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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-87785
PROSPECTUS
4,200,000 Shares
[LifeMinders Logo Appears Here]
Common Stock
This is an initial public offering of common stock by LifeMinders.com, Inc.
The initial public offering price is $14.00 per share.
----------------
Prior to this offering, there has been no public market for the common
stock. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "LFMN."
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Per Share Total
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<S> <C> <C>
Initial public offering price......................... $14.00 $58,800,000
Underwriting discounts and commissions................ $ 0.98 $ 4,116,000
Proceeds to LifeMinders.com, Inc., before expenses.... $13.02 $54,684,000
</TABLE>
LifeMinders.com has granted the underwriters an option for a period of 30
days to purchase up to 630,000 additional shares of common stock. The
underwriters are severally underwriting the shares being offered on a firm
commitment basis. At our request, the underwriters have reserved for sale, at
the initial public offering price, up to 250,000 shares, which are being
offered to our directors, officers, employees, business associates and related
persons.
Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 5.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
HAMBRECHT & QUIST
THOMAS WEISEL PARTNERS LLC
PAINEWEBBER INCORPORATED
WIT CAPITAL CORPORATION
November 19, 1999
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Edgar Colorwork Descriptions:
Inside Front Cover of Prospectus
Black background. On top of the black background are various Post It notes in 3
rows with 3 at the top and 2 each at the bottom and in the middle row. A typical
sampling of notes includes "Info on Hawaii," "Return Joey's recalled Sippy Cup,"
"Change Oil in Nissan," "Mom's Birthday," "Mulch Perennials Soon," "Dr. Elias
Tues. 10 am Buy Vitamin B," and "Training Tips for Rex."
Inside Gatefold
Description of Left Side of Gatefold
Black Background. One Post-It note in the middle which says "Sign Up for
Lifeminders.com Today!"
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Description of Right Side of Gatefold
A picture of a computer screen appears with a typical Lifeminders.com personal
finance email. It includes links to information about Career, Maintaining Good
Credit, Online Banking and Small Business. At the bottom of the page, after
brief descriptions of the stories, are targeted advertisements based on member
preferences. Along the side of the page is a sidebar with links to more
advertisements as well as personal choice links such as changing the member's
profile of email address.
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TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 14
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Information........................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 30
Management............................................................... 43
Certain Transactions..................................................... 51
Principal Stockholders................................................... 53
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 57
Underwriting............................................................. 59
Legal Matters............................................................ 62
Experts.................................................................. 62
Additional Information................................................... 62
Index to Financial Statements............................................ F-1
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PROSPECTUS SUMMARY
This summary highlights material information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" and our financial statements and
the notes to those statements, before making an investment decision. Unless
otherwise indicated, all information in this prospectus gives effect to a 5 for
4 common stock split effective November 17, 1999.
LifeMinders.com
We are an online direct marketing company that provides personalized
information, or content, and advertisements via e-mail to a community of
members. Our e-mail messages contain helpful reminders and tips that enable our
members to better organize and manage their busy lives. Our proprietary
information about our members and highly-precise targeting capabilities provide
our advertising partners the opportunity to more effectively reach their target
markets.
Members can create profiles in one or more of our 10 e-mail categories,
including family, entertainment, home, personal events, pet, automotive,
health, personal finance, travel and shopping. On average, each member creates
profiles in four e-mail categories and receives an average of eight e-mails per
month. We gather member profile data from several sources, including
information provided by our members during the sign up process and through
member preferences and buying habits automatically collected through
interaction with our e-mail messages. We also supplement our profile data with
information obtained from third-party sources. Our proprietary matching process
correlates member profile data to uniquely identified messages that we
personalize and deliver to each member via e-mail. Using our direct marketing
expertise and our proprietary member database we create highly-targeted e-mail
messages that enable our advertising partners to reach a receptive audience. We
generate revenue primarily through advertising and opt-in services.
As of September 30, 1999, we had approximately 4.0 million members, creating
more than 16.2 million profiles. As of the same date, we had 62 advertising
partners. The value of our service to our members is also evidenced by our
growth from 311,000 members and 1.3 million profiles at March 31, 1999, which
represents a compounded quarterly growth rate for both members and profiles of
over 250%.
The Online Direct Marketing Opportunity
According to the Direct Marketing Association, advertising expenditures in
the United States totaled approximately $285.2 billion in 1998, of which
approximately $162.7 billion or 57% was spent on direct marketing and 43% on
brand advertising. Traditional advertisers and direct marketers face numerous
challenges, primarily the inability to accurately target consumers, resulting
in low return on advertising investments. While the Internet offers advertisers
a number of advantages over traditional media, there remain significant
challenges to realizing the full potential of online advertising. Response
rates, or click through rates, for the top banner advertisements averaged just
under 0.6% during the month of September 1999, as reported by The
Nielsen//NetRatings Reporter. Furthermore, large, unsolicited e-mail message
campaigns, or "spamming," have met with considerable negative consumer reaction
and low response rates. As a result of the limitations in both online
advertising and direct marketing, businesses continue to seek more effective
approaches to deliver highly-targeted advertisements in a more personalized and
content-rich editorial environment from which advertisers receive real-time
feedback.
At the same time, many Internet users seeking greater personalized content
have increasingly migrated from broadbased, untargeted portals and search sites
to portals organized around specific interests, or vertically-oriented portals,
and Web sites aggregating groups of Internet users with common interests, or
online communities, which were designed to provide an improved platform for
Internet users with similar interests to obtain relevant information. We
believe that these sites continue to provide a poor context for
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users to discover customized and individual content because users lack the
affinity and opportunity to relate personally to their online experiences.
Accordingly, we believe that Internet users have a significant and growing need
for a trusted online service that can automatically provide relevant,
personalized and timely information.
Our Solution
Our solution offers the following benefits to both our members and our
advertising partners:
Benefits to Members
. Highly targeted and relevant content that becomes more personalized and
useful as our members continue to interact with our e-mail messages
. Enhanced personalization and user efficiency that enables our members to
avoid the mass of extraneous information received through untargeted e-
mails and obtained from most portals and search engines
. Access to e-commerce opportunities that are delivered within our relevant
and timely e-mail messages and highlight useful and appropriate products
and services based on each member's profile
. Member trust and confidence developed by providing content that we
believe our members consider valuable without compromising their privacy
Benefits to Advertising Partners
. Large and targeted member base of approximately 4.0 million members who
have created more than 16.2 million profiles and have generated extensive
demographic, behavioral and performance information
. Detailed real-time reporting and proprietary data mining technology that
provides our advertising partners the ability to immediately determine
the effectiveness of a given advertising campaign and to precisely target
their marketing messages
. Enhanced targeting capability and increased return on advertising
investment based on our ability to target members on numerous variables
resulting in high click through rates and low delivery costs
Our Strategy
Our objective is to be the leading online direct marketing company that
provides personalized content and advertisements via e-mail to a loyal
community of users. The key elements of this strategy include:
. Aggressively and cost-effectively expanding our member base
. Improving member experience and retention
. Expanding and pursuing multiple revenue streams
. Enhancing advertiser effectiveness
. Increasing awareness and understanding of the LifeMinders.com brand
. Pursuing strategic acquisitions and alliances
We were incorporated in Maryland on August 9, 1996 and reincorporated in
Delaware on July 2, 1999. Our principal executive offices are located at 1110
Herndon Parkway, Herndon, Virginia 20170 and our telephone number is (703) 707-
8261.
We maintain a Web site on the World Wide Web at www.lifeminders.com. The
information on our Web site is not part of this prospectus. We have filed
trademark applications for "LifeMinders.com," "LifeMinders," "backslashSanity"
and the LifeMinders.com logo. All brand names and trademarks appearing in this
prospectus are the property of their respective holders.
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THE OFFERING
Common stock offered by 4,200,000 shares
LifeMinders.com........................
Common stock to be outstanding after 19,630,914 shares
this offering..........................
Underwriters' over-allotment option..... 630,000 shares
Use of proceeds......................... Primarily for general corporate
purposes, including working
capital, marketing, member
acquisition activities, capital
expenditures, and potential
strategic acquisitions or
investments. See "Use of Proceeds."
Nasdaq National Market Symbol........... LFMN
SUMMARY FINANCIAL INFORMATION
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Period from
August 9,
1996 (date of Year Ended Nine Months Ended
inception) to December 31, September 30,
December 31, ----------------------- -------------------------
1996 1997 1998 1998 1999(1)
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Statement of Operations
Data:
Revenue................. $ -- $ 67,126 $ 56,750 $ 26,750 $ 5,979,493
Gross margin (loss)..... -- 29,877 (2,722) (3,750) 5,507,586
Loss from operations.... (35,073) (485,078) (1,971,721) (1,366,527) (14,577,478)
Net loss................ (35,073) (479,100) (1,947,206) (1,343,977) (14,453,241)
Net loss available to
common stockholders.... (35,073) (479,100) (2,104,243) (1,452,477) (15,117,618)
Basic and diluted net
loss per common share.. $ (0.04) $ (0.19) $ (0.64) $ (0.44) $ (4.59)
======== ========== =========== =========== ============
Weighted average common
shares outstanding
(basic and diluted).... 798,220 2,530,228 3,275,000 3,275,000 3,296,181
======== ========== =========== =========== ============
Pro forma basic and
diluted net loss per
common share........... $ (0.40) $ (1.50)
=========== ============
Pro forma weighted
average common shares
and common share
equivalents (basic and
diluted)............... 5,202,083 10,082,775
=========== ============
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As of September 30, 1999
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Actual Pro Forma Pro Forma As Adjusted
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Balance Sheet Data:
Cash and cash equivalents...... $11,279,137 $11,279,137 $64,788,137
Working capital................ 17,940,409 17,940,409 71,449,409
Total assets................... 25,348,586 25,348,586 78,857,586
Long term debt, including
current maturities............ 161,986 161,986 161,986
Mandatorily redeemable
convertible preferred stock... 37,720,790 -- --
Stockholders' equity
(deficit)..................... (17,002,861) 20,717,929 74,226,929
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(1) Summary Statement of Operations Data for the Three Month Periods Ended
March 31, June 30, and September 30, 1999 and for the Nine Months Ended
September 30, 1999 are as follows:
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Three Months Ended Nine Months Ended
--------------------------------------- -----------------
March 31, June 30, September 30, September 30,
1999 1999 1999 1999
----------- ----------- ------------- -----------------
(unaudited) (unaudited) (unaudited)
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Revenue................. $ 23,322 $1,418,899 $4,537,272 $ 5,979,493
Gross margin (loss)..... (75,192) 1,271,500 4,311,278 5,507,586
Loss from operations.... (1,647,525) (5,028,707) (7,901,246) (14,577,478)
Net loss................ (1,624,745) (4,983,264) (7,845,232) (14,453,241)
Net loss available to
common stockholders.... (1,724,791) (5,114,840) (8,277,987) (15,117,618)
</TABLE>
The "pro forma" basic and diluted net loss per common share is computed
using the weighted average number of common shares outstanding giving effect to
the automatic conversion of all series of mandatorily redeemable convertible
preferred stock into shares of our common stock upon the consummation of this
offering. The "pro forma" summary balance sheet data as of September 30, 1999
reflects the events described above as if the events had occurred as of
September 30, 1999. The "pro forma as adjusted" summary balance sheet as of
September 30, 1999 reflects the sale of 4,200,000 shares of our common stock at
the initial public offering price of $14.00 per share and our receipt of the
estimated net proceeds of the offering.
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. You should also refer to the other information in this
prospectus, including our financial statements and the related notes. The risks
and uncertainties described below are not the only ones potentially affecting
our company. Additional risks and uncertainties that we are unaware of or that
we currently deem immaterial also may become important factors that affect our
company. If any of the following risks occur, our business, results of
operations or financial condition could be materially harmed. As a result, the
trading price of our common stock could decline, and you may lose all or part
of your investment.
Risks Related to Our Business
We have a history of losses and expect continued losses for the foreseeable
future.
We have not achieved profitability in any previous quarter, and given our
planned level of operating expenses, we expect to continue to incur operating
losses for the foreseeable future. Our accumulated deficit as of September 30,
1999 was approximately $16.9 million. We incurred net losses of $1.9 million
for the year ended December 31, 1998 and $14.5 million for the nine months
ended September 30, 1999. We plan to increase our operating expenses as we
continue to acquire new members, build infrastructure and create brand
awareness. If our revenue growth is slower than we anticipate or our operating
expenses exceed our expectations, our losses will significantly increase. Even
if we were to achieve profitability, we may not be able to sustain or increase
our profitability on a quarterly or annual basis.
Failure to manage our expansion and expected growth effectively will strain our
resources and could impair the expansion of our business.
Failure to manage our growth effectively could adversely affect our ability
to attract and retain our members and advertising partners. We continue to
increase the scope of our operations and have increased the number of our
employees substantially. In addition, we have only recently engaged several key
members of our executive management team. We plan to expand our technology,
sales, administrative and marketing organizations. These factors have placed
and will continue to place a significant strain on our management systems and
resources. We will need to continue to improve our operational, financial and
managerial controls and reporting systems and procedures to expand, train and
manage our workforce in order to manage our expected growth.
We may not be able to sustain revenue growth or achieve or sustain
profitability if we have to refine or change our business strategy.
We have only a limited operating history upon which to evaluate our business
and prospects and the online direct marketing industry is relatively new and
rapidly evolving. This presents many risks and uncertainties that could require
us to further refine or change our business strategy. If we are unsuccessful in
addressing these risks and uncertainties, we may not be able to sustain revenue
growth or achieve or sustain profitability. A detailed description of our
business strategy is contained in "Business -- The Lifeminders.com Strategy."
Our quarterly results of operations may fluctuate in future periods and we may
be subject to seasonal and cyclical patterns that may negatively impact our
stock price.
If we do not successfully anticipate or adjust to quarterly fluctuations in
revenue, our operating results could fall below the expectations of public
market analysts and investors, which could negatively impact our stock price.
We believe that our revenue will be subject to seasonal fluctuations as a
result of general patterns of retail advertising and marketing, and consumer
purchasing, which are typically higher during the fourth calendar quarter and
lower in the following quarter. In addition, expenditures by advertisers and
marketers tend to be cyclical, reflecting overall economic conditions and
consumer buying patterns. Due to these and other factors, our revenues and
operating results may vary significantly from quarter-to-quarter.
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We may not be able to generate sufficient revenue if the acceptance of online
advertising and direct marketing does not continue.
We expect to derive a substantial portion of our revenue from online
advertising and direct marketing, including both e-mail and Web-based programs.
If these services do not continue to achieve market acceptance, we may not
generate sufficient revenue to support our continued operations. The Internet
has not existed long enough as an advertising medium to demonstrate its
effectiveness relative to traditional advertising. Advertisers and advertising
agencies that have historically relied on traditional advertising may be
reluctant or slow to adopt online advertising. Many potential advertisers have
limited or no experience using e-mail or the Web as an advertising medium. They
may have allocated only a limited portion of their advertising budgets to
online advertising, or may find online advertising to be less effective for
promoting their products and services than traditional advertising media. If
the market for online advertising fails to develop or develops more slowly than
we expect, we may not sustain revenue growth or achieve or sustain
profitability.
The market for e-mail advertising in general is vulnerable to the negative
public perception associated with unsolicited e-mail, known as "spam." Public
perception, press reports or governmental action related to spam could reduce
the overall demand for e-mail advertising in general, which could reduce our
revenue and prevent us from achieving or sustaining profitability.
If we do not maintain and expand our member base we may not be able to compete
effectively for advertisers.
Our revenue is primarily derived from advertisers seeking targeted member
groups in order to increase their return on advertising investments. If we are
unable to maintain and expand our member base, advertisers could find our
audience less attractive and effective for promoting their products and
services and we could experience difficulty retaining our existing advertisers
and attracting additional advertisers. To date, we have relied on referral-
based marketing activities to attract a portion of our members and will
continue to do so for the foreseeable future. This type of marketing is largely
outside of our control and there can be no assurance that it will generate
rates of growth in our member base comparable to what we have experienced to
date.
We would also be unable to grow our member base if a significant number of
our current members stopped using our service. Members may discontinue using
our service if they object to having their online activities tracked or they do
not find our content useful. In addition, our service allows our members to
easily unsubscribe at any time by clicking through a link appearing at the
bottom of our e-mail messages and selecting the particular categories from
which they want to unsubscribe.
If we do not continue to develop and maintain relevant and appealing content in
our e-mail messages, we may not be able to maintain and expand our member base,
which could negatively impact our ability to retain and attract the advertisers
we need to sustain revenue growth.
We rely on our editorial staff to identify and develop substantially all of
our content utilizing content from third parties. Because our members'
preferences are constantly evolving, our editorial staff may be unable to
accurately and effectively identify and develop content that is relevant and
appealing to our members. As a result, we may have difficulty maintaining and
expanding our member base, which could negatively impact our ability to retain
and attract advertisers. If we are unable to retain and attract advertisers our
revenue will decrease. Additionally, we license a small percentage of our
content from third parties. The loss of or increase in cost of our licensed
content may impair our ability to assimilate and maintain consistent, appealing
content in our e-mail messages or maintain and improve the services we offer to
consumers. We intend to continue to strategically license a portion of our
content for our e-mails from third parties, including content that is
integrated with internally developed content. These third-party content
licenses may be unavailable to us on commercially reasonable terms, and we may
be unable to integrate third-party content successfully. The inability to
obtain any
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of these licenses could result in delays in product development or services
until equivalent content can be identified, licensed and integrated. Any delays
in product development or services could negatively impact our ability to
maintain and expand our member base.
Because of our limited experience with building our brand, we might not
effectively utilize the resources we spend to build our brand, which could
negatively impact our revenue and our ability to maintain and expand our member
base and attract advertisers.
We intend to build our brand through expanded consumer and trade
advertising, including national print, outdoor and broadcast placements,
continued public relations campaigns, direct mail, participation in strategic
industry events and sustained consumer communications campaigns. We have
minimal practical experience with building our brand through these channels. If
the additional resources we expend to build our brand through these channels do
not generate a corresponding increase in revenue, our financial results could
be harmed. We believe that developing a strong brand identity is critical to
our ability to maintain and expand our member base and retain and attract
advertisers. If we do not successfully develop the LifeMinders.com brand we may
not be able to retain and expand our number of members and advertisers, which
would adversely affect our ability to sustain revenue growth or achieve or
sustain profitability.
We face intense competition, and if we do not respond to this competition
effectively, we may not be able to retain and attract advertisers, which would
reduce our revenue and harm our financial results.
We face intense competition from both traditional and online advertising and
direct marketing businesses. If we do not respond to this competition
effectively, we may not be able to retain current advertisers or attract new
advertisers, which would reduce our revenue and harm our financial results.
Currently, several companies offer competitive e-mail direct marketing
services, including coolsavings.com, MyPoints.com, PostMasterDirect.com and
YesMail.com. We also expect to face competition from online content providers,
list aggregators as well as established online portals and community Web sites
that engage in direct marketing programs. Additionally, we may face competition
from traditional advertising agencies and direct marketing companies that may
seek to offer online products or services. A more detailed discussion of the
potential competitive disadvantages we face is contained in "Business--
Competition."
We may be unable to protect our intellectual property rights and other
proprietary information, which could prevent us from competing effectively.
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we seek to protect
through a combination of patent, copyright, trade secret and trademark law, as
well as confidentiality or license agreements with our employees, consultants,
and corporate and strategic partners. If we are unable to prevent the
unauthorized use of our proprietary information or if our competitors are able
to develop similar technologies independently, the competitive benefits of our
technologies, intellectual property rights and proprietary information will be
diminished. Additional discussion of our reliance on our intellectual property
and proprietary rights is contained in "Business--Intellectual Property and
Proprietary Rights."
Failures of our network infrastructure could result in unanticipated expenses
and prevent our members from effectively utilizing our services, which could
negatively impact our ability to attract and retain members and advertisers.
Our ability to successfully create and deliver our e-mail messages depends
in large part on the capacity, reliability and security of our networking
hardware, software and telecommunications infrastructure. Failures of our
network infrastructure could result in unanticipated expenses to address such
failures and could prevent our members from effectively utilizing our services,
which could prevent us from retaining and attracting members and advertisers.
The hardware infrastructure on which our system operates is located at PSINet
in Reston, Virginia. We do not currently have fully redundant systems or a
formal disaster recovery plan. Our system is
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susceptible to natural and man-made disasters, including earthquakes, fires,
floods, power loss and vandalism. Further, telecommunications failures,
computer viruses, electronic break-ins or other similar disruptive problems
could adversely affect the operation of our systems. Our insurance policies may
not adequately compensate us for any losses that may occur due to any damages
or interruptions in our systems. Accordingly, we could be required to make
capital expenditures in the event of unanticipated damage.
In addition, our members depend on Internet service providers, or ISPs, for
access to our Web site. Due to the rapid growth of the Internet, ISPs and Web
sites have experienced significant system failures and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems. These problems could harm our business by preventing our members from
effectively utilizing our services.
Our management team has only worked together for a short period of time and the
inability of our management team to function effectively or the loss of any of
our officers or key employees could seriously harm our business by impairing
our ability to implement our business model.
Many of our executive officers, including our Chief Financial Officer, Chief
Technology Officer, Vice President, Marketing and Communications, and Vice
President, Strategic Planning have joined our company in 1999. We may not
successfully assimilate our recently hired officers and may not be able to
successfully locate, hire, assimilate and retain qualified key management
personnel, which could seriously harm our business by impairing our ability to
implement our business strategy. Our business is largely dependent on the
personal efforts and abilities of our senior management, including Stephen R.
Chapin, Jr., our President, Chief Executive Officer and Chairman of the Board,
and other key personnel. Many of our officers or employees can terminate their
respective employment relationship at any time. The loss of these key employees
or our inability to attract or retain other qualified employees could seriously
harm our business.
We may not be able to hire or retain skilled employees, which could prevent us
from effectively growing and operating our business.
Our ability to support the growth of our business will depend, in part, on
our ability to attract and retain highly skilled employees, particularly
management, editorial, sales and technical personnel. In particular, we rely on
highly skilled editorial personnel to create our e-mail messages, sales and
marketing personnel to maintain and expand our member base and the number of
advertisers, and technical personnel to maintain and improve our technological
capabilities. If we are unable to hire or retain key employees, our ability to
operate and grow our business will be adversely affected. Competition for
employees with these skills and experience is intense. As a result, we may be
unable to retain our key employees or to attract other highly qualified
employees in the future. We have experienced difficulty from time to time in
attracting the personnel necessary to support the growth of our business, and
we may experience similar difficulty in the future.
Our results of operations and financial condition may be adversely affected if
we do not successfully integrate future acquisitions into our operations.
In order to respond to the competitive pressures of the online direct
marketing industry and support our intended growth, we intend to focus on
acquiring, or making significant investments in, additional companies, products
and technologies that complement our business. We do not have any present
understanding, nor are we having any discussions, relating to any significant
acquisition or investment. Our ability to compete effectively and support our
intended growth may be adversely affected if we are not able to identify
suitable acquisition candidates or investments or acquire companies or make
investments on acceptable terms or at acceptable times. In addition, acquiring
companies, products, services or technologies involves many potential
difficulties and risks, including:
. difficulty in assimilating them into our operations;
. disruption of our ongoing business and distraction of our management and
employees;
. negative effects on reported results of operations due to acquisition-
related charges and amortization of acquired technology and other
intangibles; and
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. potential dilutive issuances of equity or equity-linked securities.
These potential difficulties and risks could adversely affect our ability to
realize the intended benefits of an acquisition and could result in
unanticipated expenses and disruptions in our business, which could harm our
financial results and condition.
We may have to obtain additional capital to grow our business, which could
result in significant costs and dilution that could adversely affect our stock
price.
Maintaining and expanding our member base and the number of our advertisers
will require significant cash expenditures. If the proceeds from this offering,
cash on hand, cash generated from operations and existing loan and credit
arrangements are not sufficient to meet our cash requirements, we will need to
seek additional capital, which could result in significant costs and dilute the
ownership interest of our stockholders and thereby adversely affect our stock
price. Additional financing may not be available on terms favorable to us, or
at all, which could result in significant costs to obtain the necessary capital
and limit our ability to maintain and expand our member base and number of
advertisers, or otherwise respond to competitive pressures. In addition, if we
raise additional funds through the issuance of equity or equity-linked
securities, the percentage ownership of our stockholders would be reduced.
These securities may have rights, preferences or privileges senior to those of
our stockholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for a
discussion of working capital and capital expenditures.
Problems associated with operating in international markets could prevent us
from achieving or sustaining our intended growth.
An element of our growth strategy is to introduce our services in
international markets. Our participation in international markets will be
subject to a number of risks, including relative low levels of Internet usage
in foreign countries, foreign government regulations, export license
requirements, tariffs and taxes, fluctuations in currency exchange rates,
introduction of the European Union common currency, difficulties in managing
foreign operations and political and economic instability. To the extent our
potential international members are impacted by currency devaluations, general
economic crises or other negative economic events, the ability of our members
to utilize our services could be diminished.
The content contained in our e-mails may subject us to significant liability
for negligence, copyright or trademark infringement or other matters.
If any of the content that we create and deliver to our members or any
content that is accessible from our e-mails through links to other Web sites
contains errors, third parties could make claims against us for losses incurred
in reliance on such information. In addition, the content contained in or
accessible from our e-mails could include material that is defamatory, violates
the copyright or trademark rights of third parties, or subjects us to liability
for other types of claims. Our general liability insurance may not cover claims
of these types or may not be adequate to indemnify us for all liability that
may be imposed. Any imposition of liability, particularly liability that is not
covered by insurance or is in excess of insurance coverage, could result in
significant costs and expenses and damage our reputation.
We also enter into agreements with certain e-commerce partners under which
we may be entitled to receive a share of certain revenue generated from the
purchase of goods and services through direct links to our e-commerce partners
from our e-mails. These agreements may expose us to additional legal risks and
uncertainties, including potential liabilities to consumers of those products
and services by virtue of our involvement in providing access to those products
or services, even if we do not provide those products or services. Any
indemnification provided to us in our agreements with these parties, if
available, may not adequately protect us.
9
<PAGE>
Risks Related to the Internet Industry
If we fail to adapt to rapid change in the online direct marketing industry or
our internally developed systems cannot be modified properly for increased
traffic or volume, our services may become obsolete and unmarketable.
