and concept development of promotions--create
appropriate prize interest categories; create theme-based and
private label promotions
o Promotion design and production--create and produce visually
attractive, easy-to-use promotions
Automation of Process
o Collection and maintenance of demographic information--manage data
provided by member registration, prize selection and other member
activity
o Promotion research--measure effectiveness of promotions; suggest
alternatives to better satisfy client goals
o Winner selection, notification and affidavit collection--select
winners in compliance with sweepstakes laws; collect affidavits;
verify accuracy of information provided by winner
o Customer service--respond to email questions
o Promotion support services--handle postal entries; provide lists of
winners
o Legal compliance services--distribute IRS Form 1099's as required;
create and provide official rules
Fulfillment
o Prize selection and acquisition--select appropriate prizes; acquire
prizes from suppliers
o Prize fulfillment--arrange for shipment of prizes
The Internet and our technology allow us to deliver promotions at a lower
cost than traditional offline promotions. Unlike traditional direct marketing
promotion campaigns, which typically use paper-based materials delivered by
mail, our promotions do not require postage or printing because they are all
delivered electronically. It is also unnecessary for us to manually enter online
response information because participants enter their own information when they
register as a member or participate in a promotion. Lastly, all of the online
winner selection, notification and processing functions are automated. We
believe that this high degree of automation will allow us to increase our
promotion volume without the need to add a significant number of employees to
handle these functions.
We provide our services to businesses through webstakes.com and directly on
client web sites through syndicated versions of our promotions or through
private label promotions. webstakes.com is our largest distribution channel. We
use webstakes.com to host promotions, to gather demographic information and to
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serve as a gateway for access to our clients' web sites. Syndicated versions of
our promotions are designed to run on our clients' web sites at the same time as
they are running on webstakes.com. Private label promotions run exclusively on
our clients' web sites. These promotions have a customized appearance and
client-specific prizes or offers but use our technology and infrastructure.
Promotions on webstakes.com
We currently offer a variety of promotion services built around our
sweepstakes. Our services are most typically sold in sponsorship packages, each
of which includes a combination of Webstakes.com services tailored to satisfy a
client's objectives. The choice and level of the services included in a
sponsorship package is determined by the level of sponsorship selected by the
client. Our sponsorship packages vary by:
o the number of interest categories in which a client's logo appears;
o the size of the client's logo, and whether a text message
accompanies the logo;
o the number of guaranteed impressions or visitors delivered to a
client's logo, advertisement or web site;
o the number of times a client's offer appears in the Webstakes Update
newsletter; and
o the number of email campaigns.
Anchor sponsors receive the most prominent placement in the interest categories
of their choice. Anchor sponsors have included CDW, Golden Palace, iMALL,
Internet Shopping Network, Speedyclick and Spree.com. Tenant and Affiliate
sponsors pay a lower fee than Anchor sponsors and receive fewer and less
prominent logo placements and other services. Tenant and Affiliate sponsors have
included FortuneCity, Net Market, PC World and Value America.
The promotional tools we use to help clients meet their marketing
objectives include:
Exposure on webstakes.com. Clients receive exposure in the
webstakes.com interest categories they select. We feature client logos,
advertisements and text messages on the selected web pages. Each interest
category provides clients with the opportunity to direct their marketing
efforts to consumers most likely to be interested in their products.
Interest categories may be added as clients request additional exposure on
webstakes.com or the ability to direct offers to consumers with other
specific interests. We generally guarantee the minimum number of visitors
who will view a client's advertisement and/or be delivered to the client's
web site during the term of its sponsorship.
Lead Generation. Clients may extend special email offers to
webstakes.com members based on information gained using our technology.
These offers can be directed to members who meet pre-determined demographic
profiles. Members who request information about a client or client's offer
later receive an email describing a special offer that is sent
automatically using our iDialog technology. Each email includes a link to
the client's web site that allows the recipient to take advantage of the
offer. Finally, our iDialog technology allows us to measure the response
rates to these emails.
The Webstakes Update Newsletter. The Webstakes Update is an
electronic newsletter that is sent to more than 800,000 registered members
each week. The Webstakes Update features products, services and special
promotions from our clients. Each offer featured in The Webstakes Update
includes a link to the web site of the client making the offer, enabling
newsletter recipients to access the offer directly from the Webstakes
Update.
Loyalty Program. Our clients have the opportunity to place a banner
on their web site linking it directly to webstakes.com. A webstakes.com
banner on a client's web site provides the client with sweepstakes content
to build traffic and loyalty to the web site and provide value to its
visitors.
Management Reports. We make detailed daily reports available to our
clients. These reports include aggregated demographic information and
consumer preferences regarding our members that select a client's logo and
responses to each client's promotions on webstakes.com. A client can use
this information to tailor its promotions to reach its desired audience.
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Special Promotions. Clients also may participate in special
promotions we run that relate to seasonal and special events, like the
Super Bowl or movie premiers, or major holidays, like Christmas or Mother's
Day. These special promotions provide a further opportunity for our clients
to make special merchandise offers relating to the featured event or
holiday.
Promotions on Client Web Sites
We provide a comprehensive outsourcing solution for clients who want to
host a promotion on their own web site to increase traffic. These promotions
range from a special promotion run only on the client's web site to a modified
version of a sweepstakes running concurrently on webstakes.com. We offer all of
the other services available in our sponsorship package to our private label and
syndication promotion clients at an additional cost.
We conceive, design and produce private label promotions for a variety of
clients. A private label promotion gives a client the opportunity to run a
promotion on its own web site that has an appearance that is unique and
consistent with its own web site design, while using our infrastructure and
technology to avoid the cost of developing the promotion in-house. A client can
choose a complete promotion package or any one or a combination of the specific
services we offer. We guide private label clients through the promotion-
creation process and allow clients to choose those features appropriate for
their promotion. We will generally work with the client to design the appearance
of the promotion on its web site. Clients generally select their own prizes or
offers for the promotion and we tailor the other aspects of the promotion to
help clients meet their goals. Private label promotions generally include lead
generation through email campaigns and management reports.
Web site visitors entering private label promotions register for prizes
through our technology and registration process. This enables our private label
promotion clients to use our technology to offer our one-time lifetime
registration, which makes it easier for their visitors to enter our sweepstakes.
Private label clients have included Autobytel, Hyundai, NBC Multimedia,
Netscape, Panasonic, The Sharper Image, Toshiba and Universal Studios.
We provide syndicated versions of our webstakes.com promotions which may be
run on our clients' web sites at the same time as they are running on
webstakes.com. These promotions serve the same purpose as a private label
promotion but require less customization. Syndicated promotions have an initial
appearance consistent with the host client's web site. We display the client's
logo and/or color scheme on the various pages of the promotion. While the
appearance of the promotion is customized, the process for entering the
promotion is the same as the visitor would experience on our web site had he or
she selected the logo of the syndicated promotion client on webstakes.com. The
prizes offered in a syndicated promotion are the same as those being offered on
webstakes.com. Syndicated promotions may include promotions in all interest
categories, as well as seasonal, special event and major holiday promotional
programs. Syndicated promotion clients have included Internet Broadcast System
and JOBTRAK.
OUR STRATEGY
Our objective is to be the leading full-service online promotion company
and to make webstakes.com a leading Internet promotion destination. Key elements
of our strategy include:
Build on our Sweepstakes Expertise to Provide an Integrated, Comprehensive
Online Promotions Solution
We intend to build on our expertise, technology, membership base, web site
and client relationships to expand our offerings to include a broad range of
promotion services, including instant win and other games, premium incentive
tools, points and loyalty programs, coupons, promotion fulfillment and product
sampling. Our goal is to provide clients with a one-stop promotion outsourcing
solution that provides a full range of promotions and promotion support services
that can be integrated to maximize effectiveness.
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Grow our Membership Base
A larger membership base provides more potential consumers with whom we can
test the effectiveness of our clients' promotions. We plan to increase our
membership base and membership usage by:
o increasing awareness of webstakes.com among Internet users;
o increasing the number of promotions available to members;
o increasing the number of destinations at which Internet users can
enter our promotions; and
o improving the attractiveness of webstakes.com by adding new
promotional opportunities, such as games and points and loyalty
programs.
Build Strong Brand Awareness through Online and Traditional Marketing
Campaigns
Brand recognition will help increase our membership base and help improve
visibility with potential clients. We plan to establish and expand the
recognition of our brand identity and service offerings through our web site,
other web sites, direct mail, promotional activities, trade show participation
and other media events. We have entered into an agreement with Excite to market
our promotions on Excite.com and with NBC to advertise on national television.
Enhance Our Database of Information About Our Members
We believe we can enhance the effectiveness of our promotions by learning
more about our membership base. As more members enter our promotions, and with
each additional contact with our members, the extent and precision of our
information continues to grow. We intend to use our growing database and our
knowledge and experience to assist clients to tailor offers and encourage future
participation in our promotions.
Expand Internationally
We believe that our products and technology can both help U.S.-based
businesses to reach international consumers and help international businesses to
reach U.S. and international consumers. We intend to open sales offices in
selected foreign countries and to employ non-exclusive sales agents to expand
international sales. We also intend to create foreign language web sites to
increase foreign sales.
SALES AND MARKETING
We believe that a strong sales and marketing organization is essential to
effectively sell our promotion services and to promote webstakes.com.
We sell our promotion services through a sales and marketing team that has
grown over the past three years to include 39 employees as of August 31, 1999.
These employees are located at our offices in New York and San Francisco. The
sales organization is dedicated to developing and maintaining close
relationships with our clients. We intend to increase our sales force and open
additional sales offices in the United States. We also intend to expand our
sales effort internationally.
Customer service is an important part of our sales effort. Once a sale is
made, our strategy group develops a plan to execute the promotions to help
assure that the client's objectives are met. We are committed to providing a
high level of client satisfaction. Sometimes a client will first use a private
label or syndicated promotion as an introduction to our promotion services. Once
we can demonstrate the effectiveness of our promotions, these clients may
purchase full sponsorship packages.
Our marketing of webstakes.com to consumers initially was primarily through
word-of-mouth and by promotions by clients. In March 1999, we entered into an
agreement with NBC under which we advertise on the NBC television network. In
June 1999, we began an on-line promotion campaign through Excite. Banner ads
promoting webstakes.com and our clients will appear on many of Excite's topical
web channels including the Money and Investing channel, the Home & Real Estate
channel, the Games channel and others. We are also advertising our web site and
the promotions run by our clients in The Net's Best, a Sunday newspaper
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insert included in over 40 newspapers. We also use our Affiliate Program and our
Tell-a-Friend Program to expand our consumer reach at little or no cost.
CLIENTS
During 1998, we served approximately 125 clients. During the first six
months of 1999, we served approximately 75 clients. In 1998, our five largest
clients, iVillage.com, Jam TV, PC World, SonicNet and Virtual Vegas, accounted
for approximately 24% of our revenues. For the first six months of 1999, our
five largest clients, NBC, Speedyclick, iMall, Internet Shopping Network and
MapQuest.com, accounted for approximately 24% of our revenues.
OPERATING INFRASTRUCTURE
Our operating infrastructure is designed to support the creation and
delivery of millions of page views each day. This infrastructure currently uses
30 web servers, application servers and database servers to provide timely and
efficient delivery of our services to clients and members. Our servers run on
Sun Solaris and Microsoft NT operating systems and our database systems are
standardized in Oracle products.
We have developed a broad array of information systems to perform site
management, user interaction, tracking, search, transaction processing and
fulfillment functions. When available, our systems use third-party licensed
technologies to augment internally-developed software. We focus our development
efforts on improving and enhancing our specialized tools with the goal of
automating as many processes as possible to increase member and client
satisfaction.
Our iDialog technology consists of three integrated systems: a publishing
system, an online promotion engine and a data processing system, all of which
are supported by relational databases.
Publishing System
The publishing system contains the relevant information about our
promotions, including prizes, interest categories and clients. Once a client's
offer or advertisement has been designed, each component, such as color, text
and graphics, is published as datasets in our Oracle relational database
management systems. Various combinations of these datasets are accessed and
published to webstakes.com.
Online Promotion Engine
When a member visits our web site, the online promotion engine creates a
web page of various datasets by accessing the online Oracle databases. The
components of each web page are dynamically generated based on the demographic
characteristics and preferences of the member user. The online promotion engine
also deploys email campaigns to members based on the same information stored in
the Oracle databases. The online promotion engine uses a combination of Sun
MicroSystems' NetDynamics Application Servers, Standard Java servlets and
Netscape and Apache Webservers as the front-end development tools to connect
with the Oracle databases. This software handles all transactional events and
queries, updates the Oracle databases and manages webstakes.com, which is
designed to give members a convenient and safe environment to register for
offers.
