UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM_____________TO_____________
COMMISSION FILE NUMBER: 000-27411
PROMOTIONS.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3898912
--------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11 West 19th Street, 10th Floor
New York, New York 10011
(Address of principal executive offices) (Zip Code)
(212) 242-8800
(Registrant's telephone number, including area code)
Indicate by check mark (X) whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ( X )
No(__).
As of August 1, 2000, there were 14,267,569 shares of the registrant's
common stock outstanding.
1
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PROMOTIONS.COM, INC.
FORM 10-Q
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999......................................... 3
Condensed Statements of Operations for the six months
ended June 30, 2000 and 1999 (unaudited)...................... 4
Condensed Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 (unaudited)............... 5
Notes to Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8
Item 3. Qualitative and Quantitative Disclosures About Market Risk.... 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................. 18
Item 2. Changes in Securities and Use of Proceeds..................... 18
Item 3. Defaults Upon Senior Securities............................... 19
Item 4. Submission of Matters to a Vote of Security Holders........... 19
Item 5. Other Information............................................. 19
Item 6. Exhibits and Reports on Form 8-K.............................. 20
SIGNATURES.................................................... 21
</TABLE>
2
<PAGE>
Part 1.
Item 1. FINANCIAL STATEMENTS
PROMOTIONS.COM, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 22,246,834 $ 34,647,630
Accounts receivable, net ................................................ 7,139,085 2,396,853
Prepaid expenses and other current assets ............................... 9,080,286 9,976,198
------------ ------------
Total current assets ................................................... 38,466,205 47,020,681
------------ ------------
Fixed assets, net ......................................................... 5,712,222 3,089,311
Restricted cash ........................................................... 1,600,000 --
Other assets .............................................................. 491,901 3,615,465
------------ ------------
Total assets .......................................................... $ 46,270,328 $ 53,725,457
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 4,940,126 $ 1,754,255
Accrued liabilities ..................................................... 2,793,737 2,821,005
Deferred revenues ....................................................... 1,379,852 483,366
Capital lease obligations ............................................... 386,630 290,640
Notes payable ........................................................... 33,333 66,667
------------ ------------
Total current liabilities ............................................. 9,533,678 5,415,933
------------ ------------
Capital lease obligation, net of current portion ........................ 535,058 436,424
Deferred gain on sale of assets ......................................... 15,585 17,531
------------ ------------
Total liabilities ..................................................... 10,084,321 5,869,888
------------ ------------
Stockholders' equity:
Common stock-par value $.01, 50,000,000 shares authorized, 14,241,244 and
14,267,569 and 14,241,244 shares issued and outstanding
at June 30, 2000 (unaudited), and December 31, 1999 ................... 142,675 142,412
Additional paid-in capital .............................................. 68,067,441 67,969,343
Accumulated deficit ..................................................... (32,009,639) (20,233,041)
Deferred compensation ................................................... (14,470) (23,145)
------------ ------------
Total stockholders' equity ............................................ 36,186,007 47,855,569
------------ ------------
Total liabilities and stockholders' equity .......................... $ 46,270,328 $ 53,725,457
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
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PROMOTIONS.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ......................................... $ 8,856,293 $ 1,735,835 $ 14,916,385 $ 3,054,463
Operating expenses:
Product development ............................ 1,487,731 342,160 2,328,949 450,865
Sales and marketing ............................ 7,869,080 2,375,629 14,736,856 3,680,864
Non-cash sales and marketing - MatchLogic
& Excite expense ............................. 2,160,000 360,000 4,261,139 360,000
General and administrative ..................... 3,044,508 1,359,519 5,316,183 2,033,926
Depreciation and amortization .................. 471,244 70,378 851,006 176,808
Non-cash financial advisory services ........... -- 774,470 -- 796,691
------------ ------------ ------------ ------------
Total operating expenses ..................... 15,032,563 5,282,156 27,494,133 7,499,154
------------ ------------ ------------ ------------
Loss from operations ........................... (6,176,270) (3,546,321) (12,577,748) (4,444,691)
Interest income, net ............................. 394,525 37,851 801,150 51,933
------------ ------------ ------------ ------------
Net loss ......................................... $ (5,781,745) $ (3,508,470) $(11,776,598) $ (4,392,758)
Preferred stock deemed dividend .................. (8,712,352) -- (8,712,352)
------------ ------------ ------------ ------------
Net loss attributable to common
stockholders ................................... $ (5,781,745) $(12,220,822) $(11,776,598) $(13,105,110)
