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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Amendment No. 1
FORM 10-Q/A
| /x/ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 |
OR
| / / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission File Number 0-26707
NETWORK COMMERCE INC.
(Exact name of registrant as specified in its charter)
| WASHINGTON (State or other jurisdiction of incorporation or organization) |
91-1628103 (I.R.S. Employer Identification Number) |
411 1st AVENUE SOUTH
SUITE 200 NORTH
SEATTLE, WA 98104
(Address of principal executive offices)
(206) 223-1996
(Registrant's telephone number, including area code)
ShopNow.com Inc.
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
As of September 29, 2000, there were 61,848,422 shares outstanding of the Registrant's common stock.
Network Commerce Inc.
Form 10-Q/A
Index
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| PART I | FINANCIAL INFORMATION | |||
| ITEM 2: |
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Management's Discussion and Analysis of Financial |
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| Condition and Results of Operations | 3 | |||
| SIGNATURES |
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The purpose of this Form 10-Q/A is to amend the registrant's Form 10-Q for the quarterly period ended June 30, 2000 to change the measuring time period of average revenue per premier merchant from per month to per quarter in the table appearing under "Financial Data" in Item 2 of Part I. No part of the Form 10-Q for the quarterly period ended June 30, 2000 previously filed with the SEC other than Item 2 of Part I is affected by this amendment.
In accordance with Rule 12b-15 of the Exchange Act of 1934, this Amendment No. 1 sets forth the complete text to Item 2 of Part I of our form 10-Q for the quarter ended June 30, 2000, as amended.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The matters discussed in this report contain forward-looking statements that involve known and unknown risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Words such as "may," "could," "would," "expect," "anticipate," "intend," "plan," "believe," "estimate," and variations of such words and similar expressions are intended to identify such forward-looking statements. You should not place undue reliance on these forward-looking statements, which are based on our current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below) and apply only as of the date of this report. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in "Additional Factors That May Affect Future Results" as well as those discussed in this section and elsewhere in this report, and the risks discussed in the "Risk Factors" section included in our December 31, 1999 10-K filed on February 10, 2000 with the Securities and Exchange Commission.
Overview
We provide end-to-end technology and services that enable businesses, merchants, Internet sites and wireless networks to engage in e-commerce. Our end-to-end commerce solution consists of proprietary e-commerce technology platforms, mobile commerce technology, commerce network systems, proprietary transaction processing technology, hosting and profession services. We maintain an on-line marketplace, referred to as the Network Commerce Consumer Network, which aggregates merchants and shoppers over a distributed network of web sites. We also maintain a business-to-business portal and marketplace, known as the Network Commerce Business Network, which is designed to enable businesses to engage in online transactions with other businesses.
We were incorporated in January 1994 and initially operated as a computer services company. In 1996, we began to change the focus of our business to conducting commerce over the Internet. In May 1997, we launched BuySoftware.com, an online computer products store. During 1998, we completed three acquisitions, including the acquisition of Media Assets, Inc., a direct marketing company, launched ShopNow.com and began offering merchants e-commerce enabling products and services. In April 1999, we changed our name from TechWave Inc. to ShopNow.com Inc. In June 1999, we ceased operation of BuySoftware.com because we determined it was inconsistent with our evolving strategy. In May 2000, we changed our name to Network Commerce Inc. We consummated two acquisitions in the second quarter of 1999, three in the fourth quarter of 1999, two in the first quarter of 2000 and two in the second quarter of 2000.
We derive substantially all of our revenues from the Network Commerce Consumer Network, the Network Commerce Business Network and from providing services to businesses.
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Revenues from the Network Commerce Consumer Network, which is a network of proprietary and affiliated web sites including www.shopnow.com and licensed affiliates, the BottomDollar Network (including www.bottomdollar.com and licensed affiliate sites), www.speedyclick.com and www.chaseshop.com are generated primarily from the sale of on-line e-mail marketing and registrations, leads and orders, banner advertising and merchandising to merchants. Revenues from these agreements are recognized as the media are delivered to the merchants over the term of the agreements, which typically range from one to four months. In certain circumstances, such as with ChaseShop (www.chaseshop.com), we offer products directly to shoppers. In these instances where we act as merchant-of-record, we record as revenue the full sales price of the product sold and record the full cost of the product to us as cost of revenues, upon shipment of the product. Revenues generated from our ceased BuySoftware.com business are included in our June 30, 1999 operations, as management did not cease operations of BuySoftware.com until June 1999.
Revenues from the Network Commerce Business Network, which is a network of proprietary and affiliated web sites, including www.b2bnow.com, www.freemerchant.com and www.ubarter.com, are derived primarily from providing services, transaction processing, advertising and technology licensing to businesses. Since the acquisition of Ubarter.com on June 2, 2000, we also generate revenues from transaction fees earned from member businesses that transact over the Ubarter exchange system as well as from products sold by Ubarter.com to other member merchants of the Ubarter exchange system. Revenues from services are generated principally through development fees, hosting fees and sales and marketing services. These services can be purchased as a complete end-to-end suite of services or separately. We recognize revenues from development of custom applications and online stores and marketing projects on a percentage of completion basis over the period of development or the period of the marketing project. These projects generally range from two to five months. Hosting contracts typically have a term of one year, with fees charged and earned on a monthly basis. We bear full credit risk with respect to these sales. Contract costs include all direct labor, material, subcontract and other direct project costs and certain indirect costs related to contract performance.
Revenues are also generated from fees paid to us by businesses and merchants that license our transaction processing and fraud prevention technologies and on-line payment gateways, as well as other e-commerce enabling technologies. Revenues include licensing fees, per-transaction fees and in certain cases monthly hosting and maintenance fees, which are recognized in the period earned. Revenues generated from technology licensing are recognized in accordance with Statement of Position 97-2, "Software Revenue Recognition." Businesses and merchants that utilize our payment processing technologies act as the merchant-of-record and bear the full credit risk on those sales of goods and services. Revenues from b2bNow.com are generated primarily from the sales of advertising and merchandising products and services similar to those sold on the Network Commerce Consumer Network.