Data Processing System
Our data processing system retrieves member demographic data from the
Oracle databases through the online promotion engine, processes the data,
creates and issues offers to members and manages all winner selections. The
system was designed to give employees and clients instant online access to
information related to specific promotions. Our salespeople can access member
profiles to search and analyze demographics and usage patterns to suggest
promotions and offers to clients. Generally, only aggregate data, and not
individual member profiles, is available to our clients.
The structure of our hardware and software is designed to allow for rapid
expansion while maintaining our desired user performance standards. In the
rapidly changing Internet environment, we believe that the ability to update an
application to stay current with new technologies is important. Our system
design allows
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for the addition, modification or replacement of applications in a
cost-efficient and expeditious manner. We continually evaluate emerging
technologies and new developments in web technologies with the objective of
optimizing our member and client interfaces, web site features and operational
systems.
We use high-capacity telephone communication lines to connect with the
Internet. These communication lines are currently one-third to one-half
utilized. As we grow, communications lines with increased capacity and higher
capacity routers will need to be added. We maintain redundant communication
lines with the Internet to protect against the loss of connectivity and we
safeguard our information using large storage devices. We have back-up copies of
all of our programs and data in an off-site location.
Our Internet connectivity is provided by Frontier GlobalCenter. We have
entered into an Internet-hosting agreement with Frontier to maintain all of our
production servers at Frontier's Manhattan data center. Frontier provides
comprehensive facilities management services, including human and technical
monitoring of all production servers 24 hours per day, seven days per week.
Frontier provides the means of connectivity from webstakes.com servers to
end-users via the Internet. The facility has two independent uninterruptible
power supplies, as well as two independent diesel generators designed to provide
power to the systems within seconds of a power outage.
COMPETITION
Competition in the Internet promotion services market is intense. We expect
competition in our market to continue to intensify as a result of increasing
market size, greater visibility of the market opportunity for Internet promotion
services and minimal barriers to entry. Competition may also increase as a
result of industry consolidation, particularly among narrowly-focused promotion
companies. We believe that our ability to compete depends on many factors both
within and beyond our control, including the following:
o the success of the sales and marketing efforts of us and our
competitors;
o the ease of use, performance, price and reliability of promotions
developed by us and our competitors; and
o the timing and market acceptance of new services developed by us and
our competitors.
The online promotion services market is highly fragmented, with many
companies focusing generally on only one aspect of the promotions market. We
also compete with offline promotion companies, large Internet publishers, search
engine and other portal companies, a variety of Internet advertising networks
and other companies that facilitate the marketing of products and services on
the Internet.
Please see "Risk Factors--We face significant competition, and we may not
be able to compete successfully" for a more detailed description of the risks of
our competition.
PROPRIETARY RIGHTS
We protect our technology and proprietary rights through a combination of
patent, copyright, trade secret and trademark law. We have filed one patent
application in the United States relating to the presentation of questions to
webstates.com visitors. In addition, we have a pending registration for the
Webstakes trademark in the United States. Our patent applications and trademark
registration may not be approved.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally 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 proprietary rights. We cannot be certain that the steps we have taken will
prevent misappropriation of our proprietary rights, particularly in foreign
countries where the laws or law enforcement may not protect our proprietary
rights as fully as in the United States.
Our technology collects and utilizes data derived from user activity on
webstakes.com. This data is used primarily for promotion targeting and measuring
the effectiveness of different promotions. Although we believe that we have the
right to compile and use this data, there can be no assurance that any trade
secret, copyright or other protection will be available for this information. In
addition, others may claim rights to
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this information or to the technology that we use to collect this information,
tailor advertisements and measure promotional performance.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Regulation of Sweepstakes
The sweepstakes industry is subject to extensive regulation on the local,
state and national levels, regardless of whether the promotions take place over
the Internet, through the mail or otherwise. Thus, the same regulations that
apply to traditional sweepstakes promotions apply to each of our online
sweepstakes promotions. Regulations governing the conduct of sweepstakes
promotions vary from state to state and from country to country. Although the
state and national sweepstakes laws and regulations generally are similar in
nature, they and their application vary. We use various methods to achieve
compliance with these laws.
We seek to protect ourself by placing restrictions on who may enter our
sweepstakes. We generally prohibit minors from entering our sweepstakes.
Further, our sweepstakes generally are limited to United States residents, and
residents of Florida typically are prohibited from entering certain of our
sweepstakes to comply with local laws, regulations or administrative rulings.
However, because it is sometimes difficult to verify entries over the Internet,
it is possible that minors or residents of these restricted states are entering
our sweepstakes promotions using misinformation.
Deceptive practices in direct mail sweepstakes promotions have recently
been the subject of hearings in the United States Senate and certain states.
While these hearings did not focus on online sweepstakes, it is unclear whether
any new laws or regulations will result from these hearings and whether or not
these laws or regulations will affect online sweepstakes. Similar attention is
expected from state legislatures and regulators. See "Risk Factors--Sweepstakes
regulations may limit our ability to conduct sweepstakes or limit participation
in our sweepstakes."
Regulation Concerning Privacy
Congress has passed the Children's Online Privacy Protection Act, and the
Federal Trade Commission has issued a Notice of Proposed Rulemaking regarding
the adoption of regulations regarding the collection and use of personal
identifying information obtained from individuals when accessing web sites, with
particular emphasis on access by minors. These regulations may include
requirements that companies establish certain procedures to, among other things:
o give adequate notice to consumers regarding information collection
and disclosure practices;
o provide consumers with the ability to have personal identifying
information deleted from a company's database;
o provide consumers with access to their personal information and with
the ability to rectify inaccurate information; and
o obtain express parental consent prior to collecting and using
personal identifying information obtained from children under
13 years of age.
These regulations may also include enforcement and redress provisions. While we
have a privacy policy designed to enhance the protection of the privacy of our
users, there can be no assurance that these programs will conform with any
regulations adopted by the FTC. Moreover, even in the absence of those
regulations, the FTC has begun investigations into the privacy practices of
companies that collect information on the Internet. One investigation resulted
in a consent decree pursuant to which an Internet company agreed to establish
programs to implement the principles noted above. We may become subject to a
similar investigation, or the FTC's regulatory and enforcement efforts may
adversely affect our ability to collect demographic and personal information
from users, which could have an adverse effect on our ability to provide
effective promotions. Any of these developments would have a material adverse
effect on our business, results of operations and financial condition.
It is also possible that cookies, or information keyed to a specific
server, file pathway or directory location that is stored on a user's hard
drive, possibly without the user's knowledge, which are used to track
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demographic information and to target advertising, may become subject to laws
limiting or prohibiting their use. A number of Internet commentators, advocates
and governmental bodies in the United States and other countries have urged the
passage of laws limiting or abolishing the use of cookies. Limitations on or
elimination of our use of cookies could limit the effectiveness of our
promotions, which could have a material adverse effect on our business, results
of operations and financial condition.
The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data. Under the directive, EU citizens are
guaranteed rights to access their data, rights to know where the data
originated, rights to have inaccurate data rectified, rights to recourse in the
event of unlawful processing and rights to withhold permission to use their data
for direct marketing. The directive could, among other things, affect U.S.
companies that collect information over the Internet from individuals in EU
member countries, and may impose restrictions that are more stringent than
current Internet privacy standard in the United States. In particular, companies
with offices located in EU countries will not be allowed to send personal
information to countries that do not maintain adequate standards of privacy. The
directive does not, however, define what standards of privacy are adequate. As a
result, the directive may adversely affect the activities of entities such as
Webstakes.com that engage in data collection from users in EU member countries.
We are taking steps to prepare for the institution of any safeguards to
privacy and procedures that could limit access, storage, use and transport of
individual data elements. These steps include:
o carefully identifying the source, timing and classification of each
data element collected;
o segregating data elements with matching identifiers in our data
warehouse to allow for separate processes, regulations and
treatments by type of data; and
o making the maintenance of members' elections with respect to the
receipt of information a priority in the handling and conveyance of
information from and to members.
Regulation of the Internet
We are currently subject to federal and state laws and regulations that are
applicable to specific activities on the Internet. Although there are currently
few laws or regulations directly governing access to or commerce on the
Internet, due to the increasing popularity and use of the Internet, a number of
laws and regulations may be adopted regarding user privacy, pricing, acceptable
content, taxation and quality of products and services. In addition, the
government has been requested to regulate and impose fees on Internet service
providers and online service providers in a manner similar to long distance
telephone carriers. This regulation may place our activities under increased
regulation, increase our cost of doing business, decrease the growth in Internet
use or otherwise have a material adverse effect on our business. See "Risk
Factors--Laws and regulations pertaining to the Internet may adversely affect
our business."
EMPLOYEES
As of August 31, 1999, we employed 86 people including 39 in sales and
marketing, 32 in engineering and product development and 15 in accounting, human
resources, business operations and administration. We are not subject to any
collective bargaining agreements and believe that our relationship with our
employees is good.
FACILITIES
Our principal executive offices are currently located in two separate
facilities in New York, New York. These facilities consist of a total of
approximately 11,250 square feet and are under leases which expire in March 2000
and February 2002. We also lease approximately 3,400 square feet of space for
our sales and marketing efforts in San Francisco, California. We will need
additional space in the near future, and we believe that suitable additional
space will be available on commercially reasonable terms.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
The following table sets forth our directors and executive officers, their
ages and the positions held by them with us.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- -------------------------------------------------
<S> <C> <C>
Steven H. Krein..................... 29 Chairman of the Board of Directors and
Chief Executive Officer
Daniel J. Feldman................... 29 President and Director
Christopher F. Bragas............... 39 Vice President of Integrated Promotions
Thomas E. Brophy.................... 32 Vice President of Finance and Chief Financial
Officer
Steven K. Caputo.................... 43 Vice President of Partnership Services and
Promotions
Kenneth J. Grosso................... 31 Vice President of Partnership Development
Alfonzso Holmes..................... 35 Chief Technology Officer
Joseph Lamport...................... 42 Vice President of Product Development
Robert D. Rathbun................... 44 Vice President of Business Development
Jane C. Weber....................... 45 Vice President of Direct Marketing
Lisa Z. Crane....................... 40 Director*
Arnold Greenberg.................... 67 Director
Dirk A. Hall........................ 28 Director*
Kristopher A. Wood.................. 28 Director*
</TABLE>
- ------------------
* Nominee--to be elected by the board immediately after completion of this
offering.
Steven H. Krein, a founder of Webstakes.com, has been our Chief Executive
Officer and Chairman of the Board of Directors since January 1999. From our
inception to January 1999, he served as President and director. Prior to
founding Webstakes.com, from October 1994 to May 1996, Mr. Krein was Assistant
Publisher of Law Journal EXTRA!, an online service for lawyers from American
Lawyer Media, Inc. In 1993, Mr. Krein co-founded LINK, an online service for
lawyers in Delaware. Mr. Krein received his J.D. degree from Widener University
School of Law and his B.A. degree from the University of Maryland.
Daniel J. Feldman, a founder of Webstakes.com, has been President since
January 1999 and a director since our inception. Mr. Feldman served as Vice
President of Webstakes.com from January 1998 until January 1999. He was our
Director of Operations from January 1996 to December 1996 and Director of Sales
and Marketing from January 1997 to December 1997. Prior to founding
Webstakes.com, from 1995 through 1996, Mr. Feldman was employed by Law Journal
EXTRA!, where he was Director of Product Development. Previously, Mr. Feldman
founded Closeout Network, Inc., a directory service for the closeout industry.
Mr. Feldman received his B.A. degree in International Business from George
Washington University.
Christopher F. Bragas has been Vice President of Integrated Promotions
since July 1999. From September 1998 to July 1999, Mr. Bragas was our Vice
President of Finance and Chief Financial Officer. Prior to joining
Webstakes.com, Mr. Bragas was the Senior Vice President of Finance at Don Jagoda
Associates, Inc., an international promotions agency. From July 1981 through
August 1989, Mr. Bragas was in public accounting, serving with
PricewaterhouseCoopers LLP from February 1983 to July 1988. Mr. Bragas is a CPA
and received his B.S. degree from State University of New York at Oneonta.
Thomas E. Brophy has been our Vice President of Finance and Chief Financial
Officer since July 1999. From April 1999 to July 1999, Mr. Brophy served as our
Controller. From November 1994 through March 1999, Mr. Brophy held the positions
of Chief Financial Officer and Vice President of Finance at Health Partners,
Inc., a healthcare company based in Connecticut. From January 1989 through
November 1994, Mr. Brophy held various auditing positions at Deloitte & Touche,
LLP, including Audit Manager from August 1993 through November 1994. Mr. Brophy
is a CPA and received his B.S. degree in accounting from the University of
Connecticut.
Steven K. Caputo has been Vice President of Partnership Services and
Promotions since June 1999. From February 1997 to June 1999, Mr. Caputo served
as Executive Vice President and General Manager of Promotion Development Group,
Inc., a New York promotion agency. From June 1990 to January 1997, Mr. Caputo
was Senior Vice President of Account Services at Don Jagoda Associates, Inc.
