<PAGE>
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 transition period from _______ to ________
Commission File Number 000-29121
SNOWBALL.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3316902
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
250 EXECUTIVE PARK BOULEVARD, SUITE 4000, SAN FRANCISCO, CA 94134
(Address of principal executive offices) (Zip Code)
(415) 508-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports and (2) whether the registrant has
been subject to such filing requirements for the past 90 days. Yes X No ___
----
The number of shares of the registrant's common stock outstanding as of July 31,
2000 was 37,480,400.
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<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Part II. Other Information
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
</TABLE>
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SNOWBALL.COM, INC.
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Condensed Consolidated Financial Statements (unaudited)
----------------------------------------------------------------
A. Condensed Consolidated Balance Sheets (unaudited)
-------------------------------------------------
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 56,196 $ 25,489
Short-term investments 5,111 8,000
Accounts receivable, net 3,512 2,560
Prepaid expenses and other current assets 2,268 2,235
-------------- --------------
Total current assets 67,087 38,284
Goodwill and intangible assets, net 7,652 3,355
Fixed assets, net 6,119 4,368
Other assets 588 711
-------------- --------------
Total assets $ 81,446 $ 46,718
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 6,869 $ 4,757
Accrued liabilities and other 4,736 3,081
Deferred revenue 1,377 702
Notes and loan payable - 400
Current equipment financing obligations 1,592 1,081
-------------- --------------
Total current liabilities 14,574 10,021
Long-term equipment financing obligations 2,329 2,036
Stockholders' Equity
Common stock, $0.001 par value:
Authorized: 1999 - 37,500,000 shares
2000 - 100,000,000 shares
Outstanding: 1999 - 5,585,500 shares
2000 - 37,462,300 shares
37 6
Convertible preferred stock, $0.001 par value, issuable in series
20,000,000 shares authorized and 18,066,300 shares issued and outstanding
at December 31, 1999; no shares outstanding at June 30, 2000 - 18
Additional paid-in capital 153,077 88,662
Other (9,616) (14,264)
Accumulated deficit (78,955) (39,761)
-------------- --------------
Total stockholders' equity 64,543 34,661
-------------- --------------
Total liabilities and stockholders' equity $ 81,446 $ 46,718
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
3
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SNOWBALL.COM, INC.
B. Condensed Consolidated Statements of Operations (unaudited)
-----------------------------------------------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenue $ 6,201 $ 1,110 $ 10,792 $ 2,008
Cost of revenue 3,390 644 5,921 1,235
---------------------- -------------------------
Gross margin 2,811 466 4,871 773
Operating expenses:
Production and content 2,963 1,349 6,533 2,202
Engineering and development 2,220 1,193 4,745 1,610
Sales and marketing 11,228 1,946 24,347 2,602
General and administrative 1,531 425 3,417 1,319
Stock-based compensation/(1)/ 1,892 - 3,846 -
Amortization of goodwill and intangible assets 1,042 15 1,780 15
---------------------- -------------------------
Total operating expenses 20,876 4,928 44,668 7,748
---------------------- -------------------------
Loss from operations (18,065) (4,462) (39,797) (6,975)
Interest and other income, net 799 147 603 122
---------------------- -------------------------
Net Loss $ (17,266) $ (4,315) $ (39,194) $ (6,853)
====================== ========================
Net Loss Per Share - Basic and Diluted $ (0.52) $ (22.95) $ (2.10) $ (46.94)
====================== ========================
Shares used in per share calculation 33,406 188 18,674 146
====================== ========================
Pro Forma Net Loss Per Share - Basic and Diluted $ (0.23) $ (1.29) $ (0.48)
======== ========= =========
Shares used in pro forma per share calculation 18,436 30,327 14,169
======== ========= =========
(1) Stock-based compensation relates to the following in 2000:
Cost of revenue $ 7 $ 12
Production and content 575 946
Engineering and development 108 347
Sales and marketing 477 1,012
General and administrative 725 1,529
--------- ---------
Total $ 1,892 $ 3,846
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
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SNOWBALL.COM, INC.
C. Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---------------- --------------
<S> <C> <C>
Cash Flows from Operations
Net loss $ (39,194) $ (6,853)
Reconciliation to net cash used in operations:
Depreciation and amortization 3,437 268
Stock-based compensation 3,846 -
Charitable contribution of common stock 1,000 -
Other noncash expenses 498 51
Changes in assets and liabilities:
Accounts receivable (1,259) (212)
Prepaid expenses and other assets (33) (1,149)
Accounts payable and accrued liabilities 3,767 3,397
Deferred revenue 675 136
------------ -----------
Net cash used in operating activities (27,263) (4,362)
------------ -----------
Cash Flows from Investment Activities
Change in short-term investments 2,889 (12,973)
Acquisition of goodwill and intangible assets (5,450) (275)
Purchases of fixed assets (3,408) (1,811)
------------ -----------
Net cash used in investment activities (5,969) (15,059)
------------ -----------
Cash Flows from Financing Activities
Proceeds from issuance of common stock related
to initial public offering, net 62,033 -
Proceeds from issuance of common stock and preferred stock 1,503 27,118
Proceeds from equipment financing obligations 1,526 562
Proceeds from borrowings 12,000 -
Payment of borrowings (12,400) -
Payment of equipment financing obligations (723) -
------------ -----------
Net cash provided by financing activities 63,939 27,680
------------ -----------
Net increase in cash and cash equivalents 30,707 8,259
Cash and cash equivalents at beginning of period 25,489 -
------------ -----------
Cash and cash equivalents at end of period $ 56,196 $ 8,259
============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
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Notes to Condensed Consolidated Financial Statements (unaudited)
----------------------------------------------------------------
1. FINANCIAL STATEMENT PRESENTATION
The condensed consolidated financial statements include Snowball.com, Inc.
and its wholly-owned subsidiaries ("Snowball" or collectively the
"Company") after elimination of intercompany amounts.
The information furnished in this report reflects all normal recurring
adjustments which, in the opinion of management, are necessary for a fair
statement of the results for the interim periods. Results of operations for
interim periods are not necessarily indicative of results for the full
year. These unaudited condensed consolidated financial statements should be
read in conjunction with the Company's audited financial statements and
notes thereto, which include information as to significant accounting
policies, included in the Company's Registration Statement on Form S-1
(Registration No. 333-93487) declared effective by the Securities and
Exchange Commission on March 20, 2000.
2. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Snowball is an Internet company that operates a network of destination
websites for members of Generation i and the companies that want to reach
them. For these web-centric young adults, Snowball provides current
content, relevant services such as email and instant messaging, a forum for
interacting with one another and carefully selected merchandise. In
addition to creating original content, we expand the breadth and depth of
our content offerings by adding affiliated web sites to our network. This
network model enables us to build our traffic and brand rapidly, and to
realize revenue in a variety of ways through traditional online advertising
and sponsorships, and by providing customer acquisition and audience
development services to companies that target Generation i. We organize
both our own web sites and affiliated web sites around networks that target
different segments of Generation i, providing a demographic and lifestyle
targeting mechanism for our marketing customers.
