EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 -
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe-harbor
for forward-looking statements made by public companies. This safe-harbor
protects a company from securities law liability in connection with
forward-looking statements if the company complies with the requirements of the
safe-harbor. As a public company, we have relied and will continue to rely on
the protection of the safe harbor in connection with our written and oral
forward-looking statements.
When evaluating our business, you should consider:
o all of the information in this quarterly report on Form 10-Q;
o the risk factors described in our Annual Report on Form 10-K for the
year ended December 31, 1999; and
o the risk factors described below.
The Company's business is subject to the following risks. These risks also
could cause actual results to differ materially from results projected in any
forward-looking statement in this report.
RISKS RELATED TO OUR BUSINESS
We have a limited operating history, which makes it difficult to predict our
future performance.
Our limited operating history makes predicting our future performance
difficult and does not provide investors with a meaningful basis for evaluating
an investment in our common stock. From our inception in June 1994 through June
1997, we existed as a division of Online Interactive, Inc. We began operations
as an independent company in June 1997. In the first half of 1998, we began
offering advertising opportunities on our Web sites and in our email
newsletters, in addition to our primary business of lead generation. As a
result, our performance since the end of the first quarter of 1998 is not
comparable to prior periods. Moreover, we have never operated during a general
economic downturn in the United States, which typically adversely affects
advertising and marketing expenditures.
We will face risks encountered by early-stage companies in Internet-related
businesses and may be unsuccessful in addressing these risks.
We face risks frequently encountered by early-stage companies in new and
rapidly evolving markets, including the market for online direct marketing. We
may not succeed in addressing these risks, and our business strategy may not be
successful. These risks include uncertainties about our ability to:
o attract a larger number of consumers to our Web sites;
o contract with new marketing clients and add new and compelling content
to our Web sites;
o collect receivables for services performed from existing marketing
clients;
o manage our expanding operations;
o adapt to potential decreases in online advertising rates;
o successfully introduce new products and services;
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o continue to develop and upgrade our technology and to minimize
technical difficulties and system downtime;
o create and maintain the loyalty of our customers and clients;
o maintain our current, and develop new, strategic relationships and
alliances; and
o attract, retain and motivate qualified personnel.
We have a history of losses, expect future losses and may never achieve
profitability.
We have not achieved profitability and expect to continue to incur
substantial losses for the foreseeable future. We incurred net losses of $3.2
million, or more than 2.5 times the amount of our net revenues, for the year
ended December 31, 1998, and $10.9 million, or nearly 1.3 times the amount of
our net revenues, for the year ended December 31, 1999. As of September 30,
2000, our accumulated deficit was $29.7 million. We have increased our operating
expenses and capital expenditures in order to accelerate our growth. We expect
further increases in operating expenses as we continue to expand marketing and
brand name promotion. Although our net revenues have grown in recent quarters,
we will need to significantly increase net revenues to achieve profitability.
Even if we do achieve profitability, we may be unable to sustain profitability
on a quarterly or annual basis in the future. It is possible that our net
revenues will grow more slowly than we anticipate or that operating expenses
will exceed our expectations.
Our quarterly operating results are uncertain and may fluctuate significantly,
which could negatively affect the value of your investment.
Our operating results have varied significantly from quarter to quarter in
the past and may continue to fluctuate. As a result, we believe period-to-period
comparisons of our operating results are not meaningful. For example, during the
year ended December 31, 1999, the percentage of annual net revenues attributable
to the first, second, third and fourth quarters were 7.8%, 16.4%, 28.1% and
47.7%, respectively. Our operating results for a particular quarter or year may
fall below the expectations of securities analysts and investors, which could
result in a decrease in our stock price.
Our limited operating history and the new and rapidly evolving Internet
market makes it difficult to ascertain the effects of seasonality on our
business. We believe, however, that our revenues may be subject to seasonal
fluctuations because advertisers generally place fewer advertisements during the
first and third calendar quarters of each year. In addition, expenditures by
advertisers tend to be cyclical, reflecting overall economic conditions as well
as budgeting and buying patterns. A decline in the economic prospects of
advertisers could alter current or prospective advertisers' spending priorities,
or the time periods in which they determine their budgets, or increase the time
it takes to close a sale with our advertisers.