From May 1989 to
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May 1990, Mr. Caputo was Director of Account Services at Sims Freeman O'Brien
(Omnicom Group). Mr. Caputo received his B.A. degree from Adelphi University.
Kenneth J. Grosso joined Webstakes.com in August 1997 as Director of Sales.
Mr. Grosso has served as Vice President of Partnership Development, responsible
for sales, since May 1998. From 1992 to 1997, Mr. Grosso was employed with KPMG,
L.L.P., as an audit manager. Mr. Grosso founded Zonk Productions, a New York
promotions company, in 1994 and served as its president through 1996.
Mr. Grosso is a C.P.A. and received his B.A. degree in Accounting from Pace
University.
Alfonzso Holmes joined Webstakes.com in August 1997 as Director of Systems
Architecture and was Vice President of Technology from January 1998 until May
1998. In March 1999, Mr. Holmes returned to Webstakes.com as Chief Technology
Officer. From October 1998 to March 1999, Mr. Holmes was employed by Advanced
Solutions Inc. as Vice President of Technology Development. From 1995 to 1997,
Mr. Holmes was Director of Technology at Comedy Central, a subsidiary of Viacom
and Time Warner/HBO. Prior to that time, Mr. Holmes was employed by
Communications Workers of America in various positions, including application
developer, network administrator and director of operations. Mr. Holmes has over
14 years of technology experience. Mr. Holmes received his B.A. degree in
English from West Virginia University.
Joseph Lamport has been Vice President of Product Development since
September 1998. From 1992 to 1998, Mr. Lamport served as Publisher of Law
Journal EXTRA! for American Lawyer Media, Inc. During his tenure, Mr. Lamport
established and served as publisher of both Counsel Connect, an online
interactive service for lawyers, and Law Journal EXTRA! From 1987 to 1992,
Mr. Lamport was an attorney with the law firm Cleary, Gottlieb, Stern and
Hamilton. Mr. Lamport received his J.D. degree from Cardozo Law School and his
B.A. degree from Yale University. Mr. Lamport served as a director of
Webstakes.com from its inception in January 1996 until June 1999.
Robert D. Rathbun joined Webstakes.com in August 1999 as Vice President of
Business Development. Prior to joining Webstakes.com, Mr. Rathbun served as Vice
President of Business Development and Strategic Planning at PCFlowers.com from
February 1999 to July 1999 and Vice President of Marketing and Business
Development at Cyberian Outpost from September 1995 to February 1999. From 1993
to August 1995, Mr. Rathbun was President and Executive Director of Camp Sloane,
Inc. Prior to 1993, Mr. Rathbun worked for several entities in business
development and communication capacities. Mr. Rathbun received his B.A. degree
in Journalism from Washington and Lee University.
Jane C. Weber has been Vice President of Direct Marketing since June 1999.
Ms. Weber joined Webstakes.com in September 1997 as Direct Marketing Account
Manager, and was promoted to Director of Strategic Development in February 1998.
From 1994 to 1997, Ms. Weber served as Product Manager at The Reader's Digest
Association and, from 1990 to 1994, she held various direct marketing positions
at International Masters Publishers, Inc. Ms. Weber received her M.B.A. degree
from the University of Connecticut and her B.A. degree from Oral Roberts
University.
Lisa Z. Crane has agreed to serve as a director of Webstakes.com upon
completion of this offering. From January to July 1999, Ms. Crane served as Vice
President of NBC Interactive and general manager of NBC.com. Prior to joining
NBC Interactive, Ms. Crane served as Vice President of Sales and Marketing of
Universal Studios Online from May 1997 to December 1998, Vice President of
Marketing of the New Media Group from September 1996 to May 1997, and Vice
President of the Consumer Products Group from August 1995 to September 1996. She
was also director of Corporate Sales and Sponsorships for ECO Expo from 1992 to
1993 and was President of Zola Fine Art from 1986 to 1992. Ms. Crane received
her M.B.A. degree from Pepperdine University and her B.A. degree from the
University of California, Los Angeles.
Arnold Greenberg has served as a director of Webstakes.com since June 1999.
Mr. Greenberg co-founded Snapple Beverages in 1972, and he served as Chief
Operating Officer and Vice Chairman of the Board of Snapple until 1994. He is a
trustee of Mount Sinai-New York University Medical Center and Health Service and
a trustee of the New York University Medical School. Mr. Greenberg is also a
director of Volatile Media, a seller of custom compilation music compact discs,
and of the Lipper/Lumi High Income Bond Fund, Ltd.
Dirk A. Hall has agreed to serve as a director of Webstakes.com upon
completion of this offering. Since June 1997, Mr. Hall has served as Portfolio
Manager of Citigroup Investments Inc. where he is responsible for the management
of venture capital investments for various Travelers insurance companies. From
July
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1993 to June 1996, Mr. Hall was a member of the Investment Banking Group at
Smith Barney Inc. Mr. Hall received his M.B.A. degree from Harvard Business
School and his B.S. degree in Finance and Information Systems from New York
University.
Kristopher A. Wood has agreed to serve as a director of Webstakes.com upon
completion of this offering. Since September 1997, Mr. Wood has served as
Managing Director of XL Ventures, Inc., the venture capital investment
subsidiary of Big Flower Holdings, Inc., an advertising, marketing and
information services company. Since September 1995, Mr. Wood has also served as
Managing Director--Mergers & Acquisitions of Big Flower Holdings, Inc. (and its
predecessor, Big Flower Press Holdings, Inc.). From July 1993 to May 1995,
Mr. Wood was a member of the Global Finance Group at BT Alex. Brown
Incorporated. Mr. Wood also serves as a director of About.com, Inc. and
Andromedia, Inc. Mr. Wood received his B.S. degree in economics from The Wharton
School of the Univerisity of Pennsylvania.
RIGHT OF INVESTORS TO DESIGNATE BOARD MEMBERS
The terms of the purchase agreement executed in conjunction with our
June 1999 sale of class B mandatorily redeemable convertible preferred stock
permit the holders of a majority of these shares, or the majority of the shares
of common stock into which these shares are converted upon completion of this
offering, to designate two directors to serve on our board. We are required to
nominate these designees to the board and use our best efforts to have them
elected. This right to nominate directors expires three years after the closing
of this offering. Mr. Hall and Mr. Wood have been designated by these holders.
OBSERVATION RIGHTS OF INVESTORS
Under the terms of the stock purchase agreement executed in conjunction
with the sale of our class B mandatorily redeemable convertible preferred stock,
any purchaser who purchased $5.0 million or more of that stock is entitled to
have an agent present at all meetings of our board of directors for a period of
three years from the closing of this offering, unless that purchaser has one or
more of its nominees placed on our board of directors as described above.
CLASSES OF THE BOARD OF DIRECTORS
Our board of directors is divided into three classes that serve staggered
three-year terms as follows:
<TABLE>
<CAPTION>
CLASS EXPIRATION OF TERM MEMBERS
- ------------------------------------------------- ------------------ --------------------
<S> <C> <C>
Class I.......................................... 2000 Daniel J. Feldman
Arnold Greenberg
Class II......................................... 2001 Lisa Z. Crane*
Steven H. Krein
Class III........................................ 2002 Dirk A. Hall*
Kristopher A. Wood*
</TABLE>
- ------------------
* Nominee--to be elected by the board immediately after completion of this
offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors recently established a compensation committee and an
audit committee. The compensation committee evaluates our compensation policies,
determines compensation for our executive officers and administers our stock
option plans. The members of the compensation committee are Messrs. Greenberg,
Hall and Wood. The audit committee reviews the scope of our audit, the
engagement of our independent auditors and their audit reports. The audit
committee also meets with the financial staff to review accounting procedures
and reports. The audit committee currently consists of Ms. Crane and Messrs.
Greenberg and Wood.
DIRECTOR COMPENSATION
We do not pay directors cash compensation. Directors are reimbursed for the
expenses they incur in attending meetings of the board or board committees.
Non-employee directors are eligible to receive options to purchase common stock
awarded under our 1999 Equity Compensation Plan.
Each non-employee director will be granted, upon the closing of this
offering, an option to purchase 16,000 shares that will have an exercise price
equal to the offering price in this offering. After this offering,
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<PAGE>
each director who is not an employee will receive an option to purchase 16,000
shares upon his or her election to the board and will receive an option to
purchase 5,000 shares upon his or her reelection to the board. The exercise
price of options granted after this offering will be the fair market value of
the stock on the date of the grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to our completion of this offering, our board of directors as a whole
made decisions relating to the compensation of our executive officers. During
this time, Messrs. Krein, Feldman and Lamport participated in all discussions
concerning the compensation of our executive officers, except that each was
excluded from discussions regarding his own compensation. None of our officers
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving on our compensation
committee.
EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal year ended
December 31, 1998 concerning compensation we paid to our Chief Executive
Officer. No other executive officer received more than $100,000 in compensation
for 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY
- ----------------------------------------------------------------------------------------- ----------- --------
<S> <C> <C>
Steven H. Krein
Chairman of the Board and Chief Executive Officer...................................... 1998 $131,250
</TABLE>
No stock options were granted to Mr. Krein in 1998 nor did he exercise any
options in 1999 or hold any unexercised stock options as of December 31, 1998.
In connection with employment agreements entered into in June 1999, Messrs.
Krein and Feldman will receive a base annual salary of $175,000 and $150,000 per
year, respectively, and a bonus of up to $100,000 each based on the attainment
of certain performance objectives. In addition, upon completion of this
offering, Messrs. Krein and Feldman will each be paid a bonus of $175,000. At
the time of execution of the employment agreement in June 1999, as an inducement
to Messrs. Krein and Feldman to enter into their respective agreements, they
were each granted 62,000 options to purchase common stock at $6.00 per share.
The options are exercisable for a period of ten years beginning on the date of
grant. One-half of the options vest immediately and one-half vest one year from
the date of grant.
STOCK OPTION PLANS
1999 Equity Compensation Plan
We adopted the 1999 Equity Compensation Plan on June 8, 1999. The plan
provides for grants of incentive stock options, nonqualified stock options and
restricted stock to designated employees, advisors and consultants, and to
non-employees directors. By encouraging stock ownership, we seek to motivate
these individuals to contribute to our success.
The plan authorizes up to 2,000,000 shares of common stock for issuance
under the plan. If options granted under the plan expire or are terminated for
any reason without being exercised, or shares of restricted stock are forfeited,
the underlying shares of common stock will again be available for issuance under
the plan.
The compensation committee of the board of directors administers and
interprets the plan. The compensation committee has the sole authority to
determine the type, size and terms of the grants, including the individuals to
whom grants shall be made.
Grants may be made to any of our employees or any employee of our
subsidiaries and to any non-employee member of our board of directors. Key
consultants and advisors who perform services for us or any of our subsidiaries
are eligible if they render bona fide services, other than as part of the offer
or sale of securities in a capital-raising transaction. No more than 500,000
shares and/or options in the aggregate may be granted or awarded to any
individual in any calendar year.
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<PAGE>
Incentive stock options may be granted only to employees. Non-qualified
stock options may be granted to employees, non-employee directors and key
consultants and advisors. The exercise price of an option is determined by the
compensation committee but in no event can the exercise price of an incentive
stock option be less than the fair market value of a share of common stock on
the date the incentive stock option is granted. The exercise price of an
incentive stock option granted to an employee who owns more than 10% of the
common stock may not be less than 110% of the fair market value of a share of
common stock on the date of grant.
The compensation committee determines the term of each option, up to a
maximum of ten years from the date of grant, except that the term of an
incentive stock option granted to an employee who owns more than 10% of the
common stock may not exceed five years from the date of grant.
The compensation committee shall determine the number of shares of
restricted stock granted to a participant. Grants of restricted stock may be
conditioned on such performance requirements, vesting provisions, transfer
restrictions or other restrictions and conditions as the compensation committee
determines in its sole discretion.
The compensation committee may amend or terminate the plan at any time,
subject to stockholder approval if required. The plan will terminate in June
2009, unless the compensation committee terminates it earlier or extends it with
approval of the stockholders.
In the event of a change of control, whether by merger or asset sale or a
sale by the stockholders of more than 50% of the total voting power of
Webstakes.com, the compensation committee may determine that all outstanding
options shall immediately vest, and the restrictions on all outstanding
restricted stock shall immediately lapse.
Upon the occurrence of an event where we are not the surviving entity or
where we survive only as a subsidiary of another entity, unless the compensation
committee determines otherwise, all outstanding grants shall be assumed by or
replaced with comparable options or stock by the surviving corporation. In
addition, the compensation committee may require that grantees surrender their
outstanding options in exchange for payment by us, in cash or common stock, at
an amount equal to the amount by which the then fair market value of the shares
of common stock subject to the grantee's unexercised options exceeds the
exercise price of those options and/or after giving grantees an opportunity to
exercise their outstanding options, terminate any or all unexercised options.
