<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 1999
REGISTRATION NO. 333-84019
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
NETCREATIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NEW YORK 7319 11-3300476
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
</TABLE>
379 WEST BROADWAY, SUITE 202
NEW YORK, NEW YORK 10012
TELEPHONE: (212) 625-1370; FACSIMILE: (212) 625-1387
(Address and telephone number
of Registrant's principal executive offices)
GREENBERG TRAURIG
200 PARK AVENUE, 15(TH) FLOOR
NEW YORK, NEW YORK 10166
REFERENCE: NETCREATIONS
TELEPHONE: (212) 801-9200; FACSIMILE: (212) 801-6400
(Name, address and telephone number of agent for service)
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
ANDREW J. COSENTINO, ESQ. RICHARD H. GILDEN, ESQ.
ALAN N. SUTIN, ESQ. GREGG J. BERMAN, ESQ.
MARIA ALLEN, ESQ. FULBRIGHT & JAWORSKI L.L.P.
GREENBERG TRAURIG 666 FIFTH AVENUE
200 PARK AVENUE NEW YORK, NEW YORK 10103
NEW YORK, NEW YORK 10166 TELEPHONE: (212) 318-3000
TELEPHONE: (212) 801-9304 FACSIMILE: (212) 752-5958
FACSIMILE: (212) 801-6400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON THE DATE OR
DATES AS MAY BE NECESSARY TO DELAY OUR EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON THE DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT
TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 20, 1999
PROSPECTUS
3,300,000 SHARES
[LOGO]
COMMON STOCK
------------------
This is NetCreations, Inc.'s initial public offering. We anticipate that the
initial public offering price will be between $10.00 and $12.00 per share. We
have applied to list the common stock on the Nasdaq National Market under the
symbol "NTCR."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF FACTORS THAT YOU
SHOULD CONSIDER BEFORE YOU INVEST IN THE COMMON STOCK BEING SOLD WITH THIS
PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public Offering Price..................................... $ $
Underwriting Discount and Commissions..................... $ $
Proceeds to NetCreations.................................. $ $
</TABLE>
In connection with this offering, the underwriters have reserved up to
330,000 shares of the common stock being offered for sale at the initial public
offering price to our directors, officers, employees and friends.
The underwriters may purchase up to an additional 495,000 shares from us at
the public offering price, less underwriting discounts, solely to cover
over-allotments.
FRIEDMAN BILLINGS RAMSEY
C.E. UNTERBERG, TOWBIN
FBR.COM
FIDELITY CAPITAL MARKETS
----------------
THIS PROSPECTUS IS DATED , 1999
<PAGE>
[Inside front cover page]
[Description of Artwork]
The top of the inside front cover contains the centered captioned statement
"Samples of NetCreations Network of Web sites."
The inside front cover contains a sample of mostly third-party Web sites
comprising the NetCreations Network such as CMPnet, PostMasterDirect.com,
Regards.com, etc. The bottom left corner of the page contains a NetCreations
logo graphic. The bottom right corner of the page contains the captioned
statements "The above Web sites are among the top 25 suppliers of email
addresses for our database" and "Each Web site in the NetCreations Network
receives commissions when marketers use our services to deliver email messages
to the addresses provided by that Web site." The bottom of the page contains the
captioned statement "Service marks, trademarks and tradenames referred to on
this page are the property of their respective owners."
[Gatefold]
[Description of Artwork]
The top of the gatefold contains the centered captioned statement "NetCreations,
Inc. Double Opt-In Email Marketing Services."
The center of the gatefold contains a large circle. Within the circle and
towards the top is the NetCreations logo. In the middle of the circle and
directly below the NetCreations logo is the captioned statement "Email Address
Database." Below that captioned statement are the captioned statements
"4+Million Names" and "3000+Topical Categories."
Above the circle is the captioned statement "Internet User." Extending from the
left side of the captioned statement "Internet User" is a long horizontal arrow
that first extends out towards the left and then down towards the left center of
the gatefold. Directly above the arrow is the captioned statement "Opt In Via
Sign-Up Form on Web." In between the circle and the captioned statement
"Internet User" are two vertical arrows. The left arrow, which points up to the
captioned statement "Internet User," has the captioned statement "Request for
Opt-in Confirmation" on the left of it. The right arrow, which points down to
the circle, has the captioned statement "Opt-in Confirmation" on the right of
it.