Revenue Recognition
Revenue is derived principally from short-term contracts for banner
advertisements, buttons and textlinks. Advertising revenue is recognized at
the lesser of the straight-line basis over the term of the contract or the
ratio of impressions delivered over total committed impressions, provided
that we do not have any significant remaining obligations and collection of
the resulting receivable is probable. To the extent that minimum committed
impression levels or other obligations are not met, we defer recognition of
the corresponding revenue until such levels are achieved.
Revenue also includes fees from sponsorship, fixed slotting fees, variable
lead generation, commerce partnerships and other marketing programs under
contracts in which we commit to provide our business customers with
promotional opportunities in addition to traditional banner advertising. We
generally receive a fixed fee plus incremental payments for lead
generation, customer delivery or traffic driven to the commerce partner's
site. Revenue that includes delivery of various types of impressions is
recognized based on the lesser of the straight-line basis over the term of
the contract or the ratio of average impressions delivered over the average
total guaranteed impressions. The portion of any up-front nonrefundable fee
specified in the contract
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related to the up-front design work is also recognized at the lesser of the
straight-line basis over the term of the contract or the ratio of average
impressions delivered over the average total guaranteed impressions.
3. ACQUISITIONS
In February 2000, Snowball signed an asset purchase agreement to acquire
all of the assets of GameSages LLC, an Internet content provider, in
exchange for approximately $4.8 million in cash (of which $0.5 million was
placed in escrow to secure certain obligations). The financial results of
this entity were insignificant and, therefore, no pro forma information
reflecting this acquisition has been presented.
In December 1999, the Company completed the acquisition of Extreme
Interactive Media, Inc. ("Extreme") for $1.9 million in cash, common stock
and unsecured promissory notes. The purchase price may be increased by up
to $3.5 million of additional cash consideration based upon the attainment
of certain economic milestones by Extreme. In May 2000, the Company paid
$0.6 million of additional cash consideration, and in July 2000, an
additional $0.3 million.
4. NET LOSS PER SHARE
Basic and diluted net loss per share are presented in conformity with
Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," for all
periods presented.
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued or
granted for nominal consideration prior to the effective date of the
initial public offering must be included in the calculation of basic and
diluted pro forma net income (loss) per common share as if they had been
outstanding for all periods presented.
In accordance with SFAS No. 128, basic and diluted net loss per share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Basic and
diluted pro forma net loss per share, as presented in the condensed
consolidated statements of operations, have been computed as described
above and also give effect the conversion of the convertible preferred
stock (using the if-converted method) from the original date of issuance.
7
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The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per common share (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net Loss $(17,266) $(4,315) $(39,194) $ (6,853)
Basic and diluted:
Weighted average shares of
common stock outstanding 37,453 4,533 22,949 3,135
Less: weighted average shares
subject to repurchase (4,047) (4,345) (4,275) (2,989)
-------- ------- -------- --------
Weighted average shares used
in computing basic and diluted
net loss per share 33,406 188 18,674 146
-------- ------- -------- --------
Basic and diluted net loss per share $ (0.52) $(22.95) $ (2.10) $ (46.94)
======== ======= ======== ========
Pro forma
Shares used in the above 188 18,674 146
Pro forma adjustment to reflect weighted
effect of assumed conversion
of convertible preferred stock 18,248 11,653 14,023
------- -------- --------
Shares used in computing pro forma basic
and diluted net loss per share 18,436 30,327 14,169
------- -------- --------
Pro forma basic and diluted net loss per share $ (0.23) $ (1.29) $ (0.48)
======= ======== ========
</TABLE>
5. COMMITMENTS
During the second quarter of 2000, the Company entered into two new
operating lease agreements for its sales and marketing offices in
Connecticut and New York, for 5 and 10 years, respectively. The Company
expects possession to be in the third quarter of 2000. The Company will pay
total future minimum lease payments of $7.3 million over the lease terms.
Along with the Company's construction of its new principal office in
Brisbane, California and its new sales and marketing offices, the Company
will also contribute a significant amount towards the construction of these
facilities. This amount is subject to change, but is currently estimated at
approximately $15 million of which $5 million is refundable in 2001. The
Company has issued letters of credit of approximately $5.1 million in
conjunction with their operating leases.
6. STOCKHOLDERS' EQUITY
In February 1999, Snowball loaned an aggregate of $92,000 to an officer,
secured by a full recourse promissory note and a stock pledge agreement, in
connection with his purchase of 1,978,021 shares of common stock at $0.05
per share. The note accrued interest at a rate of 4.64% per year, payable
annually, and the principal amount of the note was due and payable on or
before February 1, 2003. Snowball forgave the principal and accrued
interest at a rate of $1,667 per month. Effective April 1, 2000, the
Company forgave the remaining balance. Total amount forgiven during 2000
was $71,000.
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In March 1999, Snowball loaned an aggregate of $7,000 to one of its
directors, secured by a full recourse promissory note and stock pledge
agreement, in connection with his purchase of 150,000 shares of common
stock at $0.05 per share. The note accrued interest at a rate 4.67% per
year, payable annually, and was due and payable on or before March 11,
2001. In March 2000, the principal and accrued interest was repaid.
7. INITIAL PUBLIC OFFERING
In March 2000, the Company completed its initial public offering of
6,250,000 shares of common stock and realized proceeds, net of underwriting
discounts, commission and issuance costs, of approximately $62 million.
8. COMPREHENSIVE INCOME
The Company has adopted SFAS 130, "Reporting Comprehensive Income," which
establishes standards for reporting comprehensive loss and its components
in the financial statements. To date, Snowball's comprehensive loss has
equaled its net loss.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities, and is
effective for fiscal years beginning after June 15, 2000, as amended by
SFAS No. 137. Snowball does not currently hold any derivatives and does not
expect this pronouncement to materially impact the results of its
operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes
certain of the Staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. In June 2000,
the SEC issued SAB No. 101B to defer the effective date of implementation
of SAB No. 101 until the fourth quarter of the current year.
9
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Item 2 Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our Registration Statement on Form
S-1 (Registration No. 333-93487) and our condensed consolidated financial
statements and related notes appearing elsewhere in this report. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those discussed below and elsewhere in this
report.
Overview
From our inception in January 1997 through December 1998, we operated as
independent divisions of Imagine Media, Inc. During this period, we focused our
operating activities primarily on the creation of our IGN, ChickClick and
PowerStudents networks; the development of relationships with web content
partners or "affiliates" to expand our content and community offerings; and the
generation of revenue from advertising sales. The Company was incorporated as a
separate entity in January 1999.
In addition to the creation of our own web site content, our relationships
with our affiliates are an important part of our business model. By adding new
affiliates to our networks, we are able to gain new content and increase the
consolidated page views of our networks. We typically enter into agreements
with affiliates for periods of between six months and five years. These
agreements offer affiliates revenue opportunities and a package of integrated
marketing services and support in exchange for the integration of their site and
audience into our network and the use of their site for advertising, promotions
and sponsorships. Typically, we pay affiliates a portion of the revenue
generated from advertising, promotions and sponsorships run on their pages, and
in some cases, we pay minimum guaranteed payments.
