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
COMMISSION FILE NO. 0-29971
UPROAR INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 52-2192125
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
240 WEST 35TH STREET
NEW YORK, NEW YORK 10001
---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 714-9500
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) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of October 31, 2000 there were 42,504,733 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
Uproar Inc. and Subsidiaries
FORM 10-Q
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 2000 (unaudited) and December 31, 1999 3
Unaudited Condensed Consolidated Statements of
Operations for the three and nine months ended
September 30, 2000 and September 30, 1999 4
Unaudited Condensed Consolidated Statements of
Cash Flows for the nine months ended September 30,
2000 and September 30, 1999 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Changes in Securities and Use of Proceeds 36
Item 3. Defaults upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Securities Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
Item 7. Signatures 38
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Uproar Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, December 31,
------------- -------------
2000 1999
------------- -------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 13,188,553 $ 15,135,742
Short term investments 71,082,299 --
Restricted cash 603,408 604,275
Accounts receivable - net of allowance for doubtful
accounts of $768,000 and $271,000, respectively 9,128,597 3,767,769
Prepaid advertising 3,796,004 3,861,996
Other current assets 1,730,155 744,612
------------- -------------
Total current assets 99,529,016 24,114,394
------------- -------------
Property and equipment, net 11,126,731 5,031,429
Goodwill and other intangible assets, net 14,377,043 10,649,387
Prepaid advertising, long term portion -- 2,847,005
Other long term assets 684,463 173,426
------------- -------------
Total assets $ 125,717,253 $ 42,815,641
============= =============
Liabilities and stockholders' equity
Current liabilities:
Current portion of capital lease obligations $ 168,844 $ 102,777
Trade accounts payable 3,248,120 1,390,908
Accrued expenses and other current liabilities 7,197,496 4,065,969
------------- -------------
Total current liabilities 10,614,460 5,559,654
------------- -------------
Long term portion of capital lease obligation 161,543 51,681
Stockholders' equity:
Preferred stock, $.01 par value, 48,000,000
shares authorized, none issued -- --
Common stock, $.01 par value, 112,000,000
shares authorized; 29,407,623 and
23,971,948 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively 294,076 1,198,597
Additional paid-in capital 198,457,921 85,193,156
Accumulated deficit (83,580,687) (49,149,339)
Deferred compensation (137,672) --
Accumulated other comprehensive (loss) (92,388) (38,108)
------------- -------------
Total stockholders' equity 114,941,250 37,204,306
------------- -------------
Total liabilities and stockholders' equity $ 125,717,253 $ 42,815,641
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
-3-
Uproar Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenues $ 8,451,471 $ 2,765,889 $ 21,220,325 $ 5,274,896
Cost of revenues (2,871,865) (814,599) (7,136,240) (1,662,902)
------------ ------------ ------------ ------------
Gross profit 5,579,606 1,951,290 14,084,085 3,611,994
------------ ------------ ------------ ------------
Sales and marketing 10,609,209 6,003,115 28,739,619 11,816,272
Product and technology
development 2,333,302 1,021,059 6,303,474 2,548,338
General and administrative 3,849,886 2,433,235 11,388,680 6,043,408
Amortization of intangible assets 2,001,427 1,517,540 5,038,727 4,553,154
------------ ------------ ------------ ------------
Total operating expenses 18,793,824 10,974,949 51,470,500 24,961,172
------------ ------------ ------------ ------------
Loss from operations (13,214,218) (9,023,659) (37,386,415) (21,349,178)
Other income (expenses):
Litigation settlement -- -- (350,000) --
Foreign exchange gain (loss) 6,011 12,615 (71,954) (136,991)
Interest income 1,376,515 241,169 3,467,992 435,476
Interest expense (33,549) (2,000) (63,455) (6,000)
Other income (expense) 317 (132,723) 3,883 (179,723)
------------ ------------ ------------ ------------
Loss before income taxes (11,864,924) (8,904,598) (34,399,949) (21,236,416)
Provision for income taxes 9,794 5,039 31,399 50,043
------------ ------------ ------------ ------------
Net loss $(11,874,718) $ (8,909,637) $(34,431,348) $(21,286,459)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.41) $ (0.38) $ (1.26) $ (1.00)
Weighted average number of
common shares outstanding 28,777,917 23,147,211 27,346,453 21,299,655
============ ============ ============ ============
The results for all periods have been restated to reflect the acquisition of
PrizePoint Entertainment Corporation which was completed on June 7, 1999 and
accounted for as a pooling of interests.
See accompanying notes to the unaudited condensed consolidated financial
statements.
-4-
Uproar Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
2000 1999
------------- -------------
Cash flows from operating activities
Net loss $ (34,431,348) $ (21,286,459)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 6,864,180 5,028,225
Amortization of investment discount (1,484,736) --
Provision for doubtful accounts 655,000 70,000
Amorization of prepaid advertising services 2,847,005 390,000
Loss on sale of property and equipment -- 205,698
Stock compensation expense 348,007 420,164
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable (6,015,828) (1,390,281)
Prepaid advertising and other current assets (857,634) (7,639,183)
Trade accounts payable 1,778,933 1,298,681
Accrued expenses and other current liabilities 2,292,438 972,661
Other long term assets (245,481) (278,960)
------------- -------------
Net cash used in operating activities (28,249,464) (22,209,454)
Cash flows from investing activities
Purchase of investments (153,270,702) --
Proceeds from maturities of investments 83,684,725 --
Cash acquired in acquisition 393,402 --
Purchase of property and equipment (7,020,819) (2,779,855)
Proceeds from sale of equipment -- 27,154
------------- -------------
Net cash used in investing activities (76,213,394) (2,752,701)
Cash flows from financing activities
Proceeds from issuance of common stock 102,106,301 40,360,695
Proceeds from exercise of stock options & warrants 575,269 261,122
Principal payments on capital lease obligations (100,035) (53,118)
------------- -------------
Net cash provided by financing activities 102,581,535 40,568,699
Effect of exchange rate on cash (65,866) (87,903)
Net (decrease) increase in cash and cash equivalents (1,947,189) 15,518,641
Cash and cash equivalents, beginning of period 15,135,742 7,035,645
------------- -------------
Cash and cash equivalents, end of period $ 13,188,553 $ 22,554,286
============= =============
Supplemental disclosure of cash flow information
Interest paid $ 30,906 $ 4,000
Issuance of common stock for advertising
services and intangibles $ -- $ 24,665,875
Purchase of equipment under capital lease
obligations $ 275,964 $ --
The results for all periods have been restated to reflect the acquisition of
PrizePoint Entertainment Corporation which was completed on June 7, 1999 and
accounted for as a pooling of interests.
See accompanying notes to unaudited condensed consolidated financial statements.
-5-
Uproar Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) Organization and Summary of Significant Accounting Policies
(a) Unaudited Interim Condensed Consolidated Financial Statements
The unaudited interim consolidated financial statements of the Company
as of September 30, 2000 and for the three and nine months ended
September 30, 2000 and 1999 included herein have been prepared in
accordance with the instructions for Form 10-Q under the Securities
Exchange Act of 1934, as amended, and Article 10 of Regulation S-X
under the Securities Act of 1933, as amended. Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations relating
to interim consolidated financial statements.
In the opinion of management, the accompanying unaudited interim
condensed consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the financial position of the Company at September 30, 2000,
and the results of its operations for the three and nine months ended
September 30, 2000 and 1999 and its cash flows for the nine months
ended September 30, 2000 and 1999.
The results of operations for such periods are not necessarily
indicative of results expected for the full year or for any future
period. These financial statements should be read in conjunction with
the audited financial statements as of December 31, 1999, and for the
three years then ended and related notes included in the Company's
Registration Statement on Form S-1, File No. 333-93315, filed with the
Securities and Exchange Commission.
(b) Nature of business
The Company was originally formed in February 1995 as E-Pub Services
Limited, a corporation organized under the laws of Ireland. In July
1997, due to tax matters related to the trading of common shares on
the third tier of the Vienna Stock Exchange, Uproar Ltd., a
corporation organized under the laws of Bermuda, was formed. All
shareholders in E-Pub Services Limited became shareholders in Uproar
Ltd. by exchanging their shares in E-Pub Services Limited for shares
in Uproar Ltd. at a ratio of 1:1. The transaction was accounted for as
a transaction between companies under common control and therefore
there was no adjustment to the historical basis of the assets and
liabilities of E-Pub Services Limited.
On December 16, 1999, Uproar Inc. was incorporated in the state of
Delaware. On January 26, 2000, Uproar Ltd. domesticated from Bermuda
to Delaware and, on January 27, 2000, merged with Uproar Inc. Between
the date of incorporation and January 27, 2000, Uproar Inc. had no
substantial operations.
The Company provides online game shows and interactive single- and
multi-player games that appeal to a broad audience. The Company seeks
to attract a large, quality audience by offering highly engaging and
"sticky" products. Players access the products free of charge, with
the Company's revenue primarily being generated through the sale of
advertising. The Company operates in one business segment.
-6-
(c) Acquisitions of Take Aim Holdings Ltd. and iwin.com, Inc.
On August 11, 2000, the Company consummated the acquisition of Take
Aim Holdings Ltd., a British Virgin Islands company in the development
stage, which owns and operates the ibetcha.com Web site, ("Take Aim"),
and its subsidiaries, pursuant to an Agreement and Plan of Merger
dated July 25, 2000. The ibetcha.com Web site allows users, at no cost
to the user, to predict the outcome of world events offering a chance
to win prizes.