Options to purchase 1,137,800 shares of common stock are outstanding under
this plan.
Stock Option Plan
Options to purchase 450,000 shares of common stock are outstanding under
the Stock Option Plan. Holders of these options were given the right to purchase
common stock at the market price on the date of grant as determined by the board
of directors. These options vest ratably on an annual basis over a four-year
period. The other terms of this predecessor plan are similar in all material
respects to the 1999 Equity Compensation Plan.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Messrs. Krein and Feldman
pursuant to which Mr. Krein serves as Chief Executive Officer and Mr. Feldman
serves as President. In connection with these employment agreements, Messrs.
Krein and Feldman receive base annual salaries of $175,000 and $150,000 per
year, respectively, and a bonus of up to $100,000 each based on the attainment
of certain performance objectives. In addition, upon completion of this
offering, Messrs. Krein and Feldman will each be paid a bonus of $175,000. At
the time of execution of the employment agreements in June 1999, as an
inducement to Messrs. Krein and Feldman to enter into their respective
agreements, they were each granted 62,000 options to purchase common stock at
$6.00 per share. The options are exercisable for a period of ten years. One-half
of the options vest immediately and one-half vest after one year. If either of
Messrs. Krein or Feldman is terminated for any reason other than for cause, the
employment agreements provide that he is entitled to a severance payment equal
to one year of his base salary. The employment agreements contain provisions
restricting the rights of Messrs. Krein or Feldman to compete with us under
certain events of termination. They also contain standard confidentiality
provisions. Please see "Management--Executive Compensation."
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<PAGE>
CERTAIN TRANSACTIONS
In June 1999, we entered into a two-year sponsorship agreement with Excite
under which Excite agreed to promote webstakes.com through ad banner placements
and links to webstakes.com and its promotions on Excite.com, WebCrawler.com and
Classified 2000.com and through the use of a webstakes.com personalized front
page made available by Excite. As part of this agreement, we received a
guarantee of a total number of impressions per year. The fee to be paid to
Excite under this agreement is $5.6 million, $1.3 million of which has been paid
and the balance of which is due 10 days following the completion of this
offering. See "Use of Proceeds." At Home Corporation, the parent company of
Excite, is one of our principal stockholders.
In June 1999, we entered into a services agreement with MatchLogic, Inc., a
wholly owned subsidiary of Excite, pursuant to which MatchLogic will provide us
with ad serving and targeting, data processing, analysis and enhancement
services. The term of the agreement is two years. The fee to be paid to
MatchLogic under this agreement is $13.1 million, $5.0 million of which has been
paid and the balance of which is due 10 days following completion of this
offering. See "Use of Proceeds."
In June 1999, we redeemed all outstanding shares of class A mandatorily
redeemable convertible preferred stock and 1,714,608 shares of common stock for
an aggregate amount of $24.0 million. To finance the redemption and to provide
working capital, we issued shares of new class B mandatorily redeemable
convertible preferred stock to a group of investors, including At Home
Corporation, XL Ventures, a subsidiary of Big Flower Holdings, and Travelers,
for an aggregate purchase price of $40.0 million. Upon completion of this
offering, the class B mandatorily redeemable convertible preferred stock will
automatically convert into 6,666,668 shares of common stock.
39
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides certain information regarding the beneficial
ownership of our common stock as of June 30, 1999 and as adjusted to reflect the
sale of the 3,575,000 shares of our common stock offered in this offering, by:
o each person or entity who beneficially owns more than 5% of our
stock;
o each of our directors and director nominees;
o our named executive officer; and
o all executive officers and directors as a group.
Unless otherwise indicated, the address of each person named in the table
below is care of Webstakes.com, Inc., 11 West 19th Street, New York, New York
10011. The amounts and percentages of common stock beneficially owned are
reported on the basis of regulations of the Securities and Exchange Commission
governing the determination of beneficial ownership of securities. Under the
rules of the Commission, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power," which includes the power
to vote or to direct the voting of such security, or "investment power," which
includes the power to dispose of or to direct the disposition of such security.
A person is also deemed to be a beneficial owner of any securities of which that
person has a right to acquire beneficial ownership within 60 days. Under these
rules, more than one person may be deemed a beneficial owner of the same
securities and a person may be deemed to be a beneficial owner of securities as
to which such person has no economic interest. The information set forth in the
following table (1) assumes that the over-allotment option by the underwriters
has not been exercised, (2) excludes any shares purchased in this offering by
the respective beneficial owner, and (3) reflects the conversion of all shares
of class B mandatorily redeemable convertible preferred stock upon completion of
this offering.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Steven H. Krein(1)............................................ 1,868,500 17.5% 13.1%
Daniel J. Feldman(2).......................................... 1,868,500 17.5 13.1
At Home Corporation(3)........................................ 1,166,667 10.9 8.2
XL Ventures, LLC(4)........................................... 1,166,667 10.9 8.2
Kristopher Wood(5)*........................................... 1,166,667 10.9 8.2
The Travelers Insurance Company(6)(7)......................... 833,333 7.8 5.9
Dirk A. Hall(7)(8)*........................................... 833,333 7.8 5.9
Invesco Private Capital Inc.(9)(10)........................... 691,667 6.5 4.9
Joseph Lamport................................................ 588,000 5.5 4.1
Arnold Greenberg(11).......................................... 166,667 1.6 1.2
Lisa Z. Crane(12)*............................................ -- -- --
All executive officers and directors as a group
(14 persons)(13)............................................ 5,788,656 53.8% 40.6%
</TABLE>
- ------------------
* Nominee - to be elected to the board immediately after completion of this
offering.
(1) Includes 367,500 shares held in trust. Also includes 165,000 shares owned
by Mister, L.P., of which Mr. Krein is the general partner, and options to
purchase 31,000 shares of common stock which are exercisable within 60 days
following the date of this prospectus. Also includes 367,500 shares held in
trust by Mr. Feldman. Mr. Krein serves as a trustee of such trust and
shares investment power with Mr. Feldman. Mr. Krein disclaims beneficial
ownership of the shares held in trust by Mr. Feldman.
(Footnotes continued on next page)
40
<PAGE>
(Footnotes continued from previous page)
(2) Includes 367,500 shares held in trust. Also includes 165,000 shares owned
by DJF Enterprises, L.P., of which Mr. Feldman is the general partner, and
options to purchase 31,000 shares of common stock which are exercisable
within 60 days following the date of this prospectus. Also includes 367,500
shares held in trust by Mr. Krein. Mr. Feldman serves as a trustee of such
trust and shares investment power with Mr. Krein. Mr. Feldman disclaims
beneficial ownership of the shares held in trust by Mr. Krein.
(3) The address of At Home Corporation is 450 Broadway Street, Redwood, CA
94063.
(4) The address of XL Ventures, LLC is 1105 North Market Street, Suite 1300,
Wilmington, DE 19899.
(5) Represents 1,166,667 shares held by XL Ventures, LLC. Mr. Wood is managing
director of XL Ventures, Inc., an affiliate of XL Ventures, LLC. Mr. Wood
disclaims beneficial ownership of these shares. Does not include 16,000
shares issuable upon the exercise of stock options which will be granted to
Mr. Wood upon completion of this offering.
(6) The address of The Travelers Insurance Company is 399 Park Avenue, New
York, NY 10022.
(7) Does not include 16,000 shares issuable upon the exercise of stock options
which will be granted to Mr. Hall upon completion of this offering. Upon
grant, such options will be transferred to The Travelers Insurance Group by
Mr. Hall.
(8) Represents 833,333 shares held by The Travelers Insurance Company. Mr. Hall
is Portfolio Manager of Citigroup Investments, the parent company of The
Travelers Insurance Company. Mr. Hall disclaims beneficial ownership of
these shares.
(9) The address of Invesco Private Capital, Inc. is 1166 Avenue of the
Americas, New York, NY 10036.
(10) Includes 691,667 shares over which Invesco Private Capital Inc. has
discretionary authority for five accounts, including dispositive and voting
control. Invesco Private Capital Inc. disclaims beneficial ownership of
these shares.
(11) These shares are owned by the Greenberg Family Fund LLC for which Mr.
Greenberg serves as manager. Does not include 16,000 shares issuable upon
the exercise of stock options which will be granted to Mr. Greenberg upon
completion of this offering.
(12) Does not include 16,000 shares issuable upon the exercise of stock options
which will be granted to Ms. Crane upon completion of this offering.
(13) Includes options to purchase 62,000 shares of common stock held by
Messrs. Krein and Feldman which are exercisable within 60 days following
the date of this prospectus. Also includes 1,166,667 shares held by XL
Ventures, LLC, with respect to which Mr. Wood disclaims beneficial
ownership, and 833,333 shares held by The Travelers Insurance Company, with
respect to which Mr. Hall disclaims beneficial ownership.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following description of our capital stock and provisions of our
certificate of incorporation and our bylaws are summaries thereof and are
qualified by reference to our certificate of incorporation and our bylaws,
copies of which have been filed with the SEC as exhibits to our registration
statement, of which this prospectus forms a part.
Upon the completion of this offering, our capital stock will consist of:
<TABLE>
<CAPTION>
PAR VALUE
TYPE OF CAPITAL STOCK AUTHORIZED PER SHARE
- -------------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
Common.................................................................... 50,000,000 $ 0.01
Preferred Stock........................................................... 1,000,000 no par value
</TABLE>
COMMON STOCK
The holders of the common stock are entitled to receive dividends and other
distributions in cash, stock or property from our assets that are legally
available for distribution, subject to any dividend preferences that may be
attributable to preferred stock that may be outstanding. The form, amount and
timing of dividends will be determined by our board of directors.
Holders of the common stock may vote on all matters submitted for a vote of
our stockholders. Each share of common stock is entitled to one vote. Cumulative
voting is not authorized by our certificate of incorporation.
Voting may be done by written consent when one or more stockholders have
enough votes to approve a particular issue by themselves. There are no
preemptive, conversion, redemption or sinking fund provisions applicable to the
common stock. Each outstanding share of common stock is, and all shares of
common stock to be outstanding upon completion of this offering will be, duly
and validly issued, fully paid and non-assessable. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share ratably in the assets available for distribution after the claims of
all senior security holders and creditors are satisfied.
PREFERRED STOCK
Our board of directors, without further action by the stockholders, is
authorized to issue an aggregate of 1,000,000 shares of preferred stock in one
or more series. The board may fix the rights, preferences and privileges of the
preferred stock, along with any limitations or restrictions. The preferred stock
could have voting or conversion rights that could adversely affect the voting
power or other rights of common stock holders. The issuance of preferred stock
could also have the effect, under certain circumstances, of delaying, deferring
or preventing a change of control of Webstakes.com. We currently have no plans
to issue any shares of preferred stock.
COMMON STOCK WARRANTS
As of the date of this prospectus, we have issued and outstanding warrants
to purchase a total of 221,683 shares of common stock, at an exercise price of
$6.00 per share. The warrants contain anti-dilution provisions providing for
adjustments of the exercise price and the number of shares of common stock
underlying the warrants upon the occurrence of any recapitalization,
reclassification, stock dividend, stock split, stock combination or similar
transaction. The warrants expire on March 24, 2009.
DELAWARE ANTI-TAKEOVER LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents certain
Delaware corporations, under certain circumstances, from engaging in a "business
combination" with:
o a stockholder who owns 15% or more of our outstanding voting stock
(otherwise known as an "interested stockholder"),
42
<PAGE>
o an affiliate of an interested stockholder or
o an associate of an interested stockholder,
for three years following the date that the stockholder became an "interested
stockholder." A "business combination" includes a merger or sale of more than
10% of our assets.
However, the above provisions of Section 203 do not apply if:
o our board approves the transaction that made the stockholder an
"interested stockholder," prior to the date of that transaction;
o after the completion of the transaction that resulted in the
stockholder becoming an "interested stockholder," that stockholder
owned at least 85% of our voting stock outstanding at the time the
transaction commenced, excluding shares owned by persons who are
Webstakes.com officers and directors; or
o on or subsequent to the date of the transaction, the business
combination is approved by our board and authorized at a meeting of
our stockholders by an affirmative vote of at least two-thirds of
the outstanding voting stock not owned by the "interested
shareholder."
This statute could prohibit or delay mergers or other change in control
attempts, and thus may discourage attempts to acquire us.
CLASSIFIED BOARD OF DIRECTORS
Our bylaws divide our board of directors into three classes, with regular
three-year staggered terms and initial terms of three years for class III
directors, two years for class II directors and one year for class I directors.
This could prevent a party who acquires control of the majority of the
outstanding voting stock from immediately obtaining control of our board of
directors.