Since our inception, we have acquired some of our affiliates. We
anticipate that we may acquire additional affiliates and selected assets of
affiliates in the future.
Our operating activities to date have been focused on developing the
quality of our content and services; expanding our audience and the usage of our
services; establishing relationships with users, affiliates and the companies
who want to reach this large web-centric audience; building sales momentum and
marketing our networks and Snowball brands; developing our computer software and
hardware infrastructure; recruiting personnel; and raising capital.
To date, we have derived revenue principally from short-term contracts for
banner advertisements, buttons and textlinks. Under these contracts, we provide
advertisers with a number of "impressions," or a number of times a user will
view their advertisements, for which we receive a fee. Advertising revenue is
recognized at the lesser of the straight-line basis over the term of the
contract or the ratio of impressions delivered over total committed impressions,
provided that we do not have any significant remaining obligations and
collection of the resulting receivable is probable. To the extent that minimum
committed impression levels or other obligations are not met, we defer
recognition of the corresponding revenue until such levels are achieved.
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Revenue also includes fees from sponsorship, fixed slotting fees, variable
lead generation, commerce partnerships and other marketing programs under
contracts in which we commit to provide our business customers with promotional
opportunities in addition to traditional banner advertising. These agreements
typically provide for the delivery of advertising impressions on our web sites,
exclusive placement on our networks, special content and promotional offers and
the design and development of customized sites to enhance the promotional
objectives of the advertiser or commerce partner. We generally receive a fixed
fee plus incremental payments for lead generation, customer delivery or traffic
driven to the commerce partner's site. Revenue that includes delivery of
various types of impressions is recognized based on the lesser of the straight-
line basis over the term of the contract or the ratio of average impressions
delivered over the average total guaranteed impressions. The portion of any up-
front nonrefundable fee specified in the contract related to the up-front design
work is also recognized at the lesser of the straight-line basis over the term
of the contract or the ratio of average impressions delivered over the average
total guaranteed impressions.
Revenue has increased each quarter since our incorporation, although we
have never been profitable. Furthermore, due in part to the financial
difficulties experienced recently by Internet and Internet-related companies and
reductions in advertising budgets of companies that advertise on the Internet,
we cannot assure you that our revenue will continue to grow or that we will ever
achieve or maintain profitability. We anticipate that we will incur additional
operating losses at least through 2001. In addition we have recently
experienced a shift in the source of our advertising revenues from Internet
companies to companies in more traditional lines of business. These advertisers
often have substantially different requirements and expectations than Internet
companies with respect to advertising programs. If we are unsuccessful in
adapting to the needs of our advertisers, it could have a material adverse
effect on our business, operating results and financial condition.
Results of Operations
Revenue
Revenue was $6.2 million and $1.1 million for the three months ended June 30,
2000 and 1999, respectively. For the six months ended June 30, 2000 and 1999,
revenue was $10.8 million and $2.0 million, respectively. Our increase in
revenue during these periods can be attributed to our expansion efforts in sales
and marketing and increases in our available inventory of internal and
affiliated pageviews.
Cost of Revenue
Cost of revenue consists primarily of expenses related to operating Company-
owned web sites, guaranteed payments or the portion of revenue owed to our
affiliates for advertising and marketing placed on their web sites, and costs of
content and community tools. At June 30, 2000, we had 301 affiliates compared
to 100 at June 30, 1999. As a result of expanding and improving our web site
operations, increases in hosting costs and payments to affiliates resulted in an
increase in cost of revenue to $3.4 million during the second quarter of 2000
compared to $0.6 million in the prior year period. For the six months ended
June 30, 2000 and 1999, cost of revenue was $5.9 million and $1.2 million,
respectively. Gross margin improved to 45% for the second quarter in 2000
compared to 42% in the prior year period. The improvement is due primarily to
the increase in total revenues and the mix of advertisements and marketing
programs
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placed on our web sites compared to those placed on affiliate web sites. These
costs are expected to vary from period to period as we acquire an affiliate or
selected sites from an affiliate or as we expand the portion of our total sites
that are represented by affiliates versus those that we own and operate
directly.
Operating Expenses
We categorize operating expenses into production and content, engineering and
development, sales and marketing, general and administrative, stock-based
compensation and amortization of goodwill and intangible assets. Total
operating expenses for the three months ended June 30, 2000 were $20.9 million
compared to $4.9 million for the prior year period. Excluding significant non-
cash expenses for stock-based compensation and amortization of goodwill and
intangible assets, operating expenses were $17.9 million in the second quarter
of 2000 compared to $4.9 million in the second quarter of 1999. Operating
expenses in all categories increased primarily as a result of our growth from
approximately 100 employees at June 30, 1999 to 340 employees at June 30, 2000
and increases in our marketing and advertising expenses. Additionally,
operating expenses increased as a result of higher outside consulting costs, and
increases in rent and facilities expenses for expanding our principal office
space in San Francisco and opening new offices in Los Angeles, New York and
Connecticut. These expenses may increase further due to our expected growth of
the business, relocation of our offices in the second half of 2000, and
additional legal, investor relations, accounting and filing costs associated
with operations as a public company.
Production and content costs increased to $3.0 million in the first second
quarter of 2000 compared to $1.3 million in the prior year period. For the six
months ended June 30, 2000, these expenses rose to $6.5 million from $2.2
million for the prior year period. These increases are due, primarily to
expansion of our editorial, artistic and production staff; payments to
additional freelance writers and artists; and computer-related expenses for the
creation of content for our web sites.
Engineering and development expenses increased to $2.2 million for the three
months ended June 30, 2000 from $1.2 million for the prior year period. For the
six months ended June 30, 2000, these expenses increased to $4.7 million
compared from $1.6 million in the comparable period of the prior year. These
increases are due primarily to additional personnel, consulting and recruiting
fees associated with expanding our development and programming efforts and
depreciation expense associated with the increase in capital equipment.
Sales and Marketing expenses increased to $11.2 million for the three months
ended June 30, 2000 from $1.9 million for the prior year period. For the six
months ended June 30, 2000 these expenses increased to $24.3 million from $2.6
million for the prior year period. The increases resulted from costs associated
with increasing our sales and marketing staff as well as our advertising,
marketing and branding activities. Beginning March 2000 and continuing through
May 2000, we conducted a national television and radio advertising campaign to
increase awareness of the Company among our target audience and customers.
During the second quarter of 2000, we also added a market research group. As a
result of tightening spending controls, partially offset by increases in
expenses for the radio and television advertising campaign and the introduction
of our market research group, sales and marketing expenses decreased $1.9
million for the second quarter of 2000 compared to the first quarter of 2000.
12
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We may increase our sales and marketing expenses in future periods. There can
be no assurances that these efforts will increase traffic to our web site or
increase revenue.