The online direct marketing industry is characterized by rapid change. The
introduction of products and services embodying new technologies, the emergence
of new industry standards and changing consumer needs and preferences could
render our existing services obsolete and unmarketable. If we do not respond
effectively to rapidly changing technologies, industry standards and customer
requirements, the quality and reliability of the services we provide to our
members and advertisers may suffer. We may experience technical difficulties
that could delay or prevent the successful development, introduction or
marketing of new products and services. In addition, any new enhancements to
our products and services must meet the requirements of our current and
prospective users. As a result, we could incur substantial costs to modify our
services or infrastructure to adapt to rapid change in our industry, which
could harm our financial results.
Concerns about, or breaches of, the security of our member database could
prevent us from sustaining revenue growth and achieving or sustaining
profitability by adversely affecting our ability to attract and retain members
and develop our member profiles, resulting in significant expenses to prevent
breaches, and subjecting us to liability for failing to protect our members'
information.
We maintain a database containing information on our members, including
their account balances. Our database may be accessed by unauthorized users
accessing our systems remotely. If the security of our database is compromised,
current and potential members may be reluctant to use our services or provide
us with the personal data we need to adequately develop and maintain individual
member profiles, which could prevent us from retaining and attracting the
advertisers we require to sustain revenue growth. In addition, as a result of
these security and privacy concerns, we may incur significant costs to protect
against the threat of security breaches or to alleviate problems caused by
security breaches, and we may be unable to effectively target direct marketing
offers to members or may be subject to legal claims of members if unauthorized
third parties gain access to our system and alter or destroy information in our
database. Also, any public perception that we engaged in the unauthorized
release of member information, whether or not correct, would adversely affect
our ability to attract and retain members.
We may be vulnerable to computer viruses and other disruption problems caused
by unauthorized or illegal access that could adversely affect the quality of
our products and services and require us to expend significant resources.
Our networks may be vulnerable to computer viruses and other disruptive
problems caused by unauthorized or illegal access, which could require us to
expend significant capital or other resources to protect against and prevent
security breaches causing accidental or intentional interruptions or other
disruptive problems. In addition, eliminating computer viruses and alleviating
other disruptive problems may require interruptions, delays or cessation of
service to our members, which could reduce the benefits of our services and
products to our members and advertisers. A party who is able to circumvent
security measures could cause interruptions in our Internet operations. ISPs
and other online service providers have in the past experienced, and may in the
future experience, interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or others.
Although we intend to continue to implement security measures, we cannot be
certain that measures implemented by us will not be circumvented in the future.
10
<PAGE>
The unauthorized access of confidential member information that we transmit
over public networks could adversely affect our ability to attract and retain
members.
Our members transmit confidential information to us over public networks and
the unauthorized access of such information by third parties could harm our
reputation and significantly hinder our efforts to attract and retain members.
We rely on a variety of security techniques and authentication technology
licensed from third parties to provide the security and authentication
technology to effect secure transmission of confidential information, including
customer credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments may result in a
compromise or breach of the technology used by us to protect customer
transaction data.
Problems with the performance and reliability of the Internet infrastructure
could adversely affect the quality and reliability of the products and services
we offer our members and advertisers which could prevent us from sustaining
revenue growth.
We depend significantly on the Internet infrastructure to deliver
attractive, reliable and timely e-mail messages to our members. If Internet
usage grows, the Internet infrastructure may not be able to support the demands
placed on it by this growth, and its performance and reliability may decline,
which could adversely affect our ability to sustain revenue growth. Among other
things, continued development of the Internet infrastructure will require a
reliable network backbone with necessary speed, data capacity and security.
Currently, there are regular failures of the Internet network infrastructure,
including outages and delays, and the frequency of these failures may increase
in the future. These failures may reduce the benefits of our products and
services to our members and undermine our advertising partners' and our
members' confidence in the Internet as a viable commercial medium. In addition,
the Internet could lose its viability as a commercial medium due to delays in
the development or adoption of new technology required to accommodate increased
levels of Internet activity or due to government regulation.
We may have to litigate to protect our intellectual property and other
proprietary rights or to defend claims of third parties, and such litigation
may subject us to significant liability and be time consuming and expensive.
There is a substantial risk of litigation regarding intellectual property
rights in Internet-related businesses and legal standards relating to the
validity, enforceability and scope of protection of certain proprietary rights
in Internet-related businesses are uncertain and still evolving. We may have to
litigate in the future to enforce our intellectual property rights, protect our
trade secrets or defend ourself against claims of violating the proprietary
rights of third parties. This litigation may subject us to significant
liability for damages, result in invalidation of our proprietary rights, be
time-consuming and expensive to defend, even if not meritorious, and result in
the diversion of management time and attention. Any of these factors could
adversely affect our business operations and financial results and condition.
Government regulation and legal uncertainties of doing business on the Internet
could significantly increase our costs and expenses.
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent and these laws and regulations could
significantly increase the costs we incur in using the Internet to conduct our
business. Recently, the United States Congress enacted Internet legislation
regarding children's privacy, copyright and taxation. The European Union
recently adopted a directive addressing data privacy that may result in limits
on the collection and use of member information. A number of other laws and
regulations may be adopted that regulate the use of the Internet, including
user privacy, pricing, acceptable content, taxation, use of the
telecommunications infrastructure and quality of products and services. The
laws governing the Internet remain largely unsettled, even in areas where there
has been
11
<PAGE>
some legislative action. It may take years to determine whether and how
existing laws, including those governing intellectual property, privacy, libel
and taxation apply to the Internet and Internet advertising. In addition, the
growth and development of the market for Internet commerce may prompt calls for
more stringent consumer protection laws, both in the United States and abroad,
that may impose additional burdens on companies conducting business over the
Internet. As a result of these uncertainties, we may incur unanticipated,
significant costs and expenses that could harm our financial results and
condition. For additional discussion of potential governmental intervention,
please see "Business-Government Regulation."
Sweepstakes regulation may limit our ability to conduct sweepstakes and other
contests, which could negatively impact our ability to attract and retain
members.
The conduct of sweepstakes, lotteries and similar contests, including by
means of the Internet, is subject to extensive federal, state and local
regulation, which may restrict our ability to offer contests and sweepstakes in
some geographic areas or altogether. Any restrictions on these promotions could
adversely affect our ability to attract and retain members.
We are subject to potential disruptions and costs associated with the Year 2000
problem, any of which may prevent us from achieving or sustaining
profitability.
We cannot be certain that our internal IT and non-IT systems will perform in
compliance with Year 2000 or that the Year 2000 compliance efforts of our third
party providers of hardware and software and our third party network providers
will be successful. If we, our third party providers of hardware and software
or our third party network providers fail to remedy any Year 2000 issues, we
could experience significant costs and disruptions in the operation of our
business. Moreover, the failure to adequately address Year 2000 compliance
issues in our products and systems could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time consuming to defend. These problems could result in increased
operating costs, the loss of members and advertisers and a reduction in the
growth of revenue. A more detailed description of our Year 2000 compliance is
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."
Risks Related to the Offering
After the offering, our executive officers and directors will retain
substantial voting control which will allow them to influence the outcome of
matters submitted to stockholders for approval in a manner that may be adverse
to your interests.
We anticipate that our executive officers, our directors and entities
affiliated with them will, in the aggregate, beneficially own approximately
62.5% of our outstanding common stock following the completion of this
offering, or 60.1% assuming exercise of the underwriters option to purchase
additional shares. As a result, these stockholders will retain substantial
control over matters requiring approval by our stockholders, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in control, which could have an adverse affect on our stock price. See
"Principal Stockholders" for more information relating to the ownership
positions of our executive officers and directors.
The substantial number of shares that will be eligible for sale in the near
future may cause the market price of our common stock to decline.
A substantial number of shares of common stock will be available for sale in
the public market following this offering, which could adversely affect the
market price for our common stock. See "Shares Eligible for Future Sale" for a
more detailed description of the eligibility of shares of our common stock for
future sale.
12
<PAGE>
A public market for our securities may not develop or be sustained, which could
adversely affect our stock price.
There has not been a public market for our common stock. The initial public
offering price for the shares was determined by negotiations between us and the
representatives of the underwriters and may not be indicative of prices that
will prevail in the trading market. Because we have a limited operating history
under our current business model and the online direct marketing industry is
relatively new and rapidly evolving, it is difficult to predict the extent to
which investor interest in our common stock will lead to the development of a
trading market or how liquid that market might become. You may not be able to
resell your shares at or above the initial public offering price.
A reduction in our stock price following this offering could lead to class
action litigation, which could result in substantial costs.
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly Internet-related
companies, have been highly volatile. In the past, securities class action
litigation has often been instituted against a company following periods of
volatility in that company's stock price. This type of litigation could result
in substantial costs and could divert our management's attention and resources,
which could harm our financial results and condition.
You will experience an immediate and substantial dilution in the book value of
your investment.
The initial public offering price of our common stock is substantially
higher than what the net tangible book value per share of the common stock will
be immediately after this offering. If you purchase our common stock in this
offering, you will incur immediate dilution of approximately $10.22 in the net
tangible book value per share of our common stock from the price you pay for
our common stock based upon the initial public offering price of $14.00 per
share. The exercise of outstanding options may result in further dilution.
Our management will have broad discretion in using the proceeds of this
offering and we cannot assure you that we will effectively utilize the
proceeds.
We intend to use the net proceeds from the sale of the common stock for
general corporate purposes, including working capital, marketing, member
acquisition activities, capital expenditures, and for potential acquisitions or
investments. The failure of management to apply these funds effectively could
harm our business. Our management has not determined how it will allocate the
proceeds among the anticipated uses. Accordingly, our management will have
significant flexibility in applying the net proceeds of this offering and you
will not have the opportunity, as part of your investment decision, to assess
whether management is using the proceeds appropriately. Management has
flexibility to use the net proceeds for corporate purposes and cannot assure
that the proceeds will be expended effectively. Until the proceeds are needed,
we plan to invest them in investment-grade, interest-bearing securities.
Anti-takeover provisions in our charter documents and Delaware law could
prevent or delay a change in control of our company, which could adversely
affect our stock price.
Our Restated Certificate of Incorporation and Bylaws may discourage, delay
or prevent a merger or acquisition that a stockholder may consider favorable by
authorizing the issuance of "blank check" preferred stock and providing for a
classified board of directors with staggered, three-year terms. Certain
provisions of Delaware law may also discourage, delay or prevent someone from
acquiring or merging with us. These anti-takeover provisions could adversely
affect our stock price. For a detailed description of the anti-takeover
provisions in our charter documents, see "Description of Capital Stock--Anti-
takeover Effects of Provision of the Certificate of Incorporation, Bylaws and
Delaware Law."
13
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by these forward-looking statements. These
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology, including "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or
the negative of these terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined under "Risk Factors." Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of these statements. We are under no duty to
update any of the forward-looking statements after the date of this prospectus
to conform these statements to actual results.
14
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of 4,200,000 shares of
common stock we are offering will be approximately $53.5 million ($61.7 million
if the underwriters exercise their over-allotment option in full) at the
initial public offering price of $14.00 per share and after deducting estimated
offering expenses of $1.2 million and underwriting discounts and commissions
payable by us.
We expect to use the net proceeds for general corporate purposes, including
working capital, marketing advertising, member acquisition activities and
capital expenditures. A portion of the net proceeds may also be used to acquire
or invest in businesses, or technologies, that are complementary to our
business. However, we have not targeted any particular business for
acquisition. We have no current agreements or commitments nor are we
negotiating with any other party with respect to any acquisitions or
investments. Our management will have broad discretion concerning the use of
the net proceeds of the offering. Pending these uses, we intend to invest the
net proceeds of this offering in investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities and do not currently anticipate paying cash dividends in the
foreseeable future. Our credit facilities with Imperial Bank prohibit the
payment of dividends until the expiration of the facilities. We are currently
negotiating the renewal of our credit facilities with Imperial Bank, which
expire in early January 2000.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
. On an actual basis;
. On a "pro forma" basis to reflect the automatic conversion of all
outstanding shares of our mandatorily redeemable convertible preferred
stock into 12,081,541 shares of our common stock upon the consummation of
this offering; and
. On a "pro forma as adjusted" basis to reflect the sale of 4,200,000
shares of our common stock at the initial public offering price of $14.00
per share and our receipt of the estimated net proceeds of the offering.
The information below reflects the initial public offering price of $14.00
per share as reduced for underwriting discounts, commissions and expenses
incurred in connection with the offering. The following table does not reflect
1,700,374 shares of common stock issuable upon exercise of options outstanding
as of September 30, 1999 at a weighted average exercise price of $2.11 per
share.
This information should be read in conjunction with our consolidated
financial statements and the notes appearing at the end of the financial
statements included in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------
Pro Pro Forma
Actual Forma As Adjusted
------------ ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents............. $ 11,279,137 $11,279,137 $64,788,137
============ =========== ===========
Long-term debt, including current
portion.............................. 161,986 161,986 161,986
------------ ----------- -----------
Mandatorily redeemable convertible
preferred stock, $0.01 par value;
1,000,000 Series A shares, 1,000,000
Series B shares, 2,620,373 Series C
shares, 2,252,874 Series D shares,
2,791,993 Series E shares authorized,
issued and outstanding (actual); no
shares authorized, issued and
outstanding (pro forma and pro forma
as adjusted)......................... 37,720,790 -- --
------------ ----------- -----------
Stockholders' equity (deficit):
Common stock, $.01 par value,
25,000,000 shares authorized,
3,349,373 issued and outstanding
(actual); 15,430,914 shares issued
and outstanding on a pro forma
basis; 19,630,914 shares issued and
outstanding on a pro forma as
adjusted basis..................... 33,494 154,309 196,309
Additional paid-in capital.......... 2,027,253 39,627,228 93,094,228
Deferred compensation............... (2,148,988) (2,148,988) (2,148,988)
Accumulated deficit................. (16,914,620) (16,914,620) (16,914,620)
------------ ----------- -----------
Total stockholders' (deficit) equity.. (17,002,861) 20,717,929 74,226,929
------------ ----------- -----------
Total capitalization.................. $ 20,879,915 $20,879,915 $74,388,915
============ =========== ===========
</TABLE>
16
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
$20,717,929, or approximately $1.34 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total assets less
total liabilities, divided by the number of shares of common stock outstanding
after giving effect to the conversion of each share of our mandatorily
redeemable convertible preferred stock into 1.25 shares of common stock upon
completion of this offering. After giving effect to the sale of the 4,200,000
shares of common stock offered hereby at the initial public offering price of
$14.00 per share and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses, the pro forma net tangible book
value as of September 30, 1999 would have been $74,226,929, or approximately
$3.78 per share. This represents an immediate increase in pro forma net
tangible book value of $2.44 per share to existing stockholders and an
immediate dilution in net tangible book value of $10.22 per share to new
investors of common stock in this offering. The following table illustrates
this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $14.00
Pro forma net tangible book value per share as of September 30,
1999.......................................................... $1.34
Increase per share attributable to new investors............... 2.44
-----
Pro forma net tangible book value per share after the offering.. 3.78
------
Dilution per share to new investors............................. $10.22
======
</TABLE>
The following table summarizes as of September 30, 1999, on the pro forma
basis described above, the number of shares of capital stock purchased from us,
the total consideration paid to us and the average price per share paid by
existing stockholders and by investors purchasing shares of common stock in
this offering at the initial public offering price of $14.00 per share, before
deducting the estimated underwriting discount and commissions and estimated
offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 15,430,914 78.6% $39,500,000 40.2% $ 2.56
New investors............... 4,200,000 21.4% 58,800,000 59.8% 14.00
----- ----------- -----
Total..................... 19,630,914 100.0% $98,300,000 100.0%
========== ===== =========== =====
</TABLE>
The table above excludes options to purchase 1,700,374 shares of common
stock at a weighted average exercise price of $2.11 per share issued and
outstanding as of September 30, 1999 under our stock option plan. In addition,
as of September 30, 1999, there were 1,145,321 shares available for issuance
under our stock option plan. If the issued options were to be exercised in full
for cash, pro forma net tangible book value per share after the offering would
be $2.73, the increase per share attributable to new investors would be $1.39,
and the dilution per share to new investors would be $11.27.
17
<PAGE>
SELECTED FINANCIAL INFORMATION
We present below selected financial information for our company. The summary
historical balance sheet data as of December 31, 1997, 1998 and September 30,
1999 and the summary historical statement of operations data for the period
from August 9, 1996 (Date of Inception) to December 31, 1996 and for each of
the years ended December 31, 1997, 1998 and for the nine month periods ended
September 30, 1998 and 1999, have been derived from our audited financial
statements that are included elsewhere in this prospectus. The summary
historical balance sheet data as of December 31, 1996 has been derived from our
audited financial statements that are not included in this prospectus.
PricewaterhouseCoopers LLP has audited the financial statements for the period
from August 9, 1996 (Date of Inception) to December 31, 1996 and for the years
ended December 31, 1997, 1998 and for the nine month periods ended September
30, 1998 and 1999.
<TABLE>
<CAPTION>
Period from
August 9, 1996
(Date of Year Ended Nine Months Ended
Inception) to December 31, September 30,
December 31, ---------------------- -------------------------
1996 1997 1998 1998 1999(1)
-------------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Advertising........... $ -- $ 67,126 $ 56,750 $ 26,750 $ 4,064,962
Opt-in................ -- -- -- -- 1,914,531
-------- --------- ----------- ----------- ------------
Total revenue....... -- 67,126 56,750 26,750 5,979,493
Cost of revenue......... -- 37,249 59,472 30,500 471,907
-------- --------- ----------- ----------- ------------
Gross margin (loss)..... -- 29,877 (2,722) (3,750) 5,507,586
-------- --------- ----------- ----------- ------------
Operating expenses:
Sales and marketing... 15,965 147,325 868,706 591,359 16,465,006
Research and
development.......... 9,800 240,498 373,788 285,784 1,012,603
General and
administrative....... 9,308 127,132 726,505 485,634 2,338,784
Stock-based
compensation......... -- -- -- -- 268,671
-------- --------- ----------- ----------- ------------
Total operating
expenses........... 35,073 514,955 1,968,999 1,362,777 20,085,064
-------- --------- ----------- ----------- ------------
Loss from operations.... (35,073) (485,078) (1,971,721) (1,366,527) (14,577,478)
Interest income, net.... -- 5,978 24,515 22,550 124,237
-------- --------- ----------- ----------- ------------
Net loss................ (35,073) (479,100) (1,947,206) (1,343,977) (14,453,241)
Accretion on mandatorily
redeemable convertible
preferred stock........ -- -- (157,037) (108,500) (664,377)
-------- --------- ----------- ----------- ------------
Net loss available to
common stockholders.... $(35,073) $(479,100) $(2,104,243) $(1,452,477) $(15,117,618)
======== ========= =========== =========== ============
Basic and diluted net
loss per common share.. $ (0.04) $ (0.19) $ (0.64) $ (0.44) $ (4.59)
======== ========= =========== =========== ============
Weighted average common
shares outstanding
(basic and diluted).... 798,220 2,530,228 3,275,000 3,275,000 3,296,181
======== ========= =========== =========== ============
Pro forma basic and
diluted net loss per
common share(2)....... $ (0.40) $ (1.50)
=========== ============
Pro forma weighted
average common shares
and common share
equivalents (basic and
diluted)(2)........... 5,202,083 10,082,775
=========== ============
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
December 31, September 30, 1999
-------------------------------- -------------------------------------
Pro Forma
Pro As
1996 1997 1998 Actual Forma(3) Adjusted(4)
-------- --------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 163 $ 792,553 $ 232,073 $ 11,279,137 $11,279,137 $64,788,137
Working capital
(deficit).............. (25,073) 744,067 (245,267) 17,940,409 17,940,409 71,449,409
Total assets............ 163 797,152 278,301 25,348,586 25,348,586 78,857,586
Mandatorily redeemable
convertible preferred
stock.................. -- 866,338 2,023,375 37,720,790 -- --
Stockholders' equity
(deficit).............. (25,073) (117,672) (2,222,414) (17,002,861) 20,717,929 74,226,929
</TABLE>
(1) Results of Operations for the Three Month Periods Ended March 31, June 30
and September 30, 1999 (unaudited) and the Nine Month Period Ended
September 30, 1999:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
Nine Months Ended
March 31, June 30, September 30, September 30,
1999 1999 1999 1999
----------- ----------- ------------- -----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Advertising........... $ 10,024 $ 886,065 $ 3,168,873 $ 4,064,962
Opt-in................ 13,298 532,834 1,368,399 1,914,531
----------- ----------- ----------- ------------
Total revenue....... 23,322 1,418,899 4,537,272 5,979,493
Cost of revenue......... 98,514 147,399 225,994 471,907
----------- ----------- ----------- ------------
Gross margin (loss)..... (75,192) 1,271,500 4,311,278 5,507,586
----------- ----------- ----------- ------------
Operating expenses:
Sales and marketing... 1,081,501 5,158,985 10,224,520 16,465,006
Research and
development.......... 220,075 305,357 487,171 1,012,603
General
administrative....... 259,702 747,572 1,331,510 2,338,784
Stock based
compensation......... 11,055 88,293 169,323 268,671
----------- ----------- ----------- ------------
Total operating
expenses........... 1,572,333 6,300,207 12,212,524 20,085,064
----------- ----------- ----------- ------------
Loss from operations.... (1,647,525) (5,028,707) (7,901,246) (14,577,478)
Interest income, net.... 22,780 45,443 56,014 124,237
----------- ----------- ----------- ------------
Net loss................ (1,624,745) (4,983,264) (7,845,232) (14,453,241)
Accretion on mandatorily
redeemable
convertible preferred
stock.................. (100,046) (131,576) (432,755) (664,377)
----------- ----------- ----------- ------------
Net loss available to
common stockholders.... $(1,724,791) $(5,114,840) $(8,277,987) $(15,117,618)
=========== =========== =========== ============
</TABLE>
(2) The calculation of pro forma basic and diluted loss per share includes the
weighted average number of common shares outstanding and the conversion of
our mandatorily redeemable convertible preferred stock into our common
stock upon the consummation of our offering.
(3) The "pro forma" summary balance sheet data as of September 30, 1999
reflects the automatic conversion of all outstanding shares of our
mandatorily redeemable convertible preferred stock into 12,081,541 shares
of our common stock upon the consummation of this offering.
(4) The "pro forma as adjusted" summary balance sheet as of September 30, 1999
reflects the sale of shares of our common stock at the initial offering
price of $14.00 per share and our receipt of the estimated net proceeds of
the offering.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with the financial statements and
the related notes. This discussion contains forward-looking statements based
upon current expectations that involve risks and uncertainties, including our
plans, objectives, expectations and intentions. Our actual results and the
timing of certain events could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors," "Business" and elsewhere in this
prospectus. See "Forward-Looking Statements."
Overview
We provide online direct marketing opportunities to our advertising partners
by delivering personalized e-mail messages to our members. Our e-mail messages
contain helpful reminders and tips that enable our members to better organize
and manage their busy lives. Our proprietary information about our members and
highly-precise targeting capabilities provide our advertising partners the
opportunity to more effectively reach their target audiences.
We were incorporated in Maryland on August 9, 1996 ("Date of Inception")
under the name of MinderSoft, Inc. In January 1999, we changed our name to
LifeMinders.com, Inc. We reincorporated in Delaware on July 2, 1999. From 1996
to 1998, we entered into arrangements with national retailers to distribute our
reminder products in software form on disk. In late 1998, we revised our
strategy to become an online direct marketing company that provides
personalized content and advertisements via e-mail to a community of members.
Given this significant shift in strategy in late 1998, the historical financial
condition and results of operations prior to 1999 do not necessarily reflect
our business as it is currently being conducted and are not material. See
"Business" for a more comprehensive discussion.
We had approximately 4.0 million members who created more than 16.2 million
profiles as of September 30, 1999. As of December 31, 1998, we had
approximately 15,800 members representing 41,000 profiles.
Revenue
Since the beginning of calendar year 1999, we have generated revenue
primarily through advertising and opt-in services. Our advertising revenue is
subject to the effects of seasonality. If purchasing patterns or timing of
purchasing by advertisers were to change, our operations and quarter-to-quarter
comparisons could be materially affected.
Advertising
Our advertising arrangements consist primarily of advertisements that are
displayed within our e-mails. Generally, advertisers pay us and we recognize
revenue on a per e-mail basis, based on the number of e-mails delivered to our
members in which the advertisements are displayed. From time to time, we may
guarantee a minimum number of e-mails to be delivered containing an
advertisement directed at a specific group. Under these contracts, we are not
required to forfeit fees received for e-mails previously delivered. We have
historically fulfilled our guaranteed minimum number of e-mails and have not
had any disputes with advertisers regarding the guaranteed minimum number of e-
mails. Currently, there are no contracts that have a guaranteed minimum number
of e-mails that will generate a material amount of revenues. We may also
guarantee a minimum number of sales orders for the advertiser based on the e-
mails delivered. Under these contracts we defer all revenue until notification
is received from the advertiser that the minimum number of sales orders have
been achieved by the advertiser. Our advertising contracts generally have
average terms ranging from one to six months. In addition, we may provide
advertisers the opportunity for the exclusive right to sponsor advertisements
within a specific e-mail category for a specified period of time for a fixed
fee. Under these contracts we recognize revenue during the period the
advertisement is displayed in our e-mails since there is no obligation to
provide a minimum number of e-mails for that individual advertiser.
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Advertising revenue also includes barter transactions, where we exchange
advertising space on our e-mails for reciprocal advertising space or traffic on
other Web sites. Revenue from these barter transactions is recorded at the
estimated fair value of the advertisements delivered and is recognized when the
advertisements are included in our e-mails. No gain or loss results from these
barter transactions as the revenue recognized equals the advertising costs
incurred. For the nine month period ended September 30, 1999, barter revenue
was less than 5% of net revenues. We did not enter into barter transactions
prior to 1999.
Opt-in Services
Revenue is recognized when members affirmatively respond to the advertisers'
newsletters and other promotions offered during our sign up process. We derive
revenue from our opt-in services through fees that our opt-in advertising
partners pay. We record revenue net of estimated duplicate member responses to
our opt-in partners' newsletters and other promotions.
Duplicate member responses are names we provide to opt-in advertising
partners for which our members have previously registered either through our
sign up process or with our opt-in advertising partners directly. For the nine
month period ended September 30, 1999, revenue was recorded net of
approximately $443,000 for estimated duplicate member responses to our opt-in
partners' newsletters and other promotions.
Expenses
Cost of Revenue
Cost of revenue consists of salaries, employee benefits and related expenses
of our Member Experience personnel, fees paid to freelance writers of our
content and depreciation of the computer equipment necessary to run our
service. We believe that a significant increase in these expenses will be
necessary as we expand the number of e-mail categories offered to our members.
