<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 September 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)
3240 BAYSHORE BOULEVARD, BRISBANE, CA 94005
(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 October
31, 2000 was 37,626,400.
1
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<TABLE>
<CAPTION>
Page No.
Part I. Financial Information
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
December 31, 1999 and September 30, 2000 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 2000 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1999 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Part II. Other Information
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
</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>
September 30, December 31,
2000 1999
-------------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 39,615 $ 25,489
Short-term investments 5,111 8,000
Accounts receivable, net 3,566 2,560
Prepaid expenses and other current assets 2,037 2,235
-------- --------
Total current assets 50,329 38,284
Goodwill and intangible assets, net 7,439 3,355
Fixed assets, net 10,580 4,368
Other assets 658 711
-------- --------
Total assets $ 69,006 $ 46,718
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,571 $ 4,757
Accrued liabilities and other 6,099 3,081
Deferred revenue 1,745 702
Notes and loan payable - 400
Current equipment financing obligations 1,620 1,081
-------- --------
Total current liabilities 15,035 10,021
Long-term equipment financing obligations 1,910 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 - 37,619,150 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 September 30, 2000 - 18
Additional paid-in capital 152,951 88,662
Other (7,849) (14,264)
Accumulated deficit (93,078) (39,761)
-------- --------
Total stockholders' equity 52,061 34,661
-------- --------
Total liabilities and stockholders' equity $ 69,006 $ 46,718
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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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 September 30, Nine Months Ended September 30,
2000 1999 2000 1999
--------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenue $5,194 $1,206 $15,986 $3,214
Cost of revenue 3,041 1,052 8,962 2,287
--------------------------- ------------------ -----------
Gross margin 2,153 154 7,024 927
Operating expenses:
Production and content 2,373 1,760 8,906 3,962
Engineering and development 2,441 1,473 7,186 3,083
Sales and marketing 8,248 7,100 32,595 9,702
General and administrative 1,392 781 4,809 2,100
Stock-based compensation (1) 1,286 506 5,132 506
Amortization of goodwill and intangible assets 1,105 74 2,885 89
--------------------------- ----------------------------------
Total operating expenses 16,845 11,694 61,513 19,442
--------------------------- ----------------------------------
Loss from operations (14,692) (11,540) (54,489) (18,515)
Interest and other income, net 569 177 1,172 299
--------------------------- ----------------------------------
Net Loss $(14,123) $(11,363) $(53,317) $(18,216)
=========================== ==================================
Net Loss Per Share - Basic and Diluted $(0.42) $(51.89) $(2.24) $(107.15)
=========================== ==================================
Shares used in per share calculation 33,907 219 23,752 170
=========================== ==================================
Pro Forma Net Loss Per Share - Basic and Diluted $(0.53) $(1.69) $(1.10)
=========== ==================================
Shares used in pro forma per share calculation 21,247 31,521 16,513
=========== ==================================
(1) Stock-based compensation relates to the following:
Cost of revenue $7 $- $ 19 $-
Production and content 456 126 1,402 126
Engineering and development 80 102 427 102
Sales and marketing 251 263 1,263 263
General and administrative 492 15 2,021 15
--------------- ----------- ---------------------------------
Total $1,286 $506 $5,132 $506
=========================== ==================================
</TABLE>
See notes to condensed consolidated financial statements.
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SNOWBALL.COM, INC.
C. Condensed Consolidated Statements of Cash Flows (unaudited)
-----------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Months Ended September 30,
2000 1999
------------------- -----------------
Cash Flows from Operations
Net loss $(53,317) $(18,216)
Reconciliation to net cash used in operations:
Depreciation and amortization 5,532 767
Stock-based compensation 5,132 506
Charitable contribution of common stock 1,000 -
Other noncash expenses 630 374
Changes in assets and liabilities:
Accounts receivable (1,472) (423)
Prepaid expenses and other assets 198 (1,402)
Accounts payable and accrued liabilities 3,832 5,509
Deferred revenue 1,043 282
------------------- -----------------
Net cash used in operating activities (37,422) (12,603)
------------------- -----------------
Cash Flows from Investment Activities
Change in short-term investments 2,889 (2,991)
Acquisition of goodwill and intangible assets (6,050) (1,610)
Purchases of fixed assets (8,859) (4,176)
------------------- -----------------
Net cash used in investment activities (12,020) (8,777)
------------------- -----------------
Cash Flows from Financing Activities
Proceeds from issuance of common stock related
to initial public offering, net 62,033 -
Proceeds from other issuance of common and preferred stock 1,522 27,302
Proceeds from equipment financing obligations 1,526 1,877
Proceeds from borrowings 12,000 -
Payment of borrowings (12,400) -
Payment of equipment financing obligations (1,113) -
------------------- -----------------
Net cash provided by financing activities 63,568 29,179
------------------- -----------------
Net increase in cash and cash equivalents 14,126 7,799
Cash and cash equivalents at beginning of period 25,489 -
------------------- -----------------
Cash and cash equivalents at end of period $ 39,615 $ 7,799
=================== =================
</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
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SNOWBALL.COM, INC.