Cost of revenues generated from the Network Commerce Consumer Network include the portion of our Internet telecommunications connections that are directly attributable to traffic on the Network Commerce Consumer Network and the direct labor costs incurred in maintaining and enhancing our network infrastructure. In order to fulfill our obligations under our registrations, lead and order delivery advertising programs, we occasionally purchase consumer traffic from third party networks by placing on their web sites advertisements that, when clicked on by a visitor, send the visitor to the Network Commerce Consumer Network. Any shopping traffic that we purchase from a third party that is used to fulfill these obligations is included as cost of revenues. Cost of revenues on the products that we sell as merchant-of-record includes the cost of the product, credit card fees and shipping costs. Cost of revenues generated from providing services includes all direct labor costs incurred in connection with the provision of services, as well as fees charged by third-party vendors that have directly contributed to the design, development and implementation of our services. Cost of revenues generated from licensing e-commerce-enabling technologies and from our proprietary business-to-business portal consists
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primarily of telecommunications costs and direct labor costs incurred in maintaining and enhancing our network infrastructure.
Financial Data
The following table presents selected operating data for the Network Commerce Consumer and Business Networks. This information should be read in conjunction with the other information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations. The operating data presented below for any quarter are not necessarily indicative of data for any future period.
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June 30, 2000 |
March 31, 2000 |
December 31, 1999 |
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| Number of premier merchants listed on the Network Commerce Consumer Network(1) | 125 | 97 | 68 | ||||||
| Average revenue per premier merchant per quarter | $ | 71,736 | $ | 47,504 | $ | 34,991 | |||
| Number of businesses listed on the Network Commerce Business Network(2) | 899,000 | 610,000 | — | ||||||
| Number of businesses utilizing our technology platforms | 115,000 | 19,700 | 18,300 | ||||||
| (1) | Premier merchants include those merchants that contribute greater than $10,000 of revenue per month to the Network Commerce Consumer Network. | |
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Represents the number of businesses listed in the Network Commerce Business Network directory as of the last day of the applicable quarter. The Network Commerce Business Network launched in January 2000. |
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Results of Operations
Revenues. Total revenues for the three- and six-month periods ended June 30, 2000 were $26.9 million and $45.6 million, respectively. Revenues for the comparable periods in 1999 were $8.4 million and $16.0 million, respectively. The increase was due primarily to the expansion of our networks and increased demand for our services. We continued to experience growth in our business and merchant listings, consumer traffic and affiliate and syndication shopping sites, which resulted in increased fees from licensing, transaction processing, business services, online direct marketing and advertising, exclusive of BuySoftware.com. The BuySoftware.com portion of revenues for the six-month period ended June 30, 1999 was $9.9 million.
Cost of Revenues. The cost of revenues for the three- and six-month periods ended June 30, 2000 were $12.8 million and $23.2 million, respectively. Total costs of revenues for the comparable periods in 1999 were $7.5 million and $14.7 million, respectively. The increase in our cost of revenues was directly attributable to the increase in revenues during the same period from the Network Commerce Consumer Network and the Network Commerce Business Network. The BuySoftware.com portion of cost of revenues for the six-month period ended June 30, 1999 was $11.2 million.
Gross Profit. Gross profit for the three- and six-month periods ended June 30, 2000 were $14.1 million and $22.4 million, respectively. Gross profit for the comparable periods in 1999 were $871,000 and $1.3 million, respectively. As a percent of revenues, our gross profits were 52.3% and 49.1%, respectively, compared to 10.4% and 8.1% for the comparable periods in 1999. This increase in gross profit percentage was due primarily to the increase in higher-margin revenues during 2000, while decreasing our concentration of revenues from product sales to shoppers, which historically has contributed only flat or negative gross profits. While we expect to continue to increase our gross profits
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both in absolute dollars and as a percentage of revenues, we do not expect that the rate of growth achieved historically will continue.
Sales and Marketing. Sales and marketing expenses consist primarily of costs associated with marketing programs such as advertising and public relations, as well as salaries and commissions. Sales and marketing expenses for the three- and six-month periods ended June 30, 2000 were $24.0 million and $46.1 million, respectively. Sales and marketing expenses for the comparable periods in 1999 were $12.8 million and $18.3 million, respectively. The increase was due primarily to increased spending as a result of our expansion of the Network Commerce Consumer Network and our launch and expansion of the Network Commerce Business Network, both of which resulted in additional personnel and nationwide television, print, radio and on-line advertisements. We anticipate continued growth in our sales and marketing expenses during the remainder of 2000.
General and Administrative. General and administrative expenses consist primarily of salaries and other personnel-related costs for executive, financial, human resources, information services and other administrative personnel, as well as legal, accounting and insurance costs. General and administrative expenses for the three- and six-month periods ended June 30, 2000 were $3.4 million and $6.6 million, respectively. General and administrative expenses for the comparable periods in 1999 were $1.5 million and $2.5 million, respectively. The increase was due primarily to an increase in personnel from internal growth and acquisitions. We anticipate continued growth in our general and administrative expenses during the remainder of 2000.
Research and Development. Research and development expenses consist primarily of salaries and related costs associated with the development of new products and services, the enhancement of existing products and services, and the performance of quality assurance and documentation activities. Research and development expenses for the three- and six-month periods ended June 30, 2000 were $5.2 million and $9.4 million, respectively. Research and development costs for the comparable periods in 1999 were $1.3 million and $2.9 million, respectively. The increase was due primarily to the development and enhancement of our technology platform, as well as to an increase in technology personnel. These employees focus on developing our technology platform as well as building the overall infrastructure that supports the Network Commerce Consumer Network and the Network Commerce Business Network. We anticipate continued growth in our research and development expenses during the remainder of 2000.