Sales and Marketing
Sales and marketing expenses include salaries, sales commissions, employee
benefits, travel and related expenses of our direct sales force, advertising
and promotional expenses, marketing, and sales support functions. In an effort
to increase our revenue, member base and brand awareness, we expect to increase
significantly the amount of spending on sales and marketing over the next year.
Marketing costs associated with increasing our member base, which to date have
been minimal, are expensed in the period incurred.
Research and Development
Research and development costs include expenses for the development of new
or improved technologies designed to enhance the performance of our service,
including the salaries and related expenses for our engineering department, as
well as costs for contracted services, content facilities and equipment. We
believe that a significant level of product development activity is necessary
for our business and intend to increase significantly the amount of spending to
fund this activity.
General and Administrative
General and administrative expenses include salaries, employee benefits and
expenses for our executive, finance, legal and human resources personnel. In
addition, general and administrative expenses include fees for professional
services and occupancy costs. We expect general and administrative expenses to
increase in absolute dollars, in part due to the costs associated with being a
public company.
We do not currently anticipate that inflation will have a material impact on
our cash flows or results of operations.
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Stock-Based Compensation
In connection with the grant of stock options to employees during the nine
month period ended September 30, 1999, we recorded total deferred compensation
of approximately $2.4 million as a reduction to stockholders' equity (deficit).
This deferred compensation represented the difference between the estimated
fair value of our common stock and the exercise price of these options at the
date of grant. We are amortizing this amount over the vesting periods of the
applicable options resulting in an expense of approximately $269,000 for the
nine month period ended September 30, 1999. Annual amortization of deferred
stock compensation for stock options granted as of September 30, 1999, is
approximately $420,000, $604,000, $604,000, $604,000 and $185,000 for the years
ending December 31, 1999, 2000, 2001, 2002, and 2003, respectively.
Results of Operations
Results of Operations for the Three Month Periods Ended March 31, June 30 and
September 30, 1999
<TABLE>
<CAPTION>
March 31, June 30, September 30,
1999 1999 1999
----------- ----------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Revenue:
Advertising......................... $ 10,024 $ 886,065 $ 3,168,873
Opt-in.............................. 13,298 532,834 1,368,399
----------- ----------- -----------
Total revenue..................... 23,322 1,418,899 4,537,272
Cost of revenue....................... 98,514 147,399 225,994
----------- ----------- -----------
Gross margin (loss)................... (75,192) 1,271,500 4,311,278
----------- ----------- -----------
Operating expenses:
Sales and marketing................. 1,081,501 5,158,985 10,224,520
Research and development............ 220,075 305,357 487,171
General and administrative.......... 259,702 747,572 1,331,510
Stock based compensation............ 11,055 88,293 169,323
----------- ----------- -----------
Total operating expenses.......... 1,572,333 6,300,207 12,212,524
----------- ----------- -----------
Loss from operations.................. (1,647,525) (5,028,707) (7,901,246)
Interest income, net.................. 22,780 45,443 56,014
----------- ----------- -----------
Net loss.............................. (1,624,745) (4,983,264) (7,845,232)
Accretion on mandatorily redeemable
convertible preferred stock.......... (100,046) (131,576) (432,755)
----------- ----------- -----------
Net loss available to common stock-
holders.............................. $(1,724,791) $(5,114,840) $(8,277,987)
=========== =========== ===========
</TABLE>
Three Months Ended September 30, 1999 Compared to Three Months Ended June 30,
1999
Revenue. Revenue increased 219.8% from approximately $1.4 million for the
three months ended June 30, 1999 to approximately $4.5 million for the three
months ended September 30, 1999. Advertising revenue increased approximately
$2.3 million, which was primarily attributable to an increase in sales of
banner advertisements, and opt-in revenue increased approximately $836,000,
primarily due to an increase in the number of opt-in services.
Cost of revenue. Cost of revenue increased 53.3% from approximately $147,000
for the three months ended June 30, 1999 to approximately $226,000 for the
three months ended September 30, 1999. The increase was primarily attributable
to an increase in depreciation expense of the computer equipment required to
operate our service and an increase in the personnel in our Member Experience
department, which is responsible for identifying, composing and editing the
content delivered in our e-mails.
Sales and marketing. Sales and marketing expenses increased 98.2% from
approximately $5.2 million for the three months ended June 30, 1999 to
approximately $10.2 million for the three months ended
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September 30, 1999. This increase was primarily the result of expanded efforts
to acquire new members through the purchase of banner advertisements and
similar services on the Web, an increase in sales and marketing staff, an
increase in sales commissions related to the increase in revenue and an
increase in advertising of our service.
Research and development. Research and development expenses increased 59.5%
from approximately $305,000 for the three months ended June 30, 1999 to
approximately $487,000 for the three months ended September 30, 1999. This
increase was primarily due to hiring of additional technical personnel and
related recruiting fees as well as an increase in professional services to
assist in expanding our computer network to accommodate the rapid increase in
the number of our members.
General and administrative. General and administrative expenses increased
78.1% from approximately $748,000 for the three months ended June 30, 1999 to
approximately $1.3 million for the three months ended September 30, 1999. This
increase was primarily the result of our rapid growth and expansion, requiring
additional managerial and other personnel and related fringe benefit expenses,
an increase in occupancy expenses due to the rental of additional office
space, an increase in legal and professional expenses and an increase in
expense for doubtful accounts as a result of an increase in accounts
receivable.
Interest income, net. Interest income consists of earnings on our cash and
cash equivalents. Interest expense consists primarily of interest expense on
capital equipment financing. Interest income, net increased 23.3% from
approximately $45,000 in the three months ended June 30, 1999 to approximately
$56,000 for the three months ended September 30, 1999. The increase was
primarily attributable to interest income on the approximately $10.5 million
in net proceeds from our Series D preferred stock financing in May 1999 and
the approximately $20.6 million in net proceeds from our Series E preferred
stock financing in September 1999.
Interest expense for the three month periods ended September 30, and June
30, 1999 was immaterial.
Income taxes. No income tax benefits have been recorded for any of the
periods presented. We have provided a full valuation allowance on our deferred
tax assets, consisting primarily of net operating loss carryforwards, because
of the uncertainty regarding their potential realization.
Accretion on mandatorily redeemable convertible preferred stock. Accretion
on mandatorily redeemable convertible preferred stock was approximately
$433,000 for the three months ended September 30, 1999 and approximately
$132,000 for the three months ended June 30, 1999. The preferred stock
carrying value for cumulative dividends and a portion of direct issuance costs
on Series A, Series B, Series C, Series D and Series E preferred stock
resulted in the increase. During the three months ended June 30, 1999, only
shares of Series A, Series B, Series C and Series D preferred stock were
outstanding. During the three months ended September 30, 1999, shares of
Series A, Series B, Series C, Series D and Series E preferred stock were all
outstanding.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Revenue. Revenue increased 22,253.2% from approximately $27,000 in the nine
months ended September 30, 1998 to approximately $6.0 million for the nine
months ended September 30, 1999. Advertising revenue increased approximately
$4.0 million and opt-in revenue increased approximately $1.9 million. The
increase in revenue was the result of our decision to revise our strategy from
entering into arrangements with national retailers as distributors of our
software-based product to an online direct marketing service that provides
personalized content and advertisements via e-mail.
Cost of revenue. Cost of revenue increased 1,447.2%, from approximately
$31,000 in the nine months ended September 30, 1998 to approximately $472,000
for the nine months ended September 30, 1999. Our cost of revenue for the nine
months ended September 30, 1999 primarily consisted of expenses related to the
maintenance of existing member profiles, the expansion of e-mail categories
and depreciation of the computer systems necessary to operate our service. The
increase in cost of revenue was the result of
23
<PAGE>
our decision to revise our strategy from entering into arrangements with
national retailers as distributors of our software-based product to an online
direct marketing service that provides personalized content and advertisements
via e-mail.
Sales and marketing. Sales and marketing expenses increased 2,684.3% from
approximately $591,000 for the nine months ended September 30, 1998 to
approximately $16.5 million for the nine months ended September 30, 1999. This
increase was primarily the result of a major expansion in our efforts to
acquire new members through the purchase of banner advertisements and similar
services on the Web, the increase in our sales and marketing staff and an
increase in sales commissions related to the growth in revenue.
Research and development. Research and development expenses increased 254.3%
from approximately $286,000 for the nine months ended September 30, 1998 to
approximately $1.0 million for the nine months ended September 30, 1999. This
increase was primarily attributable to our continued research and development
of our service and expansion of technical personnel and related recruiting
fees.
General and administrative. General and administrative expenses increased
381.6% from approximately $486,000 for the nine months ended September 30, 1998
to approximately $2.3 million for the nine months ended September 30, 1999.
This increase is primarily the result of our rapid growth and expansion,
requiring additional personnel and related fringe benefit expenses, rent, legal
services, consulting services and other administrative support expenses.
Stock based compensation. In connection with the grant of stock options to
employees during the nine month period ended September 30, 1999, we recorded
total deferred compensation of approximately $2.4 million as a reduction of
stockholders' equity (deficit). This deferred compensation represented the
difference between the estimated fair value of our common stock and the
exercise price of these options at the date of grant. We are amortizing this
amount over the vesting periods of the applicable options resulting in an
expense of approximately $269,000 for the nine month period ended September 30,
1999. Annual amortization of deferred stock compensation for stock options
granted at September 30, 1999, is approximately $420,000, $604,000, $604,000,
$604,000 and $185,000, for the years ending December 31, 1999, 2000, 2001, 2002
and 2003, respectively.
Interest income, net. Interest income, net increased 450.9% from
approximately $23,000 for the nine months ended September 30, 1998 to
approximately $124,000 for the nine months ended September 30, 1999. This
increase was due primarily to an increase in available funds for investment in
short term investments during the first nine months of 1999 as compared to the
first nine months of 1998. The amount of interest income fluctuates based upon
the amount of funds available for investment and prevailing interest rates.
Interest expense for the nine month periods ended September 30, 1998 and
1999 was immaterial.
Income taxes. No income tax benefits have been recorded for any of the
periods presented. We have provided a full valuation allowance on our deferred
tax assets, consisting primarily of net operating loss carryforwards, because
of the uncertainty regarding their potential realization.
Accretion on mandatorily redeemable convertible preferred stock. Accretion
on mandatorily redeemable convertible preferred stock was approximately
$109,000 for the nine months ended September 30, 1998 and approximately
$664,000 for the nine months ended September 30, 1999. The preferred stock
carrying value for cumulative dividends and a portion of direct issuance costs
on Series A, Series B, Series C, Series D and Series E preferred stock resulted
in the increase. During the first nine months of 1998, only shares of Series A
and Series B preferred stock were outstanding. During the nine months ended
September 30, 1999, shares of Series A, Series B, Series C, Series D and Series
E preferred stock were all outstanding.
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Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Our revenue decreased 15.5% from approximately $67,000 for the year
ended December 31, 1997 to approximately $57,000 for the year ended December
31, 1998. Revenues for this period were all from advertising. No opt-in
revenues were recorded during these periods. Revenue during these periods was
generated from our software-based products. The decrease in revenue was also
the result of our decision to revise our strategy from entering into
arrangements with national retailers as distributors of our software-based
products to an online direct marketing service that provides personalized
content and advertisements via e-mail.
Cost of revenue. Cost of revenue increased 59.7%, from approximately $37,000
for the year ended December 31, 1997 to approximately $59,000 for the year
ended December 31, 1998. This increase was primarily the result of expenses
incurred to continue to develop the content of our software-based products.
Sales and marketing. Sales and marketing expenses increased 489.7% from
approximately $147,000 for the year ended December 31, 1997 to approximately
$869,000 for the year ended December 31, 1998. This increase was primarily the
result of our expansion of sales and marketing personnel and related travel,
commission and contractor expenses.
Research and development. Research and development expenses increased 55.4%
from approximately $240,000 for the year ended December 31, 1997 to
approximately $374,000 for the year ended December 31, 1998. This increase was
primarily attributable to growth in the number of research and development
personnel and the use of an outside vendor to house and maintain the host
servers that support our Web site.
General and administrative. General and administrative expenses increased
471.5% from approximately $127,000 for the year ended December 31, 1997 to
approximately $727,000 for the year ended December 31, 1998. Representative of
our growth and expansion, this increase resulted from increases in rent,
utilities, employee fringe benefit expenses and office supplies and the
establishment of an administrative support and finance function in the company.
Interest income, net. Interest income, net increased 310.1% from
approximately $6,000 for the year ended December 31, 1997 to approximately
$25,000 for the year ended December 31, 1998. This increase was due primarily
to an increase in available funds for investment in short term investments
during 1998 as compared to 1997. As discussed in the notes to the financial
statements, we raised $1 million in a preferred stock private financing during
November 1997 and an additional $1 million in June 1998 from the exercise of
preferred stock warrants. The amount of interest income fluctuates based upon
the amount of funds available for investment and prevailing interest rates.
Accretion on mandatorily redeemable convertible preferred stock. Accretion
on mandatorily redeemable convertible preferred stock increased approximately
$157,000, or 100% from the year ended December 31, 1997 as a result of the
increase in the preferred stock carrying value for cumulative dividends and a
portion of direct issuance costs on Series A and Series B preferred stock.
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Quarterly Results of Operations
The following table sets forth unaudited quarterly statement of operations
data for the last quarter of 1997, the four quarters of 1998 and the first
three quarters of 1999. We derived this data from unaudited financial
statements, and, in the opinion of our management, they include all
adjustments, which consist only of normal recurring adjustments, necessary to
present fairly the financial results for the periods. The results of operations
for any quarter are not necessarily indicative of the results of operations for
any future period.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1997 1998 1998 1998 1998 1999 1999 1999
--------- --------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Advertising............ $ 10,000 $ -- $ -- $ 26,750 $ 30,000 $ 10,024 $886,065 $ 3,168,873
Opt-in................. -- -- -- -- -- 13,298 532,834 1,368,399
--------- --------- --------- --------- --------- ----------- ----------- -----------
Total revenue.......... 10,000 -- -- 26,750 30,000 23,322 1,418,899 4,537,272
Cost of revenue......... 28,678 1,847 9,927 18,726 28,972 98,514 147,399 225,994
--------- --------- --------- --------- --------- ----------- ----------- -----------
Gross margin (loss)..... (18,678) (1,847) (9,927) 8,024 1,028 (75,192) 1,271,500 4,311,278
--------- --------- --------- --------- --------- ----------- ----------- -----------
Operating expenses:
Sales and marketing.... 121,627 82,242 248,700 260,417 277,347 1,081,501 5,158,985 10,224,520
Research and
development........... 147,397 77,208 114,856 93,720 88,004 220,075 305,357 487,171
General and
administrative........ 110,252 121,101 146,427 218,106 240,871 259,702 747,572 1,331,510
Stock based
compensation.......... -- -- -- -- -- 11,055 88,293 169,323
--------- --------- --------- --------- --------- ----------- ----------- -----------
Total operating
expenses.............. 379,276 280,551 509,983 572,243 606,222 1,572,333 6,300,207 12,212,524
--------- --------- --------- --------- --------- ----------- ----------- -----------
Loss from operations.... (397,954) (282,398) (519,910) (564,219) (605,194) (1,647,525) (5,028,707) (7,901,246)
Interest income, net.... 5,978 8,043 5,530 8,977 1,965 22,780 45,443 56,014
--------- --------- --------- --------- --------- ----------- ----------- -----------
Net loss................ (391,976) (274,355) (514,380) (555,242) (603,229) (1,624,745) (4,983,264) (7,845,232)
Accretion on mandatorily
redeemable convertible
preferred stock........ -- (28,537) (31,426) (48,537) (48,537) (100,046) (131,576) (432,755)
--------- --------- --------- --------- --------- ----------- ----------- -----------
Net loss available to
common stockholders.... $(391,976) $(302,892) $(545,806) $(603,779) $(651,766) $(1,724,791) $(5,114,840) $(8,277,987)
========= ========= ========= ========= ========= =========== =========== ===========
</TABLE>
Seasonality and Quarterly Fluctuations in Operating Results
We believe that our revenue will be subject to seasonal fluctuations as a
result of general patterns of retail advertising and marketing and consumer
purchasing, which are typically higher during the fourth calendar quarter and
lower in the following quarter. In addition, expenditures by advertisers and
marketers tend to be cyclical, reflecting overall economic conditions and
consumer buying patterns. Due to these and other factors, we believe that
quarter-to-quarter comparisons of our operating results may not be meaningful
and you should not rely upon them as an indication of our future performance.
Recent Events
On August 25, 1999, we entered into a nine month contract with Lycos under
which we have agreed to launch "co-branded" versions of our Web site and our e-
mail service that combine elements of the LifeMinders.com brand and the Lycos
brand. Under the terms of the contract, Lycos has agreed to link to the co-
branded Web site throughout the Lycos network of Web sites. In addition, the
contract will create co-branding opportunities within selected Lycos'
properties and Lycos has agreed to provide us with banner advertisements across
the Lycos network.
On September 23, 1999, we issued 2,791,993 shares of Series E mandatorily
redeemable convertible preferred stock at $8.09 per share for cash proceeds of
approximately $22.6 million.
On October 21, 1999, we approved a 5 for 4 common stock split, effective
November 17, 1999. The conversion ratio of the mandatorily redeemable
convertible preferred stock was adjusted from a 1 for 1
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conversion ratio to a 5 for 4 conversion ratio in connection with the stock
split. Our financial statements, including all share and per share data, have
been retroactively restated to reflect the 5 for 4 common stock split for all
periods presented.
Liquidity and Capital Resources
We have funded our operations since the Date of Inception primarily through
the private placement of preferred equity securities, through which we have
raised net proceeds of $36.9 million through September 30, 1999. As discussed
in the Notes to the financial statements, we raised $866,000 in a preferred
stock private financing during November 1997 and an additional $1.0 million in
June 1998 from the exercise of preferred stock warrants. We raised an
additional amount of approximately $3.9 million in a preferred stock private
financing in January 1999, approximately $10.5 million in a preferred stock
private financing in May 1999 and approximately $20.6 million in a preferred
stock private financing in September 1999. We have also financed our operations
through equipment financing through Imperial Bank. As of September 30, 1999, we
had approximately $11.3 million of cash and cash equivalents and had
outstanding equipment financing totaling approximately $162,000. The
outstanding principal balance of the equipment financing must be repaid in 24
equal payments commencing on December 10, 1999.
Net cash used in operating activities was approximately $35,000 for the
period from the Date of Inception to December 31, 1996, approximately $428,000
for the year ended December 31, 1997, approximately $1.5 million for the year
ended December 31, 1998 and approximately $21.3 million for the nine months
ended September 30, 1999. Cash used in operating activities for the years ended
December 31, 1996 and 1997 were primarily the result of net losses in those
years. Cash used in operating activities for the year ended December 31, 1998
was primarily the result of net losses, which were partially offset by
increases in deferred revenue. Cash used in operating activities for the nine
months ended September 30, 1999 resulted from net losses and increases in
accounts receivable and prepaid expenses, which were partially offset by
increases in accounts payable and accrued expenses. During the nine month
period ended September 30, 1999, we entered into various agreements for future
advertising which aggregate approximately $24.1 million in commitments. As of
September 30, 1999, we had prepaid approximately $6.8 million in connection
with these agreements. Funds received from the initial public offering may be
used to fulfill the commitments related to these advertising contracts because
such committed expenditures may exceed revenues.
There was no net cash used in investing activities for the period from the
Date of Inception to December 31, 1996, approximately $5,000 for the year ended
December 31, 1997, approximately $50,000 for the year ended December 31, 1998
and approximately $2.9 million for the nine months ended September 30, 1999.
Cash used in investing activities was related to purchases of property and
equipment for all periods. The increase in the nine months ended September 30,
1999 is attributable to the purchase of substantial computer equipment needed
to maintain our database and deliver targeted e-mails to our rapidly growing
member base.
Net cash provided by financing activities was approximately $35,000 for the
period from the Date of Inception to December 31, 1996, approximately $1.2
million for the year ended December 31, 1997, approximately $1.0 million for
the year ended December 31, 1998 and approximately $35.3 million for the nine
months ended September 30, 1999. Cash provided by financing activities for the
period from the Date of Inception to December 31, 1996 resulted from the
purchase of common stock by the founders of the company at the Date of
Inception. Cash provided by financing activities for the years ended December
31, 1997 and 1998 and the nine months ended September 30, 1999 resulted almost
entirely from sales of preferred stock. Concurrent with the initial public
offering, all series of preferred stock will convert into common shares. At
that time, each outstanding share of our preferred stock will convert into 1.25
shares of our common stock. This will have an effect on the Company's capital
structure and future interest requirements. As of September 30, 1999, there
were 1,700,374 options outstanding with a weighted-average exercise price of
$2.11, which is significantly below the initial public offering price of $14.00
per share. This may result in substantial dilution in the future.
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While we do not have any commitments for capital expenditures, we anticipate
that we will continue to experience significant capital expenditures consistent
with our anticipated growth in our member base. We anticipate that we will
continue to experience significant growth in our operating expenses for the
foreseeable future and that our operating expenses will be a material use of
our cash resources. Also, we anticipate substantial expenditures and use of
cash resources in our efforts to acquire new members. We believe that the net
proceeds of this offering, together with our existing cash, cash equivalents
and available credit facilities, will be sufficient to meet our anticipated
cash needs for working capital, member acquisition expenses and capital
expenditures for the foreseeable future.
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The statement requires the recognition of
all derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. In July 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of Financial Accounting Standards No. 133" was issued. SFAS 137 deferred the
effective date of SFAS 133 from fiscal years beginning after June 15, 1999 to
all fiscal years beginning after June 15, 2000. Because we do not currently
hold any derivative instruments and do not engage in hedging activities, we
believe the impact of the adoption of SFAS No. 133 will not have a material
impact on our financial position, results of operations or cash flows.
Quantitative and Qualitative Disclosures About Market Risk
We do not currently hold any derivative instruments and do not engage in
hedging activities and currently do not enter into any transactions denominated
in a foreign currency. Thus, our exposure to foreign exchange fluctuations is
minimal.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. This could result in
system failures or miscalculations causing disruption of operations for any
company using computer programs or hardware, including, among other things, a
temporary inability to process transactions, send or receive e-mail messages,
send invoices or engage in normal business activities. As a result, many
companies' computer systems may need to be upgraded or replaced in order to
avoid "Year 2000" issues.
We are a comparatively new enterprise, and, accordingly, the majority of
software and hardware we use to manage our business has all been purchased or
developed by us within the last 24 months. While this does not uniformly
protect us against Year 2000 exposure, we believe our exposure is limited
because the information technology we use to manage our business is not based
upon legacy hardware and software systems. Generally, hardware and software
designed within the current decade and the past several years in particular has
given greater consideration to Year 2000 issues. All of the software code we
have internally developed to manage our network and infrastructure is written
with four digits to define the applicable year.
We are in the process of testing our internal systems, including our
membership and tracking system, content explorer and targeting system, data
explorer and mapping system, content matching and selection system, e-mail
delivery system and member behavior tracking system. These applications are
built and operate on software components that are certified as Year 2000
compliant. The testing we have completed has primarily been performed
internally and, to date, we have not retained any outside service or
consultants to test or review our systems for Year 2000 compliance. Our testing
process provides a complete end-to-end
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functional exercise of all system components. This process starts with member
sign-up and continues through profile creation and customization, content and
advertisement entry and targeting, advertisement and content fulfillment. Any
issues with regard to date handling, and any other exception conditions found
during testing, result in error correction and system modifications and a
further round of testing. Based on the testing we have performed, we believe
that our software is Year 2000 compliant. We are testing our systems for Year
2000 compliance and will continue to test these systems as development of these
systems progresses.
In addition, we rely on software and hardware developed by third parties
both for our network and internal information systems and third party network
infrastructure providers to gain access to the Internet. To date, we have not
done any testing of third-party software or hardware to determine Year 2000
compliance. We have, however, reviewed certifications from our key suppliers of
hardware and networking equipment for our data centers that this hardware and
networking equipment are Year 2000 compliant. Additionally, we have reviewed
certifications from the providers of key software applications for our internal
operations that their software is Year 2000 compliant. Based upon an initial
evaluation of our broader list of software and hardware providers, we believe
that all of these providers are in the process of reviewing and implementing
their own Year 2000 compliance programs. We intend to work with these providers
to address the Year 2000 issue and continue to seek assurances from them that
their products are Year 2000 compliant.
As of August 31, 1999, we had incurred approximately $5,000 in expenses
related to the Year 2000 problem, and we anticipate that future costs
associated with our Year 2000 remediation efforts will not exceed $100,000.
These costs will be accounted for as operating expenses and will be paid for
out of working capital.
If we, our third-party providers of hardware and software or our third-party
network providers fail to remedy any Year 2000 issues, the result could be lost
revenue, increased operating costs, the loss of customers and other business
interruptions, any of which could harm our business. Moreover, the failure to
adequately address Year 2000 compliance issues in our products and systems
could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, which could be costly and time consuming to
defend.
The most reasonably likely worst case scenario for us involving Year 2000
issues would include disruptions to Internet communications and connectivity
for a period of time due to failures in hardware and software components that
operate in a degraded state or not at all at or near the Year 2000 transition.
We have chosen our Internet connectivity partners, equipment and co-location
service providers to insure that we have at all times multiple connection
points to the Internet. In the event of failure of all connectivity paths, or
all equipment connectivity, sign-up processing will be temporarily unavailable
and end user behaviors will not be recorded during such an interval. Extended
outages will be addressed by repositioning our system on new, readily available
off-the-shelf computer systems and components at an alternative location. We
can install, configure and establish such a reconstructed site, including
restoration of off-site data backups and e-mail capacity, in less than 48
hours.
We have engaged in an ongoing Year 2000 assessment, but have not yet
developed any specific contingency plans. The results of our testing and the
responses received from third-party vendors and service providers will be taken
into account in determining the nature and extent of any contingency plans.
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BUSINESS
Overview
We are an online direct marketing company that provides personalized content
and advertisements via e-mail to a community of members. Our e-mail messages
contain helpful reminders and tips that enable our members to better organize
and manage their busy lives. Our proprietary information about our members and
highly-precise targeting capabilities provide our advertising partners the
opportunity to more effectively reach their target markets.