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.
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. 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. As of September 30, 2000, the Company paid
$1.2 million of additional cash consideration.
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.
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 pursuant to the
Securities and Exchange Commission Staff Accounting Bulletin No. 98 and give
effect to the conversion of the convertible preferred stock (using the if-
converted method) from the original date of issuance.
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SNOWBALL.COM, INC.
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 Nine months ended
September 30, September 30,
2000 1999 2000 1999
------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net loss $ (14,123) $(11,363) $(53,317) $(18,216)
Basic and diluted:
Weighted average shares of common stock
outstanding 37,474 5,010 27,791 3,760
Less: weighted average shares subject to
repurchase (3,567) (4,791) (4,039) (3,590)
------------- --------------- --------------- --------------
Weighted average shares used in
computing basic and diluted net loss per
share 33,907 219 23,752 170
------------- --------------- --------------- --------------
Basic and diluted net loss per share $ (0.42) $ (51.89) $ (2.24) $(107.15)
============= =============== =============== ==============
Pro forma:
Shares used in the above calculation 219 23,752 170
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock 21,028 7,769 16,343
--------------- --------------- ---------------
Shares used in computing pro forma basic
and diluted net loss per share 21,247 31,521 16,513
--------------- --------------- ---------------
Pro forma basic and diluted net loss per share $ (0.53) $ (1.69) $ (1.10)
=============== =============== ==============
</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 will pay total
future minimum lease payments of $7.3 million over the terms of these new
leases.
In October 2000, the Company relocated its headquarters to Brisbane,
California and began occupying new facilities in New York and Connecticut.
Associated with the occupancy of its new office in Brisbane, California and
its new sales and marketing offices, the Company is contributing a significant
amount towards the build out of these facilities. This amount is subject to
change, but is currently estimated at approximately $12 million. Of this
amount, $6 million had been spent at September 30, 2000 and the remainder is
expected to be spent during the next two quarters. Under the terms of a lease
agreement, approximately $5 million of the total amount is refundable, and is
expected to be refunded before March 30, 2001. In addition, the Company has
issued letters of credit of approximately $5.1 million in conjunction with its
operating leases.
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SNOWBALL.COM, INC.
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.
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.
During the third quarter of 2000, the Company recorded $0.9 million of
deferred stock compensation and recognized $0.1 million of expense associated
with the cancellation of options to purchase 467,250 shares of common stock
and the related issuance of 467,250 shares of restricted stock and stock
options. The restricted stock is subject to fixed expense accounting over its
vesting period. The stock options are subject to variable expense accounting,
which requires re-measurement until the date the options are exercised,
forfeited, or expire unexercised. Accordingly, additional compensation expense
may be recorded in future periods due to the variable treatment of these
options. Expenses associated with these issuances are charged to stock based
compensation.
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 the
Staff's
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SNOWBALL.COM, INC.
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. Snowball does not expect the implementation to
materially impact the results of its operations.
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SNOWBALL.COM, INC.
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 have typically entered 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 often include fixed or variable 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 and Web site and editorial services 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 and or 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.