Amortization of Intangible Assets. Amortization of intangible assets resulting from acquisitions is primarily related to the amortization of customer lists, domain names, acquired technology, proprietary concepts, assembled workforce and goodwill. Amortization of intangible assets expense for the three-and six-month periods ended June 30, 2000 was $18.3 million and $31.8 million, respectively. Amortization of intangible assets for the comparable periods in 1999 was $1.1 million and $1.6 million, respectively. This increase was due primarily to the increase in intangible assets and related amortization expenses from business acquisitions completed during the last quarter of 1999 and the first half 2000, including the acquisitions of SpeedyClick, Corp., Cortix, Inc., WebCentric, Inc., Pronet Enterprises Ltd., AXC Corporation, Freemerchant.com Inc. and Ubarter.com Inc. Intangible assets acquired in business combinations are amortized over a three-year period.
Stock-Based Compensation. Stock-based compensation expense is related to the amortization of deferred compensation resulting from stock option grants to employees with an option exercise price below the estimated fair market value of our common stock as of the date of grant. Stock-based compensation expense for the three- and six-month periods ended June 30, 2000 was $1.3 million and $3.1 million. Stock-based compensation in comparable periods for 1999 was $1.8 million and $2.0 million. The amount of deferred compensation resulting from these grants are generally amortized over a one- to three-year vesting period.
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Gain On Sale Of Marketable Equity Securities. Gain on sale of marketable equity securities for the three-and six-month periods ended June 30, 2000 was $293,000 and $1.4 million, respectively. We did not liquidate any of our marketable equity securities during the three- or six-month periods ended June 30, 1999.
Interest Income, Net. Interest income, net consists primarily of the combination of interest income earned on our cash and cash equivalents and short-term investments as well as interest expense incurred on our outstanding debt obligations. Interest income, net for the three- and six-month periods ended June 30, 2000 was $1.1 million and $1.9 million, respectively. Interest expense, net for the comparable periods in 1999 was $260,000 and $245,000, respectively. Interest income, net increased due to the increase in our cash and cash equivalents and short-term investments realized from completion of our initial and supplemental public offerings of common stock.
Income Tax Benefit. The income tax benefit resulted principally from reductions of deferred tax liabilities created as a result of business combinations. Income tax benefit for the three- and six-month periods ended June 30, 2000 was $11.6 million and $23.6 million, respectively. We did not realize any income tax benefits during the three- or six-month periods ended June 30, 1999. If we continue to consummate additional business combinations that result in the recognition of deferred taxes, we may incur additional tax deferred tax benefits. We have not paid nor have we received refunds for federal income taxes and we do not expect to pay income taxes or receive income tax refunds in the foreseeable future.
Net Loss. Net loss for the three- and six-month periods ended June 30, 2000 was $25.1 million and $47.9 million, respectively. Net loss for the comparable periods in 1999 was $18.0 and $26.2 million, respectively. This increase was due primarily to an increase in our operating expenses, most significantly sales and marketing expenses and amortization of intangible assets, partially offset by our increase in gross profit and income tax benefit during the same periods. We expect to incur additional net losses in 2000.
Net Operating Loss Carryforwards
As of June 30, 2000, we had net operating loss carryforwards of approximately $119.7 million. If not used, the net operating loss carryforwards will expire at various dates beginning in 2012. The Tax Reform Act of 1986 imposes restrictions on the use of net operating losses and tax credits in the event that there has been an ownership change, as defined, of a corporation since the periods in which the net operating losses were incurred. Our ability to use net operating losses incurred prior to July 1999 is limited to approximately $14.3 million per year due to sales of Series D and Series E convertible preferred stock to third parties in April 1998 and the sale of Series I convertible preferred stock to Chase Manhattan Bank in July 1999, which resulted in ownership changes. Our deferred tax assets are recognizable only to the extent that they are offset by deferred tax liabilities. To the extend that our deferred tax assets exceed our deferred tax liabilities in the future, valuation allowances may be recorded against our deferred tax assets. In concluding that valuation allowances may be required, management considers such factors as our history of operating losses, potential future losses and the nature of our deferred tax assets.
Liquidity and Capital Resources
Since inception, we have experienced net losses and negative cash flows from operations. As of June 30, 2000, we had an accumulated deficit of $153.2 million. We have financed our activities largely through issuances of common stock and preferred stock, from the issuance of short- and long-term obligations and from capital leasing transactions for certain of our fixed asset purchases. Through June 30, 2000, our aggregate net proceeds have been $271.9 million from issuing equity securities and
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$27.8 million from issuing debt securities. As of June 30, 2000, we had $84.9 million in cash, cash equivalents and short-term investments.
Net cash used in operating activities was $43.7 million for the six-month period ended June 30, 2000, compared to $18.8 million for the same period in 1999. The increase was due primarily to the increase in our net loss for the six-month period ended June 30, 2000 of $47.9 million compared to $26.2 million for the same period ended 1999, the increase in depreciation and amortization of $36.9 million for the six month period ended June 30, 2000 compared to $2.7 million in the comparable period in 1999, and the deferred income tax benefit of $23.6 in the six month period ended June 30, 2000 compared to none in the comparable period in 1999.
Net cash used in investing activities was $69.2 million for the six-month period ended June 30, 2000, compared to $10.1 million for the same period in 1999. The increase was due primarily to the net increase in purchases of short-term investments of $24.4 million for the six-month period ended June 30, 2000, compared to $54,000 for the same period in 1999, the increase in purchases of property and equipment of $12.8 million for the six-month period ended June 30, 2000, compared to $5.3 million for the same period in 1999, the increase in investments in equity securities and other assets of $14.3 million for the six-month period ended June 30, 2000, compared to $784,000 for the same period in 1999, and the increase in acquisition of businesses of $17.7 million for the six-month period ended June 30, 2000, compared to $4.0 for the same period in 1999.
Net cash provided by financing activities was $110.5 million for the six-month period ended June 30, 2000, compared to $25.3 million for the same period in 1999. The increase was due primarily to the closing of our public offering on February 18, 2000 of 7,913,607 shares of common stock at $14.50 per share, which resulted in proceeds to us net of underwriters' fees and commissions of $108.7 million. Offering costs incurred by the Company were approximately $700,000.