Directly below the circle is a semi-circle. The left side of the semi-circle
contains the captioned statement "Web Site Owner Support." The right side of the
semi-circle contains the captioned statements "Email Direct Marketing Campaign
Support." Directly below the semi-circle is the captioned statement
"PostMasterDirect.com" with a vertical arrow pointing down to a captioned
statement "Email List Member." To the right of the arrow is the captioned
statement "Delivery of Email Message."
To the left side of the semi-circle is a picture of a desktop computer with a
monitor sitting on top. The monitor screen contains the captioned statement "Web
site." Directly above the monitor, and below the down pointed arrow that
extended from the left side of the captioned statement "Internet User" is the
captioned statement "NetCreations Network: 175+Websites." In between the left
side of the semi-circle and the monitor are two horizontal arrows. Directly
above the top arrow, which extends from the monitor and points to the captioned
statement on the left side semi-circle, is the captioned statement "Email
Addresses." Directly below the bottom arrow, which extends from the left side of
the semi-circle pointing to the monitor, is the captioned statement "Report
Address Use."
The right side of the semi-circle is also a picture of a desktop computer with a
monitor sitting on top. This monitor screen contains the captioned statement
"Marketing Customers." Directly above this monitor is the captioned statement
"Marketer/Reseller." In between the right side of the semi-circle and this
monitor are two horizontal arrows. Directly above the top arrow, which extends
from this monitor and points to the right semi-circle, is the captioned
statement "Order Email & Submit Message." Directly below the bottom arrow, which
extends from the right side of the semi-circle pointing to the monitor, is the
captioned statement "Confirm Delivery Optional Tracking."
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS.
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS: (1) REFLECTS
A 117,000 FOR 1 STOCK SPLIT OF OUR COMMON STOCK WHICH WILL BE COMPLETED PRIOR TO
THE COMMENCEMENT OF THIS OFFERING AND (2) ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
OUR COMPANY
We provide Internet-based opt-in email direct marketing services that enable
direct marketers to target promotional campaigns to consumers who have given
their permission to receive email messages in any of over 3,000 topical
categories. Our technology allows real-time, online email address selection and
ordering as well as response-tracking. We have, as of September 30, 1999, over
4.3 million email addresses in our database, which is currently growing at the
average net rate of more than 20,000 email addresses per day.
We have collected the email addresses in our database from consumers who
have elected, and have not subsequently opted out, to receive promotional email
messages through our WWW.POSTMASTERDIRECT.COM Web site or through third-party
Web sites whose email address lists we manage. We refer to these third-party Web
sites and our own Web site as our NetCreations Network because they provide us
email addresses for our database. We charge direct marketers a fee each time we
send marketing materials on their behalf to an email address they have selected
from our database. We pay a percentage of that fee to the third-party Web sites
in our network each time an email address they own is used for a particular
email marketing campaign. We generate substantially all of our revenues from the
fees obtained from our direct marketing customers.
There are currently over 175 third-party Web sites in the NetCreations
Network, including sites such as Internet.com, NetZero, Entrepreneur Magazine,
CMPnet, LinkExchange, CDROM Guide, Regards.com and Volition. Each Web site in
the NetCreations Network accumulates email addresses by placing a sign-up
template on one or more of its Web pages which allows consumers to elect to
receive email pertaining to a selection of topical categories. We believe that
the aggregation of topically targeted, opt-in email addresses collected from
third-party Web sites is an element of the attractiveness of our services to
direct marketers.
As of September 30, 1999, we have sent email messages on behalf of more than
1,500 direct marketers. Our direct marketing customers range from large
companies, such as Dell, Compaq, Ziff-Davis and J. Crew, to small retailers
selling items over the Internet, such as Vermont Nutrition, Cyberswap, Inc.,
Technology Marketing Corp., and Intratech Alliance Corp. We also sell use of
email addresses in our database to email address list brokers for use by their
direct marketing customers. For the years ended December 31, 1996, 1997 and
1998, we generated net revenues of $476,000, $1.1 million and $3.4 million,
respectively, and during those same periods we generated a net loss of $9,000 in
1996 and net income of $260,000 and $606,000 in 1997 and 1998, respectively. For
the nine months ended September 30, 1999, we delivered approximately 68 million
email messages in email marketing campaigns for our customers using email
addresses in our database, which generated over 95% of our net revenues for the
period. During that period, we generated net revenues of $10.2 million and net
income of $2.6 million, as compared with net revenues of $2.1 million and net
income of $357,000 for the nine months ended September 30, 1998.