SPECIAL MEETINGS OF STOCKHOLDERS
Our bylaws provide that special meetings of our stockholders may only be
called by our president, board or the holders of at least one-fifth of all the
shares of any class outstanding and entitled to vote. This may have the effect
of delaying or preventing a change in control.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation, as amended, includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability:
o for any breach of the director's duty of loyalty to Webstakes.com or
its stockholders;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o under the section 174 of the Delaware General Corporation Law
regarding unlawful dividends and stock purchases; or
o for any transaction from which the director derived an improper
personal benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
o we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, subject to very limited exceptions;
o we may indemnify our other employees and agents to the same extent
that we indemnify our officers and directors, unless otherwise
required by law, our certificate of incorporation, as amended, our
bylaws or agreements; and
o we must advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding to the
fullest extent permitted by Delaware law, subject to very limited
exceptions.
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<PAGE>
We have obtained directors' and officers' insurance for our directors,
officers and some employees for specified liabilities.
The limitation of liability and indemnification provisions in our
certificate of incorporation, as amended, and bylaws may discourage stockholders
from bringing a lawsuit against directors for breach of their fiduciary duty.
They may also have the effect of reducing the likelihood of derivative
litigation against directors and officers, even though an action of this kind,
if successful, might otherwise benefit us and our stockholders. Furthermore, a
stockholder's investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers pursuant to
these indemnification provisions. However, we believe that these indemnification
provisions are necessary to attract and retain qualified directors and officers.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees regarding which indemnification is sought,
nor are we aware of any threatened litigation that may result in claims for
indemnification.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market or
the perception that these sales could occur could adversely affect prevailing
market prices of our common stock. They could also adversely affect our ability
to raise capital at a time and on terms favorable to us.
Upon completion of this offering, we will have outstanding a total of
14,241,244 shares of our common stock. Of these shares, all of the shares sold
in this offering will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are purchased by
"affiliates," as that term is defined in Rule 144 under the Securities Act. The
remaining 10,666,244 shares of common stock held by existing stockholders are
"restricted securities," as that term is defined in Rule 144 under the
Securities Act. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule 144
under the Securities Act. These rules are summarized below.
Subject to the lock-up agreements described below and the provisions of
Rules 144 and 144(k), additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ------------------------------------------ -----------------------------------------------------------
<S> <C>
3,999,576 After 180 days from the date of this prospectus (subject to
volume limitations).
6,666,668 After 180 days and upon the filing of a registration
statement to register for resale shares of common stock.
446,576 After 180 days from the date of this prospectus.
25,000 On the date of this prospectus.
</TABLE>
LOCK-UP AGREEMENTS
Our officers, directors and other stockholders who hold in the aggregate
10,641,244 shares of our common stock and holders of options and warrants to
purchase 423,704 of our common stock which vest and are exercisable within the
next 180 days, have agreed not to sell or otherwise dispose of any shares of our
common stock for a period of 180 days after the date of this prospectus, without
the prior written consent of Bear, Stearns & Co. Inc. See "Underwriting."
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<PAGE>
RULE 144
In general, under Rule 144, a person who has beneficially owned shares of
our common stock for at least one year can sell within any three-month period a
number of shares that does not exceed the greater of:
o 1% of the number of shares of common stock then outstanding, which
will equal approximately 142,412 shares immediately after this
offering; or
o the average weekly trading volume during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to the
sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, can sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
RULE 701
In general, under Rule 701, any of our employees, directors, consultants or
advisors who purchase shares from us in connection with a compensatory stock
option plan or other written agreement are eligible to resell these shares
90 days after the date of this offering in reliance on Rule 144, without
compliance with certain restrictions contained in Rule 144, including the
holding period.
REGISTRATION RIGHTS
After this offering, holders of 6,666,668 shares of common stock will be
entitled to require us to register their shares for public sale, pursuant to a
Registration Rights Agreement between us and the purchasers of the class B
mandatorily redeemable convertible preferred stock (who will become holders of
common stock after this offering). Holders of 25% of these shares (and any
people who purchase shares of common stock from these holders in a private
transaction) have the right to require us to file up to three registration
statements to allow for the public sale of their common stock. The number of our
shares subject to these registration rights which may be registered in a
non-underwritten offering is limited to 15% of the number of shares of our
common stock outstanding at the time of that registration. This 15% limit may be
exceeded if a nationally-recognized investment bank determines that a greater
number of shares may be registered without a material adverse effect on the
market for our securities. These registration statements must be maintained
effective for up to 180 days. In addition, these holders (and their transferees)
and the holder of warrants to purchase 221,683 shares of common stock have the
right to include their shares in any registered offering of our securities
(other than in connection with some corporate transactions and employee benefit
plans). We are required to pay the expenses related to these registrations,
excluding underwriters' commissions and discounts.
We intend to file registration statements to register shares of common
stock reserved for issuance under our Stock Option Plan and the 1999 Equity
Compensation Plan. These registration statements will permit the resale of
shares issued under these plans by non-affiliates in the public market without
restriction, subject to the lock-up agreements.
45
<PAGE>
UNDERWRITING
The underwriters of this offering named below, for whom Bear, Stearns & Co.
Inc., ING Barings LLC, Thomas Weisel Partners LLC and Wit Capital Corporation
are acting as representatives, have severally agreed with us, subject to the
terms and conditions of the underwriting agreement, to purchase from us the
aggregate number of shares of common stock set forth opposite their respective
names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ------------------------------------------------------------------------------------------- ---------
<S> <C>
Bear, Stearns & Co. Inc.................................................................... 1,523,000
ING Barings LLC............................................................................ 554,000
Thomas Weisel Partners LLC................................................................. 554,000
Wit Capital Corporation.................................................................... 139,000
Banc of America Securities LLC............................................................. 70,000
Donaldson, Lufkin & Jenrette Securities Corporation........................................ 70,000
Hambrecht & Quist LLC...................................................................... 70,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated......................................... 70,000
Salomon Smith Barney Inc................................................................... 70,000
SG Cowen Securities Corporation............................................................ 70,000
Chatsworth Securities LLC.................................................................. 35,000
Corinthian Partners, L.L.C................................................................. 35,000
First Securities Investors................................................................. 35,000
Jefferies & Company........................................................................ 35,000
Jesup & Lamont Securities Corporation...................................................... 35,000
Joseph Gunnar & Co., LLC................................................................... 35,000
Ladenburg, Thalmann & Co. Inc.............................................................. 35,000
McDonald Investments Inc., a KeyCorp Company............................................... 35,000
Needham & Company, Inc..................................................................... 35,000
Raymond James & Associates, Inc............................................................ 35,000
Wunderlich Securities, Inc................................................................. 35,000
---------
Total................................................................................. 3,575,000
---------
---------
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to approval of certain legal matters by counsel and to
various other conditions. We have agreed to indemnify the several underwriters
against certain liabilities, including liabilities under the Securities Act, and
where such indemnification is unavailable, to contribute to payments that the
underwriters may be required to make in respect of such liabilities. The nature
of the underwriters' obligations is that they are committed to purchase and pay
for all of the above shares of common stock if any are purchased.
If the underwriters sell more than the total number set forth in the table
above, the underwriters have an option to buy up to an additional 536,250 shares
to cover such sales from us. The underwriters may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in the same proportion as set forth in the table
above.
The underwriters, at our request, have reserved for sale at the initial
public offering price up to 357,500 of the shares of common stock to be sold in
this offering for sale to our employees and directors and other persons
designated by us. The number of shares available for sale to the general public
will be reduced to the extent that any reserved shares are purchased. Any
reserved shares not so purchased will be offered by the underwriters on the same
basis as the other shares offered hereby.
The underwriters do not expect to confirm sales of common stock to any
accounts over which they exercise discretionary authority.
We, all of our directors and officers and other stockholders holding an
aggregate of 10,641,244 shares of our common stock have agreed that, subject to
certain exceptions, for a period of 180 days from the date of this prospectus,
without the prior written consent of Bear, Stearns & Co. Inc., will not,
directly or indirectly, (i) issue, sell, offer or agree to sell, grant any
option for the sale of, pledge, make any short sale, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act
or otherwise
46
<PAGE>
dispose of any shares of our common stock (or securities convertible into,
exercisable for or exchangeable for our common stock) or (ii) enter into any
swap, derivative transaction or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of our common
stock, whether any of the transactions described in clause (i) or (ii) above is
to be settled by delivery of our common stock or those other securities, in cash
or otherwise. This restriction does not apply to bona fide gifts or, in the case
of stockholders who are corporations, limited liability companies or
partnerships, transfers to these stockholders' affiliates, shareholders, members
or partners, provided that in each case, the recipients agree in writing to
abide (and in the case of non-individuals certify in writing that they have
always abided since the original date of the agreement) by these restrictions.
In addition, this restriction does not apply to shares of our common stock
purchased in the public market after this offering.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share................................................................... $ 0.98 $ 0.98
Total....................................................................... 3,503,500 4,029,025
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the public offering price set forth on the cover of this prospectus. Any shares
sold by the underwriters to securities dealers may be sold at a discount of up
to $0.59 per share from the public offering price. Any such securities dealers
may resell any shares purchased from the underwriters to certain other brokers
or dealers at a discount of up to $0.10 per share from the public offering
price. If all the shares are not sold at the offering price, the representatives
may change the offering price and the other selling terms.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock will
be determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in those negotiations will be:
o Our results of operations in recent periods;
o Estimates of our prospects and the industry in which we compete;
o An assessment of our management;
o The general state of the securities markets at the time of this
offering; and
o The prices of similar securities of generally comparable companies.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol IWIN. However, there can be no assurance that an active
or orderly trading market will develop for the common stock or that the common
stock will trade in the public markets subsequent to this offering at or above
the initial offering price.
In connection with this offering, certain persons participating in this
offering may purchase and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase in
this offering. Stabilizing transactions consist of certain bids or purchases
made for the purpose of preventing or retarding a decline in the market price of
the common stock while this offering is in progress. The underwriters also may
impose a penalty bid. This occurs when a particular underwriter repays to the
underwriters a portion of the underwriting discount received by it because the
representative has repurchased shares sold by or for the account of such
underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
47
<PAGE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $1.5 million.
A number of shares in this offering have been reserved for sale by Wit
Capital to its customers through the Internet. A prospectus in electronic format
is being made available on a special web site established by Wit Capital for
this offering.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners LLC has been named as a lead or co-manager on 64
filed public offerings of equity securities, of which 33 have been completed,
and has acted as a syndicate member in an additional 32 public offerings of
equity securities. Thomas Weisel Partners LLC does not have any material
relationship with us or any of our officers, directors or controlling persons,
except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in this offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter,
e-Manager or selected dealer in over 130 public offerings. Except for its
participation as a representative in this offering, Wit Capital has no
relationship with us or any of our founders or significant stockholders.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Reed Smith Shaw & McClay LLP, Philadelphia, Pennsylvania and for
the underwriters by Proskauer Rose LLP, New York, New York.
EXPERTS
The financial statements of Webstakes.com as of December 31, 1998 and 1997
and for each of the two years in the period ended December 31, 1998 and the
period from January 8, 1996 (inception) to December 31, 1996 included in this
prospectus have been included in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN GET MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC. This
prospectus, which forms a part of that registration statement, does not contain
all of the information included in the registration statement. Certain
information is omitted and you should refer to the registration statement and
its exhibits. With respect to references made in this prospectus to any contract
or other document, such references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract or document. You may review a copy of the registration statement
at the SEC's public reference room in Washington, D.C., and at the SEC's
regional offices in Chicago, Illinois and New York, New York. Please call the
SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. Our SEC filings and the registration statement can also be
reviewed by accessing the SEC's Internet site at http://www.sec.gov. As a result
of this offering, we will become subject to the information and reporting
requirements of the Securities Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the SEC.
This prospectus includes statistical data regarding Internet usage and the
advertising, promotions and direct marketing industries, which were obtained
from industry publications, including reports generated by International Data
Corporation, the Direct Marketing Association, Forrester Research, Inc. and
Promo Magazine. These industry publications generally indicate that they have
obtained information from sources believed to be reliable, but they do not
guarantee the accuracy and completeness of such information. International Data
Corporation and Forrester Research, Inc. have consented to our reference to
their reports in this prospectus.