General and administrative expenses increased to $1.5 million for the second
quarter of 2000 compared to $0.4 million in the second quarter of 1999. For the
six months ended June 30, 2000, these expenses rose to $3.4 million from $1.3
million for the first half of 1999. Included in the first quarter of 2000 was a
one-time non-cash contribution of 100,000 shares of our common stock with a fair
value of $1.0 million to a charitable foundation.
Stock-based compensation expenses were $1.9 million and $3.8 million for the
three and six months ended June 30, 2000, respectively. This amount represents
the difference between the exercise price of options granted and the deemed fair
value of the common stock underlying these options on the date of grant
amortized on an accelerated basis over the vesting period of the options. At
June 30, 2000, we had $6.9 million to be amortized over the vesting period of
the options which is generally four years. No amount was recognized during the
first half of 1999.
Amortization of goodwill and intangible assets for the three and six months
ended June 30, 2000 was $1.0 million and $1.8 million, respectively. These
expenses include the continuing amortization of cost associated with our 1999
acquisitions as well as our February 2000 acquisition of GamesSages LLC for $4.8
million. Amortization of goodwill and intangible assets is over three years or
less.
In addition, upon the attainment of certain economic milestones, we will pay up
to $3.5 million of additional cash consideration related to our fourth quarter
1999 acquisition of Extreme Interactive Media, Inc. As a result of this
additional purchase price, amortization expense is expected to increase. During
the second quarter of 2000, we paid and began amortizing over the remaining life
of the asset $0.6 million in connection with the attainment of these milestones.
To the extent that more of these milestones are met, amortization expenses will
increase.
Liquidity and Capital Resources
Cash used by operations totaled $27.3 million during the first six months
of 2000 compared to $4.4 million during the first six months of 1999. This
increase resulted primarily from increases in net losses. Working capital at
June 30, 2000 amounted to $52.5 million, including cash, cash equivalents and
short-term investments of $61.3 million.
Capital expenditures increased to $3.4 million for the six months ended
June 30, 2000 from $1.8 million for the prior year period, due primarily to
purchases of computer equipment and software associated with the increase in
personnel and increased traffic on our web sites and to a lesser extent,
leasehold improvements associated with the relocation of our principal offices
in Brisbane, California. Capital expenditures for the remainder of 2000 are
expected to be approximately $17 million, of which $15 million is primarily for
leasehold improvements and capital purchases associated our principal offices
and our new sales and marketing offices in New York and Connecticut. Snowball
expects that approximately $5 million of this spending will be reimbursed by a
building owner during 2001.
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In March 2000, we raised net proceeds of approximately $62 million from an
initial public offering of 6,250,000 shares of our common stock. We are using
the proceeds from this offering for working capital and general corporate
purposes, including network expansion and content development, sales and
marketing, relocation of our offices and possible acquisitions. We have
invested unused proceeds in short-term, interest-bearing, investment-grade
securities. Prior to our initial public offering, we financed our operations
primarily through private placements of preferred stock and borrowings under
equipment lease lines and a credit facility.
As a result of the attainment of certain economic milestones, we paid $0.6
million in May 2000 and $0.3 million in July 2000, as additional consideration
associated with our acquisition of Extreme Interactive Media, Inc. Pursuant to
the related purchase agreement, we may pay up to an additional $2.6 million in
connection with this acquisition.
In April and October 1999, we entered into equipment lease lines of credit
totaling $5 million. These credit facilities have terms of three years and bear
interest at the rate of 7.5% per year. In connection with these credit
facilities, we issued warrants to the lessor to purchase 31,595 shares of our
common stock at $3.17 per share and 21,097 shares of our common stock at $7.11
per share. These credit facilities do not include any financial covenants. On
March 24, 2000, the lessor exercised the warrants associated with these credit
facilities and executed a non-cash conversion into 29,960 shares of common
stock.
In November 1999, we entered into a term loan agreement for up to an
aggregate of $15.2 million. In connection with this loan agreement, we issued
to the lenders promissory notes, bearing interest at the rate of 11% per annum,
and warrants to purchase 270,000 shares of our common stock at an exercise price
of $8.44 per share. The note holders maintained a first position lien on all of
our assets, excluding fixed assets. These credit facilities did not include any
financial covenants. In December 1999, $12 million of the loan was repaid and
the note holders cancelled $3 million of indebtedness under the notes in
exchange for 300,000 shares of our Series C preferred stock at $10 per share.
In February 2000, we borrowed $12 million, under the terms of this loan
agreement. In April 2000, we repaid $12.3 million in principal, accrued
interest and fees on this term loan.
As security deposits associated with our facilities in Brisbane, California
and New York, we obtained letters of credit totaling $5.1 million.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the resources we allocate to developing our
networks, our marketing and selling capabilities and maintenance of our brands.
We have experienced substantial increases in our expenditures since our
inception consistent with the growth in our operations and personnel.
Substantially all of the capital raised in our initial public offering is
expected to be used over the next year to operate our business and to advertise
and promote our brands. We will continue to evaluate possible acquisitions of,
or investments in, complementary businesses, technologies, services or products.
We believe that our available cash, cash equivalents and short-term investments
and cash flows from operations will be sufficient to meet our anticipated needs
for working capital and capital expenditures at least until the end of our
fiscal year. We may need to raise additional funds, however, to fund expansion,
including increases in personnel and office facilities, to develop new or
enhance existing services or products, to respond to competitive pressures or to
acquire or invest in complementary businesses, technologies,
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services or products. In addition, to meet our longer term liquidity needs, we
will need to raise additional funds, establish additional credit facilities or
seek other financing arrangements. Additional funding may not be available on
favorable terms, on a timely basis or at all.
Risk Factors
Risks Related to Our Business
Our business model is unproven and may fail.
We have a limited operating history upon which you can evaluate our business
model and prospects and the merits of investing in our stock. If our business
model proves to be unsuccessful, the trading price of our stock will fall. Our
IGN, ChickClick and PowerStudents networks began operating as divisions of
Imagine Media in March 1997, February 1998 and August 1998, respectively. We
were incorporated in January 1999, and Imagine Media contributed the IGN,
ChickClick and PowerStudents assets to us in February 1999. Accordingly, our
prospects and the merits of investing in our stock must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in new and rapidly
evolving markets such as Internet content and services. In particular, we are
implementing an evolving and unpredictable business model. Our business model
is unproven and may fail, which could harm our business and diminish the value
of your investment.
Our quarterly revenue and operating results may fluctuate in future periods and
we may fail to meet expectations, which may reduce the trading price of our
common stock.
We cannot forecast our revenue and operating results with precision,
particularly because our products and services are relatively new and our
prospects uncertain. If revenue in a particular period does not meet
expectations, it is likely that we will be unable to adjust our level of
expenditures significantly for the same period. If our operating results fail
to meet expectations, the trading price of our common stock would decline. We
believe that period-to-period comparisons are not meaningful and are not
indicative of future performance. We anticipate that the results of our
operations will fluctuate significantly in the future as a result of a variety
of factors, including the long sales cycle we face selling advertising and
promotions, seasonal trends in Internet usage, advertising placements and e-
commerce, and other factors discussed in this section. Approximately half of
our revenue is generated from Internet-oriented companies that may experience
greater variability in advertising spending. As a result, it is likely that in
some future quarters or years our results of operations will fall below the
expectations of securities analysts or investors, which would cause the trading
price of our common stock to decline.