Members can create profiles in one or more of our 10 e-mail categories,
including family, entertainment, home, personal events, pet, automotive,
health, personal finance, travel and shopping. On average each member creates
profiles in four e-mail categories and receives an average of eight e-mails per
month. We gather member profile data from several sources, including
information provided by our members during the sign up process and through
member preferences and buying habits automatically collected through
interaction with our e-mail messages. We also supplement our profile data with
information obtained from third-party sources. Our proprietary matching process
correlates member profile data to uniquely identified messages that we
personalize and deliver to each member via e-mail. Using our direct marketing
expertise and our proprietary member database, we create highly-targeted e-mail
messages that enable our advertising partners to reach a receptive audience.
As of September 30, 1999, we had approximately 4.0 million members, creating
more than 16.2 million profiles. As of the same date, we had 62 advertising
partners. The value of our service to our members is also evidenced by our
growth from 311,000 members and 1.3 million profiles at March 31, 1999, which
represents a compound quarterly growth rate for both members and profiles of
over 250%.
We were incorporated in Maryland on August 9, 1996 under the name of
MinderSoft, Inc. In January 1999, we changed our name to LifeMinders.com, Inc.
We reincorporated in Delaware on July 2, 1999. From 1996 to 1998, we entered
into arrangements with national retailers to distribute our reminder products
in software form on disk. In late 1998, we revised our strategy to become an
online direct marketing company that provides personalized content and
advertisements via e-mail to a community of members.
Industry Background
Traditional Direct Marketing and Advertising
The traditional advertising industry relies on two primary activities: brand
advertising and direct marketing. The Direct Marketing Association, or DMA,
estimates that, of the total of approximately $285.2 billion spent on
advertising in the United States in 1998, approximately $162.7 billion or 57%
was spent on direct marketing compared to 43% invested in brand advertising.
The focus of advertising is typically to build brand awareness by repeating
messages with high frequency through traditional media, including radio,
television and print. The purpose of direct marketing is to generate a specific
consumer response or action--generally the trial and purchase of a product or
service. Direct marketers typically use direct mail pieces, catalogs, magazine
inserts and telemarketing, aimed at specific and select consumers in an attempt
to maximize the number of desired responses per marketing dollar invested.
However, in order to do so, direct marketers must be able to accurately
identify and reach specific consumers and showcase products and services that
are relevant to those consumers. Direct marketers invest significant resources
in obtaining and analyzing critical data about consumers in order to assess and
understand their specific needs. Despite these efforts, average response rates
for untargeted, traditional direct marketing campaigns range between 1% to 2%
according to information gathered by the American Association of Advertising
Agencies in 1999.
Direct marketers continue to experience major challenges and inefficiencies.
A significant challenge is the inability to target consumers with relevant
advertisements and products, resulting in low response rates, negative consumer
perceptions and low returns on investments. In addition, traditional direct
marketers are constrained by inherent response and analysis delays due to
extended production lead times and lengthy consumer and intermediary response
times.
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Advent of the Internet and E-mail
The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business
electronically. International Data Corporation, or IDC, estimates that the
number of Web users will grow from approximately 142.2 million worldwide in
1998 to approximately 502.4 million worldwide by the end of 2003. E-mail, one
of the most popular and widely used Internet applications, has broadened from a
simple messaging tool to a widely accepted form of communication for both
personal and business use. According to Electronic Mail & Messaging Systems,
there were approximately 382.0 million electronic mailboxes worldwide as of
March 31, 1999. IDC expects the number of Web sites, as indicated by total
number of Uniform Resource Locators, or URLs, to grow from 925.0 million in
1998 to 13.1 billion by 2003. We believe this increase represents a growing
amount of unique content on the Internet that can be targeted at a growing
number of specific user and interest groups.
Growth of Internet-Based Direct Marketing and Advertising
The Internet has emerged as an attractive new medium for advertisers due to
unique features that are unavailable in traditional media. The interactive
nature of the Internet combined with its global reach and rapidly growing
audience enables advertisers to target specific types of users, receive direct
feedback on their advertisements and capture valuable data on user preferences.
Forrester Research estimates that total spending on Internet advertising in the
United States will grow from $2.8 billion in 1999 to $22.2 billion in 2004.
The Internet represents an even more attractive medium for direct marketers.
Online direct marketing has the potential to increase user response rates and
decrease costs per transaction by targeting campaigns to particular users based
on their demographic profile, interests and online behavior. In addition, the
Internet permits advertisers to receive immediate responses, effectively test
campaigns and direct consumers to a precise point-of-sale. Online direct
marketing is generally conducted through Web-based promotional offers or e-
mail, which has expanded from a simple personal messaging service to a powerful
and cost-effective business tool. The DMA estimates that Internet direct
marketing expenditures will rise from $603.2 million in 1998 to $5.3 billion by
2003.
Current Limitations of Internet-Based Direct Marketing and Advertising
While the Internet offers advertisers a number of advantages over
traditional media, there remain significant challenges to realizing the full
potential of online advertising. To date, advertisers have primarily employed
banner advertisements on heavily trafficked and broadbased portals and other
Web content sites, most of which do not have close and trusted relationships
with their users. These portals and content sites often have the ability to
reach wide audiences but are generally unable to offer advertisers an effective
means to identify their target audience largely because they lack precise
demographic, psychographic and navigational data. During the month of September
1999, click rates for the top banner advertisements averaged just under 0.6% as
reported by The Nielsen//NetRatings Reporter. In response to the poor
advertising performance on broadbased portals, we believe advertisers are
increasingly turning to vertically-oriented portals, organized around specific
interests, including finance, sports or women's issues, in search of more
targeted audiences and higher click through rates.
In addition, advertisers have expanded their efforts to reach consumers
using online direct marketing. These campaigns have focused primarily on the
mass mailing of unsolicited e-mail messages referred to as "spam." Spam
campaigns have met with considerable negative consumer reaction and low
response rates primarily because the offerings are unsolicited and are often
not relevant to consumers' lives. As a result of the limitations in both online
advertising and direct marketing, advertisers continue to seek more effective
approaches to deliver highly-targeted advertisements in a more personalized and
content-rich editorial environment from which they receive real-time feedback.
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Challenges to the Internet User
Generally, Internet users have relied on broadbased portals or search
engines to navigate through the mass of information available on the Internet.
Although these portals and search sites have been useful for individuals
seeking to find aggregated Web content, Internet users attempting to locate
detailed, personalized information must navigate through a vast and often
irrelevant array of Web pages and sites. These portals and search sites have
not provided a platform for aggregating and disseminating the rapidly
increasing volume of personalized content on the Web or enabling users to
interact with content and service providers--unique characteristics that
distinguish the Internet from traditional print, radio and television media.
Many Internet users seeking greater personalized content have increasingly
migrated to vertically-oriented portals and online communities. These online
portals and communities were designed to provide a platform for Internet users
with similar interests to more easily obtain relevant content and to share
experiences and ideas. However, we believe these sites provide a poor context
for Internet users to discover customized and individual content because
Internet users lack the affinity and opportunity to relate personally to their
online experiences. Accordingly, we believe that Internet users have a
significant and growing need for a trusted online service that can
automatically provide relevant, personalized and timely information.
The LifeMinders.com Solution
Our e-mail messages contain helpful reminders and tips that enable our
members to better organize and manage their busy lives. Our proprietary
information about our members and highly-precise targeting capabilities provide
our advertising partners the opportunity to more effectively reach their target
audiences.
Our solution offers the following benefits to both our members and our
advertising partners:
Benefits to Members
. Highly targeted and relevant content. We deliver highly personalized e-
mail messages containing useful and relevant information across 10 e-
mail categories. Our proprietary content matching process correlates
uniquely identified messages with individual member profiles in an
automated manner. The more our members interact with us through our e-
mail service, the more targeted and personalized our e-mails become,
thereby enhancing the value of our service to our members. We gather
profile data about each member from several sources, including
information provided by the members during the sign up process and
through member preferences and buying habits collected through
interaction with our e-mail messages. We also supplement the data with
information obtained from third-party sources.
. Enhanced personalization and user efficiency. We compose, edit and
customize each targeted message we send with specific member profile
data. Our automated and timely messages provide reminders of important
personal information and events, including birthdays, a child's
developmental milestones and car maintenance. Our personalized, content-
rich e-mails on specific interests enable our members to avoid the mass
of extraneous information received through untargeted e-mails and
obtained from most search engines and portals. We deliver each message
in a brief, user-friendly e-mail format, either text or HTML, that we
determine is most appropriate for each member. Our targeted messages
contain imbedded URLs that link directly to full-text articles and
helpful information. These links supplement the content within the
messages and provide easily accessible information to our members
without requiring lengthy and potentially unproductive Web searches.
. Access to e-commerce opportunities. Our proprietary database management
capabilities and timely, targeted content allow us to deliver highly
relevant e-commerce opportunities to our members. For example, if a
member has a child nearing his or her second birthday, then shortly
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before that birthday we might deliver an e-mail that outlines a two-year
old child's developmental milestones. In addition, we might include an
offer to purchase an age and developmentally appropriate learning tool
and display advertisements for other relevant products. Members have
also benefitted from the availability of high-quality offers from our
leading brand advertising partners, including The Home Depot,
PETsMART.com, PC Flowers & Gifts and SmarterKids.com.
. Member trust and confidence. By developing close relationships with our
members and providing content they consider valuable, we become a
trusted ally. As a matter of corporate policy, we do not sell members'
personal information to third parties without permission. We are
certified by TRUSTe, a leading, independent, non-profit organization
whose mission is to build Internet users' trust and confidence in the
Internet by promoting the principles of disclosure and informed consent.
Our policy is not to disseminate personal information and our members
choose the level of data that they feel comfortable inputting into our
database. As a result, our members are able to exercise a significant
amount of control over their experience and tend to provide us with more
information over time. Our service also allows members to easily
unsubscribe at any time by clicking through a link appearing at the
bottom of our e-mail messages and selecting the particular category in
which they want to unsubscribe.
Benefits to Advertising Partners
. Large and targeted member base. As of September 30, 1999, we had
approximately 4.0 million members who have created more than 16.2
million profiles. Using our direct marketing expertise and our
proprietary member database, which contains extensive demographic,
behavioral and performance information, we create highly-targeted e-mail
messages that enable our advertising partners to reach a large receptive
audience.
. Detailed real-time reporting and proprietary data mining technology. Our
capabilities include sophisticated data mining techniques and real-time
reporting technology to evaluate and assess the results of our
advertising partners' marketing campaigns as they occur. We also
actively engage in testing on subsets of our member base to determine
which members are not likely to respond based on shared profile
characteristics. Based on our capabilities, we offer our advertising
partners the ability to immediately determine the effectiveness of a
given advertising campaign and the opportunity to refine their marketing
messages.
. Enhanced targeting capability and increased return on advertising
investment. We offer our advertising partners a cost-effective means to
deliver targeted online advertisements to consumers. We provide the
ability to target members on numerous variables that are typically
unavailable through other direct marketing means. Because of our
continually improving testing, targeting and profiling capabilities, our
members typically open their e-mail approximately 25% of the time, and
members that open our e-mails click through one or more of the four or
five content or advertising links contained in each e-mail at rates of
approximately 20%. This highly targeted advertising opportunity results
in low delivery costs and high response rates, generating a return on
advertising investment that is higher than that achieved by traditional
direct response media and offline advertising and compares favorably to
other online alternatives.
The LifeMinders.com Strategy
Our objective is to be the leading online direct marketing company that
provides personalized content and advertisements via e-mail to a community of
members. The key elements of this strategy include:
Aggressively and Cost-Effectively Expanding Our Member Base
We intend to continue to rapidly increase our member base. By aggregating a
large audience, we plan to take advantage of economies of scale, increase our
attractiveness to advertisers and enhance our ability to enter into strategic
marketing arrangements. We intend to achieve this objective by:
. continuing to establish distribution partnerships with leading online
sites, including Lycos, whereby we become an automated component of the
sign up process within these sites;
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. continuing to invest in large scale, online member acquisition
activities, including purchasing highly targeted banner advertisements
and opt-in lists from selected vertically-oriented portals that
correspond to our members' interests;
. expanding our offline advertising and promotional activities, including
national print, outdoor and broadcast placements;
. expanding our success in viral marketing, whereby existing members refer
new members through increasing incentives, including cash and
merchandise rewards; and
. introducing new e-mail categories and services on a regular basis that
will appeal to our existing and potential members.
We will also continue to reduce new member acquisition costs by developing
financial models at the individual level and analyzing behavior to determine
the exact characteristics of a valuable member. In doing this, we will be able
to target the most cost-effective channels to acquire active and valuable
members.
Improving Member Experience and Retention
We will continue our efforts to enhance our member experience by constantly
monitoring member interaction, thereby improving the quality of our content.
Our marketing analysis and data mining team will continue to enhance our
service to our members by evaluating behavior related to consumer preferences
and buying habits in support of our efforts to personalize future content
offerings. Our category managers will continually track and analyze member data
in order to better identify and develop relevant and compelling content. We
believe these efforts will continue to result in increased click through rates
and higher customer satisfaction as we enhance our relationships. Information
that has received positive responses from existing members will be distributed
to new members as they join.
We will further differentiate ourselves with the introduction of each new e-
mail category. As a result, we will not only improve existing member experience
and retention, but will also enhance the LifeMinders.com brand and attract
additional members. We will continue to monitor and survey our members for new
areas of interest and prioritize our new categories based on their direct and
indirect input. We introduced LifeMinders Health in August 1999 and LifeMinders
Travel and LifeMinders Shopping in September 1999, and we intend to roll out a
number of new categories each quarter covering a variety of areas, including
sports and recreation, cooking and crafts and hobbies.
Expanding and Pursuing Multiple Revenue Streams
Our business model allows us the opportunity to pursue revenue from diverse
sources. Advertisers and businesses currently pay us for placement of
advertisements within our e-mail messages, as well as for advertising messages
placed on our sign up pages. We also intend to pursue other revenue sources,
including various e-commerce and content licensing opportunities, which
leverage our unique technology infrastructure, our extensive database of
personalized member information, and our expertise in data analysis and direct
marketing. In addition, we will expand our existing revenue streams by
continuing to develop new and creative advertising opportunities within our e-
mail messages.
Enhancing Advertiser Effectiveness by Expanding our Marketing Analysis and
Data Mining Capabilities
We will continue to use sophisticated tools and our proprietary technologies
to:
. increase the efficacy of our advertising partners' marketing campaigns
by refining the precision of our targeting capabilities and testing new
concepts on subsets of our member base prior to implementation across
our entire member community;
. develop and acquire content that increasingly reflects member
preferences and lifestyles by collecting data on a variety of detailed
consumer behavior, such as opening of e-mail messages, click through
behavior on content, and advertisement responsiveness, including click
through and follow up purchase activity;
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. enhance our member profiles through interactive quizzes and surveys,
purchasing additional demographic data and offering cash and prize
incentives for members to provide more extensive demographic and
preference information; and
. maximize reliability and scalability, allowing for the creation and
distribution of millions of personalized e-mails per week.
Increasing Awareness and Understanding of the LifeMinders.com Brand
We believe that establishing and leveraging the LifeMinders.com brand is
critical to our ultimate success. We have already benefitted from viral
marketing and word-of-mouth publicity of our brand through interactions between
existing and prospective members. We intend to increase brand equity through
extensive consumer and trade advertising, including national print, outdoor and
broadcast placements, continued public relations campaigns, direct mail,
participation in strategic industry events and sustained consumer
communications campaigns. We also believe that the introduction of new e-mail
categories will increase our brand awareness.
Pursuing Strategic Acquisitions and Alliances
We plan to pursue acquisitions and alliances, both domestically and
internationally, to further penetrate and expand our e-mail categories,
leverage the strong relationship we have established with our members, broaden
our member base, capture new distribution channels and establish new revenue
streams. While we do not have any definitive agreements currently in place, we
believe that there exist many opportunities to acquire or develop strong
relationships with complementary businesses.
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Services
Personalized E-mail Messages
We deliver e-mail messages to our members that contain highly personalized,
timely and relevant content along with related advertisements. Our editorial
staff of eleven searches multiple online and offline sources to identify
content that is relevant to our members' needs. Our staff develops and composes
most all of our e-mail content based on third-party sources. The e-mail
messages are delivered in an attractive, easy-to-read format and contain
imbedded URLs that link directly to relevant information. Our average member
has signed up for four e-mail categories and receives an average of eight e-
mails per month. We also assist our members in organizing and managing their
lives by automatically delivering e-mail reminders that contain important
dates, including birthdays, holidays and car maintenance dates. An example of
an e-mail message that we deliver to our members is as follows:
[GRAPHIC OF LIFEMINDERS.COM WEBPAGE APPEARS HERE]
Advertising and Direct Marketing Opportunities
We derive revenue from advertising and opt-in arrangements with our
advertising partners. Our advertising arrangements consist primarily of banner
advertisements that we display prominently within the e-mail messages we
provide to members who have indicated an interest in the product or service
being advertised. From each banner advertisement, viewers can hyperlink
directly to our advertising partner's own Web site, thus providing our partner
an opportunity to interact directly with interested members.
Our opt-in arrangements allow our members to select targeted newsletters and
advertisements during our sign up process, and in return, our opt-in partners
who are promoting these newsletters and advertisements pay us a fee based on
affirmative member response. Representatives of recent opt-in advertisers
include Click Rewards, CyberGold and Virtual Vineyards.
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The following is a description of each e-mail category and a representative
sample of our current advertisers for each e-mail category:
<TABLE>
<CAPTION>
Representative
Category Description Advertisers
------------------------------ ------------------------------------------- --------------
<C> <S> <C>
LifeMinders Family............ Parenting recommendations, toy tips, Kimberly-Clark
product recalls and development milestones (Huggies Brand)
customized by the age of a member's child
LifeMinders Entertainment..... Reviews and notifications of the latest Uproar.com
videos, books, music, games and more based
on the member's unique entertainment
interest
LifeMinders Home.............. Seasonal how-to tips and climate-specific The Home Depot
advice so member's can get the most out of
their home, lawn and garden
LifeMinders Personal Events.. Reminders to help a member keep track of Miadora.com
important dates and inspired gift
suggestions for birthdays, anniversaries
and holidays
LifeMinders Pet............... Pet care, health and training tips PETsMART.com
customized for all of our members' pets
LifeMinders Automotive........ Maintenance reminders, recall notices, InsWeb
driving tips and Blue Book values based on
make, model year and mileage of a member's
car
LifeMinders Health............ Health, nutrition and well-being tips Drugstore.com
customized for each member based on
personal profile
LifeMinders Personal Finance.. Advice about banking, family finances, NextCard
investing and saving based on our member's
personal and financial goals
LifeMinders Travel............ Getaways, destinations and travel planning Starwood Hotels
tips tailored to our member's interests
LifeMinders Shopping.......... Coupons, deals and shopping tips specific Mercata.com
to each member's profile
</TABLE>
Most of our agreements with advertisers are short-term agreements averaging
one to six months in duration. We do not believe any of the agreements with any
of the advertisers listed above are material.
Sales and Marketing
Member Acquisition
We market LifeMinders.com to prospective members primarily through online
media. These marketing efforts consist of developing large-scale, vertically-
targeted advertising campaigns and strategic partnerships with large online
sites such as Lycos. Viral marketing is also a significant component of our
member acquisition strategy, as one-third of our members refer another when
going through our sign-up process.
Advertising Sales
We sell our advertisements through a direct sales organization dedicated to
developing and maintaining close relationships with top advertisers and leading
advertising agencies nationwide. As of September 30,
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1999, we had 13 full-time employees engaged in direct sales activities based in
our Herndon, Virginia headquarters. We plan to significantly increase the size
of our sales force and open a sales office in San Francisco, California by
December 31, 1999. Our sales department is organized around and focuses on
selling advertising within designated e-mail categories. The sales force works
regularly with our advertising partners on the design and placement of their
advertisements, provides advertising partners with advertising measurement
analyses and focuses on providing a high level of client service and
satisfaction.
Advertisers and advertising agencies typically enter into short-term
agreements--on average one to six months--in which they receive a guaranteed
number of e-mails delivered containing an advertisement based on a per e-mail
basis. Our standard advertising rate currently ranges from $30 to $200 per
thousand per e-mail delivered, depending upon location of the advertisement
within our e-mail message and the extent to which it is targeted for a
particular audience.
Technology and Infrastructure
Our service offering is supported by our two key proprietary technology
components:
. Content Creation and Management Software
. Member Targeting and Behavior Tracking System
Content Creation and Management Software
Our content creation and management software has four components: content
entry, targeting, personalization and formatting.
The content entry component allows our editorial staff to easily input,
revise and test e-mail content items. The content entry software runs on the
Windows platform using an interface similar to the Windows Explorer program.
The targeting component allows e-mail content items to be sent to members
based on explicit data that members have provided, including important dates
and special interests as well as implicit data based on demographic and
psychographic groups defined by our editorial staff. These groups are defined
based on analyses of member behavior and preferences.
The personalization component allows our editorial staff to enhance content
by personalizing it for each individual member. For example, the e-mail content
items could contain the name of the child or use gender specific pronouns. The
software will automatically insert the proper pronoun or name based on the
gender or name provided by the member.
The formatting component allows our editorial staff to compose each e-mail
content item in a single, rich text format which will automatically adjust to
one of three formats (rich text, HTML or America Online) in order to provide
optimum presentation of the content. Members with HTML e-mail, supported by
most current e-mail services and e-mail clients, will receive the highest
quality presentation of our content because it includes images as well as text.
Members using America Online or plain text e-mail receive a version of our
content that is more textual in presentation, but is attractive and easy to
read.
Member Targeting and Behavior Tracking System
This system allows category managers to improve and adjust our e-mail
content over time to reflect the needs and interests of our members. Category
managers can personalize the subject line of an e-mail, content titles and the
physical display of the e-mail.
Our content targeting and behavior tracking system uses standard Internet
data transmission protocols, combined with proprietary application software, to
measure a wide range of possible member behaviors.
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These behaviors may include: opening the e-mail message, clicking through to
links, forwarding an e-mail message, or clicking through to advertisements and
select e-commerce opportunities. This system has been built to be scalable
allowing new categories to be brought online without additional programming. In
addition, this system is based on member profile data that allows categories
and subcategories to be changed to reflect member preferences and lifestyles.
Tracking individual member activity allows our category managers to measure
the effectiveness and interest level of members in our editorial content. At
the same time, the tracking systems support the measurement of the
effectiveness and efficiency of our advertising and promotional campaigns on
behalf of our advertising partners.
Scalability
We have designed our technology platform to be user friendly and to
significantly scale with additional members. We typically send e-mails in most
of our categories to our members on a weekly or bi-weekly basis. Our current
operating plan ensures that we will have approximately twice the capacity
needed to generate and deliver needed e-mail content during any peak processing
load. This assures capacity for growth and unusual fluctuations in e-mail
activity. As our member base expands, we are increasing our capacity and
replicating our infrastructure to provide increasingly parallel operations.
Therefore, we believe there are no practical technology limits to our growth
because our distributed framework should ensure that failures are isolated to a
small portion of our member base.
Security
Our technology incorporates a variety of security techniques to protect
confidential member data. We limit member activity, data transmission, and
Internet access to our information to the individual member and to authorized
company representatives. We monitor and protect all outside access to our
resources and data with state-of-the art-technology, and all suspicious
activity is logged and analyzed by qualified staff. Our data center is co-
hosted at a major third-party Internet data center operation, PSINet, that is
constantly monitored and provides both physical and logistical security. This
facility provides redundant network connections and redundant connections to
power grids and diesel generators to ensure continuous operations. In addition,
the facility provides physical security, around-the-clock operations support
and monitoring and network diagnostic support as needed.
Reliability
Our technology platform uses industry standard technologies to maximize
reliability. We ensure hardware reliability by a combination of redundancy at
the component level and hot spares for groups of components. We ensure software
and data reliability through a variety of processes and quality assurance
procedures. We have incorporated standard procedures, including daily database
backups, off site storage of critical archives, and incremental backup of
ongoing database modifications into our standard operating discipline.
Additional reliability is provided by our fault tolerant and redundant platform
architecture, which utilizes clustering technology to ensure that Web access to
our service is not interrupted by any single machine failure.
Competition
We face intense competition from both traditional and online advertising and
direct marketing businesses. We expect that competition will increase due to
the lack of significant barriers to entry in the online advertising market. As
we expand the scope of our services, we may compete with an increasing universe
of media companies across a widening range of advertising and direct marketing
services. Currently, several other companies offer competitive e-mail direct
marketing services, including coolsavings.com, MyPoints.com,
PostMasterDirect.com and YesMail.com. We may also face competition from online
content
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<PAGE>
providers and list aggregators, as well as established online portals and
community Web sites that engage in direct marketing. Additionally, traditional
advertising agencies and direct marketing companies may seek to offer online
products or services that compete with ours.
Our ability to compete effectively depends upon many factors, including:
. the timing and market acceptance of new e-mail categories;
. the pricing of our services to advertisers;
. our ongoing ability to demonstrate the effectiveness of our service to
advertisers;
. our ability to increase awareness of the LifeMinders.com brand;
. our ability to increase our member database;
. our ability to increase the depth of information in our database by
capturing demographic, behavioral and transactional data about our
members;
. the capacity of our technology infrastructure to meet the needs of
members and advertisers; and
. the extent and effectiveness of our sales and marketing efforts and
those of our competitors.
While we believe that we compare favorably to our competitors based on these
factors, many of our current competitors and potential new competitors have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
These advantages may allow them to respond more quickly to new or emerging
technologies and changes in customer requirements. It may also allow them to
engage in more extensive research and development, undertake more far-reaching
marketing campaigns, adopt more aggressive pricing policies, and make more
attractive offers to potential employees, strategic partners and advertisers.
In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products or services to address the needs of our
prospective advertisers and advertising agency customers. As a result, it is
possible that new competitors may emerge and rapidly acquire significant market
share. Increased competition may result in price reductions, reduced gross
margins and loss of our market share.
Intellectual Property and Proprietary Rights
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we seek to protect
through a combination of patents, copyrights, trade secrets and trademarks. We
have one registered patent. We regularly enter into confidentiality or license
agreements with our employees, consultants and corporate and strategic partners
and generally seek to control access to and distribution of our documentation
and other proprietary information. We pursue the registration of our trade and
service marks in the United States and internationally. We have registered
trademarks for "MinderSoft," "HomeMinder," "EntertainmentMinder" and
"GrowthMinder" in the United States and have filed 22 trademark applications in
the United States, including the name and logo for "LifeMinders.com" and
"backslashSanity." Effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which our services
are distributed or made available through the Internet, and policing
unauthorized use of our proprietary information is difficult.