During the nine months ended September 30, 2000, approximately 90% of our
contracts were month-to-month with automatic renewal unless terminated by either
party with 10 days' notice. The loss of a significant number of these contracts
in any one period might result in a significant decline in our quarterly
operating results.
We have experienced rapid growth, which has placed a strain on our resources,
and any failure to manage our growth effectively could cause our business to
suffer.
We do not have a proven record in managing our growth and may not be
successful in doing so. We have grown from 29 employees on July 1, 1997 to 189
employees on September 30, 2000. We have recently hired key management
personnel, acquired two businesses and added personnel in connection with these
acquisitions. Due to our recent rapid growth and our inexperience in integrating
newly acquired businesses, we may not be successful in integrating new personnel
and acquired businesses into our existing operations. In addition, we plan to
continue expanding our sales and marketing, customer support, creative and
research and development organizations. Past growth in these areas has placed,
and any future growth will continue to place, a significant strain on our
management systems and resources.
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If we are unable to strengthen our brand names, we may be unable to compete
effectively against competitors with greater brand name recognition.
We may be unsuccessful in strengthening our brand names. As competitive
pressures in the online direct marketing industry increase, we expect brand name
strength will become increasingly important. If we cannot strengthen our brand
names, we may be unable to maintain or increase traffic to our Web sites, which
would lead to decreased revenues from clients. The reputation of our brand names
will depend on, among other things, our ability to provide a high-quality online
experience for consumers visiting our Web sites, selecting our offers or
receiving our email newsletters. Negative experiences of consumers or marketers
with the Company might result in publicity that could damage our reputation and
diminish the strength of our brand names.
If we cannot secure sufficient promotional offers from our marketer clients, our
business will suffer.
If we are unsuccessful in acquiring and renewing a continuing array of
free, trial and promotional offers for our network of Web sites, traffic on our
sites, as well as our order volumes, will likely decrease. The attractiveness of
our Web sites to consumers is based in part on our ability to provide a broad
variety of offers of interest to consumers. In addition, a number of other Web
sites give consumers access to similar offers. We face competition for free,
trial and promotional offers from these Web sites as well as a variety of other
online and traditional competitors. Without sufficient variety and quality of
offers, our Web sites will become less attractive to marketers, and our ability
to generate revenues from marketer clients will be adversely affected.
The majority of our contracts have month-to-month terms, and the loss of a
significant number of these contracts in a short period of time could harm our
business.
During the nine months ended September 30, 2000, approximately 90% of our
contracts had month-to-month terms with automatic renewal unless terminated by
either party with 10 days' notice. The loss of a significant number of these
contracts in any one period could result in decreased traffic to our Web sites,
cause an immediate and significant decline in our net revenues and cause our
business to suffer.
The loss of the services of any of our executive officers or key personnel would
likely cause our business to suffer.
Our future success depends to a significant extent on the efforts and
abilities of our senior management, particularly Timothy C. Choate, our
Chairman, President and Chief Executive Officer, and other key employees,
including our technical and sales personnel. The loss of the services of any of
these individuals could harm our business. We may be unable to attract, motivate
and retain other key employees in the future. Competition for employees in our
industry is intense, and in the past we have experienced difficulty in hiring
qualified personnel. We do not have employment agreements with any of our key
personnel, nor do we have key-person insurance for any of our employees.
Our business strategy includes growth through acquisitions, so we expect to
pursue other acquisitions in the future. Our recent acquisitions and any future
acquisitions present many risks and uncertainties generally associated with
acquisitions, including, without limitation:
o difficulties integrating operations, personnel, technologies, products
and information systems of acquired businesses;
o potential loss of key employees of acquired businesses;
o adverse effects on our results of operations from acquisition-related
charges and amortization of goodwill and purchased technology;
o increased fixed costs, which could delay profitability;
o inability to maintain the key business relationships and the
reputations of acquired businesses;
o potential dilution to current shareholders from the issuance of
additional equity securities;
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o inability to maintain our standards, controls, procedures and
policies;
o responsibility for liabilities of companies we acquire; and
o diversion of management's attention from other business concerns.