In March 1999, we entered into a loan and security agreement with a financial institution for a term loan and line of credit. In May 1999, the agreement was amended and restated to allow us to borrow up to $8.5 million at any one time, consisting of a $3.5 million term loan (term loan), a $4.0 million bridge loan (bridge loan) and a line of credit of up to $2.5 million ($1.0 million until the bridge loan is repaid). The line of credit bears interest at the financial institution's base rate plus 2% and was amended in January 2000 to expire on June 30, 2001. The outstanding credit line balance was $0 as of June 30, 2000. The term loan bears interest at 12%, is secured by substantially all of our assets and matures in March 2002. The term loan balance was $2.5 million as of June 30, 2000. The bridge loan bore interest at 12% and was repaid in October 1999 after the closing of our initial public offering.
On May 19, 2000, we entered into credit agreement with a commercial bank, with a maximum commitment amount of $15.0 million to finance the purchase of equipment, software and tenant improvements. The credit agreement is secured by substantially all of our assets and had an outstanding balance of $6.1 million at June 30, 2000. The outstanding commitments bear interest at an annual rate equal to the prime lending rate plus one and one-half percent. Outstanding commitments under the agreement are required to be repaid under specific schedules, with all commitments to be repaid no later than November 18, 2003. The credit agreement requires us to maintain certain financial ratios and places limitations on certain financing and investing activities. The credit agreement also contains other customary conditions and events of default that, in the event of noncompliance by us, would prevent any further borrowings and would generally require the repayment of any outstanding commitments under the credit agreement.
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Our capital requirements depend on numerous factors, including the rate of expansion of the Network Commerce Consumer Network and the Network Commerce Business Network, the investments we make in our technology platforms and in future technologies, the number of acquisitions that are completed and the composition of the consideration paid between cash, debt and stock, and the resources we devote to expansion of our sales, marketing and branding efforts. We have also entered into agreements with Chase Manhattan Bank and 24/7 Media that require us to make aggregate advertising and marketing expenditures of approximately $5.0 million in 2000, decreasing annually to $250,000 in 2002. We believe that existing cash balances and cash generated from operations, together with the net proceeds from our public offerings and the future sale of marketable equity securities will be sufficient to meet our anticipated cash needs for working capital and capital expenditures through the next 18 months. After that time, we may be required to raise additional financing. We cannot be sure that the assumed levels of revenues and expenses underlying our anticipated cash needs will prove to be accurate. The sale of additional equity or convertible debt securities could result in additional dilution to our shareholders. We cannot be sure that financing will be available in amounts or on terms acceptable to us, or even available at all.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," to provide guidance on the recognition, presentation and disclosure of revenues in financial statements. We believe our revenue recognition practices are in conformity with the guidelines prescribed in SAB No. 101.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving Stock Compensation." FIN 44 clarifies certain issues relating to the application of Accounting Principles Board Opinion No. 25 and related interpretations, which are the authoritative pronouncements we use to account for our stock-based compensation transactions. FIN 44 is effective July 1, 2000, however certain conclusions reached in FIN 44 are applicable for transactions consummated after either December 15, 1998 or January 12, 2000. We do not believe that the adoption of FIN 44 will have a material effect on our financial position or results of operations.
Seasonality
We believe that our advertising and merchandising revenues on the Network Commerce Consumer Network and the Network Commerce Business Network are subject to seasonality changes as retail transactions and advertising sales in traditional media, such as television and radio, generally are lower in the first and third calendar quarters of each year. In addition, Internet usage typically declines during the summer and certain holiday periods. If our market makes the transition from an emerging to a more developed market, seasonal and cyclical patterns may develop in our industry and in the usage of, and transactions on, our web sites and those of our merchants. Seasonal and cyclical patterns in online transactions and advertising would affect our revenues. Those patterns may also develop on our web sites. Given the early stage of the development of the Internet and our company, however, we cannot predict to what extent, if at all, our operations will prove to be seasonal.
Impact of the Year 2000 Computer Problem
Prior to January 1, 2000, we devoted substantial resources in an effort to ensure that our proprietary software, the third-party software on which we rely, and the underlying systems and protocols did not contain errors associated with Year 2000 date functions. Since January 1, 2000, we have not experienced any disruption as a result of Year 2000 problems.
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Additional Factors That May Affect Future Results
You should carefully consider the risks described below and the other information in this quarterly report. While we have attempted to identify all risks that are material to our business, additional risks that we have not yet identified or that we currently think are immaterial may also impair our business operations. The trading price of our common stock could decline due to any of these risks. In assessing these risks, you should also refer to the other information in this quarterly report, including the consolidated financial statements and related notes and the risks discussed in the "Risk Factors" section included in our December 31, 1999 10-K filed on February 10, 2000 with the Securities and Exchange Commission.
Our rapid growth and evolution may make it difficult to evaluate our business and prospects
We were incorporated in January 1994 and operated initially as a computer services company. In 1996, we began to change the focus of our business to conducting commerce over the Internet. In August 1998, we launched our first online marketplace, ShopNow.com. In recent months, particularly with the launch of the Network Commerce Business Network, we have increasingly focused on developing and providing products and services to enable businesses to conduct online commerce. The recent shifts in our business focus may make it difficult for you to evaluate our business and prospects. You should also consider the risks, expenses and difficulties that we may encounter as a young company in a rapidly evolving market.
We have a history of losses and we expect future losses
We incurred net losses of $47.9 million for the six-month period ended June 30, 2000 and $26.2 million for the six-month period ended June 30, 1999. At June 30, 2000, we had an accumulated deficit of $153.2 million. We have historically invested heavily in sales and marketing, technology infrastructure and research and development and expect to continue to do so in the future. As a result, we must generate significant revenues to achieve and maintain profitability. We expect that our sales and marketing expenses, research and development expenses and general and administrative expenses will continue to increase in absolute dollars and may increase as a percentage of revenues. In addition, we may incur substantial expenses in connection with future acquisitions.
Our future revenues are unpredictable and we expect our operating results to fluctuate from period to period
Our business model has only been applied to the Internet since the mid-1990's and continues to evolve. Therefore we have limited experience in planning the financial needs and operating expenses of our business. It is difficult for us to accurately forecast our revenues in any given period. We may not be able to sustain our recent revenue growth rates or obtain sufficient revenues to achieve profitability. If our revenues in a particular period fall short of our expectations, we will likely be unable to quickly adjust our spending in order to compensate for that revenue shortfall.