48
<PAGE>
WEBSTAKES.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................................................................ F-2
Balance Sheets at December 31, 1997 and 1998 and the six months ended
June 30, 1999 (unaudited).............................................................................. F-3
Statements of Operations for the period from January 8, 1996 (inception) to December 31, 1996,
the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 (unaudited) and June
30, 1999 (unaudited)................................................................................... F-4
Statements of Stockholders' Equity (Deficit) for the period from January 8, 1996 (inception) to
December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1999
(unaudited)............................................................................................ F-5
Statements of Cash Flows for the period from January 8, 1996 (inception) to December 31, 1996, the years
ended December 31, 1997 and 1998 and for the six months ended June 30, 1998 (unaudited) and June 30,
1999 (unaudited)....................................................................................... F-6
Notes to Financial Statements............................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Webstakes.com, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity (deficit) and cash flows present fairly, in all
material respects, the financial position of Webstakes.com, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1998, and the period
from January 8, 1996, (inception) to December 31, 1996, in conformity with
generally accepted accounting principles. 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 generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
February 19, 1999
1301 Avenue of the Americas
New York, New York
F-2
<PAGE>
WEBSTAKES.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------ JUNE 30,
1997 1998 1999
--------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 85,365 $ 17,573 $ 12,973,305
Accounts receivable, less allowance of $12,700, $125,000
and $314,714 (unaudited)............................................. 113,336 615,230 803,536
Prepaid expenses and other current assets, principally related party in
1999................................................................. 2,751 125,174 3,140,319
--------- ----------- -------------
Total current assets................................................. 201,452 757,977 16,917,160
--------- ----------- -------------
Fixed assets, net........................................................ 232,858 437,759 862,295
Other assets............................................................. 41,708 -- 531,104
--------- ----------- -------------
Total assets......................................................... $ 476,018 $ 1,195,736 $ 18,310,559
--------- ----------- -------------
--------- ----------- -------------
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................................... $ 155,257 $ 221,745 $ 571,718
Accrued liabilities.................................................... 22,081 169,136 591,537
Deferred revenues...................................................... 23,333 117,297 161,720
Capital lease obligations.............................................. -- 31,764 80,965
Notes payable-related party, current portion........................... 150,000 1,342,222 66,667
--------- ----------- -------------
Total current liabilities............................................ 350,671 1,882,164 1,472,607
--------- ----------- -------------
Capital lease obligation, net of current portion....................... -- -- 133,005
Deferred gain on sale of assets........................................ -- -- 20,776
Notes payable--related party, net of current portion................... -- 66,667 33,333
--------- ----------- -------------
Total liabilities.................................................... 350,671 1,948,831 1,659,721
--------- ----------- -------------
Class B mandatorily redeemable convertible preferred stock--par value
$.01, no shares authorized issued and outstanding at December 31, 1997
and 1998, 6,700,000 authorized, 6,666,668 shares issued and outstanding
at June 30, 1999 (unaudited), respectively............................. -- -- 40,000,000
Stockholders' equity (deficit):
Common stock--par value $.01, 50,000,000 shares authorized, 4,999,176,
5,714,184 and 3,999,576 shares issued and outstanding at
December 31, 1997, 1998 and June 30, 1999 (unaudited),
respectively......................................................... 49,992 57,142 39,996
Additional paid-in capital............................................. 526,914 1,140,624 (16,977,147)
Accumulated deficit.................................................... (447,934) (1,861,977) (6,254,735)
Deferred compensation.................................................. (3,625) (88,884) (157,276)
--------- ----------- -------------
Total stockholders' equity (deficit)................................. 125,347 (753,095) (23,349,162)
--------- ----------- -------------
Total liabilities, redeemable preferred stock and stockholders'
equity (deficit)................................................ $ 476,018 $ 1,195,736 $ 18,310,559
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
WEBSTAKES.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 8, 1996
(INCEPTION) TO
DECEMBER 31, SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------- -------------------------- ---------------------------
1996 1997 1998 1998 1999
--------------- ---------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ 79,584 $1,618,277 $ 4,798,893 $ 2,262,454 $ 3,054,463
Operating expenses:
Product development................. 59,073 181,260 548,818 221,508 235,634
Sales and marketing................. 124,754 1,090,721 3,618,557 1,490,946 4,193,595
General and administrative.......... 108,665 535,963 1,969,214 773,359 2,273,234
Non-cash financial advisory
services......................... -- -- -- -- 796,691
----------- ---------- ------------ ----------- ------------
Total operating expenses......... 292,492 1,807,944 6,136,589 2,485,813 7,499,154
----------- ---------- ------------ ----------- ------------
Loss from operations................ (212,908) (189,667) (1,337,696) (223,359) (4,444,691)
Interest income (expense), net........ (8,187) (37,172) (76,347) (24,845) 51,933
----------- ---------- ------------ ----------- ------------
Net loss.............................. $ (221,095) $ (226,839) $ (1,414,043) $ (248,204) $ (4,392,758)
Deemed dividend on redemption of class
A mandatorily redeemable convertible
preferred stock (unaudited)......... (8,712,352)
----------- ---------- ------------ ----------- ------------
Net loss attributable to common
stockholders........................ $ (221,095) $ (226,839) $ (1,414,043) $ (248,204) $(13,105,110)
----------- ---------- ------------ ----------- ------------
----------- ---------- ------------ ----------- ------------
Basic and diluted net loss per share
attributable to common
stockholders........................ $ (0.06) $ (0.05) $ (0.27) $ (0.05) $ (2.36)
----------- ---------- ------------ ----------- ------------
----------- ---------- ------------ ----------- ------------
Weighted average shares of common
stock used in computing basic and
diluted net loss per share
attributable to common
stockholders........................ 3,999,576 4,278,916 5,181,356 4,999,176 5,562,617
----------- ---------- ------------ ----------- ------------
----------- ---------- ------------ ----------- ------------
Pro forma basic and diluted net loss
per share (see Note 2).............. $ (0.12) $ (1.23)
------------ ------------
------------ ------------
Shares of common stock used in
computing pro forma basic and
diluted net loss per share (see Note
2).................................. 11,848,024 10,666,244
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
WEBSTAKES.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL DEFERRED ACCUMULATED
SHARES AMOUNT PAID-IN-CAPITAL COMPENSATION DEFICIT TOTAL
---------- ------- --------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders at
January 8, 1996 (inception)................. 3,999,576 $39,996 $ (9,967) $ 30,029
Net and comprehensive loss................ $ (221,095) (221,095)
---------- ------- ------------- ----------- ------------
Balance December 31, 1996..................... 3,999,576 39,996 (9,967) (221,095) (191,066)
---------- ------- ------------- ----------- ------------
---------- ------- ------------- ----------- ------------
Debt to equity conversion at book value plus
interest.................................. 999,600 9,996 533,256 543,252
Stock options to non-employees.............. 3,625 $ (3,625) --
Net and comprehensive loss................ (226,839) (226,839)
---------- ------- ------------- ---------- ----------- ------------
Balance December 31, 1997..................... 4,999,176 49,992 526,914 (3,625) (447,934) 125,347
---------- ------- ------------- ---------- ----------- ------------
---------- ------- ------------- ---------- ----------- ------------
Debt to equity conversion at book value plus
interest.................................. 715,008 7,150 524,826 531,976
Amortization of deferred compensation....... 3,625 3,625
Stock options to non-employees.............. 88,884 (88,884) --
Net and comprehensive loss................ (1,414,043) (1,414,043)
---------- ------- ------------- ---------- ----------- ------------
Balance December 31, 1998..................... 5,714,184 57,142 1,140,624 (88,884) (1,861,977) (753,095)
---------- ------- ------------- ---------- ----------- ------------
---------- ------- ------------- ---------- ----------- ------------
Repurchase of common stock (unaudited)...... (1,714,608) (17,146) (10,270,502) (10,287,648)
Deemed dividend on redemption of Class A
mandatorily redeemable convertible
preferred stock (unaudited)............... (8,712,352) (8,712,352)
Adjustment of deferred compensation to
non-employees to current fair value
(unaudited)............................... 177,293 (177,293) --
Stock options to non-employees (unaudited).. 687,790 (687,790) --
Amortization of deferred compensation
(unaudited)............................... 796,691 796,691
Net and comprehensive loss (unaudited).... (4,392,758) (4,392,758)
---------- ------- ------------- ---------- ----------- ------------
Balance June 30, 1999 (unaudited)............. 3,999,576 $39,996 $ (16,977,147) $ (157,276) $(6,254,735) $(23,349,162)
---------- ------- ------------- ---------- ----------- ------------
---------- ------- ------------- ---------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
WEBSTAKES.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 8, 1996
(INCEPTION) TO SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
1996 ------------------------- ---------------------------
1997 1998 1998 1999
--------------- ---------- ------------ ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $ (221,095) $ (226,839) $ (1,414,043) $ (248,204) $ (4,392,758)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 7,471 37,661 147,515 59,866 176,808
Bad debt expense............................ 2,499 11,829 208,604 38,431 215,805
Non-cash financial advisory services
expense.................................. -- -- 3,625 -- 796,691
Interest payable converted into
common stock............................. -- 33,256 24,826 -- 35,000
Changes in operating assets and liabilities:
Increase in accounts receivable............. (55,480) (72,184) (710,498) (277,035) (404,111)
(Increase) in prepaid expenses and other
current assets, principally related party
in 1999.................................. -- (2,751) (122,423) (77,225) (3,015,145)
(Increase) decrease in other assets......... -- (41,708) 41,708 33,871 (531,104)
Increase in accounts payable................ 48,161 107,096 66,488 10,891 349,973
Increase in accrued liabilities............. 16,934 5,147 147,055 17,279 422,401
Increase in deferred revenue................ -- 23,333 93,964 93,595 44,423
----------- ---------- ------------ ----------- -------------
NET CASH USED IN OPERATING ACTIVITIES............. (201,510) (125,160) (1,513,179) (348,531) (6,302,017)
----------- ---------- ------------ ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchase of fixed assets........................ (64,934) (203,060) (301,444) (166,092) (509,170)
Proceeds from sale of fixed assets.............. -- -- -- -- 157,292
----------- ---------- ------------ ----------- -------------
NET CASH USED IN INVESTING ACTIVITY............... (64,934) (203,060) (301,444) (166,092) (351,878)
----------- ---------- ------------ ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable......... 260,000 390,000 1,820,000 466,667 120,000
Principal payments on notes payable-related
party......................................... -- -- (61,111) -- (38,889)
Proceeds from issuance of common stock.......... 30,029 -- -- -- --
Principal payments on capital lease
obligations................................... -- -- (12,058) (58) (46,484)
Proceeds from issuance of class A mandatorily
redeemable convertible preferred stock........ -- -- -- -- 3,575,000
Proceeds from issuance of class B mandatorily
redeemable convertible preferred stock........ -- -- -- -- 40,000,000
Redemption of class A mandatorily redeemable
convertible preferred stock and repurchase of
common stock.................................. -- -- -- -- (24,000,000)
----------- ---------- ------------ ----------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 290,029 390,000 1,746,831 466,609 19,609,627
----------- ---------- ------------ ----------- -------------
NET INCREASE (DECREASE) IN CASH FOR THE PERIOD.... 23,585 61,780 (67,792) (48,014) 12,955,732
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.... -- 23,585 85,365 85,365 17,573
----------- ---------- ------------ ----------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 23,585 $ 85,365 $ 17,573 $ 37,351 $ 12,973,305
----------- ---------- ------------ ----------- -------------
----------- ---------- ------------ ----------- -------------
CASH PAID DURING THE PERIOD FOR INTEREST.......... $ 18,530 $ 10,247 $ 11,157
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During 1997, 1998 and the six months ended June 30, 1999 (unaudited),
certain convertible notes and interest were converted into common stock
and preferred stock (see Note 8).
During 1998 and the six months ended June 30, 1999, the Company entered
into capital leases for computer equipment with a cost of $43,822 and
$228,692 (unaudited), respectively.
Barter revenue for the period January 8, 1996 to December 31, 1996, the
years ended December 31, 1997 and 1998 was $0, $484,844, and $2,039,144,
and for the six months ended June 30, 1998 and 1999 was $944,907
(unaudited), and $876,892 (unaudited), respectively.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Webstakes.com, Inc. (the "Company"), formerly Netstakes, Inc., was
incorporated and commenced operations in the State of New York on January 8,
1996 and was reincorporated in the State of Delaware on June 5, 1996. The period
from January 8, 1996 to December 31, 1996 is referred to as the Inception
Period. The Company is an online sweepstakes promotion company. The Company
integrates sweepstakes, contests and similar promotional events with direct
marketing tools and a proprietary database. The Company makes promotions
available without charge to consumers through its web site, webstakes.com,
clients' web sites and consumers' personal home pages. The Company generates
revenues through the sale of promotion sponsorships and services that allow
clients to cost-effectively identify and communicate with potential customers,
increase sales and foster brand awareness.
The Company has sustained net losses and negative cash flows from
operations since its inception. The Company's ability to meet its obligations in
the ordinary course of business is dependent upon its ability to establish
profitable operations or raise additional financing through public or private
equity financings, collaborative or other arrangements with corporate sources,
or other sources of financing to fund operations. During 1999, the Company has
raised additional financings through the issuance of class A mandatorily
redeemable convertible preferred stock (the "class A") and class B mandatorily
redeemable convertible preferred stock (the "class B"). Management believes that
its current funds will be sufficient to enable the Company to meet its planned
expenditures through at least June 2000. If anticipated operating results are
not achieved and additional financings are not available on terms acceptable to
the Company, management has the intent and believes it has the ability to delay
or reduce expenditures.