============ ============ ============ ============
Basic and diluted net loss per share
attributable to common
stockholders ................................... $ (0.41) $ (2.26) $ (0.83) $ (2.36)
============ ============ ============ ============
Weighted average shares of common
stock used in computing basic and
diluted net loss per share
attributable to common
stockholders ................................... 14,261,108 5,409,365 14,251,131 5,562,617
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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PROMOTIONS.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................... $(11,776,598) $ (4,392,758)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of fixed assets ............................ 851,006 176,808
Amortization of deferred compensation expense ............................ 30,174 --
Expense recognized in connection with issuance of warrants ............... 45,116 --
Non-cash financial advisory services ..................................... -- 796,691
Bad debt expense ......................................................... 873,718 215,805
Interest payable converted into common stock ............................. -- 35,000
Changes in operating assets and liabilities:
Accounts receivable ...................................................... (5,615,948) (404,111)
Prepaid expenses and other current assets ................................ 895,912 (3,015,145)
Other assets ............................................................. 3,122,913 (531,104)
Accounts payable ......................................................... 3,185,871 349,973
Accrued and other liabilities ............................................ (29,215) 422,401
Deferred revenue ......................................................... 896,486 44,423
------------ ------------
Net cash used in operating activities ........................................ (7,520,565) (6,302,017)
------------ ------------
Cash flows from investing activities:
Payment of security deposit ................................................ (1,600,000) --
Proceeds from sale of fixed assets ......................................... -- 157,292
Purchase of fixed assets ................................................... (3,473,267) (509,170)
------------ ------------
Net cash used in investing activities ........................................ (5,073,267) (351,878)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable .................................... -- 120,000
Proceeds from exercise of stock options .................................... 31,746 --
Principal payments on notes payable-related party .......................... (33,334) (38,889)
Proceeds from issuance of capital leases ................................... 385,768 --
Principal payments on capital lease obligations ............................ (191,144) (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 ................................... 193,036 19,609,627
------------ ------------
Net (decrease) increase in cash for the period .............................. (12,400,796) 12,955,732
Cash and cash equivalents, beginning of period ............................... 34,647,630 17,573
------------ ------------
Cash and cash equivalents, end of period ..................................... $ 22,246,834 $ 12,973,305
============ ============
Cash paid during the period for interest ..................................... $ 41,806 $ 11,157
============ ============
Supplemental disclosure of non-cash investing, financing and other activities:
Notes payable converted into common and preferred stock ...................... -- $ 1,390,000
Equipment acquired under capital leases ...................................... $ 408,634 $ 228,692
Barter transactions .......................................................... $ 1,482,255 $ 944,907
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
<PAGE>
PROMOTIONS.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Promotions.com, Inc. (the "Company"), was incorporated and commenced operations
in the State of New York on January 8, 1996 as Webstakes, Inc. and was
reincorporated in the State of Delaware on June 5, 1996 as Netstakes, Inc. On
June 11, 1999 the Company changed its name to Webstakes.com, Inc. On January 31,
2000, the Company changed its name to Promotions.com, Inc. Promotions.com, Inc.
is a global internet promotion solutions company. Combining technology, data and
promotions expertise, the Company provides promotion solutions to help clients
achieve their overall marketing and business objectives. The Company generates
revenues through WEBSTAKES.COM, a web site dedicated to internet sweepstakes and
promotions; Promotions.com CUSTOM SOLUTIONS, a full service integrated internet
promotion services group; and Promotions.com DIRECT, which offers targeted email
and lead generation.
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. INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required under generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for the fair presentation of the
results of the interim periods presented in this filing have been made.
Operating results for the six month period ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000 or for any other future interim periods.
The balance sheet information at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
financial statements and footnotes thereto included in the Company's Form 10-K
for the year ended December 31, 1999, as filed with the Securities and Exchange
Commission.
The Company has made certain reclassifications within its financial statements
to conform with current period classification.
3. 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 stock equivalent shares are excluded from
the computation if their effect is antidilutive.