Our operating results are likely to fluctuate substantially from period to period as a result of a number of factors, such as:
| • | declines in the number of businesses and merchants to which we provide our products and services; | |
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the amount and timing of operating costs and expenditures relating to expansion of our operations; and |
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the mix of products and services that we sell. |
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In addition, factors beyond our control may also cause our operating results to fluctuate, such as:
| • | the announcement or introduction of new or enhanced products or services by our competitors; and | |
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the pricing policies of our competitors. |
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Period-to-period comparisons of our operating results are not a good indicator of our future performance. It is likely that our operating results in some quarters may not meet the expectations of stock market analysts and investors and this could cause our stock price to decline.
Our business model is unproven and changing
Our business model consists of providing businesses and merchants with e-commerce enabling solutions. We have limited experience as a company and, additionally, the Internet, on which our business model relies, is still unproven as a business medium. Accordingly, our business model may not be successful, and we may need to change it. Our ability to generate sufficient revenues to achieve profitability will depend, in large part, on our ability to successfully market our e-commerce products and services to businesses and merchants that may not be convinced of the need for an online presence or may be reluctant to rely upon third parties to develop and manage their e-commerce offerings and marketing efforts.
Our future growth will depend on our ability to make and successfully integrate additional acquisitions
Our success depends on our ability to continually enhance and expand our e-commerce enabling products and services and our online marketplaces in response to changing technologies, customer demands and competitive pressures. Consequently, we have acquired complementary technologies or businesses in the past, and intend to do so in the future. If we are unable to identify suitable acquisition targets, or if we are unable to successfully complete acquisitions and successfully integrate the acquired businesses, technologies and personnel, our ability to increase product and service offerings will be reduced. This could cause us to lose business to our competitors, and our operating results could suffer.
Acquisitions involve a number of risks
We actively seek to identify and acquire companies with attributes complementary to our e-commerce products and services. Since December 31, 1999, we have acquired four companies.
Acquisitions that we make may involve numerous risks, including:
| • | diverting management's attention from other business concerns; | |
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being unable to maintain uniform standards, controls, procedures and policies; |
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entering markets in which we have no direct prior experience; |
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improperly evaluating new services and technologies or otherwise being unable to fully exploit the anticipated opportunity; and |
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being unable to successfully integrate the acquired businesses, technologies and other assets. |
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If we are unable to accurately assess any newly acquired businesses or technologies, our business could suffer. For example, in June 1998 we acquired e-Warehouse and CyberTrust. These companies had developed payment processing technologies that we planned to utilize as part of our e-commerce products and services. However, we are not currently utilizing the acquired technologies, and we have determined that the technologies have no other use or value to us. Because we are not using the acquired technologies, we wrote off substantially all of the $5.4 million aggregate purchase price for e-Warehouse and CyberTrust in 1998. Future acquisitions may involve the assumption of obligations or
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large one-time write-offs and amortization expenses related to goodwill and other intangible assets. Any of the factors listed above would adversely affect our results of operations.
In addition, in order to finance any future acquisition, we may need to raise additional funds through public or private financings. In this event, we could be forced to obtain equity or debt financing on terms that are not favorable to us and that may result in dilution to our shareholders.
Our success depends upon achieving adequate market share to increase our revenues and become profitable
Our success depends upon achieving significant market penetration and acceptance of our e-commerce enabling products and services. We have only recently begun to expand our business-to-business initiatives designed to enable businesses to maximize their e-commerce opportunities, and our online marketplaces have achieved only limited market acceptance to date. We may not currently have adequate market share to successfully execute our business plan. If we are unable to reach and retain substantial numbers of businesses, merchants and shoppers, our business model may not be sustainable.
To successfully market and sell our e-commerce enabling products and services we must:
| • | become recognized as a leading provider of end-to-end enabling solutions; | |
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enhance existing products and services; |
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add new products and services; |
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complete projects on time; |
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increase the number of businesses and merchants using our e-commerce products and services and online marketplaces; and |
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continue to increase the attractiveness of the Network Commerce Consumer Network to shoppers. |
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If we do not increase brand awareness our sales may suffer
Due in part to the emerging nature of the markets for e-commerce enabling products and services and online marketplaces, together with the substantial resources available to many of our competitors, our opportunity to achieve and maintain a significant market share may be limited. Developing and maintaining awareness of the ShopNow.com, b2bNow.com, Freemerchant.com, SpeedyClick.com, Ubarter.com and BottomDollar brand names is critical in achieving widespread acceptance of our e-commerce enabling products and services and our online marketplaces. We launched the Network Commerce Consumer Network in August 1998 and we have only recently begun to expand our business-to-business initiatives designed to enable businesses to maximize their e-commerce opportunities. The importance of brand recognition will increase as competition in our markets increases. Successfully promoting and positioning our brands will depend largely on the effectiveness of our marketing and sales efforts and our ability to develop reliable and useful products and services at competitive prices. If our planned marketing and sales efforts are ineffective, we may need to increase our financial commitment to creating and maintaining brand awareness among businesses, merchants and shoppers, which could divert financial and management resources from other aspects of our business, or cause our operating expenses to increase disproportionately to our revenues. This could cause our business and operating results to suffer.
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We face significant competition
The market for e-commerce enabling products and services and online marketplaces is highly competitive, and we expect competition to intensify in the future. Barriers to entry are not significant. Our failure to compete effectively could result in the following:
| • | fewer businesses and merchants relying upon our enabling solutions; | |
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the obsolescence of the technology underlying our products and services; |
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fewer businesses and merchants listed in our directories; |
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a decrease in shopper traffic on our web sites; and |
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a reduction in the prices of or profits on our products and services. |
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The number of companies providing e-commerce enabling products and services is large and increasing at a rapid rate. We expect that additional companies which to date have not had a substantial commercial presence on the Internet or in our markets will offer competing products and services. Although we believe no one company currently offers a range of e-commerce enabling solutions as comprehensive as our suite of products and services, companies such as InfoSpace, Go2Net, Yahoo! and Cybersource offer alternatives to one or more of our products and services.