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<PAGE>
Current and Potential Government Regulation
Privacy Issues
The Federal Trade Commission, or FTC, adopted regulations effective April
21, 2000 regarding the collection and use of personal identifying information
obtained from individuals when accessing Web sites, with particular emphasis on
access by minors. These regulations include requirements that companies
establish certain procedures prior to April 21, 2000 to, among other things:
. give adequate notice to consumers regarding information collection and
disclosure practices;
. provide consumers with the ability to have personal identifying
information deleted from a company's database;
. provide consumers with access to their personal information and with the
ability to rectify inaccurate information;
. clearly identify affiliations or a lack of affiliations with third
parties that may collect information or sponsor activities for a
services membership; and
. obtain express parental consent prior to collecting and using personal
identifying information obtained from children under 13 years of age.
These regulations also include enforcement and redress provisions. We are
currently implementing programs designed to comply with these regulations. We
believe, based upon information provided by 33.5% of our current members, that
less than 5% of our members are under the age of 13. We do not believe that
these regulations will result in significant additional costs or that they will
materially affect our ability to obtain new members.
The FTC has also begun investigations into the privacy practices of
companies that collect information on the Internet. One investigation resulted
in a consent decree pursuant to which an Internet company agreed to establish
programs to implement the principles noted above. We may become subject to a
similar investigation, or the FTC's regulatory and enforcement efforts may
adversely affect our ability to collect demographic and personal information
from members. This, in turn, could have an adverse effect on our ability to
provide highly targeted opportunities for advertisers and electronic commerce
marketers.
The European Union, or EU, has adopted a directive that imposes restrictions
on the collection and use of personal data. Under the directive, EU citizens
are guaranteed rights to access their data, to know where the data originated,
to have inaccurate data corrected, to recourse in the event of unlawful
processing and to withhold permission to use their data for direct marketing.
The directive could, among other things, affect U.S. companies that collect
information over the Internet from individuals in EU member countries, and may
impose restrictions that are more stringent than current Internet privacy
standards in the United States. In particular, companies with offices located
in EU countries will not be allowed to send personal information to countries
that do not maintain adequate standards of privacy. The directive does not,
however, define what standards of privacy are adequate. As a result, the
directive may adversely affect the activities of entities like us that engage
in data collection from users in EU member countries.
Internet Taxation
There are currently pending a number of legislative proposals at the
federal, state and local level, and by certain foreign governments, that would
impose additional taxes on the sale of goods and services over the Internet and
certain states already have taken measures to tax Internet-related activities.
Although Congress recently placed a three-year moratorium on state and local
taxes on Internet access or on discriminatory taxes on e-commerce, existing
state or local laws were expressly excepted from this moratorium. Further, once
this moratorium is lifted, one or more federal and/or state taxes may be
imposed upon Internet commerce. This legislation, or other attempts at
regulating commerce over the Internet, may substantially impede the growth of
commerce on the Internet and, therefore, adversely affect our opportunity to
derive financial benefit from those activities.
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<PAGE>
Jurisdictions
Although our e-mail transmissions over the Internet originate primarily in
Virginia, due to the global nature of the Internet, it is possible that the
governments of other states, the federal government and governments of foreign
countries might attempt to regulate our transmissions or prosecute us for
purported violations of their laws. These laws may be modified, or new laws
enacted, in the future. Any of the foregoing developments could harm our
business, results of operations and financial condition. In addition, as our
service is available over the Internet in multiple states and foreign
countries, these jurisdictions may claim that we are required to qualify to do
business as a foreign corporation in each of these states or foreign countries.
We are qualified to do business only in Delaware and Virginia, and our failure
to qualify as a foreign corporation in a jurisdiction where we are required to
do so could subject us to penalties and could result in our inability to
enforce contracts in these jurisdictions.
Employees
As of September 30, 1999, we employed 55 people, including 21 in sales and
marketing, 13 in technology and production, 11 in member experience/marketing
and analysis, and 10 in support, administration, finance, management and human
resources. All employees except 2 are full-time. We believe that we maintain
good relations with our employees.
Facilities
We are currently leasing approximately 17,500 square feet of office space at
two locations in Herndon, Virginia. The lease for 13,000 square feet expires in
2004 while the lease for 4,500 square feet expires in August 2000. We believe
that this existing space will meet our space requirements for the near future
but that we will likely require additional space in late 2000.
Legal Proceedings
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this prospectus, we are not a party to any legal proceeding.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth, as of November 17, 1999, certain information
concerning our executive officers, directors and key employees:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Stephen R. Chapin, Jr... 36 President, Chief Executive Officer and Chairman of the Board of Directors
John A. Chapin.......... 34 Senior Vice President, Member Experience, Secretary
Joseph S. Grabias....... 50 Vice President and Chief Financial Officer
David N. Mahony......... 39 Vice President and Chief Operating Officer
Harry A. Layman......... 42 Vice President, Engineering and Chief Technology Officer
Mark F. Bryant.......... 35 Vice President, Business Development and Advertising Sales
David C. Meade.......... 26 Vice President, Member Acquisition
Timothy D. Hanlon....... 41 Vice President, Marketing and Communications
E. Rogers Novak, Jr. ... 51 Director
B. Gene Riechers........ 44 Director
Douglas A. Lindgren..... 37 Director
Philip D. Black......... 33 Director
Jonathan B. Bulkeley.... 38 Director
</TABLE>
Stephen R. Chapin, Jr. co-founded LifeMinders.com in August 1996 and has
served as our President, Chief Executive Officer and Chairman of the Board
since August 1996. Prior to founding LifeMinders.com, from September 1995 to
October 1996, Mr. Chapin served as a Vice President at First USA Bank. From
September 1993 to September 1995, Mr. Chapin was a management consultant at
McKinsey & Company. From 1985 to 1990, Mr. Chapin served in the U.S. Navy, as
the Secretary of the Navy's liaison to Congress and as a naval engineering and
weapons officer.
John A. Chapin co-founded LifeMinders.com in August 1996 and has served as
our Senior Vice President, Member Experience since August 1999. Prior to co-
founding LifeMinders.com, from September 1996 to July 1997, Mr. Chapin worked
in system sales to large corporate clients at Otis Elevator, an elevator
maintenance company. From July 1995 to September 1995, Mr. Chapin served as a
financial analyst at Allied Signal.
Joseph S. Grabias joined LifeMinders.com in August 1999 as Vice President
and Chief Financial Officer. Prior to joining LifeMinders.com, from October
1997 to July 1999, Mr. Grabias was the Vice President and Chief Financial
Officer of Comm Site International, Inc., a provider of tower related services
to the U.S. wireless communications industry. Mr. Grabias was the Chief
Financial Officer and Vice President at KMR Power Corporation from January 1994
to September 1997. Prior to working for KMR Power Corporation, Mr. Grabias was
a self-employed business consultant for seven years.
David N. Mahony joined LifeMinders.com in November 1999 as Vice President
and Chief Operating Officer. Prior to joining LifeMinders.com, from June 1994
to November 1999, Mr. Mahony was the Senior Vice President, Finance--Pricing
and Management Information Systems at First USA, Inc., a financial services
company. Prior to working at First USA, from December 1988 to June 1994, Mr.
Mahony was a Project/Process Design Engineer at E.I. Dupont de Nemours & Co.,
Inc.
Harry A. Layman has served as our Vice President, Engineering and Chief
Technology Officer since March 1999. Prior to joining LifeMinders.com, Mr.
Layman was Executive Director of Software Services at The College Board, an
educational association which provides financial aid services and software.
Mr. Layman joined The College Board in January 1996 upon its acquisition of
Virginia Software Inc., a software development firm that Mr. Layman founded in
January 1986. Prior to founding Virginia Software,
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Inc., Mr. Layman worked in servicing systems and in strategic planning at
Sallie Mae and was a consultant with Arthur Young & Company.
Mark F. Bryant has served as our Vice President, Business Development and
Advertising Sales, since May 1998. Prior to joining LifeMinders.com, Mr. Bryant
served as Chief Operating Officer and Senior Vice President of Marketing and
Sales of System Dynamics, Inc., a database management and targeted direct
communications company, which he joined in 1988. Prior to working at System
Dynamics, Inc., Mr. Bryant was involved in political fundraising and was active
in national and state politics.
David C. Meade has served as our Vice President, Member Acquisition, since
June 1999 and served as Product Manager from April 1998 to June 1999.
Previously, from June 1996 to April 1998, Mr. Meade worked as a consultant at
Price Waterhouse LLP (now PricewaterhouseCoopers LLP). He was the Chief
Operating Officer of an independent franchise from May 1995 to September 1995.
Timothy D. Hanlon has served as our Vice President, Marketing and
Communications since July 1999. Prior to joining LifeMinders.com, from July
1997 to May 1999, Mr. Hanlon was the President of Van Bueren International
where he served as the head of marketing and communications at America's
Promise, a national non-profit organization led by retired General Colin
Powell. From September 1995 to July 1997, Mr. Hanlon was an Account Director at
Bozell Worldwide, and from June 1993 to September 1995 he served as President
and CEO of the Buoniconti Fund to Cure Paralysis, Inc., a $38 million campaign
to build a new research facility for the Miami Project. Prior to that, Mr.
Hanlon was an Account Manager at Saatchi & Saatchi Advertising.
E. Rogers Novak, Jr. has been a director of LifeMinders.com since November
1997. Mr. Novak is a General Partner of Novak Biddle Venture Partners, a
venture capital investment firm, which he co-founded in 1996. During 1995 and
1996, Mr. Novak was a Managing Director of Markowitz & McNaughton, a consulting
firm. In 1994, Mr. Novak was self-employed as a private investor. From 1984 to
1993 he was an officer of Grotech Capital Group, Inc., the General Partner of
Grotech Venture Partners, I, II and III. Mr. Novak currently serves on the
boards of directors of Entevo Corporation, Blackboard Inc., Engenia Software,
Inc., 1010 Web and Spyrus. He serves on the board of advisors of MMG Ventures,
a specialized small business investment company.
B. Gene Riechers has served as a director of LifeMinders.com since November,
1997. Mr. Riechers is a managing director of FBR Technology Venture Partners
L.P., a venture capital investment firm, which he joined in December 1996.
Prior to joining FBR Technology Venture Partners L.P., Mr. Riechers served as
the Chief Financial Officer of CyberCash, a leader in Internet payment systems,
from December 1995 to December 1996. From September 1993 to December 1995, Mr.
Riechers served as the Chief Financial Officer and Vice President of
Development of Online Resources and Communications Corp., a provider of
electronic home banking services. He currently serves on the boards of
directors of webMethods, Inc., WisdomWare, Inc., Entevo Corporation, Call
Technologies, Inc. and Varsitybooks.com.
Douglas A. Lindgren, has served as a director of LifeMinders.com since
February 1999. Mr. Lindgren is a Managing Director of United States Trust
Company of New York and is the Chief Investment Officer of Excelsior Private
Equity Fund II, Inc. Prior to joining U.S. Trust in April 1995, Mr. Lindgren
served in various capacities for Inco Venture Capital Management, Inc. from
January 1988 through March 1995, including the positions of President and
Managing Principal from January 1993 through March 1995. Before joining Inco
Venture Capital Management, Inc., Mr. Lindgren was employed at Salomon Brothers
Inc and Smith Barney, Harris Upham & Co., Inc. He is an Adjunct Professor of
Finance at Columbia University's Graduate School of Business, where he has been
teaching courses on venture capital since 1993. Mr. Lindgren currently serves
on the boards of directors of Constellar Corporation, ReleaseNow.com,
PowerSmart, Inc., On the Go Software, Inc. and MarketFirst Software, Inc.
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Philip D. Black has served as a director of LifeMinders.com since May 1999.
Since March 1999, Mr. Black has been a Managing Member of Calvert Capital
L.L.C. and Calvert Capital II, L.L.C., which are both venture capital
investment firms and the general partners of the ABS Ventures Entitites. From
March 1995 to March 1999, Mr. Black was a General Partner of Weiss, Peck &
Greer Venture Partners, a venture capital investment firm, and from 1988 to
1995, was a Senior Associate at Summit Partners, also a venture capital firm.
Mr. Black currently serves on the boards of directors of Personify Incorporated
and Zilliant.com.
Jonathan B. Bulkeley has served as a director of LifeMinders.com since
August 1999. Since January 1999, Mr. Bulkeley has served as the Chief Executive
Officer of barnesandnoble.com. From July 1995 to January 1999, he served as
Managing Director of America Online, Inc.'s joint venture with Bertelsmann
Online to provide interactive online services in the United Kingdom. Prior to
July 1995, Mr. Bulkeley was Vice President of Business Development at America
Online in the United States, and prior that, served as General Manager of media
at America Online. Before joining America Online in March 1993, Mr. Bulkeley
worked at Time Inc. in a variety of roles, including Director of Marketing and
Development for Money magazine and sales and marketing positions at Time and
Discover magazines.
Board Composition
Our certificate of incorporation currently authorizes seven directors. Upon
completion of this offering, our Restated Certificate of Incorporation and
Bylaws will provide that our board will be divided into three classes, Class I,
Class II and Class III, with each class serving staggered three-year terms. The
Class I directors, Messrs. Novak and Riechers, will stand for reelection at the
2000 annual meeting of stockholders. The Class II directors, Messrs. Lindgren
and Black, will stand for reelection at the 2001 annual meeting of
stockholders. The Class III directors, Messrs. Stephen Chapin and Bulkeley,
will stand for reelection at the 2002 annual meeting of stockholders. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible,
each class will consist of one-third of the directors. This staggered
classification of the board of directors may have the effect of delaying or
preventing changes in control or management.
We currently expect to add one additional director prior to December 31,
1999.
Executive officers are appointed by and serve at the discretion of the board
of directors. Stephen Chapin is the brother of John Chapin. There are no other
family relationships among any of our directors, officers or key employees.
Board Committees
The board of directors has a compensation committee and an audit committee.
Compensation Committee. Our board's compensation committee reviews and makes
recommendations to the board regarding the compensation and benefits provided
to our key executive officers and directors, including stock compensation and
loans. In addition, the compensation committee reviews policies regarding
compensation arrangements and benefits for all of our employees. As part of the
foregoing, the compensation committee also administers our 1998 Stock Option
Plan. The current members of the compensation committee are Messrs. Bulkeley
and Novak.
Audit Committee. Our board's audit committee reviews and monitors our
internal accounting procedures and reviews the results and scope of the annual
audit and other services provided by our independent accountants. The audit
committee also consults with our management and our independent auditors prior
to the presentation of financial statements to stockholders and, as
appropriate, initiates
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<PAGE>
inquiries into aspects of our financial affairs. In addition, the audit
committee is responsible for considering and recommending the appointment of,
and reviewing fee arrangements with, our independent auditors. The current
members of the audit committee are Messrs. Riechers and Novak.
Director Compensation
Our directors do not receive compensation for attendance at board meetings
or board committee meetings. However, our directors are reimbursed for all
reasonable out-of-pocket expenses incurred in connection with their attendance
at board and board committee meetings. From time to time, certain directors who
are not employees of LifeMinders.com have received grants of options to
purchase shares of our common stock. On August 19, 1999, we granted Jonathan B.
Bulkeley an option to purchase 62,500 shares of our common stock, at an
exercise price of $3.86 per share.
Compensation Committee Interlocks and Insider Participation
The compensation committee of the board of directors currently consists of
Messrs. Bulkeley and Novak. No interlocking relationship exists between any
member of our board of directors or our compensation committee and any member
of the board of directors or compensation committee of any other company, and
no interlocking relationship has existed in the past.
Indemnification
Our Restated Certificate of Incorporation limits the liability of directors
to the maximum extent permitted under the Delaware General Corporation Law.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duties as directors,
except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
. unlawful payments of dividends or other distributions or unlawful stock
repurchases or redemptions under Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derives an improper personal
benefit.
We or our stockholders may pursue equitable remedies for a director's
alleged breach of his or her fiduciary duties, including an injunction or
rescission, even where monetary remedies are unavailable.
Our Restated Certificate of Incorporation provides that we shall indemnify
our current and former directors and officers, and may indemnify our current
and former employees and agents, against any and all liabilities and expenses
incurred in connection with their services in those capacities to the maximum
extent permitted by Delaware law. In addition, our Restated Certificate of
Incorporation requires us to advance expenses to any person entitled to
indemnification, provided that the person undertakes to repay the advancement
if it is determined in a final judicial decision from which there is no right
of appeal that the person is not entitled to indemnification. Our Restated
Certificate of Incorporation further permits us to secure insurance on behalf
of our directors, officers, employees and agents for any expense, liability or
loss incurred in these capacities, regardless of whether the Restated
Certificate of Incorporation or Delaware law would permit indemnification
against this expense, liability or loss.
With respect to the indemnification of directors and officers for
liabilities arising under the Securities Act, the SEC has opined that this
indemnification is against public policy, as expressed in the Securities Act,
and is therefore unenforceable.
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Executive Compensation
The following table sets forth information concerning the compensation we
paid to our chief executive officer and our other executive officer whose total
annual compensation exceeded $100,000 (the "named executive officer") during
the fiscal year ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
-------------------
Annual Compensation(1)
----------------------- Number of Shares
Name and Principal Underlying Other
Position Salary ($) Bonus ($) Options (#) Compensation
- ------------------ ----------------------- ------------------- ------------
<S> <C> <C> <C> <C>
Stephen R. Chapin, $ 131,250 -- -- --
Jr. ...................
President, Chief
Executive Officer and
Chairman of the Board
Mark F. Bryant.......... $ 125,000 -- 125,000 --
Vice President,
Business Development
and Advertising Sales
</TABLE>
- --------
(1) Mr. Layman was hired in March 1999 and is compensated at an annual rate of
$175,000, Mr. Hanlon was hired in July 1999 and is compensated at an annual
rate of $150,000, Mr. Grabias was hired in August 1999 and is compensated
at an annual rate of $175,000 and Mr. Mahony was hired in November 1999 and
is compensated at an annual rate of $160,000.
The following table provides information concerning grants of options to
purchase our common stock that we made to our chief executive officer and named
executive officer during the fiscal year ended December 31, 1998. We did not
grant stock appreciation rights to these individuals during 1998.
Option Grants in Fiscal Year 1998
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------
Potential Realizable
Percentage Value at Assumed
Number of of Total Annual Rates of Stock
Securities Options Price Appreciation for
Underlying Granted to Exercise Option Term(3)
Options Employees in Price Per Expiration ----------------------
Name Granted(1) Fiscal 1998 Share(2) Date 5% 10%
- ---- ---------- ------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stephen R. Chapin, Jr... -- -- -- -- -- --
Mark F. Bryant.......... 125,000 26.7% $0.80 5/1/08 $ 62,889 $ 159,374
</TABLE>
- --------
(1) Of the options listed in the table above, 25% are exercisable on May 1,
2000 and a pro rata portion of the remaining 75% becomes exercisable each
month over the subsequent three year period.
(2) The exercise price is equal to the fair market value of our common stock as
valued by our board of directors on the date of grant. In determining this
fair market value, the board of directors took into account the purchase
price paid by investors for shares of our preferred stock (taking into
account the liquidation preferences and other rights, privileges and
preferences associated with our preferred stock) and an evaluation by the
board of directors of our revenue, operating history and prospects. The
exercise price may be paid in cash, in shares of our common stock valued at
fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. We may also
finance the option exercise by lending the optionee sufficient funds to pay
the exercise price for the purchased shares, together with any federal and
state income tax liability incurred by the optionee in connection with this
exercise.
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<PAGE>
(3) Potential Realizable Value assumes that the common stock appreciates at the
indicated annual rate (compounded annually) from the grant date until the
expiration of the option term and is calculated based on the rules
promulgated by the SEC. Potential Realizable Value does not represent our
estimate of future stock price performance. The potential realizable value
at 5% and 10% appreciation is calculated by assuming that the estimated
fair market value on the date of grant appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated
price.
Aggregated Fiscal Year-End Option Values
The following table provides summary information regarding options held by
our chief executive officer and named executive officer for the fiscal year
ended December 31, 1998. The value of unexercised in-the-money options is based
on the initial public offering price of $14.00 per share.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised "In-the-Money" Options
Options at December 31, 1998 at December 31, 1998(1)
--------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen R. Chapin, Jr... -- -- -- --
Mark F. Bryant.......... -- 125,000 -- --
</TABLE>
- --------
(1) Value for "in-the-money" options represents the positive spread between the
exercise price of outstanding options and the fair market value of $0.80
per share on December 31, 1998. The fair market value of our common stock
at the end of 1998 was estimated by the board of directors on the basis of
the purchase price paid by investors for shares of our preferred stock
(taking into account the liquidation preferences and other rights,
privileges and preferences associated with the preferred stock) and an
evaluation by the board of our revenue, operating history and prospects.
Stock Option Plan
We adopted a stock option plan for the purpose of promoting our long-term
growth and profitability by (i) providing key people with incentives to improve
stockholder value and contribute to our growth and financial success and (ii)
enabling us to attract, retain and reward talented and skilled persons for
positions of substantial responsibility. We have used stock options as a
component of compensation for our officers and key employees.
Share Reserve. Our board of directors adopted our 1998 Stock Option Plan on
March 26, 1998 and our stockholders approved the plan in April 1998, initially
providing for a maximum of 475,000 shares to be issued pursuant to stock
options granted under the plan. The board of directors and stockholders
approved an increase in the number of shares available for issuance pursuant to
stock options under the plan of 301,250 shares on June 26, 1998, a further
increase of 643,820 shares effective January 29, 1999, a further increase of
625,000 shares effective May 28, 1999, and a further increase of 875,000 shares
effective September 22, 1999, resulting in an aggregate maximum of 2,920,070
shares of the common stock available and reserved for issuance under the plan.
Administration. The compensation committee of our board of directors
administers the 1998 Stock Option Plan. The committee has the complete
discretion to make all decisions relating to the interpretation and operation
of the plan. The committee has the discretion to determine who will receive an
option, what type of option it will be, how many shares will be covered by the
option, what the vesting requirements will be (if any), and what the other
features and conditions of each option will be. The compensation committee,
with the approval of the board of directors, may also reprice the exercise
price of outstanding options to the then current fair market value of the
underlying stock and modify outstanding awards in other ways.
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<PAGE>
Eligibility. The following groups of individuals are eligible to participate
in the 1998 Stock Option Plan: employees, members of our board of directors and
consultants. The 1998 Stock Option Plan provides that no participant may
receive options covering more than 237,500 shares in the same year.
Types of Award. The 1998 Stock Option Plan provides for the issuance of
incentive stock options, which may be granted only to employees, and
nonstatutory stock options to purchase shares of our common stock. An optionee
who exercises an incentive stock option may qualify for favorable tax treatment
under Section 422 of the Internal Revenue Code of 1986. On the other hand,
nonstatutory stock options do not qualify for favorable tax treatment. The
exercise price for incentive stock options granted under the 1998 Stock Option
Plan may not be less than 100% of the fair market value of our common stock on
the option grant date. In the case of nonstatutory stock options, the minimum
exercise price is 85% of the fair market value of our common stock on the
option grant date.
Exercise and Vesting. Optionees may pay the exercise price by using cash
and, if permitted by the compensation committee and provided in their grant
agreement, through the following:
. shares of common stock which, if acquired by option exercise, the
optionee has owned for six months prior to exercise;
. a promissory note with the security as the board of directors shall
require;
. an immediate sale of the option shares through a broker designated by
us; or a loan from a broker designated by us; or
. a loan from a broker designated by us, secured by the option shares.
Options vest (that is, become exercisable) at the time or times determined by
the compensation committee. In most cases, our options vest over the four-year
period following the date of grant. Options generally expire 10 years after
they are granted, except that they generally expire earlier if the optionee's
service terminates earlier.
Merger or Sale. If we merge with another company, or there is a sale of
substantially all of our assets to another company, an option under the 1998
Stock Option Plan will terminate if the option is not assumed by the surviving
corporation or its parent or if the surviving corporation or its parent does
not substitute another award on substantially the same terms. In that event,
the optionee will be given at least 15 days prior to the option's termination
to exercise the vested portion of the option.
Change in Capitalization. The number and price of shares covered by
outstanding stock options and the number of shares authorized under the 1998
Stock Option Plan shall be proportionately adjusted, as determined by the board
of directors, to take into account a stock split, reverse stock split, stock
dividend, combination or reclassification of shares or similar event.
Amendment or Termination. Our board may amend or terminate the 1998 Stock
Option Plan at any time. If our board amends the plan, it does not need to ask
for stockholder approval of the amendment unless applicable law requires it. No
amendment shall impair the rights of any optionee under an option previously
granted without his or her consent. The 1998 Stock Option Plan will continue in
effect until March 25, 2008, unless the board decides to terminate the plan
earlier.
Employment Agreements
In November 1997, we entered into two year employment agreements with each
of Stephen Chapin and John Chapin. Under the agreements, we agreed to pay
Stephen Chapin an annual salary of $120,000 and John Chapin an annual salary of
$72,000. The board of directors subsequently approved an annual salary for
Stephen Chapin of $200,000 effective July 1999 and an annual salary of John
Chapin of $100,000
49
<PAGE>
effective July 1999. Both agreements provide for bonuses based upon our
profitability and overall financial condition, which may be awarded by our
board of directors in its sole discretion. The employment agreements prohibit
Stephen Chapin and John Chapin from competing with us and soliciting our
customers or employees during the term of the employment agreement and the 12-
month period after the date of their termination.
In November 1999, the compensation committee of the board of directors
approved an annual base salary for Stephen Chapin of $195,000. In addition to
his annual base salary, Stephen Chapin will receive a bonus of 25% of his base
salary if our revenues exceed $11 million in 1999 and 25% of his salary if the
number of subscribers we have at the end of 1999 is at least 7,000,000. For the
year 2000, he will receive 25% of his base salary if our revenues exceed $31
million in 2000 and 25% of his base salary if the number of subscribers we have
at the end of 2000 is at least 12,000,000. The compensation committee also
granted him incentive stock options exercisable beginning January 31, 2000 for
$20,000 of common stock based upon the initial public offering price of our
common stock and non-qualified stock options exercisable for 200,000 shares of
our common stock exercisable on the first anniversary of the grant date. The
exercise price for the options will be the initial public offering price of the
common stock. Stephen Chapin's employment agreement will be amended to reflect
his new compensation package.