MARKET OPPORTUNITY
The Direct Marketing Association, or DMA, estimates that approximately
$221.5 billion will be spent on direct marketing in the United States in 2003.
Direct marketing includes postal direct mail, credit card offers and other
solicitations that encourage consumers to buy products or services.
The emergence of the Internet as a global communication and commerce medium
has led traditional and e-commerce businesses to direct increasing portions of
their marketing budgets to the Internet. Forrester Research projects that
worldwide Internet advertising expenditures are expected to
3
<PAGE>
reach $24.1 billion in 2003. Currently, the most popular form of Internet
advertising is banner advertising. We believe that, while banners provide
marketers with the ability to reach broad audiences and establish brand
awareness, banners have proven less than effective as vehicles for generating
consumer response. Forrester Research reports that response rates, or
click-throughs, from banner advertising averaged approximately 0.7% as of March
1999.
Businesses seek to maximize the impact of their advertising campaigns.
Drawbacks to traditional direct mail include the high costs involved, the delay
in response and the difficulty in tracking responses. Banner advertising is not
cost-effective because of the relatively low click-through rate it generates.
Finally, unsolicited email advertising is not desirable because of privacy
concerns and potential damage to marketers' reputations.
OUR BUSINESS
Our opt-in email direct marketing business offers direct marketers three key
advantages over postal direct marketing and banner advertising:
- SPEED. Opt-in email campaigns can be sent out immediately and generate
results in a shorter period of time than direct mail or banner
advertising.
- RESPONSIVENESS. We believe that opt-in email campaigns typically generate
response rates ranging from 5% to 15%, although Forrester Research
estimates that opt-in email campaigns generated average response rates of
18% as of March 1999. This greatly exceeds the typical banner advertising
response rate of 0.7% and typical postal direct mail response rates, which
we believe to be approximately 2%.
- COST. Forrester Research estimates that opt-in email marketing campaigns
typically cost 25% to 75% less than postal direct mail campaigns.
OUR STRATEGY
Our goal is to become the leader in opt-in direct marketing on the Internet.
The key elements of our strategy include:
- maintain and extend market leadership in opt-in email direct marketing;
- enrich our database with opt-in transaction data;
- develop new Internet marketing products and services;
- expand our sales channels; and
- leverage our scaleable technology platform.
RISK FACTORS
An investment in our common stock involves certain risks associated with our
business, including (1) the difficulty you may have in evaluating our business
and prospects or projecting our future operating results because we have a
relatively limited operating history and we are an early-stage company, (2) the
unpredictability of our future revenues and financial results quarter to quarter
and otherwise, (3) the possibility that we may incur losses in the future,
(4) the possibility that we may be unable to replace lost revenues if our
marketing customers cease to do business with us, as they may do at any time,
(5) our dependence on third parties, who may terminate their agreements with us
any time, for collection of email addresses for our database, (6) the ability of
Internet users to remove their names from our database or to change their email
addresses at any time, (7) our need to expand and retain our marketing customer
base, (8) our reliance on resellers to increase the orders for use of opt-in
email addresses in our database, (9) the strain we are experiencing and the
additional strains which we anticipate our planned growth will place upon our
management systems and resources, (10) uncertainties associated with possible
overseas expansion, (11) our dependence upon Rosalind Resnick, Ryan Scott
Druckenmiller, and our employees, (12) the difficulty of preventing others from
using our intellectual property, (13) following this offering, Rosalind Resnick
and Ryan Scott
4
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Druckenmiller will control us, and their interests may conflict with yours, and
(14) uncertainty concerning our ability to obtain additional financing if we
need it.