The Take Aim acquisition was accounted for under the purchase method
of accounting and accordingly, the operating results of Take Aim have
been included in the Company's consolidated results of operations from
the date of acquisition. The purchase price was $9,492,995, which
included the issuance of 1,333,334 shares of common stock with a fair
value of $9,141,738 and acquisition costs of approximately $300,000.
The Company also assumed Take Aim's outstanding options to purchase,
after conversion, 28,941 shares of the Company's common stock. The
fair value of the vested options, amounting to $51,257, was included
in the purchase price and the intrinsic value of the unvested options
at the date of acquisition, amounting to $145,660, was recorded as
deferred compensation and is being expensed over the remaining vesting
periods. The excess of the purchase price over the fair value of the
net assets acquired, amounting to $8,741,139, has been recorded as
goodwill and other intangibles. The goodwill and other intangibles are
being amortized over three years and accumulated amortization at
September 30, 2000 was approximately $486,000.
The allocation of purchase price is as follows:
Current assets, primarily cash $ 455,319
Property and equipment 649,216
Goodwill and other intangibles 8,741,139
Liabilities assumed and other, net (352,679)
-----------
$ 9,492,995
===========
On October 20, 2000, the Company acquired iwin.com, Inc. ("iwin"), a
Delaware corporation, pursuant to an Agreement and Plan of
Reorganization, dated as of July 25, 2000. iwin has developed an
online entertainment network that offers online games, free lotteries,
and other activities that award winners cash prizes or other
consideration, at no cost to users. iwin's primary source of revenues
is from the sale of advertising on its Web sites and sponsorship
revenue.
The acquisition will be accounted for under the purchase method of
accounting and accordingly, the operating results of iwin will be
included in the Company's consolidated results of operations from the
date of acquisition. The purchase price was $94,348,913, which
included the issuance of 13,065,110 shares of common stock at a fair
value of $86,719,668 and acquisition costs of approximately
$1,100,000. The Company also assumed iwin's outstanding options to
purchase, after conversion, 1,390,761 shares of the Company's common
stock. The fair value of the vested options, amounting to $6,529,245,
was included in the purchase price and the intrinsic value of the
unvested options at the date of acquisition, amounting to $1,749,606,
will be recorded as deferred compensation and will be expensed over
the remaining vesting periods. The excess of the purchase price over
-7-
the fair value of the net assets acquired, amounting to $80,463,403,
will be recorded as goodwill and other intangibles. The goodwill and
other intangibles will be amortized over three years.
The allocation of purchase price is as follows:
Current assets, primarily cash $ 13,945,396
Property and equipment 4,901,620
Goodwill and other intangibles 80,463,403
Liabilities assumed and other, net (4,961,506)
------------
$ 94,348,913
============
The following unaudited pro forma financial information presents the
combined results of operations of the Company, Take Aim, and iwin, as
if the acquisitions had occurred as of January 1, 2000, after giving
effect to certain adjustments, including amortization of goodwill. The
pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the acquisitions
occurred at the beginning of the period presented or that may be
obtained in the future.
Unaudited Pro Forma Financial Information
(In Thousands Except Per Share Data)
Nine Months Ended
September 30,
-----------------
2000
-----------------
Revenues $ 36,417
============
Net loss $ (79,362)
============
Basic and diluted net loss per common share $ (1.91)
============
Weighted average number of
common shares outstanding 41,502
============
The impact of the acquisitions on the financial information for the
nine months ended September 30, 1999 is insignificant.
(d) Principles of consolidation
The consolidated financial statements comprise the accounts of the
Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(e) Short term investments
$24 million of the Company's short-term investments consist of
commercial paper and mutual funds which are stated at amortized cost
and classified as held-to-maturity.
-8-
$47 million of the Company's short-term investments are classified as
available-for-sale and are available to support operations or to take
advantage of other investment opportunities. These investments
primarily consist of commercial paper which are stated at their
estimated fair value based on publicly available market quotes.
Unrealized gains and losses are computed on the basis of specific
identification and are included in stockholders' equity. Realized
gains and losses and a decline in value, judged to be
other-than-temporary, are included in other income. There were no
gross realized gains or losses from sales of securities in the periods
presented. As of September 30, 2000, the Company had gross unrealized
losses of $11,586 from its available-for-sale short-term investments.
(f) Stock split
On February 4, 2000, the Company's Board of Directors declared a
two-for-one stock split in the form of a stock dividend. Stockholders
of record on February 18, 2000 received one additional share of Common
Stock for every share held on that date. All share numbers in the
financial statements and notes thereto for all periods presented have
been adjusted to reflect the two-for-one stock split.
(g) Major customers
For the three months ended September 30, 2000 no customer accounted
for greater than 10% of revenues. For the nine months ended September
30, 2000, one customer accounted for 15.4% of total revenues.
(h) Revenue recognition
Advertising revenues are derived principally from short-term
advertising contracts in which the Company typically guarantees its
advertising customers a minimum number of impressions to be delivered
to users of its Web sites or clicks over a specified period of time
for a fixed fee. Customers are invoiced monthly in accordance with
delivery of advertising services during the month. Advertising
revenues are recognized as the advertisement is displayed or as users
click or otherwise respond to advertisements, provided that no
significant Company obligations remain. To the extent that minimum
guaranteed impressions are not met, the Company defers recognition of
the corresponding revenues until the guaranteed impressions, or
clicks, are achieved.
The Company commenced selling merchandise through its Web site in
December 1999 and recognized related revenues of approximately $15,000
and $34,000 for the year ended December 31, 1999 and the six months
ended June 30, 2000, respectively. In June 2000, the Company made a
strategic decision to focus on its core strength of online
entertainment, and exit the e-commerce business. As a result, the
Uproar store was closed and the related inventory ultimately having no
alternate use, amounting to approximately $192,000, was written off in
the quarter ended September 30, 2000.
The Company provides sponsorship advertising on game shows or on a
portion of its Web sites in consideration for a fixed fee. The Company
incurs insignificant costs to customize the advertisements received
from the sponsors which are expensed as incurred. Sponsorship
agreements do not segregate the fees for development of customized
features and the displaying of sponsors advertisements on the Web
sites. Therefore, the entire fee is deferred and recognized ratably in
the period in which the sponsor's advertising is displayed.
-9-
The Company enters into arrangements with third parties whereby the
Company's games are displayed on the third parties' Web sites. The
revenues generated from advertising in connection with the use of the
Company's games are recognized ratably in the period in which the
advertising is displayed on the third parties' Web sites. Generally,
the Company is responsible for selling the advertising, billing, and
collections and is obligated to pay the third party their fees for
displaying the games on their Web sites regardless of whether the
Company collects the advertising revenue. In these situations the
Company records the gross advertising revenues and the payments to the
third parties are recorded as cost of revenues. When the third party
sells the advertising and pays the Company a portion of the
advertising revenues, the Company only recognizes revenue for its
portion of the gross revenues.
Revenues include barter revenues from the exchange by the Company of
services or advertising space on the Company's Web sites for
reciprocal advertising or promotional services including prizes.
Revenues from these barter transactions are recorded at the estimated
fair value of the services or advertisements delivered, unless the
fair value of the goods or services received is more objectively
determinable, and are recognized when the advertisements are run on
the Company's Web sites or services are provided. The related expense
is recorded when it is incurred and classified as sales and marketing
expenses or cost of revenues in accordance with the terms of the
barter agreement. When the barter transaction involves advertising
exchanged for advertising, the Company recognizes barter advertising
revenues only if the bartered advertising is similar to previous
advertising sold to third parties for cash and is limited to the
amount of available similar cash advertising during the prior six
month periods.
(i) Business segment reporting
The Company has determined that it does not have any separately
reportable business segments. However, related disclosures about
products and services and geographic areas are included in note 4.
(j) Per share data
Basic net income per share is computed by dividing net income for the
period by the weighted average number of common shares outstanding
during the period. Diluted net income per share is computed by
dividing the net income for the period by the weighted average number
of common and common equivalent shares outstanding during the period.
Common equivalent shares, comprised of incremental common shares
issuable upon the exercise of stock options and warrants, are included
in the calculation of net income per share to the extent such shares
are dilutive. Common Stock equivalents are not included in the
calculation of loss per share for any periods presented since they are
anitdilutive.
(k) Recent accounting pronouncements
The Company is required to adopt SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS
138, effective January 1, 2001, and has not yet determined the effect
SFAS No. 133 will have on its results of operations and financial
position. This statement is not required to be applied retroactively
to financial statements of prior periods.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB No. 101") which
summarizes certain of the SEC staff's views in applying generally
-10-
accepted accounting principles to revenue recognition in financial
statements. The Company will be required to adopt the accounting
provisions of SAB No. 101 no later than the fourth quarter of 2000.
The Company does not believe that the implementation of SAB No. 101
will have a significant effect on its results of operations.
(2) Stockholders' equity
(a) Par value
On December 16, 1999, Uproar Inc. was incorporated in the state of
Delaware. On January 26, 2000, Uproar Ltd. domesticated from Bermuda
to Delaware, and on January 27, 2000, merged with Uproar Inc.
Simultaneous with the merger, the number of authorized shares of
common stock was increased to 112,000,000, with a par value of $.01
per share.
(b) Sale of Common Stock to Trans Cosmos
On February 2, 2000, the Company sold 1,265,372 shares of common stock
to a strategic investor, Trans Cosmos USA, Inc., for approximately
$25.0 million. Trans Cosmos is a subsidiary of Trans Cosmos, Inc.,
which is headquartered in Tokyo, Japan. The Company initially intended
to establish a joint venture with Trans Cosmos to produce a local
language version of the Company's flagship entertainment site,
uproar.com, in Japan, but the parties have chosen not to proceed at
this time.