Since our inception 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 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 $5.2 million and $16.0 million for the three and nine months ended
September 30, 2000, respectively. For the three and nine months ended September
30, 1999, revenue was $1.2 million and $3.2 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. Revenue for the third quarter of 2000 declined by $1.0
million compared to the second quarter of 2000 due primarily to industry-wide
weakness in the online advertising market and the associated decrease in
marketing and advertising spending by this market segment. Many of our customers
did not continue or renew their advertising and marketing programs with us this
quarter causing revenue to decline. This was only partially offset by revenue
from new customers. Also during the third quarter of 2000, we broadened our
product offerings. We believe this broader range of marketing and advertising
solutions may help us to increase our revenue. However, these new solutions may
take several quarters to produce any results, and if they are not accepted by
our customers, will not increase revenue at all.
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SNOWBALL.COM, INC
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 September 30, 2000, we had 313 affiliates
compared to 114 at September 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 $3.0 million during the third
quarter of 2000 compared to $1.1 million in the prior year period. For the nine
months ended September 30, 2000 and 1999, cost of revenue was $9.0 million and
$2.3 million, respectively. Gross margin declined to 41% for the third quarter
of 2000 compared to 44% for the nine months ended September 30, 2000 due to the
decline in revenue relative to certain fixed costs of revenue charges. Cost
related to affiliates are expected to vary from period to period as we acquire
affiliates or selected sites from affiliates or terminate our relationship with
affiliates or as we expand or contract 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 September 30, 2000 were $16.8 million
compared to $11.7 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 $14.5 million in the third quarter of
2000 compared to $11.1 million in the third quarter of 1999. Operating expenses
in all categories increased primarily as a result of our overall growth,
including personnel increases from 170 employees at September 30, 1999 to 310
employees at September 30, 2000. 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 are
expected to increase further due to the anticipated growth of our business, the
relocation of our offices in October 2000, costs related to our new facilities,
and additional corporate costs associated with operations as a public company.
Some of these increases may be offset by our reduction in personnel by 15%, or
50 persons, during October 2000 and other expense control efforts.
Production and content costs increased to $2.4 million in the third quarter of
2000 compared to $1.8 million in the prior year period. For the nine months
ended September 30, 2000, these expenses rose to $8.9 million from $4.0 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 $2.4 million for the three
months ended September 30, 2000 from $1.5 million for the prior year period. For
the nine months ended September 30, 2000, these expenses increased to $7.2
million from $3.1 million for the prior year period. 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.
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SNOWBALL.COM, INC
Sales and marketing expenses increased to $8.2 million for the three months
ended September 30, 2000 from $7.1 million for the prior year period. For the
nine months ended September 30, 2000 these expenses increased to $32.6 million
from $9.7 million for the prior year period. During the three and nine months
period ended September 30, 2000, 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. In addition,
during the second quarter of 2000, we added a market research group. However,
sales and marketing expenses decreased $3.0 million for the third quarter of
2000 compared to the second quarter of 2000. This decrease was due primarily to
the reduction of our advertising, marketing and branding activities, and
decreases in our sales and marketing staff in the third quarter of 2000.
General and administrative expenses increased to $1.4 million for the third
quarter of 2000 compared to $0.8 million in the third quarter of 1999. For the
nine months ended September 30, 2000, these expenses rose to $4.8 million from
$2.1 million for the first nine months 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 $1.3 million and $5.1 million for the
three and nine months ended September 30, 2000, respectively, and $0.5 million
for the three and nine months ended September 30, 1999. Included in the third
quarter of 2000 expense was $0.1 million associated with the cancellation of
options to purchase 467,250 shares of common stock and the issuance of 467,250
shares of restricted stock and stock options. Stock-based compensation expense
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 September 30, 2000, we had deferred stock compensation expense of $5.5
million, which includes $0.9 million associated with the restricted stock and
stock option issuances referenced above, to be amortized over the vesting period
of the grants which is generally four years.
Amortization of goodwill and intangible assets for the three and nine months
ended September 30, 2000 was $1.1 million and $2.9 million, respectively. These
expenses include the continuing amortization of costs 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. For the
nine months ended September 30, 2000, we paid an additional $1.2 million in
connection with the attainment of these milestones. To the extent that more of
these milestones are met, amortization expenses will increase.
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Liquidity and Capital Resources
Cash used by operations totaled $37.4 million during the first nine months
of 2000 compared to $12.6 million during the first nine months of 1999. This
increase resulted primarily from increases in net losses. Working capital at
September 30, 2000 amounted to $35.3 million, including cash, cash equivalents
and short-term investments of $44.7 million.