The Company has a limited operating history and its prospects are subject
to the risks, expenses and uncertainties frequently encountered by companies in
the new and rapidly evolving markets for Internet products and services. These
risks include the failure to develop and extend the Company's online service
brand, the rejection of the Company's services by web consumers, vendors and/or
advertisers, the inability of the Company to maintain and increase the levels of
traffic on its online service, as well as other risks and uncertainties. In the
event that the Company does not successfully implement its business plan,
certain assets may not be recoverable.
2. SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of June 30, 1999 and for the six months ended
June 30, 1999 and 1998 are unaudited and do not include all disclosures required
by generally accepted accounting principles. In the opinion of management, this
unaudited information has been prepared substantially on the same basis as the
audited financial statements and all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for any future period.
REVENUE RECOGNITION
Principally all of the Company's historical revenues have been derived from
promotion services. Promotion services revenues are derived principally from
contracts in which the Company typically guarantees a minimum number of
impressions, or times that the client's name, logo or other identifier appears
in pages viewed by visitors to webstakes.com, and/or times that visitors are
delivered to the client's web site, over a specified period of time for a fixed
fee. The contracts typically include cancellation clauses ranging from 30 to 60
days. Promotion services revenues are recognized ratably in the period in which
the promotion is run, provided that no significant Company obligations remain.
To the extent that minimum guarantees are not met, the Company defers
recognition of the corresponding revenues until the guaranteed minimums are
achieved and the clients receive credits or refunds for the guaranteed services
not provided. Promotion services revenues were approximately 100%, 95% and 98%
of total revenues for the Inception Period and the years ended December 31, 1997
and 1998, respectively. Promotion services revenues were approximately
F-7
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
96% (unaudited) and 100% (unaudited) of total revenues for the six months ended
June 30, 1998 and 1999, respectively.
Included in revenues are barter revenues from the exchange by the Company
with counterparties of promotion services for reciprocal advertising, or
applicable goods and services. Barter revenues are recorded as promotion service
revenues at the lower of the estimated fair value of goods and services received
or promotion services provided, and are recognized when the counterparty's
promotions are run by the Company. The fair value of promotional services
provided and received is determined based on the value of similar services sold
and purchased for cash by the Company. In cases where there is not objective
evidence of fair market value, no revenue is recognized. Barter revenues
represented 0%, 30% and 42% of total revenues for the Inception Period and the
years ended December 31, 1997 and 1998, respectively. Barter revenues
represented 42% (unaudited) and 29% (unaudited) of total revenues for the six
months ended June 30, 1998 and 1999, respectively. Barter expense is recognized
when the Company's promotions are run on the counterparty's web sites, which is
typically in the same period the related barter revenue is recognized.
CONCENTRATION OF CREDIT RISK
In 1998, no one customer accounted for greater than 10% of total revenues
or 10% of net accounts receivable. Two customers individually accounted for 12%
and 19% of total revenues in the Inception Period and one customer accounted for
35% of total revenues in 1997. In the Inception Period, 1997 and 1998, revenues
from the Company's five largest customers accounted for 56%, 53% and 24% of
total revenues, respectively. At December 31, 1996 and 1997, the receivable
balances from its two largest customers amounted to approximately 36% and 37%,
respectively, of the Company's net accounts receivable balance. For the six
months ended June 30, 1999, revenues from the Company's five largest customers
accounted for 24% (unaudited) of total revenues. At June 30, 1999 one customer
individually accounted for 11% (unaudited) of the net accounts receivable
balance.
FIXED ASSETS
Depreciation of computer and office equipment and furniture and fixtures is
provided for using the straight-line method over their estimated useful lives of
three years to five years. Amortization of leasehold improvements is provided
for over the lesser of the term of the related lease or the estimated useful
life of the improvement. Accumulated amortization includes the amortization of
assets recorded under capital leases. The cost of additions and betterments are
capitalized, and repairs and maintenance costs are charged to operations in the
periods incurred. Depreciation and amortization expense has been included in
general and administrative expense.
INCOME TAXES
The Company recognizes deferred taxes by the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for differences between the financial statement and
tax basis of assets and liabilities at enacted statutory tax rates in effect for
the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established when it is more likely than not that deferred tax assets will not be
realized.
F-8
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include money market accounts and all highly
liquid investments purchased with original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash, accounts receivable, accounts payable and accrued liabilities, approximate
fair value because of their short maturities. The carrying amount of the
Company's note payable approximates the fair value of such instruments based
upon management's best estimate of interest rates that would be available to the
Company for similar debt obligations at December 31, 1996, 1997 and 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Significant
estimates and assumptions made by the Company include those related to the
useful lives and recoverability of fixed assets, recoverability of deferred tax
assets, allowance for doubtful accounts and the fair value of products and
services exchanged in barter transactions.
NET LOSS PER SHARE
Basic loss per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted loss per share is computed
using the weighted-average number of common and common stock equivalent shares
outstanding during the period. Common equivalent shares are excluded from the
computation if their effect is antidilutive.
As the Company reported net losses from inception to June 30, 1999, all
66,228 and 114,009 of the options outstanding at December 31, 1997 and 1998,
respectively, and 114,009 (unaudited) and 1,126,100 (unaudited) of the options
outstanding at June 30, 1998 and 1999, respectively, were antidilutive and
therefore, there were no reconciling items between basic and diluted loss per
share for the years then ended. There were no options outstanding as of
December 31, 1996.
The pro forma basic and diluted net loss per share is computed by dividing
the net loss attributable to common stockholders by the sum of the weighted
average number of shares of common stock outstanding giving effect for the one
for one conversion of all 6,666,668 shares of the Class B to common stock and
reacquisition as if it had occurred at the beginning of the period.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). This statement requires companies to
classify items of other comprehensive income by their nature in the financial
statements and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 130 is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
The Company adopted SFAS No. 130 in fiscal year 1998. There was no difference
between net income and comprehensive income for the Inception Period and the
years ended December 31, 1997 and 1998, and for the six months ended June 30,
1998 (unaudited) and 1999 (unaudited).
F-9
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"), which established
standards for reporting information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 was adopted by
the Company at December 31, 1998. Adoption of SFAS No. 131 had no impact on the
Company's results of operations, financial position or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. As the Company has
expensed these costs historically, the adoption of this standard is not expected
to have a significant impact on the Company's results of operations, cash flows
or financial position.
In February 1998, FASB issued SFAS No. 132, "Employees' Disclosures about
Pension and Other Postretirement Benefits" ("SFAS No. 132"), which revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS No. 132 does not change the measurement or recognition of those plans. SFAS
No. 132 is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 132 has not had an impact on the Company's results of
operations, financial position or cash flows.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS No. 133 is
tentatively effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of this statement to
have a significant impact on the Company's results of operations, cash flows or
financial position.
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- -----------
1997 1998 1999
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer and office equipment........................... $266,264 $ 542,144 $ 615,365
Computer software costs................................. -- -- 196,190
Furniture and fixtures.................................. 11,275 34,307 61,639
Leasehold improvements.................................. 451 10,133 10,133
Capital leases.......................................... -- 43,822 272,514
-------- --------- ---------
277,990 630,406 1,155,841
Less accumulated depreciation and amortization........ (45,132) (192,647) (293,546)
-------- --------- ---------
$232,858 $ 437,759 $ 862,295
-------- --------- ---------
-------- --------- ---------
</TABLE>
Depreciation and amortization of fixed assets was approximately $7,471,
$37,661 and $147,515 for the Inception Period and the years ended December 31,
1997 and 1998, respectively, and $59,866 (unaudited) and $176,808 (unaudited)
for the six months ended June 30, 1998 and 1999, respectively.
Computer Software Costs
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance over accounting for computer software developed or
F-10
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. FIXED ASSETS--(CONTINUED)
obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. The Company adopted SOP 98-1 during the
first quarter of 1999. Costs incurred during the preliminary project stage are
expensed as incurred. Computer software costs incurred during the application
development stage are capitalized. Typically, these costs relate to internal
payroll costs of employees directly associated with the development of the
internal use computer software. Amortization commences once the software is
ready for its intended use and is amortized by the straight-line method over the
estimated useful life, typically twelve to eighteen months.
4. RELATED-PARTY TRANSACTIONS (SEE NOTE 8 AND "PRIVATE PLACEMENT" UNDER NOTE 11
(UNAUDITED))
The Company entered into advertising transactions with a stockholder in the
amounts of $4,855, $81,239 and $35,070, for the Inception Period and the years
1997 and 1998, respectively.
5. STOCK OPTION PLAN:
Stock Option Plan
In 1997, the Company's Board of Directors and stockholders adopted the
Company's Stock Option Plan (the "Plan"). The Plan provides for the granting, at
the discretion of the Stock Option Committee of the Board of Directors (the
"SOC"), of: (i) options that are intended to qualify as incentive stock options,
within the meaning of Section 422 of the Internal Revenue Code, as amended (the
"Code"), to employees and (ii) options not intended to so qualify to employees,
officers, consultants and directors. The total number of shares of common stock
for which options may be granted under the Plan is 250,000.
The exercise price of all stock options granted under the Plan is
determined by the SOC at the time of grant. The maximum term of each option
granted under the Plan is 10 years from the date of grant. Options generally
vest ratably over a four year period.
As of December 31, 1997 and 1998, an aggregate of 183,772 and 135,991
shares were available for future grants under the Plan, respectively.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock--Issued to Employees" ("APB 25") and related interpretations in
accounting for its stock option issuances. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", whereby compensation expense is recognized ratably over the
vesting period. Had compensation cost for the Company's stock options issued at
the fair value of the Company's stock been determined based on the fair value of
the stock options at the grant date for awards in 1998 consistent with the
provisions of SFAS No. 123, the Company's net loss would have been adjusted to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Net loss
As reported............................................... $1,414,043
Pro forma................................................. $1,426,552
Net loss per share
As reported--basic and diluted............................ $ (0.27)
Pro forma--basic and diluted.............................. $ (0.28)
</TABLE>
The fair value of each option grant is estimated using the minimum value
method of the Black-Scholes option pricing model which assumes no volatility.
The values were obtained using assumptions which were derived using information
supplied by the Company. Changes in the information would affect the assumptions
and the option prices derived from those assumptions. The weighted average
assumptions used for grants made in 1998 were as follows: Risk free interest
rate 5.6%; Expected option life 7 years; Dividend
F-11
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. STOCK OPTION PLAN:--(CONTINUED)
yield 0.0%. As the fiscal year 1997 option grants were made on December 31,
1997, no compensation cost would have resulted for the fiscal year.
In December 1997, the Company issued options to non-employee consultants to
purchase up to 27,028 shares of the Company's common stock, which vest ratably
over two years. In accordance with Emerging Issues Task Force Abstract
No. 96-18, "Accounting for Equity Investments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services", the
Company is recording the value of the services being received based on the fair
value of the options provided or the services received which ever is more
reliably measured. The fair value of these options has been estimated using the
Black-Scholes pricing model and has been recorded as deferred compensation and
is being amortized as non-cash financial advisory services expense over the
vesting period. Final measurement will occur on the vesting date.
The following table summarizes the activity in options under the plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
FAIR VALUE/EXERCISE
OPTIONS/ PRICE PER
SHARES OPTION/PER SHARE
--------- -------------------
<S> <C> <C>
Outstanding, January 1, 1997........................................... -- $ --
Granted................................................................ 66,228 $ 1.16
Outstanding, December 31, 1997......................................... 66,228 $ 1.16
Granted................................................................ 73,081 $ 3.02
Forfeited.............................................................. (25,300) $ 2.82
Outstanding, December 31, 1998......................................... 114,009 $ 1.98
Granted (unaudited).................................................... 1,014,891 $ 7.17
Forfeited.............................................................. (2,800) $ 16.06
Outstanding, June 30, 1999 (unaudited)................................. 1,126,100 $ 6.63
</TABLE>
No options were exercisable at December 31, 1997. As of December 31, 1998,
23,566 options were exercisable with a weighted average per share fair
value/exercise price of $1.19.
At December 31, 1997 and 1998, the weighted average remaining contractual
life of the options outstanding was approximately 10 years and 9.47 years,
respectively.
6. DEFINED CONTRIBUTION PLAN
The Company began sponsoring a defined contribution plan for its employees
which was effective January 1, 1998. Under the 401(K) Savings Plan (the "Plan"),
employees are allowed to contribute up to 15% of their salary to the Plan, as
defined. The Company makes voluntary contributions to the Plan matching 50% of
the first 6% of employee contributions, which vest over a period of 4 years at
25% per year starting in the second year of service. The total Company
contribution in 1998 was $24,556.