(c) Public offering
On March 16, 2000, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-1. Pursuant
to this Registration Statement, the Company completed a public
offering in the United States of 2,500,000 shares of its common stock
at an offering price of $33.88 per share (the "Offering"). Net
proceeds to the Company from the Offering after offering expenses
totaled approximately $77.1 million.
(3) Commitments and contingencies
(a) Letters of credit
In connection with two office leases, the Company has letters of
credit outstanding for $603,408. The cash balances supporting the
letters of credit are reported as restricted cash.
(b) Pearson Agreement
In July 2000, the Company amended and restated its agreement with
Pearson Television to extend the term through June 2005. Under the
terms of the amended agreement, the Company guaranteed minimum royalty
payments per broadcast year for each of the Pearson licensed games.
Such payments range from $150,000 for certain games in the year ending
June 30, 2001 to $900,000 for certain games in the year ending June
30, 2005. The amended agreement also eliminated the provision in the
original agreement for contingent issuances of common stock to
Pearson.
-11-
(4) Segment reporting
In presenting segment information, the Company has applied the provisions
of SFAS No. 131. The Company has determined that it does not have any
separately reportable business segments.
The Company attributes revenues to different geographic areas on the basis
of the location of the customer. Revenues by geographic area are as
follows:
Revenues
-------------------------------- -------------------------------
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
United States $ 8,010,358 $ 2,701,874 $ 20,451,447 $ 5,160,682
England 431,590 64,015 648,682 114,214
Other 9,523 -- 120,196 --
------------- ------------- ------------- -------------
Total $ 8,451,471 $ 2,765,889 $ 21,220,325 $ 5,274,896
============= ============= ============= =============
Investments in long-lived assets by geographic area are as follows:
Property and Equipment
and Intangible Assets
-----------------------------
September 30, December 31,
------------- -------------
2000 1999
------------- -------------
United States $ 24,512,812 $ 15,394,683
England 145,869 89,496
Scandinavia 319 --
Hungary 135,725 184,618
Israel 697,362 --
Germany 11,687 12,019
------------- -------------
Total $ 25,503,774 $ 15,680,816
============= =============
(5) Litigation Settlement
In February 2000, the Company settled an action entitled "Burgos v. Ellwell
Associates, LLC and E-Pub Inc.", in which it was a party defendent,
relating to an alleged personal injury, by a payment of $350,000.
-12-
(6) Stock Incentive Plan
On June 30, 2000, the stockholders approved the Uproar Inc. 2000 Stock
Incentive Plan (the "Incentive Plan"), which reserved 6,750,000 shares of
common stock for the grant of options or other awards. The Incentive Plan
was the successor to the Uproar Ltd. 1999 Share Option/Share Issuance Plan.
On October 18, 2000, the Company's stockholders approved an amendment and
restatement to the Incentive Plan to increase the shares reserved for
issuance by 2,250,000 shares to an aggregate of 9,000,000 shares. The
number of shares of common stock available for issuance under the Incentive
Plan automatically increases on the first trading day of each calendar year
during the term of the Incentive Plan by an amount equal to one percent of
the shares of Uproar common stock outstanding on December 31 of the
immediately preceding calendar year, not to exceed 400,000 shares in any
calendar year.
-13-
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
THIS REPORT CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT").
THESE FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF PREDICTIVE,
FUTURE-TENSE OR FORWARD-LOOKING TERMINOLOGY, SUCH AS "BELIEVES," "ANTICIPATES,"
"EXPECTS," "ESTIMATES," "PLANS," "MAY," "INTENDS," "WILL," OR SIMILAR TERMS.
THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS REPORT AND INCLUDE
STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY,
ITS DIRECTORS OR ITS OFFICERS WITH RESPECT TO, AMONG OTHER THINGS: (1) TRENDS
AFFECTING THE COMPANY'S FINANCIAL CONDITION OR RESULTS OF OPERATIONS, (2) THE
COMPANY'S BUSINESS AND GROWTH STRATEGIES, (3) THE INTERNET AND INTERNET COMMERCE
AND (4) THE COMPANY'S FINANCING PLANS. THE COMPANY ASSUMES NO OBLIGATION TO
UPDATE ANY FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
SIGNIFICANT RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS REPORT. THE
FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE
COMPANY SHOULD ALSO BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND
NOTES RELATED THERETO INCLUDED ELSEWHERE IN THIS REPORT.
Overview
Uproar Inc. is the producer of uproar.com, a leading online entertainment
destination. Through our network of Web sites, we provide online game shows and
interactive single- and multi-player games that appeal to a broad audience. Our
business was originally formed in February 1995 as E-Pub Services Limited, a
corporation organized under the laws of Ireland. From February 1995 through July
1997, we focused on developing our technology, raising capital and recruiting
personnel and did not generate significant revenues. In July 1997, we formed
Uproar Ltd., a corporation organized under the laws of Bermuda, which became the
parent of E-Pub Services Limited. In September 1997, we launched our Web sites
uproar.com and uproar.co.uk. Uproar Inc. was incorporated in Delaware on
December 16, 1999. On January 26, 2000, Uproar Ltd. domesticated from Bermuda to
Delaware and merged with Uproar Inc. on January 27, 2000.
On March 16, 2000, the Securities and Exchange Commission declared effective the
Company's Registration Statement on Form S-1. Pursuant to this Registration
Statement, the Company completed a public offering in the United States of
2,500,000 shares of its Common Stock at an offering price of $33.88 per share
("the Offering"). Net proceeds to the Company from the Offering totaled
approximately $77.1 million.
In July 2000, the Company launched Uproar Lotto, a game that allows users who
play at no cost to win $1 million if they match 7 numbers from a daily drawing.
The Company has purchased insurance based on the number of lotto entries.
On August 11, 2000, the Company consummated the acquisition of Take Aim Holdings
Ltd., a British Virgin Islands company in the development stage ("Take Aim"),
and its subsidiaries, pursuant to an Agreement and Plan of Merger dated August
7, 2000. Take Aim has developed a Web site that allows users to predict the
outcome of world events for a chance to win prizes.
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The acquisition was accounted for under the purchase method of accounting, and
accordingly, the operating results of Take Aim have been included in the
Company's consolidated results of operations from the date of acquisition. The
purchase price was $9,492,995, which included the issuance of 1,333,334 shares
of common stock with a fair value of $9,141,738 and acquisition costs of
approximately $300,000. The Company also assumed Take Aim's outstanding options
to purchase, after conversion, 28,941 shares of the Company's common stock. The
fair value of the vested options, amounting to $51,257, was included in the
purchase price and the intrinsic value of the unvested options at the date of
acquisition, amounting to $145,660, was recorded as deferred compensation and is
being expensed over the remaining vesting periods. The excess of the purchase
price over the fair value of the net assets acquired, amounting to $8,741,139,
has been recorded as goodwill and other intangibles, which are being amortized
over three years.
On October 20, 2000, the Company acquired iwin.com, Inc., a Delaware corporation
("iwin"), pursuant to an Agreement and Plan of Reorganization, dated as of July
25, 2000. iwin has developed an online entertainment network that offers online
games, free lotteries, and other activities that award winners cash prizes or
other consideration, at no cost to users. iwin's primary source of revenues is
the sale of advertising on its Web sites and sponsorship revenue.
The acquisition will be accounted for under the purchase method of accounting
and accordingly, the operating results of iwin will be included in the Company's
consolidated results of operations from the date of acquisition. The purchase
price was $94,348,913, which included the issuance of 13,065,110 shares of
common stock at a fair value of $86,719,668 and acquisition costs of
approximately $1,100,000. The Company also assumed iwin's outstanding options to
purchase, after conversion, 1,390,761 shares of the Company's common stock. The
fair value of the vested options, amounting to $6,529,245, was included in the
purchase price and the intrinsic value of the unvested options at the date of
acquisition, amounting to $1,749,606, will be recorded as deferred compensation
and will be expensed over the remaining vesting periods. The excess of the
purchase price over the fair value of the net assets acquired, amounting to
$80,463,403, will be recorded as goodwill and other intangibles. The goodwill
and other intangibles will be amortized over three years.
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues
Since July 1997, substantially all of our revenues have been derived from the
sale of online advertising. Our advertising revenues are predominantly derived
from advertising arrangements under which we receive revenues based on the
number of times an advertisement is displayed on our services, commonly referred
to as cost per thousand impressions, or CPMs.
We also derive revenues from:
o sponsorship arrangements under which advertisers sponsor a game show,
game or portion of one of our Web sites in exchange for which we
receive a fixed payment;
o strategic partner arrangements under which our strategic partners
offer co-branded versions of our games on their Web sites and display
advertising in connection with the use of the games, in return for
which we receive revenues from the related advertising;
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o advertising arrangements under which we receive revenues based on the
number of users responding or "opting in" to an advertisers promotion;
and
o advertising arrangements under which we receive revenues based on the
number of times users click on an advertisement displayed on our
services, commonly referred to as cost per click, or CPCs.
Our revenues from advertising are therefore affected by:
o the number of unique users visiting our Web sites during a given
period;
o the amount of time that users actually spend on our Web sites,
commonly referred to as the "stickiness" of our sites;
o the number of advertisements delivered to a user while on our Web
sites;
o our ability to target user audiences for our advertisers; and
o the success of our strategic partnerships.
We intermittently rotate advertisements on the pages of our Web sites where our
users tend to spend long amounts of time. As a result, we believe a more
accurate measurement of our potential to generate advertising revenue is the
number of unique users that visit our sites and the amount of time they spend on
our sites, rather than the number of registered users or page views.