50
<PAGE>
CERTAIN TRANSACTIONS
Stock Purchase Agreements and Related Matters
In November 1997, we sold shares of our Series A convertible preferred stock
to the following purchasers in the following amounts at a purchase price of
$1.00 per share:
<TABLE>
<S> <C>
FBR Technology Venture Partners, L.P................................. 325,000
Novak Biddle Venture Partners, L.P................................... 300,000
ABS Ventures IV, L.P................................................. 250,000
ABX Fund, L.P........................................................ 75,000
David Pensky......................................................... 50,000
</TABLE>
In addition, we also granted to each of the above-listed purchasers an
option to purchase a like number of shares of Series B convertible preferred
stock, at an exercise price of $1.00 per share. In June 1998, the above-
mentioned purchasers exercised those options. Each of the purchasers entered
into a stockholders' agreement and a registration rights agreement. See
"Certain Transactions--Stock Purchase Agreements and Related Matters--
Stockholders' Agreement and Registration Rights Agreement." B. Gene Riechers,
one of our directors, is a managing director of FBR Technology Venture
Partners, L.P. E. Rogers Novak, Jr., one of our directors, is a general partner
of Novak Biddle Venture Partners, L.P. Philip D. Black, one of our directors,
is a managing member of Calvert Capital L.C.C. and Calvert Capital II, L.C.C.,
which are the general partners of ABS Ventures IV, L.P. or its affiliates.
In January 1999, we sold shares of our Series C convertible preferred stock
to the following purchasers in the following amounts at a price of $1.5265 per
share:
<TABLE>
<S> <C>
Excelsior Private Equity Fund II, Inc.............................. 1,965,280
Novak Biddle Venture Partners, L.P................................. 240,201
FBR Technology Venture Partners, L.P............................... 207,446
ABS Ventures IV, L.P............................................... 159,574
ABX Fund, L.P...................................................... 47,872
</TABLE>
Excelsior Private Equity Fund II, Inc. became a party to the stockholders'
agreement and the registration rights agreement. See "Certain Transactions--
Stock Purchase Agreements and Related Matters--Stockholders' Agreement and
Registration Rights Agreement." Douglas A. Lindgren, one of our directors, is
the Chief Investment Officer of Excelsior Private Equity Fund II, Inc.
In May 1999, we sold shares of our Series D convertible preferred stock to
the following purchasers in the following amounts at a price of $4.7051 per
share:
<TABLE>
<S> <C>
Pyramid Ventures, Inc.............................................. 1,275,212
Excelsior Private Equity Fund II, Inc.............................. 637,606
FBR Technology Venture Partners, L.P............................... 212,535
Novak Biddle Venture Partners, L.P................................. 106,268
Four Individual Accredited Investors............................... 21,253
</TABLE>
Each of Pyramid Ventures, Inc. and the four individual accredited investors
became parties to the stockholders' agreement and the registration rights
agreement. See "Certain Transactions--Stock Purchase Agreements and Related
Matters--Stockholders' Agreement and Registration Rights Agreement." Pyramid
Ventures, Inc. is an affiliate of ABS Ventures IV, L.P.
51
<PAGE>
In September 1999, we sold shares of our Series E convertible preferred
stock to the following purchasers and to certain non-affiliated parties in the
following amounts at a price of $8.0868 per share:
<TABLE>
<S> <C>
Novak Biddle Venture Partners, L.P. ............................... 61,829
Novak Biddle Venture Partners II, L.P.............................. 49,463
ABS Ventures IV, L.P............................................... 91,187
ABX Fund, L.P...................................................... 27,861
FBR Technology Venture Partners, L.P. ............................. 111,292
Excelsior Private Equity Fund II, Inc.............................. 556,462
Jonathan Bulkeley.................................................. 61,829
Philip D. Black.................................................... 10,000
ABS Ventures LM L.L.C. ............................................ 120,000
Certain Non-Affiliated Parties..................................... 1,702,070
</TABLE>
Each of the Series E Convertible Preferred Stock purchasers became parties
to the stockholders' agreement and the registration rights agreement. See
"Certain Transactions--Stock Purchase Agreements and Related Matters--
Stockholders' Agreement and Registration Rights Agreement." E. Rogers Novak,
Jr., one of our directors, is a general partner of Novak Biddle Venture
Partners II, L.P. Jonathan Bulkeley is one of our directors.
Each of the transactions described above was priced at fair market value
according to arm's length negotiating with the purchasers. The proceeds were
used for general working capital purposes.
Stockholders' Agreement and Registration Rights Agreement. Holders of the
Company's preferred stock are parties to a stockholders' agreement that
contains arrangements with respect to voting, rights of first refusal, and
"tag-along" rights, as well as other agreements relating to corporate
governance. The rights and obligations under the stockholders' agreement will
terminate upon the consummation of this offering.
In addition, we have granted holders of our preferred stock certain
registration rights. Pursuant to these registration rights, we may be required
to file registration statements under the Securities Act covering all or a
portion of the common stock issued or issuable upon the automatic conversion of
the preferred stock or may be required to include the shares of common stock in
a registration under the Securities Act that we initiate on our own behalf. See
"Description of Capital Stock--Registration Rights."
Other Transactions
During 1996 and 1997, Stephen R. Chapin, Jr. and D. Thorp Foster loaned us
$35,236 and $53,319, respectively, to provide us with working capital. We
repaid $10,000 of the loan during 1996 and $53,919 during 1997. In December
1997, Mr. Chapin and Mr. Foster forgave the outstanding loan balance of
$24,636. During 1998, we paid $84,000 to the Lordhill Company for certain
consulting services with respect to the solicitation of large advertisers. Hugh
Ronalds, one of our stockholders, is the President of the Lordhill Company. In
July 1999, we paid $150,000 to Frans Kok as a settlement of our obligations to
Mr. Kok and his company, Johan Hekelaar, Inc., for financial consulting
services provided to us. Mr. Kok is a stockholder who formerly served as a
director and financial consultant for us.
We believe that the transactions disclosed above were made on terms no less
favorable to us than would have been obtained from unaffiliated third parties.
All future transactions, including loans between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, and will continue to be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
Since January 1, 1996, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we or any of our
subsidiaries was or is to be a party in which the amount involved exceeded or
will exceed $60,000 and in which any of our directors, executive officers,
holder of more than 5% of our common stock or any member of the immediate
family of these persons had or will have a direct or indirect material interest
other than (i) compensation agreements and other arrangements, which are
described where required in "Management," and (ii) the transactions described
above.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us regarding the
beneficial ownership of our common stock as of November 17, 1999, as adjusted
to reflect the sale of 4,200,000 shares of common stock in this offering and
the conversion of all outstanding shares of our convertible preferred stock
into shares of common stock, by:
. each person or group known by us to own beneficially more than 5% of our
outstanding common stock;
. each of our directors and each named executive officer; and
. our directors and executive officers as a group.
We have determined beneficial ownership in accordance with the rules of the
SEC. Unless otherwise indicated, the persons included in the table have sole
voting and investment power with respect to all shares beneficially owned.
Shares of common stock subject to options that are currently exercisable or are
exercisable within 60 days of November 17, 1999 are treated as outstanding and
beneficially owned with respect to the person holding these options for the
purpose of computing the percentage ownership of that person. However, these
shares are not treated as outstanding for purposes of computing the percentage
ownership of any other person. Stephen R. Chapin's shares include options
exercisable for 100,000 shares, Mark Bryant's shares include options
exercisable for 74,479 shares and shares held by executive officers and
directors as a group include options exercisable for 291,184 shares. The
percentages in the "After the Offering" column assume that the underwriters do
not exercise their over-allotment option to purchase up to 630,000 additional
shares.
<TABLE>
<CAPTION>
Percent of Common Stock
Shares of Beneficially Owned
Common Stock ---------------------------
Beneficially Before the After the
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ------------ ------------ -----------
<S> <C> <C> <C>
Douglas A. Lindgren............... 4,261,685 27.62% 21.71%
Excelsior Private Equity Fund II,
Inc.(1)
114 West 47th Street, New York,
New York 10036
Philip D. Black................... 2,979,632 19.31% 15.18%
Entities affiliated with ABS
Ventures(2)
1 South Street, Suite 2150,
Baltimore, Maryland 21202
B. Gene Riechers.................. 1,476,591 9.57% 7.52%
FBR Technology Venture Partners,
L.P.(3)
1001 19th Street North, 10th
Floor, Arlington, Virginia 22209
E. Rogers Novak................... 1,322,200 8.57% 6.74%
Novak Biddle Venture Partners,
L.P.(4)
1897 Preston White Drive, Reston,
Virginia 20191
Stephen R. Chapin, Jr............. 1,818,765 11.71% 9.22%
1110 Herndon Parkway, Herndon,
Virginia 20170
Jonathan B. Bulkeley(5)........... 77,286 * *
76 Ninth Avenue, 11th Floor, New
York, New York 10128
Mark F. Bryant....................
1110 Herndon Parkway, Herndon,
Virginia 20170 77,082 * *
All directors and executive
officers as a group (12
persons)......................... 12,427,047 79.21% 62.52%
</TABLE>
- --------
* Less than 1%.
53
<PAGE>
(1) Represents shares held of record by Excelsior Private Equity Fund II, Inc.
Mr. Lindgren, one of our directors, is the Chief Investment Officer of
Excelsior Private Equity Fund II, Inc. Mr. Lindgren disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest in
Excelsior Private Equity Fund II, Inc.
(2) Represents (a) 1,744,015 shares held of record by ABS Ventures LM L.L.C.
(which shares were transferred from Pyramid Ventures, Inc., an affiliate of
ABS Ventures LM L.L.C., in September 1999), the general partner of which is
Calvert Capital II LLC, (b) 938,451 shares held of record by ABS Ventures
IV, L.P., the general partner of which is Calvert Capital LLC, (c) 282,166
shares held of record by ABX Fund, L.P., the general partner of which is
Calvert Capital II LLC and (d) 15,000 shares held of record by Philip D.
Black. Mr. Black disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest in these entities.
(3) Represents shares held of record by FBR Technology Venture Partners, L.P.,
the general partner of which is FBR Venture Capital Managers, Inc. Mr.
Riechers, one of our directors, is the Managing Director of FBR Technology
Venture Partners, L.P. Mr. Riechers disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest in FBR Technology
Venture Partners, L.P.
(4) Represents shares held of record by Novak Biddle Venture Partners, L.P. and
Novak Biddle Venture Partners II, L.P. Mr. Novak, one of our directors, is
a principal of those entities. Mr. Novak disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest in those
entities.
(5) Mr. Bulkeley is one of our directors.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Upon consummation of this offering, our authorized capital stock will
consist of 60,000,000 shares of common stock, $0.01 par value, and 9,665,240
shares of preferred stock, $0.01 par value. The following is a summary of
material terms of the common stock and the preferred stock. The summary is
subject to, and qualified in its entirety by, our Restated Certificate of
Incorporation and Bylaws and by the provisions of applicable law.
Common Stock
As of November 10, 1999, there were 3,349,373 shares of common stock
outstanding that were held of record by 14 stockholders. There will be
19,630,914 shares of common stock outstanding (assuming no exercise of the
underwriters' over-allotment option and assuming no exercise after November 10,
1999, of 1,700,374 outstanding options) after giving effect to the sale of the
shares of common stock to the public offered hereby and the conversion of our
preferred stock into common stock at a five for four ratio.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably the dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for this
purpose. In the event of the liquidation, dissolution or winding up of
LifeMinders.com, the holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to any remaining
prior distribution rights of preferred stock. The common stock has no
cumulative voting, preemptive or conversion or other subscription rights. There
are no redemption or sinking fund provisions applicable to the common stock.
All outstanding shares of common stock are fully paid and nonassessable, and
the shares of common stock to be issued upon completion of this offering will
be fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, all 9,665,240 shares of preferred stock
will be converted into 12,081,541 shares of common stock and automatically
retired. After those shares are retired, the board of directors will have the
authority to issue up to 9,665,240 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions of those
shares, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of the series,
without further vote or action by the stockholders. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in
control of LifeMinders.com without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock.
The issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others. At present, we have no plans to issue any of the
preferred stock.
Anti-takeover Effects of Provisions of the Certificate of Incorporation, Bylaws
and Delaware Law
Restated Certificate of Incorporation and Bylaws
Effective upon the closing of this offering, we will have a classified board
of directors so that approximately one-third of the members of the board of
directors are elected at each annual meeting of our stockholders. Our Bylaws
will provide that our stockholders may call a special meeting of stockholders
only upon a written request of stockholders owning at least 25% of our capital
stock. These provisions of the Restated Certificate of Incorporation and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of LifeMinders.com. These provisions are intended to enhance
the
55
<PAGE>
likelihood of continuity and stability in the composition of the board of
directors and in the policies formulated by the board of directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of LifeMinders.com. These provisions are designed
to reduce our vulnerability to an unsolicited acquisition proposal. These
provisions also are intended to discourage certain tactics that may be used in
proxy fights. However, these provisions could have the effect of discouraging
others from making tender offers for our shares and, as a consequence, they
also may inhibit fluctuations in the market price of our shares that could
result from actual or rumored takeover attempts. These provisions also may have
the effect of preventing changes in our management.
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
. the board of directors approved the transaction in which the stockholder
became an interested stockholder prior to the date the interested
stockholder attained this status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
. on or subsequent to the date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the holders of at least 66 2/3% of our outstanding voting
stock which is not owned by the interested stockholder.
A "business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior to the determination of
interested stockholder status, did own, 15% or more of a corporation's voting
stock.
Registration Rights
We have granted holders of our preferred stock certain piggy-back and demand
registration rights. These rights may require us to file registration
statements under the Securities Act covering all or a portion of the common
stock issued or issuable upon the automatic conversion of the preferred stock
or we may be required to include these shares of common stock in a registration
under the Securities Act that we initiate on our own behalf.
The demand registration rights provide that upon request of the holders of
common stock issued or issuable upon the automatic conversion of the preferred
stock, which request can be made at any time after November 12, 2000 or one
year from the date of the consummation of this offering, we may be required to
use our best efforts to register all or a portion of these shares under the
Securities Act on a Form S-1 registration statement. The request for this
registration must include at least 15% of the number of shares then held by the
holders granted registration rights or the number of shares sufficient to
result in net proceeds in excess of $15 million. We are obligated to effect no
more than three of these registrations on a Form S-1 registration statement,
but we are not required to effect any demand registration within 180 days after
any other registration statement (on any form other than the Form S-4 or the
Form S-8) involving our common stock has become effective or has been filed and
not withdrawn.
The holders of common stock issued or issuable upon the automatic conversion
of the preferred stock also have the right to request that we register these
shares under the Securities Act on a Form S-3
56
<PAGE>
registration statement, if and when we qualify to use this form of
registration statement. There is no limit on the number of registrations on
Form S-3 that these holders may request, except that no holder may request
more than two of these registrations in any twelve month period and each
request must include shares having an aggregate offering price of at least $1
million.
In addition, each of the holders indicated above has certain "piggyback"
registration rights. These rights may require that we include all or a portion
of their common stock issued or issuable upon the automatic conversion of the
preferred stock in any registration of our common stock. In connection with
any of these offerings, the managing underwriter can limit the number of
shares held by persons with "piggyback" registration rights to be included in
these registrations. These rights are not exercisable in connection with
registrations relating to certain offerings in connection with the
registration of securities under an employee benefit plan or issued in a
business combination or a registered exchange offer.
We will be responsible for all expenses incurred in connection with the
registration rights above, excluding underwriting discounts or commissions.
Transfer Agent And Registrar
The Transfer Agent and Registrar for the common stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public
market could lower prevailing market prices. As described below, 277,713
shares currently outstanding will be available for sale immediately after this
offering because of contractual restrictions on resale. Sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could harm the prevailing market price and impair our ability to raise equity
capital in the future.
Upon completion of the offering, we will have 19,630,914 outstanding shares
of common stock. We will also have options outstanding to purchase 2,298,749
shares of common stock, of which 422,832 are vested and exercisable at
November 17, 1999. Of the shares outstanding, the 4,200,000 shares sold in the
offering, plus any shares issued upon exercise of the underwriters' over-
allotment option, will be freely tradable without restriction under the
Securities Act, unless purchased by our "affiliates" as that term is defined
in Rule 144 under the Securities Act. In general, affiliates include officers,
directors or 10% stockholders.
The remaining 19,297,241 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which are summarized below. Sales of the restricted securities in the
public market, or the availability of these shares for sale, could adversely
affect the market price of the common stock.
We anticipate that our directors, officers and significant securityholders
will enter into lock-up agreements in connection with this offering generally
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of our common stock or any securities
exercisable for or convertible into our common stock owned by them for a
period of 180 days after the date of this prospectus without the prior written
consent of Hambrecht & Quist LLC. Taking into account the lock-up agreements,
and assuming Hambrecht & Quist LLC does not release stockholders from these
agreements, the number of shares that will be available for sale in the public
market under the provisions of Rule 144, 144(k) and 701 will be as follows:
. Beginning on the effective date of this prospectus, only the shares sold
in this offering and an additional 277,713 shares will be immediately
available for sale in the public market.
57
<PAGE>
. Beginning 180 days after the effective date, approximately 8,334,939
shares will be eligible for sale.
. At various times after 180 days subsequent to the effective date upon the
expiration of applicable holding periods, 6,818,262 shares will become
eligible for sale.
In general, under Rule 144, after the expiration of the lock-up agreements, a
person who has beneficially owned restricted securities for at least one year
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
. one percent of the number of shares of common stock outstanding at that
time which will equal approximately 196,309 shares immediately after the
offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice and the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at any
time during the three months preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell
these shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Rule 701 permits our employees, officers, directors or consultants who
purchased shares pursuant to a written compensatory plan or contract to resell
these shares in reliance upon Rule 144 but without compliance with specific
restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares
under Rule 144 without complying with the holding period requirement and that
non-affiliates may sell these shares in reliance on Rule 144 without complying
with the holding period, public information, volume limitation or notice
provisions of Rule 144.
Following the closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act covering shares of common stock
subject to outstanding options under our 1998 Stock Option Plan and
nonstatutory stock option agreements which are outside of this plan. Based on
the number of shares subject to outstanding options as of September 30, 1999
and currently reserved for issuance under this plan and these agreements, this
registration statement would cover approximately 2,920,070 shares. This
registration statement will automatically become effective upon filing.
Accordingly, subject to the exercise of these options, shares registered under
such registration statement will be available for sale in the open market
immediately after the 180-day lock-up period expires.
58
<PAGE>
UNDERWRITING
The underwriters named below, through their representatives, Hambrecht &
Quist LLC, Thomas Weisel Partners LLC, PaineWebber Incorporated and Wit Capital
Corporation, have severally agreed to purchase, and we have agreed to sell
them, an aggregate of 4,200,000 shares of common stock pursuant to an
underwriting agreement. The number of shares of common stock that each
underwriter has agreed to purchase is listed opposite its name below:
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
Hambrecht & Quist LLC.................................... 1,296,000
Thomas Weisel Partners LLC............................... 720,000
PaineWebber Incorporated................................. 576,000
Wit Capital Corporation.................................. 288,000
BancBoston Robertson Stephens Inc........................ 120,000
Banc of America Securities LLC........................... 120,000
Bear Stearns & Co. Inc................................... 120,000
Prudential Securities Incorporated....................... 120,000
Salomon Smith Barney Inc................................. 120,000
Charles Schwab & Co., Inc................................ 120,000
SG Cowen Securities Corporation.......................... 120,000
William Blair & Company L.L.C............................ 60,000
Dain Rauscher Wessels.................................... 60,000
First Albany Corporation................................. 60,000
First Union Capital Markets Corp......................... 60,000
Legg Mason Wood Walker, Incorporated..................... 60,000
Pacific Crest Securities, Inc............................ 60,000
Scott & Stringfellow, Inc................................ 60,000
U.S. Bancorp Piper Jaffray Inc........................... 60,000
---------
Total.................................................... 4,200,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are conditioned on the absence of any material adverse change in our business
and the receipt of certificates, opinions and letters from us and the selling
stockholders, their counsel and the independent auditors. The nature of the
underwriters' obligation is such that they are committed to purchase all shares
of common stock offered by this prospectus if any of the shares are purchased.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option
to purchase additional shares of common stock.
Underwriting Discounts and Commissions Payable by Us
<TABLE>
<CAPTION>
Without Over- With Over-
Allotment Exercise Allotment Exercise
------------------ ------------------
<S> <C> <C>
Per Share........................... $ 0.98 $ 0.98
Total............................. $4,116,000 $4,733,400
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $1.2 million.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price listed on the
cover page of this prospectus and part to selected dealers at a price that
represents a concession not in excess of $0.58 per share under the public
offering price. The underwriters may allow, and such dealers may reallow a
concession not in excess of $0.10 per share to other
59
<PAGE>
underwriters or selected other dealers. After the initial public offering of
the shares of common stock, the offering price and other selling terms may be
changed by the representatives of the underwriters.
An electronic prospectus is available on the Web site maintained by eSchwab.
The underwriters have agreed to allocate a limited number of shares to eSchwab
for sale to its brokerage account holders. In addition, a prospectus in
electronic format is being made available on an Internet Web site maintained by
Wit Capital. In addition, all dealers purchasing shares from Wit Capital in the
offering have agreed to make a prospectus in electronic format available on Web
sites maintained by each of these dealers. Purchases of shares from Wit Capital
are to be made through an account at Wit Capital in accordance with Wit
Capital's procedures for opening an account and transacting in securities.
In the underwriting agreement, we have granted to the underwriters an
option, exercisable no later than 30 days after the date of this prospectus, to
purchase up to an aggregate of 630,000 additional shares of common stock at the
initial public offering price, less underwriting discounts and commissions,
listed on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase approximately the same percentage which the number of shares of
common stock to be purchased by it shown in the above table bears to the total
number of shares of common stock offered by this prospectus.
At our request, the underwriters have reserved up to 250,000 shares of
common stock to be sold in the offering and offered for sale, at the public
offering price, to our directors, officers, employees, business associates and
related persons. The number of shares of common stock available for sale to the
general public will be reduced to the extent these individuals purchase the
reserved shares. Any reserved shares which are not so purchased will be offered
by the underwriters to the general public on the same basis as the other shares
offered by this prospectus.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
LifeMinders.com has agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make with respect to these liabilities.
We anticipate that our directors, officers and our significant stockholders
will agree not to directly or indirectly, without the prior written consent of
Hambrecht & Quist LLC on behalf of the underwriters, whether any such
transaction described above is to be settled by delivery of common stock or
such other securities, in cash or otherwise, during the 180-day period
following the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock (whether
any such shares or any such securities are then owned by such person or
are later acquired directly from us); or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock.
We have also agreed that we will not, without the prior written consent of
Hambrecht & Quist LLC, offer or sell any shares of common stock, options or
warrants to acquire shares of our common stock or securities exchangeable for
or convertible into shares of common stock during the 180-day period following
the date of this prospectus. We may issue shares upon the exercise of options
granted prior to the date of this prospectus, and may grant additional options
under our stock option plans, providing that, without the prior written consent
of Hambrecht & Quist LLC, the additional options shall not be exercisable
during the 180-day period.
60
<PAGE>
The restrictions described in the previous paragraph do not apply to:
. the sale to the underwriters of the shares of common stock under the
underwriting agreement;
. the issuance of shares of our common stock upon the exercise of an option
or warrant or the conversion of a security outstanding on the date of
this prospectus which is described in the prospectus;
. transactions by any person other than LifeMinders.com relating to shares
of common stock or other securities acquired in open market transactions
after the completion of the offering of the shares of common stock; or
. issuance of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on
the date of the prospectus and consistent with past practices.
The underwriters participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the common stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
permits the underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of common stock sold by the
syndicate member are purchased in syndicate covering transactions. These
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market or otherwise. Stabilizing, if commenced, may be discontinued at
any time.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead or co-
manager of 79 filed public offerings of equity securities, of which 53 have
been completed, and has acted as a syndicate member in an additional 39 public
offerings of equity securities. We have an agreement with Thomas Weisel
Partners LLC under which they provide financial advisory and investment banking
services to us. In connection with the closing of our offering of Series E
preferred stock, Thomas Weisel Partners LLC received a cash fee equal to 10% of
the proceeds of the offering. Thomas Weisel Partners LLC does not have any
other material relationship with us or any of our officers, directors or
controlling persons, except with respect to its contractual relationship with
us under the underwriting agreement entered into in connection with this
offering.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the managing underwriters. The
National Association of Securities Dealers, Inc. approved the membership of Wit
Capital on September 4, 1997. Since that time, Wit Capital has acted as an
underwriter, e-manager or selected dealer in over 125 public offerings. Except
for its participation as a manager in the offering, Wit Capital has no
relationship with us or any of our affiliates.
Determination of Offering Price
Prior to the offering, there has been no public market for the common stock.
The initial public offering price for the common stock was determined by
negotiation among LifeMinders.com and the representatives of the underwriters.
The factors that were considered in determining the initial public offering
price were prevailing market and economic conditions, our revenue and earnings,
market valuations of other companies engaged in activities similar to us,
estimates of our business potential and prospects, the present state of our
business operations, our management and other factors deemed relevant.
61
<PAGE>
LEGAL MATTERS
The legality of the securities in this offering has been passed upon for us
by our counsel, Venable, Baetjer and Howard, LLP, of McLean, Virginia. Agreed
upon legal matters will be passed upon for the underwriters by its counsel,
Brobeck, Phleger & Harrison LLP of Washington, DC.
EXPERTS
Our financial statements at December 31, 1997, 1998 and September 30, 1999,
and for the period from August 9, 1996 (Date of Inception) through December 31,
1996, and for the years ended December 31, 1997 and 1998, and for the nine
month periods ended September 30, 1998 and 1999 appearing in this prospectus
and registration statement have been audited by PricewaterhouseCoopers LLP,
independent accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered hereby. This
prospectus does not contain all the information set forth in the registration
statement and the exhibits and schedules filed therewith. For further
information with respect to LifeMinders.com and the common stock offered
hereby, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and each such statement is qualified in all respects by reference to
the full text of such contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and the exhibits
and schedules filed therewith may be inspected without charge at the public
reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W.
Washington, D.C. 20549, and at the SEC's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the registration statement may be
obtained from such offices upon payment of the fees prescribed by the SEC. The
SEC maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of the site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the SEC. Such periodic reports, proxy
statements and other information will be available for inspection and copying
at the regional offices, public reference facilities and Web site of the SEC
referred to above.