Many of our competitors and potential competitors have substantial competitive advantages as compared to us, including:
| • | larger customer or user bases; | |
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the ability to offer a wider array of e-commerce products and solutions; |
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greater name recognition and larger marketing budgets and resources; |
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substantially greater financial, technical and other resources; |
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the ability to offer additional content and other personalization features; and |
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larger production and technical staffs. |
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These advantages may enable our competitors to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of acquisition or other opportunities more readily or develop and expand their product and service offerings more quickly.
In addition, as the use of the Internet and online products and services increases, larger well-established and well-financed entities may continue to acquire, invest in or form joint ventures with providers of e-commerce enabling solutions, and existing providers may continue to consolidate. Providers of Internet browsers and other Internet products and services who are affiliated with providers of web directories and information services that compete with our products and services may more tightly integrate these affiliated offerings into their browsers or other products or services. Any of these trends would increase the competition we face.
If we fail to maintain our strategic business relationships and enter into new relationships our business will suffer
An important element of our strategy involves entering into business relationships with other companies. Our success is dependent on maintaining our current contractual relationships and developing new strategic relationships. These contractual relationships typically involve joint marketing, licensing or promotional arrangements. For example, we have entered into a licensing and co-marketing agreement with Chase Manhattan Bank, a cross promotion agreement with 24/7 Media and a software license agreement with HNC Software. Although these relationships are an important factor in our
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strategy because they enable us to enhance our product and service offerings, the parties with which we contract may not view their relationships with us as significant to their own businesses. To date, we have not derived material revenue from these relationships, and some of these relationships impose substantial obligations on us. It is not certain that the benefits to us will outweigh our obligations. For example, our relationship with 24/7 Media requires us to refer to them any business that would benefit from the advertising services offered by 24/7 Media and makes 24/7 Media the only third party authorized to sell advertising on our web site. Several of our significant business arrangements do not establish minimum performance requirements but instead rely on contractual best efforts obligations of the parties with which we contract. In addition, either party with little notice may terminate most of these relationships. Accordingly, in order to maintain our strategic business relationships we will need to meet our partners' specific business objectives, including incremental revenue, brand awareness and implementation of specific e-commerce applications. If our strategic business relationships are discontinued for any reason, or if we are unsuccessful in entering into new relationships in the future, our business and results of operations may be harmed.
If we fail to effectively manage the rapid growth of our operations our business will suffer
Our ability to successfully offer e-commerce enabling products and services and implement our business plan in a rapidly evolving market requires an effective planning and management process. We are increasing the scope of our operations domestically and internationally, and we have recently increased our headcount substantially. From December 31, 1997 to June 30, 2000, our total number of employees increased from less than 50 to approximately 620. This growth has placed and will continue to place a significant strain on our management systems, infrastructure and resources. We will need to continue to improve our financial and managerial controls and reporting systems and procedures, and will need to continue to expand, train and manage our workforce worldwide. Furthermore, we expect that we will be required to manage an increasing number of relationships with various customers and other third parties. Any failure to expand any of the foregoing areas efficiently and effectively could cause our business to suffer.
We depend on our key management personnel for successful operation of our business
Our success depends on the skills, experience and performance of our senior management and other key personnel. Our key personnel include Dwayne Walker, our Chairman and Chief Executive Officer, Joe Arciniega, our President and Chief Operating Officer, Alan Koslow, our Chief Financial Officer, and Dr. Ganapathy Krishnan, our Chief Technology Officer. Each of these officers, other than Dr. Krishnan, has an employment agreement with Network Commerce Inc. Many of our executive officers have joined us within the past three years. If we do not quickly and efficiently integrate these new personnel into our management and culture, our business could suffer. Our business could also suffer if we do not retain our key personnel.
We must hire additional personnel to expand our operations
Our future success depends on our ability to identify, hire, train, retain and motivate highly skilled executive, technical, managerial, sales and marketing, business development and administrative personnel. We intend to hire a significant number of personnel during the next year, and as of June 30, 2000 we had openings for 62 job positions. Competition for qualified personnel is intense, particularly in the technology and Internet markets. If we fail to successfully attract and retain a sufficient number of qualified executive, technical, managerial, sales and marketing, business development and administrative personnel, our ability to manage and expand our business could suffer.
Our ability to develop and integrate e-commerce technologies is subject to uncertainties
We have limited experience delivering our e-commerce products and services and operating online marketplaces. In order to remain competitive, we must regularly upgrade our e-commerce products and services to incorporate current technology, which requires us to integrate complex computer hardware
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and software components. If we do not successfully integrate these components, the quality and performance of our online offerings may be reduced. In addition, the ability of our online marketplaces to accommodate an increasing number of businesses, merchants and shoppers would suffer. While these technologies are generally commercially available, we may be required to expend considerable time and money in order to successfully integrate them into our products and services and this may cause our business to suffer. We must also maintain an adequate testing and technical support infrastructure to ensure the successful introduction of products and services.
Our computer systems may be vulnerable to system failures
Our success depends on the performance, reliability and availability of the technology supporting our e-commerce products and services and our online marketplaces. Our revenues depend, in large part, on the number of businesses and merchants that use our products and services and the number of shoppers that access the Network Commerce Consumer Network. This depends, in part, upon our actual and perceived reliability and performance. Any inability to provide our products and services or any slowdown or stoppage of our online marketplaces could cause us to lose clients and therefore lose revenue. Substantially all of our computer and communications hardware is located at leased and third-party facilities in Seattle, Washington and Sterling, Virginia. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-in, earthquake and similar events. Because we presently do not have fully redundant systems or a formal disaster recovery plan, a systems failure could adversely affect our business. Our computer systems are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which may lead to interruptions, delays, loss of data or inability to process online transactions for our clients. We may be required to expend considerable time and money to correct any system failure. If we are unable to fix a problem that arises, we may lose clients or be unable to conduct our business at all.
Our business may be harmed by defects in our software and systems
We have developed custom software for our network servers and have licensed additional software from third parties. This software may contain undetected errors or defects. Although we have not suffered significant harm from any errors or defects to date, we may discover significant errors or defects in the future that we may be unable to fix in a timely or cost-effective manner.