We price our advertisements based on a variety of factors, including:
o whether payment is dependent upon guaranteed minimum impression or
click levels;
o whether the advertising is targeted to specific audiences; and
o the available inventory of impressions or clicks associated with a
specific game or game show that will display the specific
advertisement.
Since we are able to vary the size of advertising banners we display on a single
page, we are able to charge more for "super-sized" banners than for more
traditional banners.
We recognize advertising revenues, which are priced on a cost per thousand
impression, or CPM, basis as the advertisement is displayed, provided that no
significant obligations remain and collection of the resulting receivable is
probable. To the extent minimum guaranteed impression levels are not met, we
defer recognition of the corresponding revenues until guaranteed levels are
achieved. We recognize advertising revenues derived on a cost per click, or CPC,
basis as users click or otherwise respond to the advertisements. To the extent
minimum guaranteed click levels are not met, we defer recognition of the
corresponding revenues until guaranteed levels are achieved. In the case of
contracts requiring actual sales of advertised items, we may experience delays
in recognizing revenues pending receipt of data from that advertiser.
We recognize sponsorship advertising revenue ratably in the period in which the
sponsor's advertisement is displayed and costs associated with customizing the
advertisements received from sponsors are expensed as incurred. We recognize
revenues from our strategic partner arrangements ratably in the period in which
our games are displayed on a third party's Web site. We are obligated to pay our
strategic partners their fee regardless of whether we ultimately collect the
advertising revenue. In those situations where we are responsible for selling
the advertising, billing and collections, we record the gross advertising
revenues, and payments to our strategic partners are recorded as cost of
revenues. In those situations where our strategic partners are responsible for
selling the advertising, billing and collections, we recognize revenue only to
the extent of our share of net revenues.
If a payment is received prior to the time that we recognize revenue, we record
that payment as deferred revenues.
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We also engage in barter transactions in an effort to enhance our marketing
efforts and improve our reach to potential new users. Under these arrangements,
we deliver game content, including prizes, to a third party, or display on our
Web sites advertisements promoting the third party's goods and services in
exchange for its agreement to run advertisements promoting our Web sites.
Revenues and costs from barter arrangements are recorded at the estimated fair
value of the advertisements or services we provide, unless the fair value of the
goods or services we receive can be determined more objectively. We recognize
barter revenue at the time we deliver the third party's advertisement or product
to our users. We recognize barter costs when our advertisements are displayed by
the third-party to its users. Barter costs are recorded either as sales and
marketing expenses or as costs of revenue. The breakdown of costs is dependent
upon the nature of the goods or services received by the third party. Although
our revenues and related costs will be equal at the conclusion of the barter
transaction, the amounts may not be equal in any particular quarter. Barter
revenues constituted 8.8% of total revenues for the three months ended September
30, 2000 and 19.4% of total revenues for the three months ended September 30,
1999.
Revenues increased to $8.5 million for the three months ended September 30, 2000
as compared with $2.8 million for the three months ended September 30, 1999. The
growth in revenues of $5.7 million for the three months ended September 30, 2000
resulted from the following:
o the number of advertisers increased from 84 in the three months ended
September 30, 1999 to 218 in the three months ended September 30,
2000, an increase of 160%, as well as an increase of 18% in the
average commitment per advertiser,
o an increase in our Web site traffic,
o the launch of Uproar lotto in July 2000,
o the number of sales personnel increased by 10 people from September
30, 1999 to September 30, 2000, and
o an increase in marketing and advertising expenditures.
Advertising revenues for the three months ended September 30, 2000 were $8.2
million, which represented 97.0% of total revenues. Advertising revenues for the
three months ended September 30, 1999 were $2.7 million which represented 99.0%
of total revenues. Since September 1999, we increased our sales force,
relaunched our Web site, and ran a marketing campaign to promote brand
awareness. We anticipate the advertising revenues will continue to account for a
substantial share of our total revenues for the foreseeable future.
Cost of Revenues
Cost of revenues consist of prizes, ad serving fees, Internet connection costs,
depreciation, and partner royalties. Gross margins were 66.0% for the three
months ended September 30, 2000 and 70.5% for the three months ended September
30, 1999. Cost of revenues were $2.9 million for the three months ended
September 30, 2000 and $0.8 million for the three months ended September 30,
1999. The increase in cost of revenues was due primarily to:
o an increase in the number of prizes awarded due to the increase in
users,
o an increase in Internet connection costs to support the increase in
Web site traffic,
o incurring Web site insurance costs due to the launch of Uproar lotto
in July 2000,
o an increase in depreciation expense related to additional equipment
and software purchased to host web sites,
o increase in royalties which are a function of revenue, and
o an increase in ad serving fees due to an increase from 575 million
impressions delivered in Q3 1999 to 1.7 billion impressions delivered
in Q3 2000.
-17-
Sales and Marketing Expenses
Sales and marketing expenses include salaries, sales commissions, employee
benefits, travel and related expenses, advertising and promotional expenses,
public relations, referral fees in connection with the acquisition of new users
through the affiliate program, marketing, and sales support functions. Sales and
marketing expenses increased to $10.6 million for the three months ended
September 30, 2000 from $6.0 million for the three months ended September 30,
1999. This increase was primarily attributed to increases in advertising,
salaries and commissions. Our worldwide sales and marketing team increased to 56
employees at September 30, 2000 from 26 at September 30, 1999.
Product and Technology Development Expenses
Product and technology development costs include expenses incurred to develop,
enhance and monitor the Web sites. Product development expenses increased to
$2.3 million for the three months ended September 30, 2000 from $1.0 million for
the three months ended September 30, 1999. This increase was primarily due to
the following:
o the expansion of product offerings including Uproar lotto and
additional development costs from the acquisition of Take Aim,
o an increase in product and engineering personnel to attain staffing
levels required to support our Web sites and to enhance content and
features and,
o an increase in game development programming and development consulting
fees.
General and Administrative Expenses
General and administrative expenses include salaries, employee benefits and
expenses for executives, finance, legal, human resources, and administrative
personnel. In addition, these expenses include fees for professional services,
such as legal and accounting, and the costs related to the leases for Uproar's
offices in New York, San Francisco, London, Hamburg, Budapest, and Israel.
General and administrative expenses increased to $3.8 million for the three
months ended September 30, 2000 from $2.4 million for the three months ended
September 30, 1999. This increase was due to increases in legal and professional
fees, rental costs, insurance costs, and costs related to our operation as a
public company, such as directors and officers' liability insurance and
professional service fees. This increase was also due to an increase in the
allowance for doubtful accounts.
Amortization of Intangibles
Amortization of intangible assets increased due to the amortization of goodwill
resulting from the Take Aim acquisition in August 2000.
Interest Income
Interest income results from interest earned on our cash and investments and
amortization of debt discounts. Interest income was $1.4 million for the three
months ended September 30, 2000, as compared to $0.2 million for the three
months ended September 30, 1999. This increase primarily resulted from
investments made with the net proceeds raised by the public offering of
2,500,000 shares of common stock and the sale of 1,265,372 shares of common
stock to Trans Cosmos.
-18-
Results of Operations
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenues
Revenues increased to $21.2 million for the nine months ended September 30, 2000
as compared with $5.3 million for the nine months ended September 30, 1999. This
increase of $15.9 million for the nine months ended September 30, 2000 primarily
resulted from an increase in:
o the number of advertisers as well as the average commitment per
advertiser,
o our Web site traffic,
o the number of sales personnel, and
o marketing and advertising expenditures.
Advertising revenues for the nine months ended September 30, 2000 were $20.4
million, which represented 96.1% of total revenues. Advertising revenues for the
nine months ended September 30, 1999 were $5.2 million, which represented 98.8%
of total revenues. Since September 1999, we significantly increased our sales
force, relaunched our Web site, and ran a marketing campaign to promote brand
awareness. Barter revenues constituted 8.1% of total revenues for the nine
months ended September 30, 2000 and 17.8% of total revenues for the nine months
ended September 30, 1999.
Cost of Revenues
Gross margins were 66.4% for the nine months ended September 30, 2000 and 68.5%
for the nine months ended September 30, 1999. Cost of revenues increased to $7.1
million for the nine months ended September 30, 2000 from $1.7 million for the
nine months ended September 30, 1999. The increase in cost of revenues was due
primarily to:
o an increase in the number of prizes awarded due to the increase in
users,
o an increase in Internet connection costs to support the increase in
Web site traffic,
o incurring Web site insurance costs due to the launch of Uproar lotto
in July 2000,
o an increase in depreciation expense related to additional equipment
and software purchased to host Web sites,
o increase in royalties which are a function of revenue, and
o an increase ad serving fees.
Sales and Marketing Expenses
Sales and marketing expenses increased to $28.7 million for the nine months
ended September 30, 2000 from $11.8 million for the nine months ended September
30, 1999. This increase was primarily attributed to increases in advertising,
salaries and commissions.
Product and Technology Development Expenses
Product development expenses increased to $6.3 million for the nine months ended
September 30, 2000 from $2.5 million for the nine months ended September 30,
1999. This increase was primarily due to the following:
o the expansion of product offerings including Uproar lotto and the
acquisition of Take Aim,
-19-
o an increase in product and engineering personnel to attain staffing
levels required to support our Web sites and to enhance content and
features and,
o an increase in game development programming and development consulting
fees.
General and Administrative Expenses
General and administrative expenses increased to $11.4 million for the nine
months ended September 30, 2000 from $6.0 million for the nine months ended
September 30, 1999. This increase was due to increases in legal and professional
fees, rental costs, insurance costs, and costs related to our operation as a
public company, such as directors and officers' liability insurance and
professional service fees. This increase was also due to an increase in the
allowance for doubtful accounts.