We have a history of losses and expect to incur substantial net losses for the
foreseeable future.
We have incurred net losses since the formation of our business in January 1997.
At June 30, 2000, we had an accumulated deficit of approximately $79 million.
We may increase our operating expenses to expand our affiliate base, develop
additional networks, expand our sales and marketing operations, hire more
salespersons, increase our marketing and promotional activities, develop and
upgrade our technology and
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purchase equipment and leasehold improvements for our operations and network
infrastructure. We also may incur costs relating to the acquisition of content,
other businesses or technologies. We may not generate sufficient revenue to
offset these expenditures. As a result, we expect to incur significant operating
losses on a quarterly basis for the foreseeable future, and may never be
profitable. Even if we do achieve profitability, we might not be able to sustain
profitability on a quarterly or annual basis in the future.
If we fail to maintain our relationships with affiliates, or incorporate new
affiliates into our networks on a timely basis, our revenue will decline.
We derive revenue primarily from advertisers who pay us to advertise on our
networks because our networks attract a large number of visitors. We rely upon
our affiliates to generate a significant portion of the content that attracts
visitors to our networks. If we lose these affiliates and cannot replace them
with affiliates having comparable traffic patterns and user demographics, or if
we fail to maintain or add affiliates to our networks on a timely basis, we will
lose revenue. We could lose an affiliate if it were to:
. terminate or fail to renew its affiliate agreement with us;
. be acquired by or otherwise form a relationship with one of our
competitors;
. demand from us a greater portion of revenue derived from advertisements
placed on its web sites; or
. seek to require us to make payments for access to its web sites.
During the first half of 2000, the loss of affiliates did not have a significant
impact on our revenue because during the same period we entered into agreements
with new affiliates. We cannot assure you, however, that we will not lose a
major affiliate in the future, which could cause our revenue to decline. We
also must continue to identify potential new affiliates to ensure that we keep
pace with the changing interests, styles, trends and preferences of Generation
i. Web sites targeting Generation i might not continue to emerge at their
current pace or at all. Moreover, we may be unable to identify potential new
affiliates as they emerge or to negotiate affiliate agreements with potential
new affiliates on a timely basis. In addition, we will likely face increasing
competition for the content and services provided by current or potential
affiliates. If we fail to continue to identify and enter agreements with
potential new affiliates on a timely basis, our networks may lose their
relevance to Generation i, we will lose advertising and promotional
opportunities and our revenue will decline.
If our IGN network is unsuccessful, our revenue will decline substantially.
We rely upon IGN for a substantial portion of our traffic and advertising
revenue. IGN is a network of web sites that provide information and
entertainment to Generation i men. IGN accounted for approximately 73% of our
consolidated page views in June 2000, approximately 18% of our registered users
as of June 30, 2000 and a substantial portion of our revenue for the three
months ended June 30, 2000. If we are unable to anticipate changes in the
interests, styles, trends or preferences of the audience targeted by IGN, if we
are unable to maintain our relationship with affiliates of IGN or incorporate
new affiliates into the IGN network on a timely basis or if IGN otherwise loses
traffic, our ability to generate advertising revenue would be impeded to an even
greater extent than if any of those events occurred with respect to any of our
other networks.
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If our advertising, commerce partnership and marketing arrangements are
terminated or are not renewed, our revenue will decline.
To date, we have derived a substantial portion of our revenue from a small
number of advertising and marketing customers. We expect that this will
continue during the early stages of our development and may continue
indefinitely. If our arrangements with these customers are terminated or are
not renewed, our revenue will decline. In addition, many of our advertising and
marketing customers enter into agreements with us that have a term of less than
six months, and one or more of our material advertising agreements has a six-
month term. As a result, our customers could cancel these agreements, change
their advertising expenditures or buy advertising from our competitors on
relatively short notice and without penalty. Because we expect to derive a
large portion of our future revenue from advertising and marketing arrangements,
these short-term agreements expose us to competitive pressures and potentially
severe fluctuations in our financial results.
If we fail to perform in accordance with the terms of our advertising
agreements, we will lose revenue.
Our advertising agreements typically provide for minimum performance levels,
such as click-throughs by web users or impressions. If we fail to perform in
accordance with these terms, we typically have to provide free advertising to
the customer until the minimum level is met, causing us to lose revenue and/or
incur additional costs. In addition, we occasionally guarantee the availability
of advertising space in connection with promotion arrangements and content
agreements and often guarantee exclusive placement on our network for our
largest customers, which precludes us from permitting certain competitors of
these customers to offer products and services on our network that are similar
to those offered by our exclusive customers. If we cannot fulfill the
guarantees we make to our customers, or if we lose potential customers whose
advertisements, sponsorships and promotions conflict with those of other
customers, we will lose revenue and our future growth may be impeded.
If we do not continue to attract and retain users we may not be able to compete
successfully for advertisers and commerce partners, which would cause our
revenue to decline.
We currently derive substantially all of our revenue from advertisers and
commerce partners who pay us to advertise on our networks, and our business
model depends in part on increasing the amount of this revenue. The market for
advertising revenue is highly competitive. We must continue to attract and
retain users to compete successfully for advertising revenue. If we fail to
attract and retain more users, our revenue will decline. Many of our current
competitors, as well as a number of potential new competitors, have
significantly greater editorial, financial, technical, marketing, sales and
other resources than we do. Our competitors may develop content and service
offerings that are superior to ours or achieve greater market acceptance than
ours. Moreover, if our content and service offerings fail to achieve success in
the short term, we could suffer an insurmountable loss in market share and brand
acceptance.
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Technical problems with either our internal or our outsourced computer and
communications systems could interrupt our service, resulting in decreased
customer satisfaction, the possible loss of users and advertisers and a decline
in revenue.
Our operations depend on our ability to maintain our computer systems and
equipment in effective working order. Our web sites must accommodate a high
volume of traffic and deliver frequently updated information. Any sustained or
repeated system failure or interruption would reduce the attractiveness of our
web sites to customers and advertisers and could cause us to lose users and
advertisers to our competitors. This would cause our revenue to decline. In
addition, interruptions in our systems could result from the failure of our
telecommunications providers to provide the necessary data communications
capacity in the time frame we require. Unanticipated problems affecting our
systems have caused interruptions from time to time in the past, and could cause
interruptions in the future, slower response times and interruptions in our
services. Our web sites reside on computer systems located in the San Francisco
Bay area. Fire, earthquakes, power loss, water damage, telecommunications
failures, vandalism and other malicious acts, and similar unexpected adverse
events, may damage our computer systems and interrupt service. Our computer
system's continuing and uninterrupted performance is critical to our success.
Our insurance policies may not adequately compensate us for any losses that may
occur due to any failures or interruptions in our systems.
If we lose key personnel or are unable to hire additional qualified personnel,
or if our management team is unable to perform effectively, we will not be able
to implement our business strategy or operate our business effectively.