62
<PAGE>
LIFEMINDERS.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Accountants...................................... F-2
Balance Sheets as of December 31, 1997, 1998 and September 30, 1999.... F-3
Statements of Operations for the period from August 9, 1996 (date of
inception) to December 31, 1996, for the years ended December 31, 1997
and 1998 and for the nine month periods ended September 30, 1998 and
1999.................................................................. F-4
Statements of Changes in Stockholders' Equity (Deficit) for the period
from August 9, 1996 (date of inception) to December 31, 1996, for the
years ended December 31, 1997 and 1998 and for the nine month period
ended September 30, 1999.............................................. F-5
Statements of Cash Flows for the period from August 9, 1996 (date of
inception) to December 31, 1996, for the years ended December 31, 1997
and 1998 and for the nine month periods ended September 30, 1998 and
1999.................................................................. F-6
Notes to Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
LifeMinders.com, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of LifeMinders.com,
Inc. (the Company) at December 31, 1997, 1998 and September 30, 1999 and the
results of its operations and its cash flows for the period from August 9, 1996
(date of inception) to December 31, 1996, and for each of the years ended
December 31, 1997, 1998, and for each of the nine month periods ended September
30, 1998 and 1999 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
October 21,1999
F-2
<PAGE>
LIFEMINDERS.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, Pro forma at
---------------------- September 30, September 30,
1997 1998 1999 1999
--------- ----------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents.............. $ 792,553 $ 232,073 $11,279,137
Accounts receivable, net.. -- -- 4,167,570
Prepaid expenses and other
current assets........... -- -- 6,990,942
--------- ----------- -----------
Total current assets...... 792,553 232,073 22,437,649
Property and equipment,
net....................... 4,599 46,228 2,736,653
Deferred offering costs.... -- -- 174,284
--------- ----------- -----------
Total assets.............. $ 797,152 $ 278,301 $25,348,586
========= =========== ===========
Liabilities, Mandatorily
Redeemable Convertible
Preferred Stock and
Stockholders' Equity
(Deficit)
Current liabilities:
Accounts payable.......... $ -- $ 42,368 $ 3,273,231
Accrued expenses.......... 48,486 79,972 1,036,241
Deferred revenue.......... -- 355,000 120,274
Note payable.............. -- -- 67,494
--------- ----------- -----------
Total current
liabilities.............. 48,486 477,340 4,497,240
Note payable, net of
current portion........... -- -- 94,492
Deferred rent.............. -- -- 38,925
--------- ----------- -----------
Total liabilities......... 48,486 477,340 4,630,657
--------- ----------- -----------
Commitments and
contingencies
Mandatorily redeemable
convertible preferred
stock:
Series A, $.01 par value;
1,000,000 shares
authorized, issued and
outstanding at December
31, 1997, 1998 and
September 30, 1999
(liquidation preference
of $1,524,002 as of
September 30, 1999)...... 866,338 980,486 1,054,704
Series B, $.01 par value;
1,000,000 authorized
shares; no shares issued
and outstanding at
December 31, 1997 and
1,000,000 shares issued
and outstanding at
December 31, 1998 and
September 30, 1999
(liquidation preference
of $1,476,224 as of
September 30, 1999)...... -- 1,042,889 1,102,889
Series C, $.01 par value;
2,620,373 authorized
shares; no shares issued
at December 31, 1997 and
1998; 2,620,373 shares
issued and outstanding at
September 30, 1999
(liquidation preference
of $4,993,333 as of
September 30, 1999)...... -- -- 4,135,596
Series D, $.01 par value;
2,252,874 authorized
shares; no shares issued
at December 31, 1997 and
1998; 2,252,874 shares
issued and outstanding at
September 30, 1999
(liquidation preference
of $13,497,333 as of
September 30, 1999)...... -- -- 10,774,839
Series E, $.01 par value;
2,791,993 authorized
shares; no shares issued
at December 31, 1997 and
1998; 2,791,993 shares
issued and outstanding at
September 30, 1999
(liquidation preference
of $31,042,639 as of
September 30, 1999)...... -- -- 20,652,762
--------- ----------- -----------
Total mandatorily
redeemable convertible
preferred stock.......... 866,338 2,023,375 37,720,790
--------- ----------- -----------
Stockholders' equity
(deficit):
Common stock, $.01 par
value; 6,250,000 and
6,550,000 and 25,000,000
shares authorized at
December 31, 1997 and
1998 and September 30,
1999 respectively;
3,274,998 shares issued
and outstanding at
December 31, 1997, 1998
and 3,349,373 shares
issued and outstanding at
September 30, 1999 ...... 32,750 32,750 33,494 154,309
Additional paid-in
capital.................. 363,751 206,215 2,027,253 39,627,228
Deferred compensation on
employee stock options... -- -- (2,148,988) (2,148,988)
Accumulated deficit....... (514,173) (2,461,379) (16,914,620) (16,914,620)
--------- ----------- ----------- -----------
Total stockholders' equity
(deficit)................ (117,672) (2,222,414) (17,002,861) $20,717,929
--------- ----------- ----------- ===========
Total liabilities,
mandatorily redeemable
convertible preferred
stock and stockholders'
equity (deficit)......... $ 797,152 $ 278,301 $25,348,586
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LIFEMINDERS.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the
period
August 9,
1996
(date of For the nine month periods
inception), For the year ended ended
to December 31, September 30,
December 31, ---------------------- ---------------------------
1996 1997 1998 1998 1999
------------ --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Advertising............ $ -- $ 67,126 $ 56,750 $ 26,750 $ 4,064,962
Opt-in................. -- -- -- -- 1,914,531
-------- --------- ----------- ------------ -------------
Total revenue......... -- 67,126 56,750 26,750 5,979,493
Cost of revenue......... -- 37,249 59,472 30,500 471,907
-------- --------- ----------- ------------ -------------
Gross margin (loss)..... -- 29,877 (2,722) (3,750) 5,507,586
-------- --------- ----------- ------------ -------------
Operating expenses:
Sales and marketing.... 15,965 147,325 868,706 591,359 16,465,006
Research and
development........... 9,800 240,498 373,788 285,784 1,012,603
General and
administrative........ 9,308 127,132 726,505 485,634 2,338,784
Stock-based
compensation.......... -- -- -- -- 268,671
-------- --------- ----------- ------------ -------------
Total operating
expenses............. 35,073 514,955 1,968,999 1,362,777 20,085,064
-------- --------- ----------- ------------ -------------
Loss from operations.... (35,073) (485,078) (1,971,721) (1,366,527) (14,577,478)
Interest income, net.... -- 5,978 24,515 22,550 124,237
-------- --------- ----------- ------------ -------------
Net loss.............. (35,073) (479,100) (1,947,206) (1,343,977) (14,453,241)
Accretion on mandatorily
redeemable convertible
preferred stock........ -- -- (157,037) (108,500) (664,377)
-------- --------- ----------- ------------ -------------
Net loss available to
common stockholders.... $(35,073) $(479,100) $(2,104,243) $ (1,452,477) $ (15,117,618)
======== ========= =========== ============ =============
Basic and diluted net
loss per common share.. $ (0.04) $ (0.19) $ (0.64) $ (0.44) $ (4.59)
======== ========= =========== ============ =============
Weighted average common
shares and common share
equivalents............ 798,220 2,530,228 3,275,000 3,275,000 3,296,181
======== ========= =========== ============ =============
Unaudited pro forma data
(Note 2):
Basic and diluted net
loss per common
share................. $ (0.40) $ (1.50)
=========== =============
Weighted average common
shares and common
share equivalents..... 5,202,083 10,082,775
=========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LIFEMINDERS.COM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deferred
Common stock Common stock stock
Common stock Class A Class B Additional compensation Treasury stock
----------------- -------------- ------------- paid-in on employee Accumulated ----------------
Shares Amount Shares Amount Shares Amount capital stock options deficit Shares Amount
--------- ------- ------ ------ ------ ------ ---------- ------------- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
Class A common
stock at
inception on
August 9, 1996.. -- $ -- 1,250 $ 13 -- $ -- $ 9,987 $ -- $ -- -- $ --
Net loss........ -- -- -- -- -- -- -- -- (35,073) -- --
--------- ------- ------ ----- ---- ----- ---------- ----------- ------------ -------- -----
Balance,
December 31,
1996............ -- -- 1,250 13 -- -- 9,987 -- (35,073) -- --
Issuance of
Class B common
stock........... -- -- -- -- 374 4 52,561 -- -- -- --
Conversion of
Class B common
stock to
Series A common
stock........... -- -- 536 5 (374) (4) (1) -- -- -- --
Issuance of
1,618.6144
shares of common
stock for each
Class A common
stock share and
cancellation of
Class A common
stock........... 2,891,248 28,913 (1,786) (18) -- -- (28,895) -- -- -- --
Conversion of
note payable to
common stock.... 321,250 3,212 -- -- -- -- 196,788 -- -- -- --
Issuance of
stock options to
purchase common
stock in
connection with
the Series A
convertible
preferred stock
issuance........ -- -- -- -- -- -- 38,000 -- -- -- --
Issuance of
common stock.... 62,500 625 -- -- -- -- (525) -- -- -- --
Issuance of
warrants in
connection with
the Series A
convertible
preferred stock
issuance........ -- -- -- -- -- -- 51,000 -- -- -- --
Contribution by
stockholder..... -- -- -- -- -- -- 20,200 -- -- -- --
Forgiveness of
loan payable to
stockholders in
lieu of
contributions... -- -- -- -- -- -- 24,636 -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (479,100) -- --
--------- ------- ------ ----- ---- ----- ---------- ----------- ------------ -------- -----
Balance,
December 31,
1997............ 3,274,998 32,750 -- -- -- -- 363,751 -- (514,173) -- --
Acquisition of
treasury stock.. -- -- -- -- -- -- -- -- -- 62,500 (500)
Exercise of
stock option in
connection with
the preferred
stock offering.. -- -- -- -- -- -- (499) -- -- (62,500) 500
Accretion on
mandatorily
redeemable
convertible
preferred
stock........... -- -- -- -- -- -- (157,037) -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (1,947,206) -- --
--------- ------- ------ ----- ---- ----- ---------- ----------- ------------ -------- -----
Balance,
December 31,
1998............ 3,274,998 32,750 -- -- -- -- 206,215 -- (2,461,379) -- --
Accretion on
mandatorily
redeemable
convertible
preferred stock
................ -- -- -- -- -- -- (664,377) -- -- -- --
Exercise of
stock options .. 74,375 744 -- -- -- -- 58,756 -- -- -- --
Issuance of
stock options in
exchange for
services ....... -- -- -- -- -- -- 9,000 -- -- -- --
Deferred
compensation ... -- -- -- -- -- -- 2,417,659 (2,417,659) -- -- --
Amortization of
deferred
compensation ... -- -- -- -- -- -- -- 268,671 -- -- --
Net loss ....... -- -- -- -- -- -- -- (14,453,241) -- --
--------- ------- ------ ----- ---- ----- ---------- ----------- ------------ -------- -----
Balance,
September 30,
1999 ........... 3,349,373 $33,494 -- $ -- -- $ -- $2,027,253 $(2,148,988) $(16,914,620) -- $ --
========= ======= ====== ===== ==== ===== ========== =========== ============ ======== =====
<CAPTION>
Total
-------------
<S> <C>
Issuance of
Class A common
stock at
inception on
August 9, 1996.. $ 10,000
Net loss........ (35,073)
-------------
Balance,
December 31,
1996............ (25,073)
Issuance of
Class B common
stock........... 52,565
Conversion of
Class B common
stock to
Series A common
stock........... --
Issuance of
1,618.6144
shares of common
stock for each
Class A common
stock share and
cancellation of
Class A common
stock........... --
Conversion of
note payable to
common stock.... 200,000
Issuance of
stock options to
purchase common
stock in
connection with
the Series A
convertible
preferred stock
issuance........ 38,000
Issuance of
common stock.... 100
Issuance of
warrants in
connection with
the Series A
convertible
preferred stock
issuance........ 51,000
Contribution by
stockholder..... 20,200
Forgiveness of
loan payable to
stockholders in
lieu of
contributions... 24,636
Net loss........ (479,100)
-------------
Balance,
December 31,
1997............ (117,672)
Acquisition of
treasury stock.. (500)
Exercise of
stock option in
connection with
the preferred
stock offering.. 1
Accretion on
mandatorily
redeemable
convertible
preferred
stock........... (157,037)
Net loss........ (1,947,206)
-------------
Balance,
December 31,
1998............ (2,222,414)
Accretion on
mandatorily
redeemable
convertible
preferred stock
................ (664,377)
Exercise of
stock options .. 59,500
Issuance of
stock options in
exchange for
services ....... 9,000
Deferred
compensation ... --
Amortization of
deferred
compensation ... 268,671
Net loss ....... (14,453,241)
-------------
Balance,
September 30,
1999 ........... $(17,002,861)
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
LIFEMINDERS.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
period
August 9,
1996 (date
of For the nine month
inception) For the year ended periods ended
to December 31, September 30,
December 31, ----------------------- -------------------------
1996 1997 1998 1998 1999
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(35,073) $ (479,100) $(1,947,206) $(1,343,977) $(14,453,241)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation.......... -- 271 8,234 4,529 200,894
Allowance for doubtful
accounts receivable.. -- -- -- -- 201,232
Amortization of
deferred compensation
on employee stock
options.............. -- -- -- -- 268,671
Issuance of common
stock and stock
options in exchange
for services......... -- 2,565 -- -- 9,000
Changes in assets and
liabilities:
Accounts receivable.. -- -- -- (106,750) (4,368,802)
Prepaid expenses and
other current
assets.............. -- -- -- -- (6,990,942)
Deferred offering
costs............... -- -- -- -- (174,284)
Accounts payable..... -- -- 42,368 60,051 3,230,863
Accrued expenses..... -- 48,486 31,486 (48,486) 956,269
Deferred revenue..... -- -- 355,000 105,000 (234,726)
Deferred rent........ -- -- -- -- 38,925
-------- ---------- ----------- ----------- ------------
Net cash used in
operating
activities......... (35,073) (427,778) (1,510,118) (1,329,633) (21,316,141)
-------- ---------- ----------- ----------- ------------
Cash flows from
investing activities:
Acquisition of
property and
equipment............ -- (4,870) (49,863) (43,401) (2,891,319)
-------- ---------- ----------- ----------- ------------
Net cash used in
investing
activities......... -- (4,870) (49,863) (43,401) (2,891,319)
-------- ---------- ----------- ----------- ------------
Cash flows from
financing activities:
Proceeds from
borrowings on notes
payable to
stockholders......... 35,236 53,319 -- -- --
Payments on notes
payable to
stockholders......... (10,000) (53,919) -- -- --
Issuance of preferred
stock................ -- 1,000,000 -- -- 37,178,289
Cash paid for offering
costs in connection
with issuance of
preferred stock...... -- (44,662) -- -- (2,145,251)
Proceeds from the
exercise of Series B
preferred warrants... -- -- 1,000,000 1,000,000 --
Proceeds from issuance
of note payable...... -- 200,000 -- -- 161,986
Purchase of treasury
stock................ -- -- (500) (500) --
Proceeds from issuance
of common stock...... 10,000 50,100 1 1 --
Exercise of stock
options.............. -- -- -- -- 59,500
Stockholder cash
capital
contribution......... -- 20,200 -- -- --
-------- ---------- ----------- ----------- ------------
Net cash provided by
financing
activities......... 35,236 1,225,038 999,501 999,501 35,254,524
-------- ---------- ----------- ----------- ------------
Net increase (decrease)
in cash and cash
equivalents........... 163 792,390 (560,480) (373,533) 11,047,064
Cash and cash
equivalents, beginning
of period............. -- 163 792,553 792,553 232,073
-------- ---------- ----------- ----------- ------------
Cash and cash
equivalents, end of
period................ $ 163 $ 792,553 $ 232,073 $ 419,020 $ 11,279,137
======== ========== =========== =========== ============
Supplemental
disclosures of non-
cash investing and
financing activities:
Conversion of note
payable to common
stock................ $ -- $ 200,000 $ -- $ -- $ --
======== ========== =========== =========== ============
Forgiveness of notes
payable to
stockholders......... $ -- $ 24,636 $ -- $ -- $ --
======== ========== =========== =========== ============
Conversion of notes
payable due to
stockholders to
common stock......... $ 10,000 $ -- $ -- $ -- $ --
======== ========== =========== =========== ============
Issuance of common
stock in exchange for
services............. $ -- $ 2,565 $ -- $ -- $ --
======== ========== =========== =========== ============
Issuance of warrants
in connection with
Series A convertible
preferred stock
issuance............. $ -- $ 51,000 $ -- $ -- $ --
======== ========== =========== =========== ============
Issuance of stock
options in exchange
for services......... $ -- $ -- $ -- $ -- $ 9,000
======== ========== =========== =========== ============
Accretion of
mandatorily
redeemable
convertible preferred
stock................ $ -- $ -- $ 157,037 $ 108,500 $ 664,377
======== ========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Financing of Start-Up Operations
LifeMinders is an online direct marketing company that provides personalized
content and advertisements via e-mail to a community of members. E-mail
messages contain reminders and tips that enable the Company's members to better
organize and manage their lives. Proprietary member information and targeting
capabilities provide advertising partners the opportunity to more effectively
reach their target audiences.
The Company was incorporated in Maryland on August 9, 1996 ("Date of
Inception") under the name of MinderSoft, Inc. In January 1999, we changed our
name to LifeMinders.com, Inc. The Company was reincorporated in Delaware in
July 1999. From 1996 to 1998, the Company entered into arrangements with
national retailers to distribute reminder products in software form on disk. In
late 1998, the Company revised its strategy to become an online direct
marketing company that provides personalized content and advertisements via e-
mail to a loyal community of members.
On October 21, 1999, the Board of Directors approved a 5 for 4 common stock
split in connection with the filing of its initial public offering. The
conversion ratio of the mandatorily redeemable convertible preferred stock will
be adjusted from a 1 for 1 conversion ratio to a 5 for 4 conversion ratio in
connection with the stock split. The financial statements of the Company,
including all shares and per share data, have been retroactively restated to
reflect the 5 for 4 common stock split for all periods presented.
The Company was considered to be in the development stage from inception
through March 31, 1999 as it was devoting substantially all of its efforts to
establishing a new business, developing the design of its database marketing
product, raising capital, financial planning and market development. Although
revenue commenced in 1997 and continued during 1998, this revenue was generated
from distribution arrangements for its software based products and not from
planned principal operations. During the three month period ended March 31,
1999, the Company generated revenue of $23,322 (unaudited) from planned
operations. Subsequent to March 31, 1999, the Company ceased being a
development stage enterprise generating revenue of approximately $6 million
from planned principal operations which consisted of Internet related services.
Initial Public Offering and Unaudited Pro Forma stockholders' equity
(deficit)--In September 1999, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission (SEC) that
would permit the Company to sell shares of common stock in connection with a
proposed initial public offering (IPO). If the IPO is consummated under the
terms presently anticipated, upon the closing of the proposed IPO all of the
then outstanding shares of the Company's mandatorily redeemable convertible
preferred stock will automatically convert into shares of common stock on a
five for four basis. The conversion of the convertible preferred stock has been
reflected in the accompanying unaudited pro forma stockholders' equity as if it
had occurred on September 30, 1999.
2. Summary of Significant Accounting Policies
The significant accounting policies followed by the Company in the
preparation of these financial statements are as follows:
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.
F-7
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
Highly liquid investments having original maturities of 90 days or less at
the date of acquisition are classified as cash equivalents. The carrying value
of cash equivalents approximate fair value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to five years. When property and equipment is retired or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and the resulting gain or loss is included in
operations.
Research and Development Costs
Research and development costs are expensed as incurred.
Revenue Recognition
During 1997 and 1998, the Company's revenue was generated from distribution
agreements for software-based products. Revenue from these agreements has been
recognized as the services were performed.
During 1999, revenue was generated primarily by advertising and opt-in
services.
Advertising
Advertising arrangements consist primarily of advertisements that are
displayed with the Company's e-mails. Generally, advertisers pay the
Company and the Company recognizes revenue on a per e-mail basis, based on
the number of e-mails delivered to the Company's members in which the
advertisements are displayed. From time to time, the Company may guarantee
a minimum number of e-mails to be delivered containing an advertisement
directed at a specific group. Under these contracts, the Company is not
required to forfeit fees received for e-mails previously delivered. We have
historically fulfilled our guaranteed minimum number of e-mails and have
not had any disputes with advertisers regarding the guaranteed minimum
number of e-mails. Currently, there are no contracts that have a guaranteed
minimum number of e-mails that will generate a material amount of revenues.
The Company may also guarantee a minimum number of sales orders for the
advertiser based on the e-mails delivered. Under these contracts the
Company defers all revenue until notification is received from the
advertiser that the minimum number of sales orders have been achieved by
the advertiser. In addition, the Company may provide advertisers the
opportunity for the exclusive right to sponsor advertisements within a
specific e-mail category for a specified period of time for a fixed fee.
Under these contracts the Company recognizes revenue during the period the
advertisement is displayed in the Company's e-mails since there is no
obligation to provide a minimum number of e-mails for that individual
advertiser during the specific period. The Company's advertising contracts
generally have average terms ranging from one to six months.
Advertising revenue also includes barter transactions, where the Company
exchanges advertising space on their e-mails for reciprocal advertising
space or traffic on other Web sites. Revenue from these barter transactions
is recorded at the estimated fair value of the advertisements delivered and
is recognized when the advertisements are included in the Company's e-
mails. No gain or loss results from these barter transactions as the
revenue recognized equals the advertising costs incurred. For the nine
month period ended September 30, 1999, barter revenue was less than 5% of
net revenues. LifeMinders.com did not enter into barter transactions prior
to 1999.
F-8
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Opt-in Services
Revenue is recognized as affirmative member responses to the
advertisers' newsletters and other promotions offered during the Company's
sign up process. The Company derives revenue from its services through fees
that its opt-in advertising partners pay. The Company records revenue net
of estimated duplicate member responses to its opt-in partners' newsletters
and other promotions.
Duplicate member responses are names the Company provides to opt-in
advertising partners for which the Company's members have previously
registered either through the Company's sign up process or with the
Company's opt-in advertising partners directly. For the nine month period
ended September 30, 1999, revenue was recorded net of approximately
$443,000 for estimated duplicate member responses to the Company's opt-in
partners' newsletters and other promotions.
Cash received in advance of advertising and opt-in services is recorded as
deferred revenue and recognized as revenue as services are performed.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist of cash and cash equivalents and accounts receivable.
The Company's cash and cash equivalents are maintained at one U.S. financial
institution. Deposits held with banks may exceed the amount of insurance
provided on such deposits. The majority of the Company's cash equivalents are
invested in short-term commercial paper.
Revenue for the years ended December 31, 1997 and 1998 and accounts
receivable as of September 30, 1999 were concentrated as follows (amounts
represent the percentage of total revenue and accounts receivable),
respectively:
<TABLE>
<CAPTION>
Accounts
Revenue Receivable
------------ -------------
For the
year ended
December 31,
------------ September 30,
1997 1998 1999
------------ -------------
<S> <C> <C> <C>
Lowes............................................. 100% * *
The Home Depot.................................... * 88.1% *
Netcentives....................................... * * 13.7%
PETsMART.com...................................... * * 12.9%
</TABLE>
* Represents less than 10% of total.
Advertising Costs
Costs related to advertising and promotion of services is charged to sales
and marketing expense as incurred. Cash paid in advance of advertising and
services received is recorded as prepaid expenses which is amortized as
services are received. Advertising costs for the years ended December 31, 1996,
1997, 1998 and for the nine months ended September 30, 1998 were considered
immaterial. Advertising costs for the nine months ended September 30, 1999 were
approximately $15,666,000. At September 30, 1999, approximately $6,779,000 of
prepaid advertising expense is included in prepaids and other current assets.
F-9
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
Prior to November 1997, the Company was organized as an S Corporation and
taxable income was included in the individual tax returns of the stockholders.
In conjunction with the Company's preferred stock financing during 1997, the
Company terminated its Subchapter S corporation election for tax. The Company,
now a C corporation, is subject to federal and state income taxes and
recognizes deferred taxes using the liability approach under which deferred
income taxes are calculated based on the differences between the financial and
tax bases of assets and liabilities based upon enacted tax laws and rates
applicable to the periods in which the taxes become payable. The Company
provides a valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value.
The provision for income taxes consists of the Company's current tax
provision (benefit) for federal and state income taxes and the changes in the
deferred tax asset and liability during the period.
Stock Based Compensation
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic value method and provides pro forma
disclosures of net loss as if the fair value method had been applied in
measuring compensation expense. Under the intrinsic value method of accounting
for stock-based compensation, when the exercise price of options granted to
employees is less than the estimated fair value of the underlying stock on the
date of grant, deferred compensation is recognized and is amortized to
compensation expense over the applicable vesting period.
Impairment of Long-lived Assets
The Company evaluates the recoverability of the carrying value of its long-
lived assets periodically. The Company considers historical performance and
anticipated future results in its evaluation of potential impairment.
Accordingly, when indicators of impairment are present, the Company evaluates
the carrying value of these assets in relation to the operating performance of
the business and future discounted and undiscounted cash flows expected to
result from the use of these assets. Impairment losses are recognized when the
sum of expected future cash flows are less than the assets' carrying value. No
such impairment losses have been recognized to date.
Basic and Diluted Net Loss Per Common Share
Basic net loss per common share is based on the weighted average number
shares of common stock outstanding during each year. Diluted net loss per
common share is based on the weighted average number of shares of common stock
outstanding during each year, adjusted for the effect of common stock
equivalents arising from the assumed exercise of stock options, if dilutive.
Pro Forma Net Loss Per Share (unaudited)
Pro forma net loss per share for the year ended December 31, 1998 and for
the nine months ended September 30, 1999 is computed using the weighted average
number of common shares outstanding including the pro forma effects of the
automatic conversion of the Company's Series A, Series B, Series C, Series D
and Series E preferred stock outstanding as of September 30, 1999 into shares
of the Company's common stock effective upon the closing of the Company's
initial public offering. The resulting pro forma adjustment results in an
increase in the weighted average shares used to compute basic and diluted net
loss per share of 1,927,083 shares for the year ended December 31, 1998 and
6,786,594 shares for the nine
F-10
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
months ended September 30, 1999 and a pro forma basic and diluted net loss per
common share of $0.40 and $1.50, respectively. Pro forma common equivalent
shares, comprised of incremental common shares issuable upon the exercise of
stock options, are not included in the pro forma diluted net loss per share
because they would be antidilutive.
Comprehensive Income
The Company has adopted the accounting treatment prescribed by SFAS 130,
Comprehensive Income. The adoption of this statement had no impact on the
Company's financial statements because the Company did not have any other
comprehensive income components other than net loss during the periods
presented.