Amortization of Intangibles
Amortization of intangible assets increased due to the amortization of goodwill
resulting from the Take Aim acquisition in August 2000.
Interest Income
Interest income was $3.5 million for the nine months ended September 30, 2000,
as compared to $0.4 million for the nine months ended September 30, 1999. The
increase resulted from investments made with the net proceeds raised by the
public offering of 2,500,000 shares of common stock, which are presently listed
on the Nasdaq National Market, and the sale of 1,265,372 shares of common stock
to Trans Cosmos.
Litigation Settlement
In February 2000, we settled an action entitled "Burgos v. Ellwell Associates,
LLC and E-Pub Inc." in which we were a party defendent, relating to an alleged
personal injury, by a payment of $350,000.
Liquidity and Capital Resources
To date, we have primarily financed our operations through the sale of our
equity securities. As of September 30, 2000, we had approximately $13.2 million
in cash and cash equivalents and $71.1 million in short term investments, an
increase from $15.1 million in cash and cash equivalents and no short term
investments as of December 31, 1999. Net cash used in operating activities was
$28.2 million, and $22.2 million for the nine months ended September 30, 2000
and 1999, respectively. Net cash used in operating activities resulted primarily
from our net operating losses, partially offset by:
o depreciation and amortization;
o increase in accounts payable and accrued expenses
Net cash used in investing activities was $76.5 million and $2.8 million for the
nine months ended September 30, 2000 and 1999, respectively, as the capital
raised in our public offering and sale of common stock to Trans Cosmos was
invested and was used to purchase equipment to enhance and develop our technical
infrastructure.
Net cash provided by financing activities was $102.9 million and $40.6 million
for the nine months ended September 30, 2000 and 1999, respectively. Net cash
provided by financing activities consisted primarily of proceeds from the sale
of shares of our common stock. On February 2, 2000, we raised approximately
$25.0 million from the sale of 1,265,372 shares of our common stock to Trans
Cosmos. On March 22, 2000, we raised approximately $77.1 million from the public
-20-
offering of 2,500,000 shares of our common stock, which are presently listed on
the Nasdaq National Market.
Our principal commitments consist of obligations under capital and operating
leases. We expect our capital expenditures will increase significantly in the
future as we make technological improvements to our system and technical
infrastructure.
We have experienced a substantial increase in our capital expenditures and
operating lease arrangements since our inception consistent with the growth in
our operations and staffing. We anticipate that this will continue for the
foreseeable future. Additionally, we will continue to evaluate possible
investments in businesses, products and technologies, and plan to expand our
sales and marketing programs and conduct more aggressive brand promotions.
We believe our current cash, cash equivalents and investments will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures
for our existing business for at least the next twelve months.
Impact of Recently Issued Accounting Pronouncements
The Company is required to adopt SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS 138, effective
January 1, 2001, and has not yet determined the effect SFAS No. 133 will have on
its results of operations and financial position. This statement is not required
to be applied retroactively to financial statements of prior periods.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB No. 101") which summarizes certain of
the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company will be required to
adopt the accounting provisions of SAB No. 101 no later than the fourth quarter
of 2000. The Company does not believe that the implementation of SAB No. 101
will have a significant effect on its results of operations.
-21-
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Currency Rate Fluctuations
To date, our results of operations have not been impacted materially by
inflation in the U.S. or in the countries that comprise Europe. Although most of
our revenues and operating expenses are denominated in U.S. dollars, a
percentage of our revenues and operating expenses are earned and incurred in
foreign currencies, respectively. As a result, our revenues and expenses may be
impacted by fluctuations in these currencies and the value of these currencies
relative to the U.S. dollar. In addition, a portion of our monetary assets and
liabilities are held overseas. Therefore, we are exposed to foreign currency
exchange risks. However, such revenues, operating expenses, assets and
liabilities did not comprise a material portion of the Company amounts. As a
result, we have not tried to manage our exposure to exchange rate fluctuations
by using hedging transactions. However, we may experience economic loss and a
negative impact on earnings and equity as a result of foreign currency exchange
rate fluctuations.
Market Risk
The Company's accounts receivable are subject, in the normal course of business,
to collection risks. The Company regularly assesses these risks and has
established policies and business practices to protect against the adverse
effects of collection risks. As a result, the Company has recorded an allowance
for doubtful accounts of $768,000 and $271,000 as of September 30, 2000 and as
of December 31, 1999, respectively.
Interest Rate Risk
The Company's investments are classified as cash and cash equivalents with
original maturities of three months or less. The Company's short-term
investments are in bonds that have fixed interest rates at the time of purchase.
Therefore, changes in the market's interest rates do not significantly affect
the carrying value of our cash equivalents or short-term investments as recorded
by the Company.
Risk Factors
Financial Risks
We have a history of losses since our inception, we expect future losses and may
not be profitable in the future.
Since our inception in February 1995, we have not been profitable. If our
revenues do not increase substantially, we may never become profitable. We have
not generated enough revenues to exceed the substantial amounts we have spent to
create, launch and enhance our Web sites, to promote awareness of our Web sites
and to develop our business generally. At September 30, 2000, our accumulated
deficit was approximately $83.6 million. Even if we do achieve profitability, we
may not sustain profitability on a quarterly or annual basis in the future.
Because we have only recently introduced many of our products and services, you
have limited information upon which you can evaluate our business.
Uproar was founded in February 1995 and we launched our flagship entertainment
site, uproar.com, in September 1997. We launched the other sites that comprise
our network throughout 1998, 1999, and 2000 and in October 2000, reintroduced
the Uproar network, including the look and feel of our Web sites and the way we
format them. Accordingly, you can only evaluate our business based on our
-22-
limited operating history. Our operating results for any particular quarter may
not be indicative of future operating results. You should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. As a young company in the new and rapidly evolving
online entertainment market, we face risks and uncertainties relating to our
ability to successfully implement our business plan. These risks include our
ability to:
o expand our content and services;
o attract a larger audience to our Web sites;
o maintain our current, and develop new, strategic relationships; and
o continue to develop and upgrade our technology.
If we are unsuccessful in addressing these risks and uncertainties, we will not
be able to successfully implement our business plan and our stock price will
decline.
Our acquisitions of iwin.com and ibetcha.com may not result in the benefits we
anticipate from the combined company.
We recently acquired iwin.com for approximately 13.1 million shares of our
common stock and the assumption of stock options and warrants to purchase 1.4
million shares of our common stock. We also recently acquired all of the capital
stock of Take Aim Holdings Ltd., the parent company of the Web site
ibetcha.com, for approximately 1.33 million shares and assumed stock options to
purchase approximately 29,000 shares of our common stock. The integration of
iwin.com and ibetcha.com into our operations may:
o divert management's attention from running our existing business;
o require us to expand resources integrating different technologies; and
o strain our financial reporting systems and procedures.
The acquisitions may not result in the benefits we anticipate from the combined
company and may underperform relative to our expectations, including with
respect to increased traffic and pricing efficiencies. Moreover, the
acquisitions will require us to amortize additional goodwill in our financial
statements, leading to an adverse effect on our operating results.
We may fail to meet market expectations because of fluctuations in our quarterly
operating results, which would cause our stock price to decline.
Although we intend to steadily increase our spending and investment to support
our planned growth, our revenues, and some of our costs, will be much less
predictable. This is likely to result in significant fluctuations in our
quarterly results. Because of our limited operating history and the emerging
nature of our industry, we anticipate that securities analysts and investors
will have difficulty in accurately forecasting our results. It is possible that
our operating results in some quarters will be below market expectations. In
this event, the price of our common stock is likely to decline.
The following are among the factors that could cause significant fluctuations in
our operating results:
o the number of users on, and the frequency of their use of, our Web
sites;
o our ability to attract and retain advertisers;
o the expiration or termination of our strategic relationships,
including our relationships with Pearson Television and Cable &
Wireless;
o the expiration or termination of partnerships with Web sites and
Internet service providers, or ISPs, which can result from mergers or
other strategic combinations as Internet businesses continue to
consolidate;
-23-
o system outages, delays in obtaining new equipment or problems with
planned upgrades;
o our ability to successfully expand our online entertainment offerings
beyond the games and game show sector;
o the introduction of new or enhanced services by us or our competitors;
o changes in our advertising rates or advertising rates in general, both
on and off the Internet; and
o changes in general economic and market conditions, including seasonal
trends, that have an impact on the demand for Internet advertising.
We may not be able to adjust our operating expenses in order to offset any
unexpected revenue shortfalls.
Our operating expenses are based on our expectations of our future revenues.
These expenses are relatively fixed, at least in the short term. We intend to
expend significant amounts in the short term, particularly to expand our
advertising sales department and to build brand awareness. We may be unable to
adjust spending quickly enough to offset any unexpected revenue shortfall. If we
fail to substantially increase our revenues, then our financial condition and
results of operations would be materially and adversely affected.
If we do not continue to develop and enhance our brand, we will not be able to
maintain or increase our customer base or our revenues.
Enhancing the Uproar brand is critical to our ability to expand our user base
and our revenues. We believe that the importance of brand recognition will
increase as the number of entertainment Web sites grows. In order to attract and
retain users and advertisers, we intend to increase our expenditures for
creating and maintaining brand loyalty. We use a combination of television,
print and Web-based advertising to promote our brand. If we fail to advertise
and market our brand effectively, we will lose users and our revenues will
decline.
Our success in promoting and enhancing the Uproar brand will also depend on our
success in providing high quality content, features and functions that are
attractive and entertaining to users of online game shows and multi-player
games. If visitors to our Web sites or advertisers do not perceive our services
to be of high quality, the value of the Uproar brand could be diminished, we
will lose users and our revenues will decline.