Our success depends upon the continued services of our senior management and
other key personnel, many of whom would be difficult to replace. The loss of
any of these individuals would adversely affect our ability to implement our
business strategy and to operate our business effectively. In particular, the
services of Mark Jung, our chief executive officer, would be difficult to
replace. None of our officers or key employees is bound by an employment
agreement, nor do we have ``key person'' life insurance policies covering any of
these individuals. Our success also depends upon our ability to continue to
attract, retain and motivate skilled employees. Competition for employees in our
industry is intense, especially in the San Francisco Bay area. We believe that
there are only a limited number of persons with the requisite skills to serve in
many key positions and it is becoming increasingly difficult to hire, retain and
motivate these persons. We have in the past experienced, and we expect to
continue to experience, difficulty in hiring and retaining skilled employees
with appropriate qualifications. Competitors and others have in the past
attempted, and may in the future attempt, to recruit our employees. We believe
that we will incur increasing salaries, benefits and recruiting expenses because
of the difficulty in hiring and retaining employees. Finally, our success
depends on the ability of our management to perform effectively, both
individually and as a group. Some members of our management team have been
working together for less than one year. Richard Boyce, was hired as our
President of the Networks in March 2000. If our management is unable to operate
effectively in their respective roles or as a team, we will not be able to
implement our business strategy or operate our business effectively.
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Our failure to manage growth effectively could result in our inability to
operate our business effectively.
We have rapidly and significantly expanded our operations and anticipate that
further expansion will be required to address potential market opportunities.
If we fail to manage this expansion effectively, we will be unable to operate
our business effectively. Since our incorporation in January 1999 to June 30,
2000, our business grew from approximately 40 employees to 340 employees. This
rapid growth has placed, and we expect it to continue to place, a significant
strain on our management, operational and financial resources. As part of this
growth, we will have to implement new operational and financial systems,
procedures and controls and expand, combine or eliminate existing networks and
organizational structures.
Our prospects for obtaining additional financing, if required, are uncertain and
failure to obtain needed financing would limit our operations and might cause
our business to fail.
Our operating history is too brief for us to know with certainty whether our
cash reserves and any cash flows from operations or financing will be sufficient
to fund our operations. We expect to need to raise additional funds based upon
our estimates of revenue, expense, working capital and capital expenditure
requirements, or if we are required to respond to unforeseen technological or
marketing hurdles or if we choose to take advantage of unanticipated
opportunities. If adequate funds are not available to satisfy either short- or
long-term capital requirements, we might be required to limit our operations
significantly and our business might fail. Additional financing might not be
available when required. Our future capital requirements are dependent upon many
factors, including:
. the rate at which we expand our sales and marketing operations;
. the amount and timing of fees paid to affiliates;
. the amount and timing of leasehold improvements and capital equipment
purchases;
. the extent to which we expand our content and service offerings;
. the extent to which we develop and upgrade our technology and data network
infrastructure;
. the response of competitors to our content and service offerings; and
. the willingness of advertisers to become or remain our customers.
Additional financings could disadvantage our existing stockholders.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our stockholders would be reduced and the value of their
investments might decline. In addition, any new securities issued might have
rights, preferences or privileges senior to those securities held by our
stockholders. If we raise additional funds through the issuance of debt, we
might become subject to restrictive covenants.
If we are unable to identify or successfully integrate potential acquisitions
and investments, we may not grow as planned, our expenses may increase and our
management's attention may be diverted from the operation of our business.
Since our incorporation, we have acquired several businesses or the selected
assets of other businesses and our growth strategy includes acquiring or making
investments in complementary businesses, products, services or technologies in
the future. If we are unable to identify suitable acquisition or investment
candidates we will not grow as planned. Even if we do identify suitable
candidates, we might not be able to make
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acquisitions or investments on commercially acceptable terms and on a timely
basis. If we buy a business, we could have difficulty in assimilating that
company's personnel, operations, products, services or technologies into ours.
We may have to litigate to protect our intellectual property rights, or to
defend claims that we have infringed the rights of others, which could subject
us to significant liability and be time consuming and expensive.
Our success depends significantly upon our copyrights, trademarks, service
marks, trade secrets, technology and other intellectual property rights. The
steps we have taken to protect our intellectual property may not be adequate and
third parties may infringe or misappropriate our intellectual property. If this
occurs, we may have to litigate to protect our intellectual property rights.
These difficulties could disrupt our ongoing business, increase our expenses and
distract our management's attention from the operation of our business. We have
not applied for the registration of all of our trademarks and service marks, and
effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our content, services and products are
made available online. If we were prevented from using our trademarks, we would
need to re-implement our web sites and rebuild our brand identity with our
customers, users and affiliates. This would increase our operating expenses
substantially. Companies frequently resort to litigation regarding intellectual
property rights. From time to time, we have received, and we may in the future
receive, notices of claims of infringement of other parties' proprietary rights.
We may have to litigate to defend claims that we have infringed the intellectual
properly rights of others. Any claims of this type could subject us to
significant liability, be time-consuming and expensive, divert management's
attention, require the change of our trademarks and the alteration of content,
require us to redesign our web sites or services or require us to pay damages or
enter into royalty or licensing agreements. These royalty or licensing
agreements, if required, might not be available on acceptable terms or at all.
If a successful claim of infringement were made against us and we could not
develop non-infringing intellectual property or license the infringed or similar
intellectual property on a timely and cost-effective basis, we might be unable
to continue operating our business as planned.
We have adopted anti-takeover defenses that could delay or prevent an
acquisition of our company, even an acquisition that would be beneficial to our
stockholders.
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock. Issuance of the preferred stock would make it more difficult
for a third party to acquire a majority of our outstanding voting stock, even if
doing so would be beneficial to our stockholders. Without any further vote or
action on the part of the stockholders, the board of directors has the authority
to determine the price, rights, preferences, privileges and restrictions of the
preferred stock. This preferred stock, if issued, might have conversion rights
and other preferences that work to the disadvantage of the holders of common
stock. Our certificate of incorporation, bylaws and equity compensation plans
include provisions that may deter an unsolicited offer to purchase Snowball.
These provisions, coupled with the provisions of the Delaware General
Corporation Law, may delay or impede a merger, tender offer or proxy contest
involving Snowball. Furthermore, our board of directors has been divided into
three classes, only one of which will be elected each year. Directors will only
be removable by the affirmative vote of at least 66 2/3% of all classes of
voting stock. These factors may further delay or prevent a change of control of
Snowball and may be detrimental to our stockholders.
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Risks Related to Our Industry
Since our revenue is derived primarily from selling advertisements, our revenue
might decline and we might not grow if advertisers do not continue or increase
their usage of the Internet as an advertising medium.
In the past, we have derived, and we expect to continue to derive in the future,
substantially all of our revenue from selling advertisements. However, the
prospects for continued demand and market acceptance for Internet marketing
solutions are uncertain. If advertisers do not continue or increase their usage
of the Internet, our revenue might decline or we might not grow. Most
advertising agencies and potential advertisers, particularly local advertisers,
have only limited experience advertising on the Internet and may not devote a
significant portion of their advertising expenditures to Internet advertising.