As the Company reported net losses at June 30, 2000 and 1999, all 2,601,787 and
1,126,100 of the options and warrants outstanding at June 30, 2000 and 1999,
respectively, were antidilutive and therefore, there were no reconciling items
between basic and diluted loss per share for the six months then ended.
6
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PROMOTIONS.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 expresses the views of the SEC staff in applying
generally accepted accounting principles to certain revenue recognition issues.
SAB 101 is not a rule or interpretation of the SEC, however, it represents
interpretations and practices followed by the Division of Corporate Finance and
the Office of the Chief Accountant in administering the disclosure requirements
of the Federal Securities laws. As a result of our review of SAB 101 the Company
has decided to change its revenue recognition policy related to its CUSTOM
SOLUTIONS services. The effect of such change did not have a materially adverse
effect on the financial statements.
7
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PROMOTIONS.COM, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
Promotions.com contains forward-looking statements relating to the future events
and the future performance of Promotions.com within the meaning of section 27A
of the Securities Exchange Act of 1933, as amended, and section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that
such statements involve risks and uncertainties. Promotions.com's actual results
and timing of certain events could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including, but
not limited to, those set forth under " Risk Factors" and elsewhere in this
report and in Promotions.com's other public filings on file with the Securities
& Exchange Commission.
OVERVIEW
During the six months ended June 30, 2000 and 1999, revenue was generated
primarily by promotion services. Principally all of the company's historical
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 customers prior to providing promotion services are
recorded as deferred revenue and are recognized as revenue ratably as the
services are provided. With respect to revenue generated from our promotions
portal, WEBSTAKES.COM, we generally guarantee a minimum number of impressions,
or times that the customer'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 customer'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.
Promotions.com CUSTOM SOLUTIONS service provides custom turnkey solutions to
create and manage promotions on a customer's own web site. Revenues are derived
principally from contracts in which the company typically provides services for
the administration and implementation of the promotion. The contracts typically
include cancellation clauses ranging from 30 to 60 days. Since there is
significant up front customized design work incurred before a promotion begins,
the company has in the past recognized the portion of revenue related to the
customized design work at the time the work is performed. The remaining revenue
was recognized ratably in the period in which the promotion was run, provided
that no significant company obligations remained. During the second quarter of
2000, the Company decided to change its revenue recognition policy related to
CUSTOM SOLUTIONS services to recognize revenues 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. The
company has accounted for this change in accordance with FASB Statement No.3,
"Reporting Accounting Changes in Interim Financial Statements." The cumulative
effective of the change in accounting principal was not material.
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 the six months ended June 30, 2000 and 1999, barter revenues were
9.4% and 31% of our total revenues. This decrease is directly related to our
efforts to decrease barter transactions and in turn increase our focus on
growing cash revenues. We expect that, as our cash revenues grow, barter as a
percentage of our revenues will decrease.
The period-to-period comparisons of our historical operating results should not
be relied upon as indicative of future performance. Our quarterly report should
be considered in light of the risks, expenses and difficulties encountered by
companies in the early stages of development, particularly companies in the
rapidly evolving stages of the Internet market. Although we have experienced
revenue growth in recent periods, we anticipate that we will incur operating
losses for the foreseeable future due to a high level of planned operating and
capital expenditures. In particular, we expect to increase our operating
expenses in order to expand our sales force and marketing personnel and to
develop, integrate and scale our technology.
8
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RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues. Revenues primarily result from the sale of promotion services.
Revenues were approximately $8.9 million and $1.7 million for the three months
ended June 30, 2000 and 1999. We recorded barter revenues of approximately
$853,000 and $442,000 during the three months ended June 30, 2000 and 1999,
representing approximately 9.6%and 25% of total revenues during those periods.
Revenues were approximately $14.9 million and $3.1 million for the six months
ended June 30, 2000 and 1999. We recorded barter revenues of approximately $1.4
million and $945,000 during the six months ended June 30, 2000 and 1999
representing approximately 9.4%and 31% of total revenues during those periods.
This decrease is directly related to our efforts to decrease barter transactions
and in turn increase our focus on growing cash revenues. We expect that, as our
cash revenues grow, barter as a percentage of our revenues will decrease.