We have derived a portion of our revenues from reciprocal advertising
agreements, or barter, which do not generate cash revenue.
We derive a portion of our revenues from reciprocal advertising arrangements, or
barter, under which we exchange advertising space on our Web sites, or provide
game content or other services for third-party Web sites, predominantly for
advertising space on other Web sites rather than for cash payments. In the three
months ended September 30, 2000 and September 30,1999, we derived approximately
$0.7 million, or 8.8% and $0.5 million or 19.4% of our revenues, from these
arrangements. In the nine months ended September 30, 2000 and September 30,
1999, we derived approximately $1.7 million or 8.1% and $0.9 million or 17.8%,
of our revenues, respectively, from these arrangements. We expect that barter
will continue to account for some of our revenues in the foreseeable future. If
our barter transactions increase and our revenues are limited our financial
results may suffer. Further, an accounting pronouncement recently issued, "EITF
99-17", prescribes limitations on recording revenues for barter advertising
transactions.
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Our advertising pricing model, which is based heavily on the number of
advertisements delivered to our users, may not be successful.
Different pricing models are used to sell advertising on the Internet. The
models we adopt may prove to not be the most profitable. Currently, advertising
based on impressions, or the number of times an advertisement is displayed on
our Web sites, comprises substantially all of our revenues. To the extent that
we do not meet the minimum guaranteed impressions that we are required to
deliver to users under many of our advertising contracts, we defer recognition
of the corresponding revenues until we achieve the guaranteed impression levels.
To the extent that minimum guaranteed impression levels are not achieved, we may
be required to provide additional impressions after the contract term, which
would reduce our advertising inventory in subsequent periods.
In addition, since advertising impressions may be delivered to a user's Web
browser without regard to user activity, advertisers may decide that a pricing
model based on user activity is preferable. We cannot predict which pricing
model, if any, will emerge as the industry standard. As a result, we cannot
accurately project our future advertising rates and revenues. If we are unable
to adapt to new forms of Internet advertising or we do not adopt the most
profitable form, our advertising revenues could be adversely affected.
We may not be able to track the delivery of advertisements on our network in a
way that meets the needs of our advertisers.
It is important to our advertisers that we accurately measure the delivery of
advertisements on our network and the demographics of our user base. Presently,
no measurement standards have been widely accepted to measure the effectiveness
of Internet-based advertising. Companies may choose to not advertise on our Web
sites or may pay less for advertising if they do not perceive our ability to
track and measure the delivery of advertisements to be reliable. We depend on
third parties to provide us with many of these measurement services. If they are
unable to provide these services in the future, we would need to perform them
ourselves or obtain them from another provider. We could incur significant costs
or experience interruptions in our business during the time we are replacing
these services. In addition, if successful, legal initiatives related to privacy
concerns could also prevent or limit our ability to track advertisements.
Our business may suffer if we have difficulty retaining users on our Web sites.
Our business and financial results are also dependent on our ability to retain
users on our Web sites. In any particular month, many of the visitors to our
sites are not registered users and many of our registered users do not visit our
sites. We believe that intense competition has caused, and will continue to
cause, some of our registered users to seek online entertainment on other sites
and spend less time on our sites. It is relatively easy for our users to go to
competing sites and we cannot be certain that any steps we take will maintain or
improve our retention of users. In addition, some new users may decide to visit
our Web sites out of curiosity regarding the Internet and may later discontinue
using Internet entertainment services. If we are unable to retain our user base,
the demand for advertising on our Web sites may decrease and our revenues may
decline.
We must increase our advertising sales department to support our growth.
We need to increase substantially our advertising sales department in the near
future to support our planned growth. On September 30, 2000, our advertising
sales department had 36 members. In October 1999, we hired an executive vice
president to manage our enhanced sales and marketing efforts and it can take a
relatively long time for a sales and marketing manager to begin to achieve
-25-
desired results. Our ability to increase our sales department and improve its
results involves a number of risks and uncertainties, including:
o strong competition in hiring and retaining advertising sales
personnel;
o our ability to efficiently integrate, train and motivate additional
advertising sales and support personnel;
o our ability to manage an advertising sales organization with offices
throughout the United States and in Europe; and
o the length of time it takes new advertising sales personnel to become
productive.
If we do not successfully increase our advertising sales department, our ability
to support our planned growth could be impeded.
We face risks associated with international operations.
We currently operate in the United States, Hungary, Germany, Norway, Israel and
the United Kingdom. We intend to establish a joint venture to expand into Japan,
and plan to continue to expand into additional international markets. We
anticipate spending significant financial and managerial resources to support
these expansions.
Our business internationally is subject to a number of risks. These include:
o linguistic and cultural differences;
o inconsistent regulations and unexpected changes in regulatory
requirements;
o differing technology standards that would affect the quality of the
presentation of our games to our users;
o potentially adverse tax consequences;
o wage and price controls;
o political instability and social unrest;
o uncertain protection of our intellectual property rights; and
o imposition of trade barriers.
We have no control over many of these matters and any of them may adversely
affect our ability to conduct our business internationally.
Currency fluctuations and exchange control regulations may adversely affect our
business.
Our reporting currency is the United States dollar. Our customers outside the
United States, however, are generally billed in local currencies. Our accounts
receivable from these customers and overhead assets will decline in value if the
local currencies depreciate relative to the United States dollar. To date, we
have not tried to reduce our exposure to exchange rate fluctuations by using
hedging transactions. Although we may enter into hedging transactions in the
future, we may not be able to do so effectively. In addition, any currency
exchange losses that we suffer may be magnified if we become subject to exchange
control regulations restricting our ability to convert local currencies into
United States dollars.
-26-
Risks Associated with Our Advertisers and Strategic Partners
We depend on a small group of advertising customers.
In the three months ended September 30, 2000, no customer accounted for greater
than 10% of total revenues. However, in the nine months ended September 30,
2000, MyPoints accounted for 15.2% of total revenues. For the year ended
December 31, 1999, MyPoints accounted for 14.2% of our revenues, and no other
customer accounted for more than 10.0% of our revenues. Our top five customers,
in the aggregate, accounted for approximately 33.2% and 28.8% of our revenues
during the three and nine months ended September 30, 2000, respectively, and
40.0% of our revenues during 1999. If we lose one or more of our top customers
and do not attract additional customers, we may not generate sufficient revenues
to offset this loss of revenues and our net income will decrease.
Our relationship with Pearson Television may not be successful.
In January 1999, we entered into an agreement with Pearson Television under
which we were granted exclusive rights to provide Internet games in the English
language based on some of the television games owned by Pearson. In July 2000,
we amended and restated the agreement to extend the term through June 2005.
Under the amended and restated agreement, the games licensed by Uproar include
Family Feud, Match Game, 100%, and To Tell the Truth. Pearson retains the
trademark rights for these shows. The termination of this relationship would
have a material adverse effect on our business, results of operations and
financial condition. As part of our agreement with Pearson, we have guaranteed
minimum royalty payments per broadcast year for each of these Internet games,
ranging from $150,000 for certain games in the year ending June 30, 2001 to
$900,000 for certain games in the year ending June 30, 2005. In the event that
one or more games is not financially successful for us, we are still obligated
to make minimum royalty payments to Pearson, and these payments may increase if
we fail to reach milestones for launching specified Pearson games.
Our plans to expand our entertainment business beyond our core game show sites
may not be successful.
Almost all of our experience to date is with online games and game shows.
Because we have only limited experience with business beyond our core gaming
sites, we cannot predict whether we will be able to successfully expand into
other online entertainment businesses. Expanding our business will require us to
expend significant amounts of capital to be able to contend with competitors
that have more experience than we do in these businesses and may also have
greater resources to devote to these businesses. Also, our management may have
to divert a disproportionate amount of its attention away from our day-to-day
core business and devote a substantial amount of time expanding into new areas.
If we are unable to effectively expand our business or manage any such
expansion, our financial results will suffer and our stock price will decline.
For example, we commenced selling merchandise through our Web site in December,
1999 and have recognized related revenues of approximately $15,000 and $34,000
for the year ended December 31, 1999 and the nine months ended September 30,
2000, respectively. In June 2000, however, we made a strategic decision to focus
on our core strength of online entertainment, and we terminated our electronic
commerce efforts.
The acquisition of iwin by Uproar could harm key third party relationships.
The present and potential relationships of Uproar and iwin with customers and
other third parties with whom they have relationships may be harmed by the
acquisition. Uncertainties following the acquisition may cause these parties to
delay decisions regarding these relationships. Any changes in these
relationships could harm the combined company's business. In addition, iwin
customers may, in response to the acquisition, delay or defer decisions
-27-
concerning iwin. iwin could experience a decrease in expected revenue as a
consequence of customers' uncertainties associated with the acquisition. Any
delay or deferral in those decisions by iwin customers could have a material
adverse effect on iwin's and Uproar's business.
Risks of Our Business Model
Competition in the online entertainment industry is intense and a failure to
adequately respond to competitive pressure could result in lower revenues.
There are many companies that provide Web sites and online destinations targeted
to audiences seeking various forms of entertainment content. All of these
companies compete with us for visitor traffic and advertising dollars. This
competition is intense and is expected to increase significantly in the future
as the number of entertainment-oriented Web sites continues to grow. Our success
will be largely dependent upon the perceived value of our content relative to
other available entertainment alternatives, both online and elsewhere.
Increased competition could result in:
o price reductions and lower profit margins;
o lower advertising rates;
o loss of visitors or visitors spending less time on our sites;
o reduced page views or advertising impressions; and
o loss of market share.
Many of our existing and potential competitors, in comparison to us, have:
o longer operating histories;
o greater name recognition in some markets;
o larger customer bases; and
o significantly greater financial, technical and marketing resources.