If we are unable to retain Fingerhut as a major investor, our stock price could
suffer.
Our stock price could be adversely affected if Fingerhut, which currently
holds a 33% interest in the Company, elects to change its investment strategy
related to the Internet and divest its holdings in a rapid fashion.
An increase in the number of visitors to our Web sites or orders on our network
may strain our systems, and we are vulnerable to system malfunctions.
Any serious or repeated problems with the performance of our Web sites or
our network could lead to the dissatisfaction of consumers, our marketer clients
or our partners and affiliates. The amount of traffic on our Web sites and our
network has increased over time and we are seeking to further increase traffic.
The systems that support our Web sites and our network must be able to
accommodate an increased volume of traffic. Although we believe our systems can
currently accommodate approximately 20 million visitors monthly, in the past,
our Web sites and our network have experienced slow response times and other
systems problems for a variety of reasons, including failure of our third party
Internet service providers, hardware failures and failure of software
applications. In these instances, our Web sites and our network were typically
unavailable or slow for approximately one and one-half to two hours. Although
these failures did not have a material adverse effect on our business, we may
experience similar problems in the future that could have a material adverse
effect on our business.
We face intense competition from marketing-focused companies for marketer
clients and may be unable to compete successfully.
We may be unable to compete successfully with current or future
competitors. We face intense competition from many companies, both traditional
and online, to provide marketing and advertising services for marketer clients.
Among promotional offer and lead generation websites our principle competitors
are coolavings.com, MyPoints.com and yesmail.com. We expect competition from
online competitors to increase significantly because there are no substantial
barriers to entry in our industry. Increased competition could result in price
reductions for online advertising space and marketing services, reduced gross
margins and loss of market share.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than Aptimus. These advantages may allow them to respond more quickly
and effectively to new or emerging technologies and changes in customer
requirements. These advantages may also allow them to engage in more extensive
research and development, undertake farther-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 marketer
clients.
Online marketing is a rapidly developing industry, and new types of
products and services may emerge that are more attractive to consumers and
marketers than the types of services we offer. As a result, it is possible that
new competitors may emerge and rapidly acquire significant market share.
If our customers request products and services directly from our marketer
clients instead of requesting the product or service from us, our business could
suffer.
Our marketer clients may offer the same free, trial or promotional products
or services on their own Web sites that we offer on our Web sites. Our customers
may choose to request products or services directly from our marketer clients
instead of requesting the product or service through us, which would result in
lower net revenues to the Company from lead generation and cause our business to
suffer.
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We may need to incur litigation expenses in order to defend our intellectual
property rights, and might nevertheless be unable to adequately protect these
rights.
We may need to engage in costly litigation to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the intellectual property rights of others. We can give no assurance
that our efforts to prevent misappropriation or infringement of our intellectual
property will be successful. An adverse determination in any litigation of this
type could require us to make significant changes to the structure and operation
of our services and features or to license alternative technology from another
party. Implementation of any of these alternatives could be costly and
time-consuming and may not be successful. Any intellectual property litigation
would likely result in substantial costs and diversion of resources and
management attention.
Our success largely depends on our trademarks, including "Aptimus" and
"FreeShop," and internally developed technologies, including our email systems
and our order-collection, order-processing and lead-delivery systems, which we
seek to protect through a combination of trademark, copyright and trade secret
laws. Protection of our trademarks is crucial as we attempt to build our brand
name and reputation. Despite actions we take to protect our intellectual
property rights, it may be possible for third parties to copy or otherwise
obtain and use our intellectual property without authorization or to develop
similar technology independently. In addition, legal standards relating to the
validity, enforceability and scope of protection of intellectual property rights
in Internet-related businesses are uncertain and still evolving. Although we are
not currently engaged in any lawsuits for the purpose of defending our
intellectual property rights, we may need to engage in such litigation in the
future. Moreover, we may be unable to maintain the value of our intellectual
property rights in the future.