F-12
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS
LEASES:
The Company leases office space in New York and California under
non-cancelable operating leases expiring at various dates through 2002. The
following is a schedule of future minimum lease payments under non-cancelable
operating leases as of December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
- -----------
<S> <C>
1999.......................................................... $120,799
2000.......................................................... 79,250
2001.......................................................... 79,568
2002.......................................................... 81,954
--------
$361,571
--------
--------
</TABLE>
Rent expense was $5,332, $16,439 and $90,693 for the periods ended December
31, 1996, 1997 and 1998, respectively.
The Company leases equipment under capital lease agreements which expire in
fiscal 1999. At December 31, 1998, future minimum lease payments due under
capital leases, together with the present value of such payments is $33,910,
less $2,146 representing interest.
8. CONVERTIBLE NOTES AND EQUIPMENT LOAN--RELATED PARTY
In July 1996, the Company entered into a promissory note agreement with a
former holder of class A (the "holder"). Under the agreement, the Company
received $260,000 during 1996 and an additional $240,000 during 1997. At the
time of issuance, the note was equal to the fair value of shares received upon
conversion. This note, and the interest related thereto, was converted into
999,600 shares of common stock at $.54 per share in September 1997.
In September 1997, the Company entered into a promissory note agreement
with the holder. Under the agreement, the Company received $150,000 during 1997
and an additional $350,000 during 1998. At the time of issuance, the note was
equal to the fair value of shares received upon conversion. This note, and the
interest related thereto, was converted into 715,008 shares of common stock at
$.73 per share in September 1998.
In December 1997, the Company entered into a promissory note agreement with
the holder. Under this agreement, the Company received $200,000 during 1998. The
terms of the agreement call for 36 equal monthly payments of principal and
accrued interest. At December 31 1998, minimum future payments due under notes
payable were $72,222 and $66,667 for the years 1999 and 2000, respectively.
In July 1998, the Company entered into an agreement with the holder under
which the holder agreed to purchase at a future date 50,000 shares of class A.
During the course of 1998, and in January 1999, the holder advanced the Company
$1,270,000 and $120,000, respectively, at an interest rate of prime plus 3%. At
the time of issuance, the face amount of the note was equal to the fair value of
shares to be received upon conversion. On January 20, 1999, the outstanding
principal balance of $1,390,000 plus interest was converted into the agreed upon
50,000 class A and the Company received additional cash of $3,575,000 for the
remaining class A. See Note 11, Subsequent Events (unaudited).
9. CAPITAL STOCK
At December 31, 1998, the authorized capital stock of the Company consisted
of 10,000,000 shares of common stock, $.01 par value per share, 50,000 shares of
class A, $100 par value, and 1,000,000 shares of class B preferred stock, $.01
par value. No shares of class A or class B preferred stock were issued or
outstanding at December 31, 1998. The Board of Directors (the "Board") of the
Company has the authority to issue preferred stock in classes with rights and
privileges determined by the Board. Upon formation of the Company, 3,999,576
shares of $.01 par value common stock were issued to the founders.
F-13
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. CAPITAL STOCK--(CONTINUED)
In 1997, the Board approved a 1 for 1,176 common stock split, which has
been retroactively restated to the inception date. However, the retroactive
restatement of the common stock, $.01 par value, at inception exceeded the
beginning capital infusion of $30,000, resulting in negative additional paid-in
capital at December 31, 1996 of $9,967.
10. INCOME TAXES
There is no current provision for corporate income taxes as the Company
generated a net operating loss for tax purposes.
The components of the net deferred tax asset as of December 31, 1996, 1997
and 1998 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1997 1998
-------- ------------ --------
<S> <C> <C> <C>
Deferred tax assets:
Operating loss carryforward.................................... $102,063 $206,169 $757,574
Allowance for doubtful accounts................................ 1,150 5,842 57,500
Accrued expenses............................................... -- -- 33,120
Other.......................................................... -- -- 3,450
-------- -------- --------
Total deferred tax assets................................... 103,213 212,011 851,644
Deferred tax liabilities:
Depreciation and amortization.................................. 2,417 13,869 14,155
-------- -------- --------
Total deferred tax liabilities.............................. 2,417 13,869 14,155
-------- -------- --------
Net deferred tax asset........................................... 100,796 198,142 837,489
Less: valuation allowance........................................ 100,796 198,142 837,489
-------- -------- --------
Deferred tax asset............................................... $ -- $ -- $ --
-------- -------- --------
-------- -------- --------
</TABLE>
The net deferred tax asset has been fully reserved due to the uncertainty
of the Company's ability to realize this asset in the future.
As of December 31, 1998, the Company had available for federal income tax
purposes net operating loss carryforwards of approximately $1,575,000 which
expire in the years 2011 through 2018.
11. SUBSEQUENT EVENTS (UNAUDITED):
PREFERRED STOCK
The class A is convertible into common stock at prices and at times subject
to the provisions set forth in the Company's restated Certificate of
Incorporation. In the event of a public offering of the Company's shares with
gross proceeds and an offering price as defined, the class A will be
automatically converted into common stock at the conversion rates as stated in
the Company's restated Certificate of Incorporation. Convertible preferred
stockholders maintain voting rights equivalent to the number of shares of common
stock on an as if converted basis.
In January 1999, the Company issued 50,000 shares of the class A through a
private placement, in consideration for net proceeds of approximately
$5,000,000, inclusive of the conversion of $1,390,000 of advances plus interest.
The holders of the class A are entitled to receive cumulative or noncumulative
dividends when and if declared by the Board. These dividends are in preference
to any declaration or payment of any dividend on the common stock of the
Company. All or any portion of the preferred shares are redeemable at the option
of the holders at any time after August 1, 2003 for $100 per share (par value),
plus accrued and unpaid dividends at the redemption date.
In the event of liquidation, the holders of the class A have a liquidation
preference over holders of common stock. Such preference is equal to the
original cost of the class of preferred stock, plus any declared or unpaid
dividends.
F-14
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED):--(CONTINUED)
In June 1999, the Company repurchased all outstanding shares of the
class A. See "Private Placement" below.
WARRANTS
In March 1999, the Company issued to Allen & Co. warrants to purchase
168,350 shares of the Company's common stock (which was increased in June 1999
to a total of 221,683 shares of common stock), for financial advisory services
provided plus three payments of $100,000 due on June 30, 1999, 2000 and 2001 in
exchange for financial advisory services to be provided from non-employee
consultants. In accordance with EITF 96-18, the Company is recording the value
of the services being received based on the fair value of the warrants provided
or the services received which ever is more reliably measured. The fair value of
these warrants is estimated using the Black-Scholes pricing model and is
expensed over the vesting period. Final measurement will occur on the vesting
date. As the warrants vested upon issuance, all of the expense was recognized as
non-cash financial advisory services expense in the six months ended June 30,
1999 (unaudited).
LEASE AGREEMENT
In March 1999, the Company entered into a secured financing agreement with
a leasing company for the leasing of equipment in an amount up to $1,000,000.
The lease has a one-year availability period and a term of 36 months, with
interest and principal payable monthly. Through July 1999, the Company has
leased approximately $812,000 of equipment under the lease. These items have
been accounted for as a capital lease.
1999 EQUITY COMPENSATION PLAN
In June 1999, the Company's Board of Directors and stockholders adopted the
Company's Equity Compensation Plan (the "1999 Plan"). The 1999 Plan provides for
the granting, at the discretion of a committee of the board of: (i) options that
are intended to qualify as incentive stock options, within the meaning of
Section 422 of the Code, to employees and (ii) options not intended to so
qualify to employees, officers, consultants and directors. The Company has
2,000,000 shares of common stock authorized for grants under the 1999 Plan. As
of July 1999, options to purchase 657,100 shares of common stock have been
granted under the 1999 Plan.
The exercise price of all stock options granted under the 1999 Plan is
determined by the committee of the board at the time of the grant. The maximum
term of each option granted under the 1999 Plan is 10 years from the date of
grant. Options generally vest ratably over a four-year period.
AUTHORIZED SHARES
In June 1999, the Company's board of directors and stockholders amended the
Company's Certificate of Incorporation to create the class B, $.01 par value and
authorized 6,700,000 shares of the class B. The previously existing class B
preferred stock became the class C preferred stock, no par value. Additionally,
the number of authorized shares of common stock was increased to 50,000,000
shares.
PRIVATE PLACEMENT
In June 1999, the Company completed a private placement and issued
6,666,668 shares of class B, in consideration for net proceeds of $40,000,000.
Subsequently, the Company repurchased all 50,000 shares of class A and 1,714,608
shares of common stock for $24,000,000. The repurchased class A was cancelled.
In accordance with EITF D-42 "The Effect on the Calculation of Earnings per
Share for the Redemption or Induced Conversion of Preferred Stock," the excess
of the consideration paid to the holders of the class A in the redemption of the
50,000 shares over the carrying amount of class A represents a deemed dividend
or return to the holders of the class A of $8,712,352.
F-15
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED):--(CONTINUED)
Each share of the class B is convertible into one share of common stock and
automatically converts at this one for one ratio upon completion of the
Company's IPO assuming net proceeds of at least $20 million and a per share
price of at least $10.50.
At any time after May 1, 2004, the class B is redeemable, at the option of
the holders, at a per share price equal to 125% of the per share purchase price,
adjusted for stock splits, dividends, stock options and the like, plus any
accrued but unpaid dividends as of the redemption date. The class B will be
accreted to its redeemable value over the five-year period from the date of
issuance to the redemption date. The accretion will be recorded as preferred
stockholder's dividend and included in the earnings per share calculation in
accordance with SFAS 128, "Earnings per Share."
As the Class B is only convertible upon closing of the Company's IPO, which
is outside the control of the holder, in accordance with EITF D-60 "Accounting
for the Issuance of Convertible Preferred Stock and Debt Securities with a
Nondetachable Conversion Feature," the Company looked to the commitment date as
the measurement date in determining whether the issuance of the Class B included
a beneficial conversion feature. It was determined that as the issuance price
equaled the common stock fair value on that date, no beneficial conversion
feature exists.
The holders of the class B will be entitled to receive dividends when and
if declared by the Board. These dividends are in preference to any declaration
or payment of any dividend on the common stock of the Company.
In the event of liquidation, the holders of the class B have a liquidation
preference over holders of common stock. Such preference is equal to 125% of the
original cost of the class B, plus any declared or unpaid dividends.
The class B stockholders maintain voting rights equivalent to the number of
shares of common stock on an as if converted basis.
SIGNIFICANT CONTRACTS
In June 1999, the Company entered into a two-year sponsorship agreement
with Excite under which Excite agreed to promote webstakes.com through ad banner
placements and links to webstakes.com and its promotions on Excite.com,
WebCrawler.com and Classified2000.com and through the use of a webstakes.com
personalized front page made available by Excite. As part of this agreement, the
Company received a guarantee of a total number of impressions per year. The fee
to be paid to Excite under this agreement is $5.6 million, $1.3 million of which
has been paid and the balance of which is due 10 days following the completion
of the Company's IPO. At Home Corporation, the parent company of Excite, is a
stockholder of the Company. The fee paid to date is recorded as a prepaid
expense and amortized as the payments are due ratably over the two-year term of
the contract. See "Use of Proceeds."
In June 1999, the Company entered into a services agreement with
MatchLogic, Inc., a wholly owned subsidiary of Excite, pursuant to which
MatchLogic will provide ad serving and targeting, data processing, analysis and
enhancement services to the Company. The term of the agreement is two years. The
fee to be paid to MatchLogic under this agreement is $13.1 million,
$5.0 million of which has been paid and the balance of which is due 10 days
following completion of the Company's IPO. The fee paid to date is recorded as a
prepaid expense and amortized as the payments are due ratably over the two-year
term of the contract. See "Use of Proceeds."
In June 1999, the Company prepaid $800,000 to National Broadcasting
Company, Inc. ("NBC"), for various advertisements that will appear on NBC
television.
Additionally, in June 1999, the Company entered into an agreement with NBC
Multimedia, Inc. whereby the Company will provide online sweepstakes services
for NBC.com and NBC Interactive Neighborhood, in exchange for which the Company
will receive placement on the NBC.com home page. This agreement is being
accounted for in accordance with the Company's barter revenue policy (Note 2).
F-16
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED):--(CONTINUED)
STOCK OPTION PLAN
In April 1999, the Company's board of directors and shareholders increased
the number of options issuable under the Stock Option Plan (the "Plan") to
450,000. As of July 1999, 450,000 stock options were outstanding under the Plan.
Upon closing of the Company's IPO, each non-employee director will receive
options to purchase up to 16,000 shares of the Company's common stock, which
vest ratably over four years. The Company has accounted for these options in
accordance with APB 25 as the Company has adopted the disclosure only provisions
of FAS 123.
F-17