We will need to expand and upgrade our systems in order to maintain customer satisfaction
We must expand and upgrade our technology, transaction processing systems and network infrastructure if the number of businesses and merchants using our e-commerce products and services and online marketplaces, or the volume of traffic on our web sites or our clients' web sites, increases substantially. We could experience periodic capacity constraints, which may cause unanticipated system disruptions, slower response times and lower levels of customer service. We may be unable to accurately project the rate or timing of increases, if any, in the use of our products or services or our web sites or when we must expand and upgrade our systems and infrastructure to accommodate these increases in a timely manner. Any inability to do so could harm our business.
Our international operations involve risks
We are subject to risks specific to Internet-based companies in foreign markets. These risks include:
| • | delays in the development of the Internet as a commerce medium in international markets; | |
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restrictions on the export of encryption technology; and |
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increased risk of piracy and limits on our ability to enforce our intellectual property rights. |
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We may require additional funding to successfully operate and grow our business
Although we believe that our cash reserves and cash flows from operations will be adequate to fund our operations for at least the next twelve months, these resources may be inadequate. Consequently, we may require additional funds during or after this period. Additional financing may not be available on favorable terms or at all. If we raise additional funds by selling stock, the percentage ownership of our then current shareholders will be reduced. If we cannot raise adequate funds to satisfy our capital requirements, we may have to limit our operations significantly. Our future capital requirements depend upon many factors, including, but not limited to:
| • | the rate at which we expand our sales and marketing operations and our product and service offerings; | |
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the extent to which we develop and upgrade our technology and data network infrastructure; and |
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the occurrence, timing, size and success of acquisitions. |
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We may be unable to adequately protect our intellectual property and proprietary rights
We regard our intellectual property rights as critical to our success, and we rely on trademark and copyright law, trade secret protection and confidentiality and license agreements with our employees, customers and others to protect our proprietary rights. Despite our precautions, unauthorized third parties might copy portions of our software or reverse engineer and use information that we regard as proprietary. We currently have five patents pending in the United States Patent and Trademark Office covering different aspects of our product architecture and technology. However, we do not currently own any issued patents and there is no assurance that any pending patent application will result in an issued patent, or that any future patent will not be challenged, invalidated or circumvented, or that the rights granted under any patent will provide us with a competitive advantage. The laws of some countries do not protect proprietary rights to the same extent as do the laws of the United States, and our means of protecting our proprietary rights abroad may not be adequate. Any misappropriation of our proprietary information by third parties could adversely affect our business by enabling third parties to compete more effectively with us.
Our technology may infringe the intellectual property rights of others
Although we have not received notice of any alleged infringement by us, we cannot be certain that our technology does not infringe issued patents or other intellectual property rights of others. In addition, because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our software. We may be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties. Intellectual property litigation is expensive and time-consuming, and could divert our management's attention away from running our business.
If the security provided by our e-commerce services is breached we may be liable to our clients and our reputation could be harmed
A fundamental requirement for e-commerce is the secure transmission of confidential information of businesses, merchants and shoppers over the Internet. Among the e-commerce services we offer to merchants are security features such as:
| • | secure online payment services; | |
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secure order processing services; and |
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fraud prevention and management services. |
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Third parties may attempt to breach the security provided by our e-commerce products and services or the security of our clients' internal systems. If they are successful, they could obtain confidential information about businesses and shoppers using our online marketplaces, including their passwords, financial account information, credit card numbers or other personal information. We may be liable to our clients or to shoppers for any breach in security. Even if we are not held liable, a security breach could harm our reputation, and the mere perception of security risks, whether or not valid, could inhibit market acceptance of our products and services. We may be required to expend significant capital and other resources to license additional encryption or other technologies to protect against security breaches or to alleviate problems caused by these breaches. In addition, our clients might decide to stop using our e-commerce products and services if their customers experience security breaches.
Our success depends on continued increases in the use of the Internet as a commercial medium
We depend on the growing use and acceptance of the Internet by businesses, merchants and shoppers as a medium of commerce. Rapid growth in the use of and interest in the Internet and online products and services is a recent development. No one can be certain that acceptance and use of the Internet and online products and services will continue to develop or that a sufficiently broad base of businesses, merchants and shoppers will adopt and continue to use the Internet and online products and services as a medium of commerce.
The Internet may fail as a commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies, including security technology and performance improvements. For example, if technologies such as software that stops advertising from appearing on a web user's computer screen gain wide acceptance, the attractiveness of the Internet to advertisers would be diminished, which could harm our business.
Rapid technological change could negatively affect our business
Rapidly changing technology, evolving industry standards, evolving customer demands and frequent new product and service introductions characterize the market for e-commerce products and services and online marketplaces. Our future success will depend in significant part on our ability to improve the performance, content and reliability of our products and services in response to both the evolving demands of the market and competitive product and service offerings. Our efforts in these areas may not be successful. If a large number of our clients adopt new Internet technologies or standards, we may need to incur substantial expenditures modifying or adapting our e-commerce products and services to remain compatible with their systems.
We rely on the Internet infrastructure provided by others to operate our business
Our success depends in large part on other companies maintaining the Internet infrastructure. In particular, we rely on other companies to maintain a reliable network backbone that provides adequate speed, data capacity and security and to develop products that enable reliable Internet access and service. If the Internet continues to experience significant growth in the number of users, frequency of use and amount of data transmitted, the Internet infrastructure of thousands of computers communicating via telephone lines, coaxial cable and other telecommunications systems may be unable to support the demands placed on it, and the Internet's performance or reliability may suffer as a result of this continued growth. If the performance or reliability of the Internet suffers, Internet users could have difficulty obtaining access to the Internet. In addition, data transmitted over the Internet, including information and graphics contained on web pages, could reach Internet users much more
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slowly. This could result in frustration of Internet users, which could decrease online traffic and cause advertisers to reduce their Internet expenditures.