Moreover, advertisers that have traditionally relied on other advertising media
may not advertise on the Internet. In addition, advertising on the Internet is
at a much earlier stage of development in international markets than it is in
the United States and may not fully develop in these markets. As the Internet
evolves, advertisers may find Internet advertising to be a less attractive or
effective means of promoting their products and services relative to traditional
methods of advertising and may not continue to allocate funds for Internet
advertising. Many historical predictions by industry analysts and others
concerning the growth of the Internet as a commercial medium have overstated the
growth of the Internet and should not be relied upon. This growth may not occur
or may occur more slowly than estimated.
There can be no assurance that customers will continue to purchase advertising
on our web pages, or that market prices for web-based advertising will not
decrease due to competitive or other factors. In addition, if a large number of
Internet users use filter software programs that limit or remove advertising
from the user's monitor, advertisers may choose not to advertise on the
Internet. Moreover, there are no widely accepted standards for the measurement
of the effectiveness of Internet advertising, and standards may not develop
sufficiently to support Internet advertising as a significant advertising
medium.
Our ability to implement our business strategy and our ultimate success depend
on continued growth in the use of the Internet and the ability of the Internet
infrastructure to support this growth.
Our business strategy depends on continued growth in the use of the Internet and
increasing the number of users who visit our networks. A decrease in the growth
of web usage, particularly usage by Generation i, would impede our ability to
implement our business strategy and our ultimate success. If the Internet
continues to experience significant growth in the number of users, frequency of
use and amount of data transmitted, the Internet infrastructure might not be
able to support the demands placed on it or the performance or reliability of
the Internet might be adversely affected. Web sites have experienced
interruptions in service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
occur frequently in the future, Internet usage, as well as the usage of our web
sites, could grow more slowly than expected or decline. Security and privacy
concerns may also slow growth. Because our revenue ultimately depend upon
Internet usage generally as well as on our web sites, our business may suffer as
a result of retarded or declining growth.
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We might have to expend significant capital or other resources to protect our
networks from unauthorized access, computer viruses and other disruptive
problems.
Internet and online service providers have in the past experienced, and may in
the future experience, interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or others.
We might be required to expend significant capital or other resources to protect
against the threat of security breaches or to alleviate problems caused by such
breaches. Nevertheless, security measures that we implement might be
circumvented. Eliminating computer viruses and alleviating other security
problems may also require interruptions, delays or cessation of service to users
accessing web pages that deliver our content and services. In addition, a party
who circumvents our security measures could misappropriate proprietary
information or cause interruptions in our operations.
We may be sued regarding privacy concerns, subjecting us to significant
liability and expense.
If third parties were able to penetrate our network security or otherwise
misappropriate our users' personal information or credit card information, we
could be subject to significant liability and expense. We may be liable for
claims based on unauthorized purchases with credit card information,
impersonation or other similar fraud claims. Claims could also be based on
other misuses of personal information, such as unauthorized marketing purposes.
These claims could result in costly litigation. The Federal Trade Commission
and state agencies have been investigating various Internet companies regarding
their use of personal information. In 1998, the United States Congress enacted
the Children's Online Privacy Protection Act of 1998. We depend upon collecting
personal information from our customers and the regulations promulgated under
this act have made it more difficult for us to collect personal information from
some of our customers. We could incur additional expenses if new regulations
regarding the use of personal information are introduced or if our privacy
practices are investigated. Furthermore, the European Union recently adopted a
directive addressing data privacy that may limit the collection and use of
information regarding Internet users. This directive and regulations enacted by
other countries may limit our ability to target advertising or to collect and
use information internationally.
Information displayed on and communication through our networks could expose us
to significant liability and expense.
We face possible liability for defamation, negligence, copyright, patent or
trademark infringement and other claims, such as product or service liability,
based on the nature and content of the materials published on or downloaded from
our web sites. These types of claims have been brought, sometimes successfully,
against Internet companies and print publications in the past, and the potential
liability associated with these claims is significant. We could also be
subjected to claims based upon the online content that is accessible from our
web sites through links to other web sites or through content and materials that
may be posted in chat rooms or bulletin boards. We do not verify the accuracy
of the information supplied by third-party content providers, including
affiliates. We also offer email services which may subject us to potential
risks, such as liabilities or claims resulting from unsolicited email, lost or
misdirected messages, illegal or fraudulent use of email or interruptions or
delays in email service. The law in these areas is unclear. Accordingly, we
are unable to predict the potential extent of our liability. Our insurance may
not cover potential claims of this type, or may not be adequate to indemnify us
for all liability that may be imposed.
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Changes in regulation of domain names may result in the loss or change of our
domain names, a reduction in brand awareness among our customers and a
diminished ability to attract advertisers and generate revenue.
We hold various domain names relating to our networks and brands. In the United
States, the National Science Foundation has appointed a limited number of
entities as the current exclusive registrars for the ".com," ".net" and
".org" generic top level domains. We expect future changes in the United
States to include a transition from the current system to a system controlled by
a non-profit corporation and the creation of additional top level domains.
Requirements for holding domain names also are expected to be affected. These
changes may result in the loss or change of our domain names, a reduction in
brand awareness among our customers and a diminished ability to attract
advertisers and generate revenue. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our trademarks and other proprietary rights. In
addition, we may lose our domain names to third parties with trademarks or other
proprietary rights in those names or similar names.
Future regulation of the Internet may slow its growth, resulting in decreased
demand for our services and increased costs of doing business.
Although we are subject to regulations applicable to businesses generally, few
laws or regulations exist that specifically regulate communications and commerce
over the Internet. We expect more stringent laws and regulations relating to
the Internet to be enacted due to the increasing popularity and use of the
Internet and other online services. Future regulation of the Internet may slow
its growth, resulting in decreased demand for our services and increased costs
of doing business. New and existing laws and regulations are likely to address
a variety of issues, including:
.user privacy and expression;
.taxation and pricing;
.the rights and safety of children;
.intellectual property; and
.information security.
Currently we may be subject to Sections 5 and 12 of the Federal Trade Commission
Act, which regulate advertising in all media, including the Internet, and
require advertisers to have substantiation for advertising claims before
disseminating advertisements. The Federal Trade Commission recently brought
several actions charging deceptive advertising via the Internet, and is actively
seeking new cases involving advertising via the Internet. We also may be
subject to the provisions of the recently enacted Communications Decency Act,
which, among other things, imposes substantial monetary fines and/or criminal
penalties on anyone who distributes or displays certain prohibited material over
the Internet or knowingly permits a telecommunications device under its control
to be used for this purpose. In addition, several telecommunications companies
and local telephone carriers have petitioned the Federal Communications
Commission to regulate Internet service providers and online service providers
in a manner similar to long distance telephone carriers and to impose access
fees. If this were to occur, the cost of communicating on the Internet could
increase substantially, potentially decreasing the use of the Internet.