We could become involved in costly and time-consuming disputes regarding the
validity and enforceability of recently issued or pending patents.
The Internet, including the market for e-commerce and online advertising,
direct marketing and promotion, is characterized by a rapidly evolving legal
landscape. A variety of patents relating to the market have been recently
issued. Other patent applications may be pending. It is possible that
significant activity in this area may continue and that litigation may arise due
to the patent holder's efforts to enforce their patent rights.
We may incur substantial expense and management attention may be diverted
if litigation occurs. Moreover, whether or not claims against us have merit, we
may be required to enter into license agreements or be subject to injunctive or
other equitable relief, either of which would result in unexpected expenses or
management distraction.
If third parties acquire domain names that are similar to our domain names, they
could decrease the value of our trademarks and take customers away from our Web
sites.
We currently hold the Internet domain names "aptimus.com", "freeshop.com,"
"catalogsite.com," "desteo.com," "wwb.com" and "clubfreeshop.com" as well as
various other related names. We may be unable to prevent third parties from
acquiring similar domain names, which could reduce the value of our trademarks,
potentially weaken our brand names and take customers away from our Web sites.
Domain names generally are regulated by Internet regulatory bodies. The
regulation of domain names in the United States and in foreign countries is
subject to change in the near future. Regulatory bodies could establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. The relationship between
regulations governing domain names and laws protecting trademarks and similar
intellectual property rights is unclear. Therefore, we may be unable to prevent
third parties from acquiring domain names that infringe on, or otherwise
decrease the value of, our trademarks and other intellectual property rights. We
believe there are online companies in other countries using domain names that
potentially infringe on our trademarks. We may be unable to prevent them from
using these domain names, and this use may decrease the value of our trademarks
and our brand name.
We may face litigation and liability for information displayed on our Web sites.
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement and various other claims relating to the nature and
content of materials we publish on our Web sites. These types of claims have
been brought, sometimes successfully, against online services in the past. We
could also face claims based on the content that is accessible from our Web
sites through links to other Web sites. Any litigation arising from these
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claims would likely result in substantial costs and diversion of resources and
management attention, and an unsuccessful defense to one or more such claims
could result in material damages. We have no insurance coverage for these types
of claims.
Security and privacy breaches could subject us to litigation and liability and
deter consumers from using our Web sites.
We could be subject to litigation and liability if third parties penetrate
our network security or otherwise misappropriate our users' personal or credit
card information. This liability could include claims for unauthorized purchases
with credit card information, impersonation or other similar fraud claims. It
could also include claims for other misuses of personal information, such as for
unauthorized marketing purposes. In addition, the Federal Trade Commission and
other federal and state agencies have been investigating various Internet
companies in connection with their use of personal information. We could be
subject to investigations and enforcement actions by these or other agencies. In
addition, we rent customer names and street addresses to third parties. Although
we provide an opportunity for our customers to remove their names from our
rental list, we nevertheless may receive complaints from customers for these
rentals.
The need to transmit confidential information securely has been a
significant barrier to electronic commerce and communications over the Internet.
Any compromise of security could deter people from using the Internet in general
or, specifically, from using the Internet to conduct transactions that involve
transmitting confidential information, such as purchases of goods or services.
Many marketers seek to offer their products and services on our Web sites
because they want to encourage people to use the Internet to purchase their
goods or services. Internet security concerns could frustrate these efforts.
Also, our relationships with consumers may be adversely affected if the security
measures we use to protect their personal information prove to be ineffective.
We cannot predict whether events or developments will result in a compromise or
breach of the technology we use to protect customers' personal information. We
have no insurance coverage for these types of claims.
Furthermore, our computer servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. We may need to expend
significant additional capital and other resources to protect against a security
breach or to alleviate problems caused by any such breaches. We may be unable to
prevent or remedy all security breaches. If any of these breaches occur, we
could lose marketing clients and visitors to our network of Web sites.
We may need additional financing, and our prospects for obtaining it are
uncertain.