The period-to-period growth in revenues was primarily attributable to the
increasing number of marketers purchasing promotional services on the Company's
on-line media property and purchasing CUSTOM SOLUTIONS as well as larger
longer-term purchases by certain marketers. Approximately 298 customers
purchased promotional services during the six months ended June 30, 2000 as
compared to approximately 72 during the six months ended June 30, 2000. No one
customer accounted for more than 10% of total revenues or accounts receivable
for the six months ended June 30, 2000. There can be no assurances that the
online promotion market will grow, customers will continue to purchase
promotional services, that customers will not make smaller and shorter term
purchases, or that market prices for Web-based promotional services will not
decrease due to competitive or other factors. There also can be no assurance
that we can continue to grow our revenues at the same growth rate as we have in
past periods.
Product Development Expenses. Product development expenses include the personnel
costs associated with the design and development of WEBSTAKES.COM and CUSTOM
SOLUTIONS, our promotions infrastructure and technology, as well as software
licensing costs. Product development expenses were approximately $1.5 million or
17% of total revenues for the three months ended June 30, 2000 compared to
$342,000 for the three months ended June 30, 1999, or 20% of total revenues.
Product development expenses were approximately $2.3 million or 15% of total
revenues for the six months ended June 30, 2000 compared to $450,000 for the six
months ended June 30, 1999, or 15% of total revenues. The period-to-period
increases in absolute dollars are primarily attributable to increases in the
number of engineers that develop and enhance the features and functionality of
WEBSTAKES.COM and the Company's increased focus on Promotions.com CUSTOM
SOLUTIONS services. The increase is also attributable to the roll-out of new
products and our international expansion. We believe that timely deployment of
new and enhanced products 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. Consequently, the Company expects to incur increased product
development expenditures in absolute dollars in future periods.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
advertising costs, salaries and commissions of sales personnel, costs of trade
shows, conventions and marketing materials and other marketing expenses. Sales
and marketing expenses were approximately $10 million for the three months ended
June 30, 2000 or 112% of total revenues compared to $2.7 million for the three
months ended June 30, 1999, or 158% of total revenues. Sales and marketing
expenses were approximately $19.0 million for the six months ended June 30, 2000
or 127% of total revenues compared to $4.0 million for the six months ended June
30, 1999, or 129% of total revenues. The period-to-period increases in sales and
marketing expenses was primarily attributed to an increase in advertising costs
associated with the Company's name change and aggressive marketing strategy. The
increase was also due in part to the growth of the Company, increases in
compensation expense associated with the growth of the Company's sales force and
marketing personnel, and an increase in sales commission associated with the
increase in revenues. Due to the growth of the Company, we anticipate that sales
and marketing expenses in absolute dollars will increase in future periods as we
continue to pursue an aggressive marketing strategy through advertising and
continue to expand our international operations, and continue to build our sales
force.
9
<PAGE>
General and Administrative Expenses. General and administrative expenses consist
primarily of services and related costs of general corporate functions,
including finance, operations, human resources and facilities. General and
administrative expenses were approximately $3.5 million for the three months
ended June 30, 2000, or 39% of total revenues compared to $1.4 million for the
three months ended June 30, 1999, or 82% of total revenues. General and
administrative expenses were approximately $6.2 million for the six months ended
June 30, 2000, or 41% of total revenues compared to $2.2 million for the six
months ended June 30, 1999, or 71% of total revenues. The absolute dollar
increase in general and administrative expenses was 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. The increase was also due in part to an increase in
allowance for doubtful accounts. This increase in the allowance for doubtful
accounts was the result of an increase in cash revenues, and increase in the
percentage of cash revenues reserved for doubtful accounts. We expect to incur
additional general and administrative expenses as we hire additional personnel
and incur additional costs related to the growth of our business and operation
as a public company. We expect these expenses to include facilities expansion,
investor relations programs and professional service fees. 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, as reflected
in the percentage decreases from the three and six months ended June 30 1999 to
the three and six months ended June 30, 2000.
Non-Cash Financial Advisory Services Expense. Non-cash financial advisory
service expenses relate to stock options and warrants granted to third parties
for consulting and financial advisory services in the three and six months ended
June 30, 1999. These stock options and warrants were fully vested at the date of
issuance. The value of the stock options and warrants issued were calculated
using the Black Scholes method.