These competitors may also be able to:
o undertake more extensive marketing campaigns for their brands and
services;
o adopt more aggressive advertising pricing policies;
o use superior technology platforms to deliver their products and
services; and
o make more attractive offers to potential employees, distribution
partners, product manufacturers, inventory suppliers, advertisers and
third-party content providers.
Our competitors may develop content that is better than ours or that achieves
greater market acceptance. Sony Station, for example, currently has the
exclusive right to the online versions of the television game shows Jeopardy and
Wheel of Fortune and the board game Trivial Pursuit. In addition, new
competitors may emerge and acquire significant market share.
We also compete with traditional forms of media, like newspapers, magazines,
radio and television for advertisers and advertising revenue. If advertisers
perceive the Internet or our Web sites to be a limited or an ineffective
advertising medium, they may be reluctant to devote a portion of their
advertising budgets to our Web sites.
-28-
Our plans to expand our entertainment business beyond our core game show sites
may not be successful.
Almost all of our experience to date is with online games and game shows.
Because we have only limited experience with businesses beyond our core gaming
sites, we cannot predict whether we will be able to successfully expand into
other online entertainment businesses. Expanding our business will require us to
expend significant amounts of capital to be able to contend with competitors
that have more experience than we do in these businesses and may also have
greater resources to devote to these businesses. Also, our management may have
to divert a disproportionate amount of its attention away from our day-to-day
core business and devote a substantial amount of time expanding into new areas.
If we are unable to effectively expand our business or manage any such
expansion, our financial results will suffer and our stock price will decline.
The Company commenced selling merchandise through its Web site in December 1999
and has recognized related revenues of approximately $15,000 and $34,000 for the
year ended December 31, 1999 and the six months ended June 30, 2000,
respectively. In June 2000, the Company made a strategic decision to focus on
its core strength of online entertainment, and exit the e-commerce business. As
a direct result, the Uproar store was closed.
Risks Related to the Internet Industry
Our revenues depend on the continuing growth of the Internet.
Our future success is dependent on the increased use of the Internet. We cannot
assure you that the market for Internet services will continue to grow or become
sustainable.
The Internet may not continue as a viable commercial marketplace because of many
factors, including:
o the inadequate development of the necessary infrastructure;
o a lack of development of complementary products such as high speed
modems and high speed communication lines; and
o delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and volume of traffic. We cannot
assure you that the Internet infrastructure will be able to support the demands
placed on it by this continued growth. In addition to the Internet's uncertain
ability to expand to accommodate increasing traffic, critical issues concerning
the use of the Internet, including security, reliability, cost, ease of
deployment and administration and quality of service, remain unresolved. A
number of states, for example, have recently permitted telephone companies to
charge increased rates for consumers connecting to the Internet. Concerns
regarding these issues may affect the growth of the use of Internet. If the
Internet fails to continue as a viable marketplace, or develops more slowly than
expected, our growth will slow or stop and our business and financial results
will suffer.
We will only be able to execute our business plan if Internet advertising
increases.
Consumer usage of the Internet is relatively new and the success of the Internet
as an advertising medium will depend on its widespread adoption. The adoption of
Internet advertising, particularly by those entities that have historically
relied on traditional media for advertising, requires the acceptance of a new
way of conducting business, exchanging information and advertising products and
services. Advertisers that have traditionally relied on other advertising media
may be reluctant to advertise on the Internet. These businesses may find
Internet advertising to be less effective than traditional advertising media for
promoting their products and services. Many potential advertising partners have
-29-
little or no experience using the Internet for advertising purposes.
Consequently, they may allocate only limited portions of their advertising
budgets to Internet advertising. We expect that revenues from Internet
advertising will make up a significant amount of our revenues for the
foreseeable future. If the Internet advertising market develops more slowly than
we expect, or if we are unsuccessful in increasing our advertising revenues, our
revenues will not grow as we expect and our business will suffer.
If we are not able to adapt as Internet technologies and customer demands
continue to evolve, we may become less competitive and our business will suffer.
We must adapt to rapidly evolving Internet technologies by continually enhancing
our existing services and introducing new services to address our customers'
changing demands. We expect to incur substantial costs in modifying our services
and infrastructure and in recruiting and hiring experienced technology personnel
to adapt to changing technology affecting providers of Internet services. If we
cannot hire the necessary personnel or adapt to these changes in a timely manner
or at all, we will not be able to meet our users' demands for increasingly
sophisticated entertainment and we will become less competitive. As a result,
our revenues would decline and our business will suffer.
Changes in government regulation could adversely affect our business.
Changes in the legal and regulatory environment that pertains to the Internet
could result in a decrease in our revenues and an increase in our costs. New
laws and regulations may be adopted. Existing laws may be applied to the
Internet. New and existing laws may cover issues like:
o sales and other taxes;
o pricing controls;
o characteristics and quality of products and services;
o consumer protection;
o libel and defamation; and
o copyright, trademark and patent infringement.
Customer uncertainty and new regulations could increase our costs and prevent us
from delivering our products and services over the Internet. It could also slow
the growth of the Internet significantly. This could delay growth in demand for
our products and limit the growth of our revenues.
Our games and game shows are subject to gaming regulations that are subject to
differing interpretations and legislative and regulatory changes that could
adversely affect our ability to grow our business.
We operate online games of skill and chance that are regulated in many
jurisdictions and, in some instances, we reward prizes to the participants. The
selection of prize winners is sometimes based on chance, although none of our
games requires any form of monetary payment. The laws and regulations that
govern our games, however, are subject to differing interpretations in each
jurisdiction and are subject to legislative and regulatory change in any of the
jurisdictions in which we offer our games. If such changes were to happen, we
may find it necessary to eliminate, modify or cancel components of our products
that could result in additional development costs and the possible loss of
revenue.
User concerns and government regulations regarding privacy may result in a
reduction in our user traffic.
Web sites sometimes place identifying data, or cookies, on a user's hard drive
without the user's knowledge or consent. Our company and many other Internet
companies use cookies for a variety of different reasons, including the
-30-
collection of data derived from the user's Internet activity. Any reduction or
limitation in the use of cookies could limit the effectiveness of our sales and
marketing efforts. Most currently available Web browsers allow users to remove
cookies at any time or to prevent cookies from being stored on their hard drive.
In addition, some privacy advocates and governmental bodies have suggested
limiting or eliminating the use of cookies. For example, the European Union
recently adopted a privacy directive that may limit the collection and use of
information regarding Internet users. These efforts may limit our ability to
target advertising or collect and use information regarding the use of our Web
sites, which would reduce our revenues. Fears relating to a lack of privacy
could also result in a reduction in the number of our users.
If Congress adopts legislation that bans online offshore casino gambling, we
will lose revenues derived from some of our advertisers and, if we do not take
appropriate measures to comply with the law, may be subject to legal penalties.
The Congress of the United States is considering legislation that would render
unlawful offshore casino gambling offered online in the United States. If this
legislation is enacted in a form similar to the bill pending in Congress, we
would need to terminate or modify our current agreements with offshore casino
site advertisers, which would result in a loss of revenue.
In addition, such legislation could impose penalties on United States-based
companies that are deemed to aid in the operation of offshore online casinos or
encourage the use of those sites by United States residents. Accordingly, it is
possible that we could be liable for criminal or civil penalties if we did not
take proper measures to terminate or modify our agreements with online casino
sites.
We may be liable for the content we make available on the Internet.
We make content available on our Web sites and on the Web sites of our
advertisers and distribution partners. The availability of this content could
result in claims against us based on a variety of theories, including
defamation, obscenity, negligence, copyright or trademark infringement. We could
also be exposed to liability for third-party content accessed through the links
from our sites to other Web sites. We may incur costs to defend ourselves
against even baseless claims and our financial condition could be materially
adversely affected if we are found liable for information that we make
available. Implementing measures to reduce our exposure to this liability may
require us to spend substantial resources and limit the attractiveness of our
service to users.
Other Risks Impacting Our Business
We may not effectively manage our growth.
In order to execute our business plan, we must grow significantly. This growth
will place a significant strain on our personnel, management systems and
resources. We expect that the number of our employees, including
management-level employees, will continue to increase for the foreseeable
future.
We must continue to improve our operational and financial systems and managerial
controls and procedures. We will need to continue to expand, train, and manage
our workforce. We must also maintain close coordination among our technical,
accounting, finance, marketing, sales and programming organizations. If we do
not effectively manage this growth, we will not be successful in executing our
business plan. In addition, we recently acquired TakeAim and iwin, and any
failure to integrate the technologies, operations or employees of Take Aim and
iwin with those of Uproar may have an adverse effect on our business.
-31-
The loss of our key personnel would impede our future success, and we may have
difficulty attracting and retaining highly-skilled employees.
Our future success depends, in part, on the continued service of our key
management personnel. Our future success also depends on our ability to attract,
retain and motivate highly-skilled employees. Competition for employees in our
industry is intense. We may be unable to attract, assimilate or retain other
highly qualified employees in the future. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly-skilled employees with appropriate
qualifications. The employment agreements that we have with our key management
personnel provide for at-will employment and any of our management personnel can
terminate their employment with us at any time. The loss of the services of
these individuals or other key employees, and the failure to attract and retain
other highly qualified employees, would have a material adverse effect on our
ability to continue to develop and effectively manage our business. We do not
maintain key person life insurance policies on any of our key management
personnel.
The technical performance of our Web sites is critical to our business and to
our reputation.
The computer systems that support our Web sites are largely designed and
maintained by us at significant expense. We may not be able to successfully
design and maintain our systems in the future. We also license communications
infrastructure software that we utilize in Uproar 2000 from Tibco Software, Inc.