Certain Risks and Uncertainties
The Company is subject to all the risks inherent in an early stage business
in the technology industry. The risks include, but are not limited to, limited
operating history, limited management resources, reliance on distribution
arrangements for software based products for revenue where acceptance of the
Company's service on the Internet is uncertain, reliance on relationships with
a limited number of customers, dependence on the Internet and related security
risks and the changing nature of the Internet industry.
3. Accounts Receivable
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Accounts receivable.......................................... $4,368,802
Allowance for doubtful accounts.............................. (201,232)
----------
Accounts receivable, net..................................... $4,167,570
==========
</TABLE>
4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------ ------- -------------
<S> <C> <C> <C>
Furniture and fixtures...................... $ -- $22,204 $ 303,691
Computer equipment.......................... 4,870 32,529 2,211,887
Leasehold improvements...................... -- -- 430,474
------ ------- ----------
4,870 54,733 2,946,052
Less: accumulated depreciation (271) (8,505) (209,399)
------ ------- ----------
Property and equipment, net................. $4,599 $46,228 $2,736,653
====== ======= ==========
</TABLE>
5. Borrowings
Line of Credit
In November 1998, the Company entered into a $600,000 working capital line
of credit with a bank. The line of credit was increased to $1,000,000 upon the
receipt of $4,000,000 from institutional venture capital investors in January
1999 in connection with the issuance of Series C mandatorily redeemable
convertible preferred stock. The interest rate on the line is the bank's prime
rate plus 1.0% per annum
F-11
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(8.75% at December 31, 1998 and 9.25% at September 30, 1999). The line of
credit is collateralized by substantially all the Company's assets, including
intangible assets and future proceeds from such assets. Prior to amendment in
August 1999, the credit line included financial and other covenants, including
a requirement to maintain a monthly quick ratio of 1 to 1.
In March 1999, the working capital line of credit of $1,000,000 was reduced
by $150,000 which was allocated for a bank credit line.
On August 19, 1999, the Company amended the $1,000,000 line of credit, which
includes $850,000 for working capital expenditures and $150,000 for a business
credit line, to be increased to $1,350,000 which includes $1,000,000 for
working capital expenditures, $250,000 for a business credit line, and a
$100,000 letter of credit for leased office space. The line and business credit
line expire on November 10, 1999. No borrowings were outstanding under the line
of credit as of December 31, 1998 and September 30, 1999.
In connection with the amendment, the Company is no longer required to
maintain a monthly quick ratio financial covenant of 1 to 1. Fees paid to the
bank in relation to the amendment of the line and waiver of the quick ratio
financial covenant totaled $50,000.
Note Payable
On March 3, 1999, the Company entered into a $200,000 promissory note with
the same bank that the Company has the line of credit, for the purpose of
equipment and software purchases and general working capital. The Company can
draw from the note through November 10, 1999 (draw period). Interest during the
draw period is due monthly beginning April 10, 1999 at an annual interest rate
of the bank's prime rate plus 1.0%. On November 10, 1999, the outstanding
principal balance of the borrowings during the draw period are payable monthly
in 24 equal principal payments commencing on December 10, 1999. All remaining
principal and accrued but unpaid interest is due on maturity of November 9,
2001. The promissory note is collateralized under the same terms of the line of
credit discussed earlier and includes financial and other covenants, including
a requirement to maintain a minimum monthly quick ratio of 1.25 to 1. At
September 30, 1999, $161,986 was outstanding under this agreement.
6. Mandatorily Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit)
Common Stock
On August 9, 1996, the founders of the Company purchased 1,250 shares of the
Company's Class A common stock for $10,000 in connection with the Company's
formation.
In June 1997, the founders were issued 374 shares of Class B common stock
for a combination of $50,000 in cash and services valued at $2,565. The
estimated fair value of services provided was determined by the Board of
Directors.
On October 15, 1997, the Company completed a plan of recapitalization which
converted the 374 shares of Class B common stock to 536 shares of Class A
common stock. Subsequent to the conversion the Class B common stock was
retired.
On November 12, 1997, the Company issued 1,618.6144 shares of common stock
for each share of Class A common stock held by stockholders at such date. Upon
the issuance of the 2,891,248 shares of common stock, 1,786 shares of Class A
common stock were retired.
F-12
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
On November 12, 1997, the Company converted a $200,000, 7% Nonassignable
Convertible Note into 321,250 shares of common stock.
On November 12, 1997, the Company issued one non-employee options to
purchase 62,500 shares of common stock for $100 in connection with a consulting
agreement for services to raise capital for the Company. These options had a
fair value of $38,000 which were recorded as direct issuance costs and offset
against the proceeds. The options were exercised on November 12, 1997. The
estimated fair value of the options were determined using the American Black-
Scholes Model.
In June 1998, the Company purchased 62,500 shares of common stock at $0.01
per share from the founders of the Company. These treasury shares were re-
issued as result of one non-employee exercising a stock option granted during
1997 in the Series A mandatorily redeemable convertible preferred stock
issuance. The total exercise price was $1.00.
Mandatorily Redeemable Convertible Preferred Stock
As of December 31, 1998, the Company had authorized two classes of
mandatorily redeemable convertible preferred stock: Series A and Series B.
The Company issued 1,000,000 shares of Series A mandatorily redeemable
convertible preferred stock on November 12, 1997 for $1.00 per share. In
conjunction with this preferred stock sale, the Company issued warrants to
purchase 1,000,000 shares of Series B mandatorily redeemable convertible
preferred stock at $1.00 per share with an estimated fair value of $51,000
determined using the American Black-Scholes Model. The Series A shares have
cumulative preferred dividends of $0.08 per share annually.
On June 17, 1998, the Company issued 1,000,000 shares of Series B preferred
stock at $1.00 per share for total proceeds of $1,000,000 resulting from the
exercise of the Series B preferred stock warrants granted in 1997. The Series B
preferred stock carry the same terms and conditions as the Series A preferred
stock.
In January 1999, the Company amended its Articles of Incorporation to
authorize 2,620,373 shares of $0.01 par value Series C mandatorily redeemable
convertible preferred stock and to include the Series A and Series B Preferred
Stock as mandatorily redeemable shares. Each shareholder of preferred stock has
the right to require the Company to redeem their respective shares upon the
earlier of (1) the fifth anniversary of the issuance of the Series C Preferred
Stock or (2) the occurrence of a liquidation and or material and incurable
breach by the Company of the Amended and Restated Articles of Incorporation.
The redemption price is equal to the original issuance price of each respective
share, plus all accrued but unpaid dividends. As of September 30, 1999, the
preferred stock carrying value has been accreted to increase the carrying value
for cumulative dividends and a portion of direct issuance costs.
On January 29, 1999, the Company issued 2,620,373 shares of Series C
convertible preferred stock at an approximate price of $1.53 per share and
total proceeds of $4,000,000. The Series C preferred stock are mandatorily
redeemable and have the same redemption rights as Series A preferred stock and
Series B preferred stock. The Series C shares have cumulative preferred
dividends of $0.08 per share annually.
On May 28, 1999, the Company Amended and Restated its Articles of
Incorporation to authorize 2,252,874 shares of Series D mandatorily redeemable
convertible preferred stock and issued 2,252,874 shares of Series D convertible
preferred stock at an approximate price of $4.71 per share and total proceeds
F-13
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
of $10,600,000. The Series D preferred stock are to be included as mandatorily
redeemable shares. In the May 28, 1999 Amendment to the Articles of
Incorporation, the mandatory redemption date for the Series A, Series B and
Series C convertible preferred stock has been amended to be the same as the
Series D shares which is upon the earlier of (1) the fifth anniversary of the
issuance of Series D convertible preferred stock or (2) the occurrence of a
liquidation and/or material and incurable breach by the Company of the Amended
and Restated Articles of Incorporation. The redemption price is equal to the
original issuance price of each respective share, plus all accrued but unpaid
dividends. As of September 30, 1999, the preferred stock carrying value has
been accreted to increase the carrying value for cumulative dividends and a
portion of direct issuance costs.
The Series D and have the same redemption rights as Series A, Series B and
Series C preferred stock. The Series D shares have cumulative preferred
dividends of $0.08 per share annually.
On September 22, 1999, the Company amended and restated its Articles of
Incorporation to authorize 2,791,993 shares of Series E mandatorily redeemable
convertible preferred stock. On September 23, 1999, the Company issued
2,791,993 shares of Series E mandatorily redeemable convertible preferred stock
at an approximate price of $8.09 per share for cash proceeds of approximately
$22.6 million. The Series E mandatorily redemption date and rights are the same
as the Series A, Series B, Series C and Series D discussed earlier. The
redemption price is equal to the original issuance price, plus all accrued but
unpaid dividends. As of September 30, 1999, the preferred stock carrying value
has been accreted to increase the carrying value for cumulative dividends and a
portion of direct issuance costs. The Series E shares have cumulative preferred
dividends of $0.08 per share annually.
Conversion
Each share of preferred stock is convertible into common stock at the option
of the holder at any time at the initial conversion ratio of 1 for 1. The
conversion ratio is subject to adjustment for events such as a stock split,
stock dividend, or certain issuances of stock. At December 31, 1997 and 1998
the conversion ratio was 1 to 1 and subsequent to September 30, 1999, the
conversion ratio was adjusted 5 for 4, giving effect to the October 21, 1999
common stock split.
Automatic conversion is required if at any time the Company shall effect an
initial public offering in which the value of the Company is at least
$30,000,000 in an offering of not less than $10,000,000, before deduction of
underwriting discounts and registration expenses.
In the January 29, 1999 Amendment to the Articles of Incorporation, the
automatic conversion of convertible preferred stock has been amended to convert
upon an initial public offering, net of underwriters' discounts, commissions
and registration expense, of at least $15,000,000 and at an offering price in
which assuming the conversion of all preferred stock and stock options and
other securities exercisable by the Company at that time would be included in
the number of common shares multiplied by the offering price would exceed at
least $45,000,000 net of underwriters' discounts, commissions and registration
expense.
In the May 28, 1999 Amendment of the Articles of Incorporation, automatic
conversion of convertible preferred stock has been amended to convert upon an
initial public offering, net of any and all underwriters' discounts,
commissions and expenses and registration expenses, of at least $20,000,000 and
at an offering price per share of common stock that is equal or greater than
two times the current applicable conversion price for the Series D convertible
preferred stock.
F-14
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As amended in the September 22, 1999 Amended and Restated Articles of
Incorporation, automatic conversion is required if at any time the Company
shall effect an initial public offering in which results in proceeds (net of
any and all underwriters' discounts, commissions and expenses and registration
expenses) of at least $25,000,000 at an offering price per share of Common
Stock that is equal to or greater than 2.12 times the original issuance price
for the Series E Preferred Stock.
Liquidation Preferences
In the event of any liquidation or winding up of the Company, the holders of
Series A, B, C and D preferred shares will be entitled to a liquidation
preference over the Company's common stock. The liquidation preference equals
the original face amount plus any accrued but unpaid dividends. No dividends
have been declared during the years ended December 31, 1997 and 1998 and for
the nine month period ended September 30, 1999.
Series A Preferred shareholders (and Series C, D, and E, as subsequently
amended) also participate so that after payment of the original purchase price
plus unpaid dividends to the holders of Series A, B, C, D and E Preferred, the
remaining assets shall be distributed on a pro rata basis to all shareholders
on a Common equivalent share basis until the holders of Series A Preferred
shares have received an aggregate of 2.5 times their original purchase price
(including the preference amount set forth in the preceding paragraph).
A merger, acquisition or sale of substantially all of the assets of the
Company in which the shareholders of the Company do not own a majority of the
outstanding shares of the surviving corporation shall be deemed a liquidation.
In the January 29, 1999 Amendment to the Articles of Incorporation, the
liquidation preference was amended to provide the holders of Series C
convertible preferred shares with the same liquidation preference as the
holders of Series A mandatorily redeemable convertible preferred shares.
In the May 28, 1999 Amendment to the Articles of Incorporation, the
liquidation preference was amended to provide the holders of Series D
convertible preferred stock with the same liquidation preference as the holders
of Series A , and C convertible preferred stock.
In the September 22, 1999 Amendment to the Articles of Incorporation, the
liquidation preference was amended to provide the holders of Series E
convertible preferred stock with the same liquidation preference as the holders
of Series A, B and C convertible preferred stock.
Dividends, Voting and Other Rights
The Company shall not declare or pay any distributions by dividend or
otherwise, payable other than in common stock, until a dividend in an amount at
least equal to the accrued and unpaid dividends due for each outstanding share
of Series A, Series B, Series C, Series D, and Series E Preferred Stock has
been paid or declared and set apart. After the holders of the outstanding
Preferred Stock have received their dividends, any dividends declared by the
Board of Directors out of funds legally available therefore shall be shared
equally among all outstanding shares on an as converted basis. The declaration
of dividends is at the discretion of the Board of Directors.
F-15
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Each share of Preferred Stock is entitled to the number of votes equal to
the number of whole shares of common stock into which each share of Preferred
Stock could be converted.
Holders of a majority of the Preferred (or Common issued upon conversion of
the Preferred) can request the Company to file a Registration Statement for at
least 15% of their shares (or any lesser percentage if the anticipated gross
receipts from the offering exceed $15,000,000). The Company must use its best
efforts to cause such shares to be registered; provided, however, that the
Company shall not be obligated to effect any such registration prior to the
earlier of (i) November 12, 2000 or (ii) within one year following the
effective date of the Company's initial public offering.
Preferred Stockholders have the right to purchase up to their pro rata share
of any shares the Company proposes to offer to any person or entity (other than
for an employee stock grant, equipment financing, acquisition of another
company or shares offered to the public pursuant to an underwritten public
offering).
If any founder of the Company proposes to sell all or a portion of his
shares to a third party, the Preferred Stockholders have the right to
participate in such sale on a pro rata basis or to exercise a right of first
refusal on the same basis. This agreement will terminate on the earlier of (1)
the transfer of all stock owned by such stockholder, (2) January 29, 2009, (3)
when less than one quarter of the aggregate number of shares outstanding as of
January 29, 1999 for Series C, as of May 28, 1999 for Series D and as of
September 22, 1999 for Series E, remain issued and outstanding (4) sale of all
or substantially all of the Company's assets, (5) the date of which any one or
more third parties acquire control or the ability to vote 33% or more of each
class outstanding, or (6) Qualified Public Offering.
7. Stock Options
Stock Option Plan for Employees and Non-employees
During 1998, the Company adopted the 1998 Stock Option Plan (the Plan),
under which incentive stock options and nonstatutory stock options may be
granted to employees, directors and consultants of the Company. Incentive stock
options may only be granted to employees of the Company.
The Plan is administered by a committee appointed by the Board of Directors.
The options are not transferable and are subject to various restrictions
outlined in the Plan. The committee determines the number of options granted to
employees, directors, or consultants, the vesting period and the exercise
price. The exercise price for stock options granted shall not be less than the
estimated fair value per share of common stock on the date of such grant for
incentive stock options and not less than 85% of the estimated fair value per
share of common stock on the date of such grant for nonstatutory stock options.
The estimated fair value of the underlying common stock is determined by third
party equity cash transactions.
The Board of Directors had reserved originally 776,250 shares of common
stock to grant options under the Plan. Options granted under the Plan vest over
a four year period and expire ten years after the grant date. In the January
29, 1999 and May 28, 1999 Amendments to the Articles of Incorporation, the
number of common stock shares reserved under the Plan was increased to
1,420,070 and 2,045,070 shares, respectively. The reserved shares were further
increased by 875,000 shares effective September 22, 1999 resulting in a total
of 2,920,070 shares of common stock available and reserved for issuance under
the plan.
F-16
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accounting for Stock Options Issued to Employees
The following table summarizes stock option activity for option grants:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
of Shares Price
--------- --------
<S> <C> <C>
December 31, 1997...................................... -- $ --
Grants................................................. 469,000 0.80
Exercises.............................................. -- --
Cancellations.......................................... (15,625) 0.80
--------- -----
December 31, 1998...................................... 453,375 0.80
Grants................................................. 1,793,256 2.06
Exercises.............................................. (74,375) 0.80
Cancellations.......................................... (471,882) 0.88
--------- -----
September 30, 1999..................................... 1,700,374 $2.11
========= =====
</TABLE>
The weighted-average exercise price for options outstanding at September 30
and December 31, 1998 and September 30, 1999 was $0.80, $0.80 and $2.11,
respectively and exercise prices ranged from $0.80 to $6.47 at September 30,
1999. These options will expire if not exercised at specific dates ranging from
March 2008 to September 2009 and the weighted-average remaining contractual
life of the options outstanding is approximately ten years. At September 30,
1998, there were 434,625 options outstanding. At December 31, 1998 and
September 30, 1998, there were no outstanding options which were exercisable.
At September 30, 1999, 411,110 outstanding options were exercisable. Management
estimates that stock options granted prior to December 31, 1998 have been
either equal to or in excess of the estimated fair value of the underlying
common stock and therefore no compensation expense was recognized. The Company
has estimated the fair value of the underlying common stock on the date of
grant was in excess of the exercise price for the options granted during the
nine month period ended September 30, 1999. As a result, the Company recorded
deferred compensation of $2,417,659 for the nine months ended September 30,
1999. This amount was recorded as a reduction to stockholders' equity (deficit)
and is being amortized as a charge to operations over the vesting period of the
stock options. For the nine months ended September 30, 1999, the Company
recognized $268,671 of employee stock compensation expense related to these
options.
Annual amortization of deferred stock compensation for stock options
outstanding as of September 30, 1999, is approximately $420,000, $604,000,
$604,000, $604,000 and $185,000, for the years ending December 31, 1999, 2000,
2001, 2002 and 2003, respectively.
For disclosure purposes, the fair value of each stock option granted is
estimated on the date of grant using the American Black-Scholes option-pricing
model with the following weighted average assumptions used for stock options
granted in 1998 and for the nine months ended September 30, 1999; no annual
dividends, expected volatility of 0%, risk-free interest rate ranging from
4.66% to 5.74% and expected life of one to four years. The weighted-average
fair value of the stock options granted in 1998 and the nine months ended
September 30, 1999 were $0.80 and $2.11, respectively.
Under the above model, the total value of the stock options granted in 1998
and for the nine months ended September 30, 1998 and 1999, respectively was
$53,704, $29,654 and $951,066, respectively, which would be amortized on a pro
forma basis over the option vesting period. SFAS No. 123 "Accounting for
F-17
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation" encourages adoption of a fair value based method for
valuing the cost of stock-based compensation. However, it allows companies to
continue to use the intrinsic value method for options granted to employees and
disclose pro forma net loss per share and loss per share. Had the Company
determined compensation cost for this plan in accordance with SFAS No. 123, the
Company's pro forma net loss for the year ended December 31, 1998 and for the
nine months ended September 30, 1998 and 1999, would have been $1,956,067,
$1,348,870 and $14,610,165, respectively, and the pro forma basic and diluted
loss per common share would have been $0.65, $0.44 and $4.63, respectively.
Changes in Stockholders' Equity (Deficit) for the Nine Months Ended
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------------ Paid-In Accumulated ---------------
Shares Amount Capital Deficit Shares Amount Total
--------- -------- ----------- ----------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997................... 3,274,998 $ 32,750 $ 363,751 $ (514,173) -- $-- $ (117,672)
Acquisition of treasury
stock.................. -- -- -- -- 62,500 (500) (500)
Exercise of stock option
in connection with the
preferred stock
offering............... -- -- (499) -- (62,500) 500 1
Accretion of mandatorily
redeemable convertible
preferred stock........ -- -- (108,500) -- -- -- (108,500)
Net loss................ -- -- -- (1,452,477) -- -- (1,452,477)
--------- -------- ----------- ----------- ------- ---- -----------
Balance, September 30,
1998................... 3,274,998 $254,752 $(1,966,650) $ -- -- $-- $(1,679,148)
========= ======== =========== =========== ======= ==== ===========
</TABLE>
8. Income Taxes
The provision (benefit) for income taxes consists of the following for the
following periods:
<TABLE>
<CAPTION>
Year Ended December Nine Months Ended
31, September 30, 1999
-------------------- ----------------------
1997 1998 1998 1999
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Current provision............... $ -- $ -- $ -- $ --
Deferred benefit................ (153,363) (638,315) (516,004) (5,486,886)
--------- --------- --------- -----------
(153,363) (638,315) (516,004) (5,486,886)
Change in valuation allowance... 153,363 638,315 516,004 5,486,886
--------- --------- --------- -----------
Total provision for income
taxes.......................... $ -- $ -- $ -- $ --
========= ========= ========= ===========
</TABLE>
The Company's deferred tax assets at December 31, 1997 and 1998 and
September 30, 1999, which consist primarily of net operating loss carryforwards
are $153,363, $791,678, and $6,278,564 respectively, are offset by a full
valuation allowance. Based upon the Company's limited operating history and
management's
F-18
<PAGE>
LIFEMINDERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
expectation of future profitability, management believes, based upon the
evidence available, that a full valuation allowance is necessary. The Company's
net operating loss carryforwards of $404,013, $1,922,365 and $15,257,892 at
December 31, 1997 and 1998 and September 30, 1999, respectively, begin expiring
in 2012.
9. Lease for Office Space
On June 14, 1999, the Company entered into a lease for office space in
Herndon, Virginia. The lease ends August 31, 2004 and has minimum annual lease
payments of $226,695 for the first year and are increased an annual rate of
3.0%. In accordance with the lease agreement, the Company is required to have a
letter of credit as a security deposit throughout the lease term. On June 18,
1999, the Company entered into a letter of credit for $100,000, which expires
November 11, 2000. The letter automatically renews on an annual basis if notice
is not received within 60 days of the anniversary date until final expiration
on November 11, 2004.
In addition, during August 1999, the Company entered into a one-year lease
for office space in Herndon, Virginia which has minimum annual payments of
$51,600 and ends during August 2000. This lease was previously a month-to-month
lease.
Future minimum lease payments under non-cancelable operating leases as of
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
2000....................................... $ 271,679
2001....................................... 235,539
2002....................................... 242,605
2003....................................... 249,883
2004....................................... 213,579
-----------
$ 1,213,285
===========
</TABLE>
Rent expense was $0, $38,317, $26,567 and $106,795 for the years ended
December 31, 1997 and 1998 and for the nine month periods ended September 30,
1998 and 1999, respectively.
10. Related Party Transactions
During 1996 and 1997, two stockholders loaned $35,236 and $53,319,
respectively, to assist the Company in paying its obligations. The Company
repaid $10,000 of the loan during 1996 and $53,919 during 1997. At December 31,
1997, the outstanding loan balance of $24,636 was forgiven by the stockholders
and recorded as additional paid-in capital by the Company.
During 1998 and for the nine months ended September 30, 1999, the Company
incurred $84,000 and $63,000, respectively, in contractor expenses from a
company in which a shareholder of the Company is also the President of the
company that provided the services. At December 31, 1998, an accounts payable
balance of $3,500 was outstanding to this entity.
F-19
<PAGE>
Also in 1998 and for the nine months ended September 30, 1999, the Company
incurred $18,000 and $202,644, respectively, in consulting expenses from a
company in which a shareholder of the Company is also the President of the
company that provided the services. In the third quarter of 1999, the Company
paid $150,000 to terminate the consulting agreement.
11. Basic and Diluted Loss per Common Share:
The Company implemented SFAS No. 128, Earnings Per Share, in 1998, which
requires certain disclosures relating to the calculation of earnings per common
share. The following is a reconciliation of the numerators and denominators of
the basic and diluted loss per common share computations.
Basic and diluted net loss per common share:
<TABLE>
<CAPTION>
For the period
August 9, 1996 Nine months
(date of inception) Year ended December 31, Ended September 30,
to December 31, ------------------------- --------------------------
1996 1997 1998 1998 1999
------------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Net loss available to
common stockholders.... $(35,073) $ (479,100) $ (2,104,243) $(1,452,477) $(15,117,618)
======== =========== ============ =========== =============
Weighted-average shares
of common stock shares
outstanding............ 798,220 2,530,228 3,275,000 3,275,000 3,296,181
======== =========== ============ =========== =============
Basic and diluted net
loss per common share.. $ (0.04) $ (0.19) $ (0.64) $ (0.44) $ (4.59)
======== =========== ============ =========== =============
</TABLE>
For the year ended December 31, 1997, 1,000,000 shares of preferred stock,
which are convertible into 1,250,000 shares of common stock, are not included
in the computation of diluted earnings per share as a result of their
antidilutive effect. For the year ended December 31, 1998 and for the nine
months ended September 30, 1999, options to purchase 453,375 and 1,700,374
shares of common stock at $0.80 per share and weighted average exercise price
of $2.11 per share, respectively, and 2,000,000 and 9,665,240 shares of
preferred stock, respectively, which are convertible into 2,500,000 and
12,081,541 shares of common stock, respectively, are not included in the
computation of diluted earnings per share as a result of their antidilutive
effect.
12. Commitments
During the nine month period ended September 30, 1999, the Company entered
into various agreements for future advertising which aggregate approximately
$24.1 million. As of September 30, 1999, the Company has prepaid approximately
$6.8 million in connection with these agreements. The term of the agreements
range from one to nine months.
13. Subsequent Events (unaudited)
Subsequent to September 30, 1999, the Company granted 710,875 options under
the 1998 Employee Stock Option Plan. The Company has estimated the fair value
of the underlying common stock on the date of the option grants was in excess
of the exercise price of the options. As a result, the Company recorded
additional deferred compensation of approximately $1.8 million for the period.
This amount will be recorded as a reduction to stockholders' equity (deficit)
and is being amortized as a charge to operations over the vesting period of the
stock options.
F-20
<PAGE>
Back Cover
Title: Free Sanity in a Crazy World.
At the bottom is the Lifeminders.com logo. Below that is a list of services
offered at Lifeminders.com: Family* Entertainment* Shopping* Home* Personal
Events* Pet* Health* Auto* Personal Finance* Travel
At the very bottom is the lifeminders web address:
www.lifeminders.com
<PAGE>
4,200,000 Shares
[LOGO OF LIFEMINDERS APPEARS HERE]
Common Stock
----------------
PROSPECTUS
----------------
HAMBRECHT & QUIST
THOMAS WEISEL PARTNERS LLC
PAINEWEBBER INCORPORATED
WIT CAPITAL CORPORATION
----------------
November 19, 1999
----------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is current only as of
the date of this prospectus.
Until December 14, 1999 (25 days after the date of this prospectus), all
dealers that buy, sell or trade in the securities in this offering, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