Interest Income, Net. Interest income, net of expense, consists primarily of
interest earned on our cash balance and the interest expense on our outstanding
debt. We recognized net interest income of approximately $394,000 for the three
months ended June 30, 2000 compared to net interest income of $37,000 for the
three months ended June 30, 1999. We recognized net interest income of
approximately $801,000 for the six months ended June 30, 2000 compared to net
interest income of $51,000 for the six months ended June 30, 1999. The increase
was primarily attributable to a higher average cash balance invested,
principally due to proceeds received from a private placement and initial public
offering during 1999. Interest income in future periods is likely to go down as
a result of a reduction in average cash balances invested maintained by the
Company and changes in the prevailing interest rate of its investments.
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, 1999, we had approximately $20.0 million of
federal net operating loss carryforwards for tax reporting purposes to offset
future taxable income. Our federal net operating loss carry forwards expire in
the years 2012 through 2019.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the private
and public placement of equity securities and the incurrence of indebtedness. On
September 24, 1999, we completed the initial public offering of 3,575,000 shares
of common stock for gross proceeds of $50.1 million and net proceeds of $44.9
million, after deducting expenses of the offering.
Net cash used in operating activities was approximately $7.5 million for the six
months ended June 30, 2000, compared to approximately $6.3 million for the six
months ended June 30, 1999. The increase in cash used in operating activities
for 2000 was primarily due to the net loss of $11.7 million during the period
which resulted from costs incurred to support the Company's sales and marketing
efforts and the increased personnel required to manage the Company's growing
operations combined with higher levels of accounts receivable resulting from
increased revenues which was partially offset by increases in accounts payable
and accrued expenses.
Net cash used in investing activities was approximately $5 million for the six
months ended June 30, 2000 compared to $352,000 for the six months ended June
30, 1999. As of June 30, 2000, 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 estimate that our capital expenditures will be
approximately $8.0 million for 2000. We currently expect that our principal
capital expenditures through 2000 will relate to improvements to our technical
infrastructure and expansion of our headquarters.
10
<PAGE>
Net cash provided by financing activities was approximately $193,000 for the six
months ended June 30, 2000 compared to net cash provided by financing activities
of approximately $19.6 million for the six months ended June 30, 1999. Net cash
provided by financing activities in 2000 was primarily attributable to proceeds
from capital leases net of principal payments made on notes payable and capital
lease obligations. Net cash provided by financing activities in 1999 was
primarily attributable to our private placements. To date, we have made all
payments due under our equipment loan.
We have 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. In June 2000, the financing agreement was increased to $2.0
million in exchange for the Company issuing warrants to purchase 13,345 shares
of the Company's common stock. As of June 30, 2000 we have approximately
$921,000 of equipment outstanding under the agreement. The leases have terms of
up to three years and the interest rates under the leases range from 8 1/2% to
13%. We are required to make monthly payments of interest and principal under
the leases. To date all payments have been made.
We have 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. We
prepaid Excite $5.6 million during 1999 for this two year agreement. At Home
Corporation, the parent company of Excite, is one of our principal stockholders.
Each quarter we recognize approximately $683,000 of expense related to this
agreement.
We have a service agreement with MatchLogic, a wholly owned subsidiary of
Excite, pursuant to which MatchLogic will provide ad serving and targeting, data
processing, analysis, enhancement and other services to Promotions.com. The term
of the agreement is two years. We prepaid MatchLogic $13.1 million during 1999
for this two-year agreement. Each quarter we recognize approximately $1.5
million of expense related to this agreement.
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
the initial public offering, the class B mandatorily redeemable convertible
preferred stock automatically converted into 6,666,668 shares of common stock.
The class A mandatorily redeemable convertible preferred stock and class B
mandatorily redeemable convertible preferred stock are not 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 $8.7 million.
Our capital requirements depend on numerous factors, including the amount of
resources the Company devotes to advertising and marketing our brand, the
resources the Company devotes to expanding our sales and marketing capabilities,
resources devoted to acquire or invest in complementary businesses,
technologies, products or services or to invest in geographic expansion.