Future governmental regulation and privacy concerns could adversely affect our business
We are not currently subject to direct regulation by any government agency, other than regulations applicable to businesses generally, and there are currently few laws or regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet, a number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governmental organizations, and it is possible that a number of laws or regulations may be adopted with respect to the Internet relating to issues such as user privacy, taxation, infringement, pricing, quality of products and services and intellectual property ownership. The adoption of any laws or regulations that have the effect of imposing additional costs, liabilities or restrictions relating to the use of the Internet by businesses or consumers could decrease the growth in the use of the Internet, which could in turn decrease the demand for our products and services, decrease traffic on our online marketplaces, increase our cost of doing business, or otherwise have a material adverse effect on our business. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, copyright, trademark, trade secret, obscenity, libel and personal privacy is uncertain and developing. Any new legislation or regulation, or application or interpretation of existing laws, could have a material adverse effect on our business.
The Federal Communications Commission is currently reviewing its regulatory positions on the privacy protection given to data transmissions over telecommunications networks and could seek to impose some form of telecommunications carrier regulation on telecommunications functions of information services. State public utility commissions generally have declined to regulate information services, although the public service commissions of some states continue to review potential regulation of such services. Future regulation or regulatory changes regarding data privacy could have an adverse effect on our business by requiring us to incur substantial additional expenses in order to comply with this type of regulation.
A number of proposals have been made at the federal, state and local level that would impose additional taxes on the sale of goods and services over the Internet and certain states have taken measures to tax Internet-related activities. Foreign countries also may tax Internet transactions. The taxation of Internet-related activities could have the effect of imposing additional costs on companies, such as Network Commerce Inc., that conduct business over the Internet. This, in turn, could lead to increased prices for products and services, which could result in decreased demand for our solutions.
We could face liability for material transmitted over the Internet by others
Because material may be downloaded from web sites hosted by us and subsequently distributed to others, there is a potential that claims will be made against us for negligence, copyright or trademark infringement or other theories based on the nature and content of this material. Negligence and product liability claims also potentially may be made against us due to our role in facilitating the purchase of some products, for example firearms. Although we carry general liability insurance, our insurance may not cover claims of these types, or may not be adequate to indemnify us against this type of liability. Any imposition of liability, and in particular liability that is not covered by our insurance or is in excess of our insurance coverage, could have a material adverse effect on our reputation and our operating results, or could result in the imposition of criminal penalties on us.
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We do not currently collect sales tax from all transactions
We do not currently collect sales or other similar taxes on products sold by us and delivered into states other than Washington, California, Georgia, Arizona, Kansas, New York, Tennessee and Kentucky. However, one or more states or foreign countries may seek to impose sales tax collection obligations on out-of-state or foreign companies engaging in e-commerce. In addition, any new operation in states outside the states for which we currently collect sales tax could subject shipments into these states to state or foreign sales taxes. A successful assertion by one or more states or any foreign country that we should collect sales or other similar taxes on the sale of merchandise or services could result in liability for penalties as well as substantially higher expenses incurred by our business.
RISKS RELATED TO AN INVESTMENT IN OUR STOCK
Provisions of our charter documents and Washington law could discourage our acquisition by a third party
Specific provisions of our articles of incorporation and bylaws and Washington law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders.
Our articles of incorporation and bylaws establish a classified board of directors, eliminate the ability of shareholders to call special meetings, eliminate cumulative voting for directors and establish procedures for advance notification of shareholder proposals. The presence of a classified board and the elimination of cumulative voting may make it more difficult for an acquirer to replace our board of directors. Further, the elimination of cumulative voting substantially reduces the ability of minority shareholders to obtain representation on the board of directors.
Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by our shareholders. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control of Network Commerce Inc. and may adversely affect the market price of the common stock and the voting and other rights of the holders of common stock.
Washington law imposes restrictions on some transactions between a corporation and significant shareholders. Chapter 23B.19 of the Washington Business Corporation Act prohibits a target corporation, with some exceptions, from engaging in particular significant business transactions with an acquiring person, which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation, for a period of five years after the acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporation's board of directors prior to the acquisition. Prohibited transactions include, among other things:
| • | a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from the acquiring person; | |
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termination of 5% or more of the employees of the target corporation; or |
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allowing the acquiring person to receive any disproportionate benefit as a shareholder. |
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A corporation may not opt out of this statute. This provision may have the effect of delaying, deterring or preventing a change in control of Network Commerce Inc.
The foregoing provisions of our charter documents and Washington law could have the effect of making it more difficult or more expensive for a third party to acquire, or could discourage a third party from attempting to acquire, control of Network Commerce Inc. These provisions may therefore
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have the effect of limiting the price that investors might be willing to pay in the future for our common stock.
Our stock price may be volatile
The stock market in general, and the stock prices of Internet-related companies in particular, have recently experienced extreme volatility, which has often been unrelated to the operating performance of any particular company or companies. Our stock price could be subject to wide fluctuations in response to factors such as the following:
| • | actual or anticipated variations in quarterly results of operations; | |
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the addition or loss of merchants and shopper traffic; |
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announcements of technological innovations, new products or services by us or our competitors; |
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changes in financial estimates or recommendations by securities analysts; |
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conditions or trends in the Internet, e-commerce and marketing industries; |
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changes in the market valuations of other Internet or online service or software companies; |
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our announcements of significant acquisitions, strategic relationships, joint ventures or capital commitments; |
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additions or departures of key personnel; |
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sales of our common stock; |
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general market conditions; and |
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other events or factors, many of which are beyond our control. |
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These broad market and industry factors may materially and adversely affect our stock price, regardless of our operating performance. The trading prices of the stocks of many technology companies are at or near historical highs and reflect price to earnings ratios substantially above historical levels. These trading prices and price-to-earnings ratios may not be sustained.
In the past, securities class action litigation has often been brought against companies following periods of volatility in their stock prices. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert our management's time and resources, which could cause our business to suffer.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NETWORK COMMERCE INC. | |||
| Date: October 17, 2000 |
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By: |
/s/ DWAYNE M. WALKER Dwayne M. Walker Chief Executive Officer |
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By: |
/s/ ALAN D. KOSLOW Alan D. Koslow Chief Financial Officer |
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