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Finally, the applicability to the Internet and other online services of existing
laws in various jurisdictions governing issues such as property ownership, sales
and other taxes, libel and personal privacy is uncertain and may take years to
resolve. Any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could also increase our costs of doing business,
discourage Internet communications and reduce demand for our services.
We may be subject to significant liability for products sold through our web
sites.
We introduced ChickShops, our first e-commerce initiative, in December 1999 and
plan to develop a range of e-commerce activities. Consumers may sue us if any of
the products sold through our web sites are defective, fail to perform properly
or injure the user. Liability claims resulting from our sale of products could
require us to spend significant time and money in litigation or to pay
significant damages.
Risks Related to the Securities Markets
We expect to experience volatility in our stock price, which could negatively
affect your investment.
Our common stock has only recently been traded in a public market and an active
trading market for our stock may not be sustained. Moreover, the trading price
of our common stock is likely to be highly volatile in response to a number of
factors, such as:
. actual or anticipated variations in our quarterly results of operations;
. the addition or loss of affiliates;
. changes in the market valuations of other Internet content and service
companies;
. announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. changes in financial estimates or recommendations by securities analysts;
. additions or departures of key personnel, and
. additions or departures of key customers.
In addition, broad market and industry factors may materially and adversely
affect the market price of our common stock, regardless of our operating
performance. The Nasdaq National Market, and the market for Internet and
technology companies in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of these companies.
Class action litigation resulting from volatility of the trading price of our
common stock would likely result in substantial costs and a diversion of
management's attention and resources.
Volatility in the trading price of our common stock could result in securities
class action litigation. Any litigation would likely result in substantial
costs and a diversion of management's attention and resources.
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<PAGE>
Should our stockholders sell a substantial number of shares of common stock in
the public market, the price of our common stock could fall.
Our current stockholders hold a substantial number of shares which they will be
able to sell in the public market in the near future. Sales of a substantial
number of these shares could reduce the market price of our common stock. Even
the perception that our current stockholders might sell shares of common stock
could depress the trading price of the common stock. These sales, and the
possibility of these sales, could make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate.
Our officers and directors and their affiliates exercise significant control
over us, which could disadvantage other stockholders.
Our executive officers and directors and their affiliates together owned
approximately 66% of our outstanding common stock as of June 30, 2000.
Christopher Anderson, the chairman of our board of directors, owned
approximately 40% of our outstanding common stock alone. As a result, these
stockholders exercise significant control over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of control could disadvantage other
stockholders with interests different from those of our officers, directors and
their affiliates. For example our officers, directors and their affiliates
could delay or prevent someone from acquiring or merging with us even if the
transaction would benefit other stockholders.
Cautionary Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements contained in this Form 10-Q that are not statements of
historical facts are "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are based on
beliefs of management, as well as assumptions made by and information currently
available to management. Such statements are based on current expectations,
estimates and projections about our industry, our beliefs and our assumptions.
All statements, other than statements of historical fact, included in this Form
10-Q, regarding our strategy, future operations, financial position, estimated
revenue, projected costs, prospects, plans and objectives of management are
forward-looking statements. Words such as "may," "will," "should,"
"anticipates," "projects," "predicts," "expects," "intends,"
"plans," "believes," "seeks" and "estimates," and variations of these
words and similar expressions, are intended to identify forward-looking
statements, although not all forward-looking statements contain these
identifying words. These statements are only predictions and are subject to
risks, uncertainties and other factors, many of which are beyond our control,
are difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company's exposure to market risk is limited to interest income
sensitivity, which is affected by changes in the general level of
interest rates in the United States, particularly since the majority of
our investments are in short-term debt securities issued by
corporations or divisions of the United States government. We place our
investments with high quality issuers and limit the amount of credit
25
<PAGE>
exposure to any one issuer. Due to the nature of our short-term
investments, we believe that we are not subject to any material market
risk exposure.
We had no foreign currency hedging or other derivative financial
instruments as of June 30, 2000.
Part II - OTHER INFORMATION
Item 1 Legal Proceedings
------------------
Not applicable.
Item 2 Changes in Securities and Use of Proceeds
-----------------------------------------
(d) Use of Proceeds
The Company completed the initial public offering of its common stock
in March 2000. The managing underwriters in the offering were Goldman,
Sachs & Co., Chase Securities, Inc. and FleetBoston Robertson Stephens
Inc. The 6,250,000 shares of the common stock sold in the offering
were registered under the Securities Act on a Registration Statement
on Form S-1 (No. 333-93487). The Securities and Exchange Commission
declared the Registration Statement effective on March 20, 2000.
The offering commenced on March 24, 2000 and terminated following the
sale of all securities registered under the Registration Statement
(excluding 937,500 shares of common stock reserved for issuance in
connection with the exercise of the underwriters' over-allotment
option). The initial public offering price was $11 per share for an
aggregate initial public offering of $68.8 million
In conjunction with the Company's initial public offering, Snowball
paid a total of $4.8 million in underwriting discounts and
commissions. In addition, the following table sets forth the estimated
costs and expenses, other than underwriting discounts and commissions,
incurred in connection with the offering. None of the amounts shown
was paid directly or indirectly to any director, officer, general
partner of Snowball or their associates, to persons owning 10 percent
or more of any class of equity securities of Snowball or to any
affiliate of Snowball.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 22,770
NASD filing fee............................................... 9,125
Nasdaq National Market filing fee............................. 95,000
Accounting fees and expenses.................................. 500,000
Legal fees and expenses....................................... 600,000
Road show expenses............................................ 85,000
Printing and engraving expenses............................... 370,000
Blue sky fees and expenses.................................... 10,000
Transfer agent and registrar fees and expenses................ 10,000
Miscellaneous................................................. 298,105
----------
Total...................................................... $2,000,000
==========
</TABLE>
26
<PAGE>
After deducting the underwriting discounts and commissions and the
offering expenses, the estimated net proceeds to Snowball from the
offering were approximately $62 million.
From March 24, 2000 to June 30, 2000, we used the net proceeds from
this offering for repayment of debt, investing in short-term, interest
bearing, investment grade securities and general corporate purposes,
including advertising and promoting our brands, maintaining our sales
and marketing activities, purchases of fixed assets and leasehold
improvements.
We currently expect that we will use the remaining net proceeds for
short-term, interest-bearing, investment-grade securities, lease
payments that may be incurred under our credit facility, purchases of
fixed assets, relocation of our offices, possible acquisitions and
other general corporate purposes.
Item 3 Defaults Upon Senior Securities
-------------------------------
Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
Item 5 Other Information
-----------------
Not applicable
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
27
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SNOWBALL.COM, INC.
Date: August 10, 2000 By /s/ Mark A. Jung
---------------- ----------------
Mark A. Jung
President, Chief Executive
Officer and Director
Date: August 10, 2000 By /s/ James R. Tolonen
---------------- --------------------
James R. Tolonen
Chief Financial Officer, Chief
Operating Officer and Director
Date: August 10, 2000 By /s/ Janette S. Chock
---------------- ------------------------
Janette S. Chock
Vice President, Controller
and Chief Accounting Officer
28