Management believes that our cash on hand as of June 30, 2000 of $23.8 million
($1.6 million of which is restricted) together with cash flows will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for our existing business for the next 12 months based on our
second quarter 2000 rate of cash use. However, we will need to raise additional
funds during 2000 in order to fund more rapid expansion, adopt a more aggressive
marketing strategy or in response to competitive pressures. There can be no
assurances that any required additional financing will be available on terms
favorable to us, or will 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 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.
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RISK FACTORS
An investment in our Company involves a high degree of risk. You should consider
carefully the risks below, together with the other information contained in this
quarterly report, before you decide to invest in our Company. If any of the
following risks actually occur, our business, results of operations and
financial condition could be harmed, the trading price of our common stock could
decline and you could lose all or part of your investment.
RISKS RELATING TO OUR COMPANY AND 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 $11.7 million
for the six months ended June 30, 2000. As of June 30, 2000, our accumulated
deficit was approximately $32 million. For us to make a profit, our revenues
will need to increase sufficiently to cover our costs and 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.
SEASONAL AND CYCLICAL PATTERNS MAY AFFECT OUR BUSINESS
We believe that advertising sales in traditional media, such as television and
radio, generally are lower in the first and third calendar quarters of each
year. If our market makes the transition from emerging to a more developed
market, the seasonal and cyclical patterns may develop in the future. As a
result, if our industry follows the same seasonal patterns as those in
traditional media, we may experience lower advertising revenues in the first and
third calendar quarter of each year. Seasonal and cyclical patterns in Internet
advertising may also affect our revenues. In addition, traffic levels on our Web
sites typically fluctuate during the summer and year-end vacation and holiday
periods.
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OUR UNCERTAIN SALES CYCLES COULD ADVERSELY AFFECT OUR BUSINESS
The time between the date of initial contact with potential clients and the
execution of a contract with the client is often lengthy, typically from six
weeks for smaller agreements to nine months for larger agreements, and is
subject to delays over which we have little or no control, including:
o Clients budgetary constraints;
o Clients internal acceptance reviews;
o The success and continued internal support of clients own development
efforts; and
o The possibility of cancellation or delay of projects by clients.
During the sales cycle, we may expend substantial funds and management resources
and yet not obtain clients. Accordingly, our results of operations for a
particular period may be adversely affected if sales to clients forecasted in a
particular period are delayed or do not otherwise occur.
IF WE ARE UNABLE TO ATTRACT VISITORS TO WEBSTAKES.COM AND THE WEB SITES OF OUR
CUSTOMERS, 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 customers. 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 customer 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
customer 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 CUSTOMERS DO NOT RENEW THEIR AGREEMENTS OR TERMINATE THEM PRIOR TO THEIR
SCHEDULED EXPIRATIONS, OUR REVENUES WILL BE REDUCED.
Our agreements with customers generally have terms ranging from one to 12
months. In addition, substantially all of our agreements permit our customers to
terminate their relationships with us on relatively short notice. Our customers
may not remain customers 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 CUSTOMERS.
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.
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 have only been employed by us for a short time, including our
Chief Financial Officer, who joined us in April 1999 and our Chief Operating
Officer, who joined us in December 1999. 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 are uncertain and still evolving. Although
we have patent and trademark applications pending, none have been granted to
date.
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.
WE REQUIRE ADDITIONAL FINANCING TO EXPAND OUR BUSINESS, AND WE MAY NOT BE ABLE
TO OBTAIN ADDITIONAL FINANCING.
We 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.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR PRODUCTS GIVEN AS PRIZES IN
OUR PROMOTIONS AND FOR PRODUCTS SOLD BY OUR CUSTOMERS 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 customers 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.
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 customers 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.
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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 customers
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.
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 web 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 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."
CHANGES IN THE LAWS RELATING TO DATA COLLECTION AND USE PRACTICES AND THE
PRIVACY OF INTERNET USERS AND OTHER INDIVIDIUALS COULD HARM OUR BUSINESS
The U.S. federal and various state governments have recently proposed
limitations on the collection and use of information regarding Internet users.
In addition, in October 1998, the European Union adopted a directive that could
limit our ability to collect and use information regarding Internet users in
Europe. Since many of the proposed laws or regulations are just being developed,
we cannot yet determine the impact these regulations may have on our business.