The license agreement with Tibco does not contain a defined termination date. If
the Tibco license is terminated, we would likely suffer a disruption in our
business and a replacement system could be difficult to identify and obtain. Any
system failure, including network, software or hardware failure, that causes an
interruption in our service or a decrease in responsiveness of our Web sites,
could result in reduced user traffic and reduced revenue. We have in the past
experienced slower response times and interruptions in service because of
equipment or software down time related to the high volume of traffic on our Web
sites and our need to deliver frequently updated information to our users. We
cannot assure you that we will be able to expand our systems to adequately
accommodate our growing user base. We could also be affected by computer
viruses, electronic break-ins from unauthorized users, or other similar
disruptions or attempts to penetrate our online security systems. Any secure
provider system disruption or failure, security breach or other damage that
interrupts or delays our operations could harm our reputation and cause us to
lose users, advertisers and sponsors and adversely affect our business and
operations.
We currently maintain production servers in New York City and London and
California. Our domestic data centers are operated at facilities provided by
Level 3 Communications and Digital Telemedia. Our London data center is operated
by PSI Net. Our operations depend on these facilities' ability to protect their
and our systems against damage from fire, power loss, water, telecommunications
failures, vandalism and other malicious acts, and similar unexpected adverse
events. Any disruption in the Internet access provided by our servers could have
a material adverse effect on our ability to deliver high-quality content to, and
produce fast response times for, our users.
Our users depend on Internet service providers, online service providers and
other Web site operators for access to our Web sites. These providers have had
interruptions in their services for hours and, in some cases, days, due to
system failures unrelated to our systems. Any future interruptions would be
beyond our control to prevent and could harm our reputation and adversely affect
our business.
We may be unable to protect our intellectual property rights and we may be
liable for infringing the intellectual property rights of others.
We do not currently maintain patents on our technology and others may be able to
develop similar technologies in the future. We regard our copyrights, service
-32-
marks, trademarks, trade secrets and other intellectual property as critical to
our success. We rely on trademark and copyright law, trade secret protection and
confidentiality and license agreements with our employees, customers, partners
and others to protect our intellectual property rights. Unauthorized use of our
intellectual property by third parties may adversely affect our business and our
reputation. It may be possible for third parties to obtain and use our
intellectual property without authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. Our multi-user
games run on proprietary software systems developed by us at significant
expense. Nonetheless, we do not maintain patents on our technology and others
may be able to develop similar technologies in the future.
We cannot be certain that our products do not or will not infringe valid
patents, copyrights, trademarks or other intellectual property rights held by
third parties. We may be subject to legal proceedings and claims from time to
time relating to the intellectual property of others in the ordinary course of
our business. Disputes concerning the ownership of rights to use intellectual
property could be costly and time consuming to litigate, may distract management
from other tasks of operating our business, and may result in our loss of
significant rights and the loss of our ability to effectively operate our
business.
Any joint ventures, acquisitions and alliances we make could be disruptive to
our business and be dilutive to our investors.
As part of our business strategy, we pursue alliances or joint ventures with,
and have in the past acquired and may continue to attempt to acquire,
complementary businesses, technologies, services or products, some of which have
been or may be significant. We recently agreed to establish a joint venture to
produce a local language version of our flagship entertainment site, uproar.com,
in Japan. These relationships may require significant management attention and,
in some cases, additional working capital. If we form a joint venture with or
acquire a company, we could have difficulty in assimilating its operations and
assimilating and retaining its key personnel. These difficulties could disrupt
our business and disrupt our management and employees.
It may also be necessary for us to raise additional funds to finance future
transactions. Any equity or debt financings, if available at all, may adversely
impact our operations and, in the case of equity financings, may result in
dilution to existing stockholders.
We cannot predict our future capital needs and we may not be able to secure
additional financing.
We will likely need to raise additional funds in the future. Any required
additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available on acceptable terms, we may be unable to:
o fund our expansion;
o successfully promote our brand;
o develop or enhance our services;
o respond to competitive pressures; or
o take advantage of acquisition opportunities.
If additional funds are raised by our issuing additional equity securities,
stockholders may experience dilution of their ownership interest and, if
approved by our stockholders, the newly issued securities could have rights
superior to those of the shares of outstanding common stock. If additional funds
are raised by our issuing debt, we may be subject to limitations on our
operations.
-33-
Our stock price has experienced, and is likely to continue to experience,
extreme price and volume fluctuations.
Our common stock has been highly volatile. Stock markets have from time to time
experienced significant price and volume fluctuations that have affected the
market prices for the securities of technology companies, particularly Internet
companies like ours. Because the trading volumes of our common stock on the
Nasdaq National Market and The European Association of Securities Dealers'
Automated Quotation System, or EASDAQ, are low, the price of our common stock is
particularly susceptible to significant fluctuations. Any large sale of stock
may have a negative effect on our stock price, regardless of whether we have
experienced any change in our prospects. We cannot predict the extent to which
investor interest will lead to the development of an active trading market in
the United States or how liquid the market might become. To date, trading
volumes in our common stock have been fairly limited.
The liquidity and trading patterns of our common stock listed on the EASDAQ may
be substantially different from those of our shares of common stock that are
traded on the Nasdaq National Market and may adversely affect the price of our
common stock. We are one of an extremely small number of issuers that quotes its
shares on both EASDAQ and the Nasdaq National Market. We have had shares of
common stock listed on EASDAQ since July 8, 1999. The shares that were offered
in our initial public offering in the United States on March 17, 2000 were
listed on both the Nasdaq National Market and EASDAQ. Our shares of common stock
listed on EASDAQ prior to the United States public offering were not registered
in the United States and are restricted securities in the United States. To be
sold in the United States, these shares must either be registered with the
Securities and Exchange Commission or must be qualified for sale under an
exemption from registration under United States securities laws. EASDAQ is a
relatively new quotation system and has relatively low trading volumes for its
stocks. As a result, the price at which our common stock will trade on EASDAQ
may be subject to significant price fluctuations that will also affect the price
of our common stock trading on the Nasdaq National Market. Historical trading
prices on EASDAQ also are not indicative of the prices at which our common stock
will trade on either EASDAQ or the Nasdaq National Market in the future.
Moreover, EASDAQ may experience delays in settlement and clearance as trading
develops, which could adversely affect the price of our common stock.
Issuance of additional shares of Uproar common stock may reduce our earnings per
share, thereby adversely affecting the Uproar share price.
13,065,110 newly issued shares of Uproar common stock were issued to iwin
shareholders and 1,333,334 newly issued shares of Uproar common stock were
issued to Take Aim shareholders. The issuance of this additional Uproar common
stock in the acquisitions will reduce Uproar's earnings per share, if any. This
dilution could reduce the market price of Uproar common stock unless and until
the combined company achieves revenue growth or cost savings and other business
economies sufficient to offset the effect of this issuance.
If our stock price is volatile, we may become subject to securities litigation
which is expensive and could result in a diversion of resources.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been brought against
that company. Many companies in the Internet industry have been subject to this
type of litigation in the past. We may also become involved in this type of
litigation. Litigation is often expensive and diverts management's attention and
resources.
Our charter documents and Delaware law may inhibit a takeover that stockholders
may consider favorable.
-34-
Provisions in our charter and bylaws may have the effect of delaying or
preventing a change of control or changes in our management that stockholders
consider favorable or beneficial. If a change of control or change in management
is delayed or prevented, the market price of our common stock could decline.
We do not plan to pay dividends in the foreseeable future and, as a result,
stockholders will need to sell shares to realize a return on their investment.
We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Consequently, you will need to sell your shares of common
stock in order to realize a return on your investment and you may not be able to
sell your shares at or above the price you paid for them.
-35-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
No material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
(a) NONE
(b) NONE
(c) Unregistered Securities
On August 11, 2000, the Company issued 1,333,334 shares of the Company's common
stock to the shareholders of Take Aim Holdings Ltd. and assumed options to
purchase, after conversion, 28,941 shares of the Company's common stock in
exchange for all of the outstanding stock and options of Take Aim Holdings Ltd.
The shares issued in the transaction were not registered under the Securities
Act of 1933, as amended (the "Securities Act"). Exemption from registration is
claimed under Section 4(2) of the Securities Act. The recipients of such stock
represented their intention to acquire the securities for investment only and
not with a view to or in connection with any distribution thereof.
(d) Use of Proceeds:
On March 16, 2000, the SEC declared effective the Registration Statement on Form
S-1, SEC Registration Number 333-93315, for our public offering of common stock
in the United States (the "Offering"). We realized net proceeds of approximately
$77.1 million from the Offering. Since the closing, the Company estimates it has
used the proceeds as follows:
o Capital expenditures ($3.4 million);
o Funding of operating activities ($16.5 million); and
o Cash and short term investments ($57.2 million)
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
27.1 Financial Data Schedule
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(b) Filings on Form 8-K
1. On August 11, 2000 the Company completed the acquisition of Take
Aim Holdings Ltd and filed a Form 8-K on August 24, 2000 relating
to the acquisition. On October 16, 2000 the Company filed the
Take Aim financial statements and proforma financials on form
8-K/A.
2. On October 20, 2000 the Company the completed the acquisition of
iwin.com, Inc. and filed a Form 8-K on November 1, 2000 relating
to the acquisition.
-37-
Item 7. Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 14, 2000 (Registrant) UPROAR INC.
By:/s/ KENNETH D. CRON
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Kenneth D. Cron
Chief Executive Officer
By:/s/ JOEL E. WILHITE
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Joel E. Wilhite
Chief Financial Officer
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