Our business does not currently generate the cash necessary to fund our
operations. Should it become necessary, we may be unable to obtain additional
financing in the future. We currently anticipate that our available cash
resources will be sufficient to meet our currently anticipated capital
expenditures and working capital requirements for at least the next 12 months.
Thereafter, we may need to raise additional funds to develop or enhance our
services or products, fund expansion, respond to competitive pressures or
acquire businesses or technologies. Unanticipated expenses, poor financial
results or unanticipated opportunities that require financial commitments could
give rise to earlier financing requirements. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage
ownership of our existing shareholders would be reduced, and these securities
might have rights, preferences or privileges senior to those of our common
stock. Additional financing may not be available on terms favorable to the
Company, or at all. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our expansion, take advantage of business
opportunities, develop or enhance services or products or otherwise respond to
competitive pressures would be significantly limited, and we might need to
significantly restrict our operations.
Risks Related to Our Industry
If the acceptance of online advertising and online direct marketing does not
continue to increase, our business will suffer.
The demand for online marketing may not develop to a level sufficient to
support our continued operations or may develop more slowly than we expect. We
expect to derive almost all of our revenues from contracts with
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marketer clients under which we provide online marketing services through our
Web sites and email newsletters. The Internet has not existed long enough as a
marketing medium to demonstrate its effectiveness relative to traditional
marketing methods. Marketers that have historically relied on traditional
marketing methods may be reluctant or slow to adopt online marketing. Many
marketers have limited or no experience using the Internet as a marketing
medium. In addition, marketers that have invested substantial resources in
traditional methods of marketing may be reluctant to reallocate these resources
to online marketing. Those companies that have invested a significant portion of
their marketing budgets in online marketing may decide after a time to return to
more traditional methods if they find that online marketing is a less effective
method of promoting their products and services than traditional marketing
methods.
We do not know if accepted industry standards for measuring the
effectiveness of online marketing will develop. An absence of accepted standards
for measuring effectiveness could discourage companies from committing
significant resources to online marketing. There are a variety of pricing models
for marketing on the Internet. We cannot predict which, if any, will emerge as
the industry standard. Absence of such a standard makes it difficult to project
our future pricing and revenues.
Email marketing is also vulnerable to potential negative public perception
associated with unsolicited email, known as "spam." Although we do not send
unsolicited email, public perception, press reports or governmental action
related to spam could reduce the overall demand for email marketing in general
and our email newsletters in particular.
If we are unable to adapt to rapid changes in the online marketing industry, our
business will suffer.
Online marketing is characterized by rapidly changing technologies,
frequent new product and service introductions, short development cycles and
evolving industry standards. We may incur substantial costs to modify our
services or infrastructure to adapt to these changes and to maintain and improve
the performance, features and reliability of our services. We may be unable to
successfully develop new services on a timely basis or achieve and maintain
market acceptance.
We face risks from potential government regulation and other legal uncertainties
relating to the Internet.
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. The adoption of such laws could create
uncertainty in use of the Internet and reduce the demand for our services.
Recently, Congress enacted legislation regarding children's privacy on the
Internet. Additional laws and regulations may be proposed or adopted with
respect to the Internet, covering issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. The passage
of legislation regarding user privacy or direct marketing on the Internet may
reduce demand for our services or limit our ability to provide customer
information to marketers. Furthermore, the growth of electronic commerce may
prompt calls for more stringent consumer protection laws. For example, the
European Union recently adopted a directive addressing data privacy that may
result in limits on the collection and use of consumer information. The adoption
of consumer protection laws that apply to online marketing could create
uncertainty in Internet usage and reduce the demand for our services.
In addition, we are not certain how our business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. It is possible that future applications
of these laws to our business could reduce demand for our services or in crease
the cost of doing business as a result of litigation costs or increased service
delivery costs.
Our services are available on the Internet in many states and foreign
countries, and these states or foreign countries may claim that we are required
to qualify to do business in their jurisdictions. Currently, we are qualified to
do business only in Washington, Minnesota and California. Our failure to qualify
in other jurisdictions if we were required to do so could subject us to taxes
and penalties and could restrict our ability to enforce contracts in those
jurisdictions.