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In addition, growing public concern about privacy and the collection,
distribution and use of information about individuals has led to self-regulation
of these practices by the direct marketing industry and to increased federal and
state regulation. The Direct Marketing Association, or DMA, the leading trade
association of direct marketers, has adopted guidelines regarding the fair use
of this information which it recommends participants, such as us, should use. We
are also subject to various federal and state regulations concerning the
collection, distribution and use of information regarding individuals. As a
consequence of government legislation or regulation or enforcement efforts or
evolving standards of fair information collection practices, we may be required
to make changes to our business in ways that could diminish the effectiveness of
our business or its attractiveness to potential customers. Although our
compliance with the DMA's guidelines and applicable federal and state laws and
regulations has not had a material adverse effect on us, we cannot assure you
that the DMA will not adopt additional, more burdensome guidelines or that
additional, more burdensome federal or state laws or regulations, including
antitrust, consumer privacy and fair collection laws, will not be enacted or
applied to us or our customers, which could materially and adversely affect our
business, financial condition and results of operations.
OUR OFFICERS AND DIRECTORS MAY CONTROL US.
Our executive officers and directors in the aggregate, beneficially own
approximately 42% of our common stock. 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.
THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN MARKET COULD DEPRESS OUR
STOCK PRICE
Sales of significant amounts of common stock in the public market in the future
or the perception that sales will occur could materially and adversely affect
the market price of the common stock or our future ability to raise capital
through an offering of our equity securities. There are approximately 10,641,000
shares of common stock held by our stockholders that are "restricted
securities," as that term is defined in Rule 144 of the Securities Act of 1933.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption for registration under Rules 144, 144(k), or 701
under the Securities Act. Currently, approximately 472,000 shares of the
restricted securities are eligible for sale in the public market under Rule 144
without volume limitations or further registration under the Securities Act, not
including approximately 3,528,000 shares held by our "affiliates," within the
meaning of the Securities Act. These 3,528,000 shares are eligible for public
sale subject to volume limitations. After June 14, 2000, approximately 6,667,000
additional shares of restricted securities were eligible for sale in the public
market under Rule 144 subject to volume limitations. The holders of these shares
are entitled to require us to register their shares for public sale.
As of June 30, 2000, there are outstanding options to purchase 2,366,759 shares
of common stock which are eligible for sale in the public market from time to
time depending on vesting. In addition, there are outstanding warrants to
purchase up to 235,028 shares of common stock upon exercise. The securities
issued upon the exercise of such warrants will be "restricted securities," as
that term is defined in Rule 144 of the Securities Act, however, will be
eligible for sale in the public market pursuant to Rule 144 subject to volume
limitations.
OUR COMMON STOCK PRICE IS HIGHLY VOLATILE
The market price of our common stock has been and will likely continue to be
highly volatile. 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. 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Rate Fluctuations. Promotions.com's results of operations, financial
position and cash flows are not materially affected by changes in the relative
values of non-U.S. currencies to the U.S. dollar.
Market Risks. Our accounts receivable are subject, in the normal course of
business, to collection risks. We regularly assess these risks and have
established policies and business practices to protect against the adverse
effects of collection risks. As a result, Promotions.com does not anticipate any
material losses in this area.
Interest Rate Risk. Our investments are classified as cash and cash equivalents
with original maturities of three months or less. Therefore, changes in the
market's interest rates do not affect the value of the investments as recorded
by Promotions.com.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(A) Changes in Securities:
NONE.
(B) Use of Proceeds:
1)Pursuant to Rule 701 of Regulation S-K, the use of proceeds from the Company's
offering of common stock which commenced on September 24, 1999, is as follows as
of June 30, 2000:
Shares registered: 3,575,000
Aggregate price of offering amount registered: $50,050,000
Shares sold: 3,575,000
Aggregate price of offering amount sold $50,050,000
Director or indirect payments to directors, Officers, general
partners of the issuer or Their associates, to persons
owning ten Percent or more of any class of equity
Securities of the issuer and to affiliates Of the
issuer: $-0-
Direct or indirect payments to others: $5,070,641
Net offering proceeds to the issuer after
Deducting expenses: $44,979,359
Detail uses to date:* $22,732,525
Working capital reserves:
Temporary investments in cash and cash equivalents: $22,246,834
* As of June 30, 2000, the proceeds used from our initial public offering were
used towards payments due to Excite and Matchlogic and for working capital and
general corporate purposes.