Capital expenditures of $8.9 million for the nine months ended September
30, 2000 include $6 million for leasehold improvements and capital purchases
associated with the relocation of our principal office to Brisbane, California
and our sales office in New York. Capital expenditures for the nine months ended
September 30, 1999 were $4.2 million. Capital expenditures for the remainder of
2000 are expected to be approximately $6 million, which is primarily for
leasehold improvements and capital purchases associated with our principal
offices and our new sales and marketing offices in New York and Connecticut.
Under the terms of a lease agreement, we expect that approximately $5 million of
the total amount will be reimbursed prior to March 31, 2001.
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, as of
September 30, 2000 we paid $1.2 million 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 $2.3 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 our 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. Of this amount, warrants to purchase 115,192 shares expired
during the third quarter of 2000. 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
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SNOWBALL.COM, INC.
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, 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.
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We cannot forecast our revenue and operating results with precision,
particularly because our products and services are relatively new and evolving,
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 September 30, 2000, we had an accumulated deficit of approximately $93
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 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. Whether we
increase expenditures or not, we may not generate sufficient revenue to offset
our 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.
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We may also choose not to retain all of our affiliates or reduce our
reliance on certain affiliates due to cost, change in our desired content,
program objectives, or other reasons. If we change or terminate existing
affiliate relationships, we cannot assure you that we will be able to retain the
affiliates with whom we have changed our relationship or to attract new
affiliates.
During the first nine months of 2000, the loss of affiliates did not have a
significant impact on our revenue because we entered into agreements with new
affiliates during the same period. 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 72% of our
consolidated page views in September 2000, approximately 22% of our registered
users as of September 30, 2000 and a substantial portion of our revenue for the
three and nine months ended September 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.
If our advertising, commerce partnerships and marketing agreements 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, commerce 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,
commerce 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 or termination rights at various points during the
contract. As a result, our customers could and do 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.
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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 and demand has recently decreased
significantly. 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.
Technical problems or intentional service adjustments with either our internal
or our outsourced computer and communications systems could interrupt or
decrease 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 from time to time in the past, and could cause in the
future, slower response times and interruptions in our services.
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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. Moreover, scheduled upgrades
and changes to our computer systems may increase our operating cost or result in
unsatisfactory performance. 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. 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.
Our failure to manage change effectively could result in our inability to
operate our business effectively.
We have rapidly and significantly expanded and reduced our operations and
anticipate that further change will be required to address potential market
problems and opportunities. If we fail to manage this change effectively, we
will be unable to operate our business effectively. From our incorporation in
January 1999 to September 30, 2000, our business grew from approximately 40
employees to 310 employees and subsequently decreased to approximately 265
employees as of October 31, 2000. These rapid changes have placed, and we
expect them to continue to place, a
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significant strain on our management, operational and financial resources. As
part of these changes, we may 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 and 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 existing 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 existing 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
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not grow as planned. Even if we do identify suitable candidates, we might not be
able to make 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
property 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,
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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.
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 or marketing programs or commerce partnerships 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
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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 depends upon Internet usage generally as well as
on our web sites, our business may suffer as a result of retarded or declining
growth.
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.
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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.
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;
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.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.
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 the Snowball Shopping Network in October 2000 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;
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SNOWBALL.COM,INC.
. 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;
. additions or departures of key customers and
. not meeting minimum Nasdaq listing requirements.
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.
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
recently became entitled to sell in the public market. Sales of a substantial
number of these shares could reduce the market price of our common stock. 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 67% of our outstanding common stock as of September 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.
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SNOWBALL.COM,INC.
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 also 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 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 September 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.
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SNOWBALL.COM,INC.
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>
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 September 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, purchasing fixed assets and improving our facilities.
We 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.
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SNOWBALL.COM,INC.
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
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SNOWBALL.COM, INC.
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: November 13, 2000 By /s/ Mark A. Jung
----------------- -------------------
Mark A. Jung
Chief Executive Officer and Director
Date: November 13, 2000 By /s/ James R. Tolonen
----------------- -----------------------
James R. Tolonen
Chief Financial Officer, Chief Operating
Officer and Director
Date: November 13, 2000 By /s/ Janette S. Chock
----------------- -----------------------
Janette S. Chock
Vice President, Controller
and Chief Accounting Officer
31