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2) In April 2000, employees exercised options and received (i) an aggregate
29,783 shares of common stock at a price per share of $1.16, (ii) an aggregate
1,963 shares at a price of $3.02.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
We held our Annual Meeting of Stockholders on June 8, 2000. The following is a
brief description of each matter voted upon at the meeting and the number of
votes cast for, withheld, or against and the number of abstentions with respect
to each matter. Each director proposed by the Company was elected and the three
management proposals were approved by the stockholders.
(A) The stockholders re-elected the two nominees for the Company's Board of
Directors:
Nominee Shares For Shares Against
------- ---------- --------------
Daniel J. Feldman 8,786,787 29,781
Arnold Greenberg 8,786,787 29,781
(B) Approval of an amendment of the Company's 1999 Equity Compensation Plan:
Shares For Shares Against Shares Abstained
---------- -------------- ----------------
5,819,742 561,937 79,112
(C) Approval of the Company's Employee Stock Purchase Plan:
Shares For Shares Against Shares Abstained
---------- -------------- ----------------
6,390,596 65,455 4,740
(D) Approval of PricewaterhouseCoopers LLP as independent auditors of the
Company:
Shares For Shares Against Shares Abstained
---------- -------------- ----------------
8,802,971 10,891 2,706
ITEM 5. OTHER INFORMATION
NONE.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits. The following is a list of exhibits filed as part of this report
on Form 10-Q. Where so indicated by footnote, exhibits that were
previously filed are incorporated by reference. For exhibits incorporated
by reference, the location of the exhibit in the previous is indicated
parenthetically except for those situations where the exhibit number was
the same as set forth below.
Exhibit
Number Description
------ -----------
3.1(1) Certificate of Incorporation
3.2(1) Certificate of Amendment to the Certificate of Incorporation, dated
February 23, 1999
3.3(1) Certificate of Amendment to the Certificate of Incorporation, dated
January 17, 1999
3.4(1) Certificate of Amendment to the Certificate of Incorporation, dated
June 11, 1999
3.5(1) Amended and Restated Bylaws
3.6(3) Amended and Restated Bylaws dated September 29, 1999
3.7(4) Certificate of Ownership and Merger dated January 26, 2000
10.1(1)(2) Netstakes, Inc. Stock Option Plan
10.2(1)(2) 1999 Equity Compensation Plan
10.3(1) Master Lease Agreement No. L6731 with Leasing Technologies
International, Inc. dated November 19, 1999
10.4(1) Master Service Agreement between Registrant and Frontier
GlobalCenter dated February 8, 1999
10.5(1)(2) Letter Agreement between Registrant and Steven H. Krein, dated June
11, 1999
10.6(1)(2) Letter Agreement between Registrant and Daniel Feldman, dated June
11, 1999
10.7(1) Stock Purchase Agreement dated June 11, 1999
10.8(4) Master Lease Agreement between Registrant and 450 Westside Partners,
LLC dated January 12, 2000
10.9* Warrant Agreement between Registrant and leasing Technologies
International, Inc. dated June 29, 2000
10.10(5) Employee Stock Purchase Plan
27.1* Financial data schedule
* Filed herewith.
(1) Filed as an exhibit to the Registrants Registration Statement on Form S-1
(Registration No. 333-80593) filed with the Commission on June 14, 1999,
amended and incorporated herein by reference.
(2) Compensatory plans and arrangements for executives and others.
(3) Filed as an exhibit on Form 10-Q filed on November 15, 1999 and
incorporated herein by reference.
(4) Filed as an exhibit on Form 10-K filed on March 30, 1999 and incorporated
herein by reference.
(5) Filed as an appendix on Form DEFR14A filed on May 11, 2000 and
incorporated herein by reference.
(B) Reports on Form 8-K
NONE.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: August 15, 2000 Promotions.com, Inc.
By: /s/ Thomas E. Brophy
Thomas E Brophy
Chief Financial Officer
(Principal Financial and
Accounting Officer Duly Authorized Officer)
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