In addition, investing in our common stock involves certain risks associated
with our industry in general, including (1) our dependence on growth in use of,
and perceived effectiveness of, the Internet for email direct marketing and
e-commerce, (2) our exposure to Internet, software or hardware failures or
shortcomings and to Year 2000 risks, (3) the potential for damage to our
business due to privacy concerns of Internet users, (4) the competition we face,
(5) our need to adapt to rapid changes in technology, industry standards, and
product offerings, (6) the damaging impact that increasing governmental
regulation may have upon us, and (7) our exposure to product liability claims
and claims due to the activities of our customers.
For a fuller discussion of these and other risk factors affecting us and our
business, see "Risk Factors."
THE OFFERING
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<S> <C>
Common stock offered by NetCreations......... 3,300,000 shares
Common stock to be outstanding after the
offering................................... 15,000,000 shares(1)
Use of proceeds.............................. To fund expansion of our network of
third-party Web sites, to increase
expenditures on sales, marketing, research
and development and other costs of expanding
our business, for working capital and for
other general corporate purposes, which may
also include acquiring or investing in
companies, technologies or expertise
complementary to our business.
Proposed Nasdaq National Market symbol....... NTCR
</TABLE>
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(1) The number of shares to be outstanding after the offering excludes 1,170,000
shares of common stock reserved for issuance under our 1999 Stock Option
Plan. We have granted options, effective as of September 14, 1999, to
purchase 232,500 shares of common stock at an exercise price of $5.00 per
share. In addition, we have granted options, effective as of October 8,
1999, to purchase 100,000 shares of common stock to each of our
non-management directors, Messrs. Michael Levy, Gregory W. Slayton and
Mitchell York, at an exercise price per share equal to the lesser of $10.00
or the initial public offering price.
CORPORATE INFORMATION
We are a New York corporation. We were originally incorporated in Florida in
1995 and we reincorporated in New York in January 1996. Our principal executive
offices are located at 379 West Broadway, Suite 202, New York, New York 10012
and our telephone number is (212) 625-1370. Our corporate Web site is located at
WWW.NETCREATIONS.COM. We provide our services on our other Web site,
WWW.POSTMASTERDIRECT.COM. Information on our Web sites does not constitute part
of this prospectus.
NETCREATIONS, POSTMASTER and 100% OPT-IN are registered trademarks of
NetCreations, Inc. We have filed applications to register POSTMASTERDIRECT.COM
and POSTMASTER DIRECT RESPONSE. Other service marks, trademarks and tradenames
referred to in this prospectus are the property of their respective owners.
5
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
INCEPTION TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------------------------- ------------------------
1995 1996 1997 1998 1998 1999
------------ -------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues (1)............... $101,652 $476,190 $1,100,781 $3,446,539 $2,062,333 $10,202,614
Gross profit................... 93,439 433,100 927,657 1,936,763 1,249,786 5,240,947
Income (loss) before income tax
provision.................... 22,789 (1,562) 283,377 678,091 399,930 2,899,924
Net income (loss).............. $ 22,789 $ (8,996) $ 260,349 $ 605,863 $ 357,330 $ 2,597,569
======== ======== ========== ========== ========== ===========
Net income (loss) per
share-basic and diluted...... $ 0.00 $ (0.00) $ 0.02 $ 0.05 $ 0.03 $ 0.22
======== ======== ========== ========== ========== ===========
Shares used in per share
computation (000's
omitted)..................... 11,700 11,700 11,700 11,700 11,700 11,700
PRO FORMA DATA (2):
Historical income (loss) before
income tax provision......... $ 22,789 $ (1,562) $ 283,377 $ 678,091 399,930 2,899,924
Pro forma income tax provision
(benefit).................... 3,500 (1,000) 129,000 316,000 186,000 1,342,000
-------- -------- ---------- ---------- ---------- -----------
Pro forma net income (loss).... $ 19,289 $ (562) $ 154,377 $ 362,091 $ 213,930 $ 1,557,924
======== ======== ========== ========== ========== ===========
Pro forma net income (loss) per
share--basic & diluted....... $ 0.00 $ (0.00) $ 0.01 $ 0.03 $ 0.02 $ 0.13
======== ======== ========== ========== ========== ===========
Shares used in per share
computation (000's
omitted)..................... 11,700 11,700 11,700 11,700 11,700 11,700
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (3) AS ADJUSTED (3)(4)
---------- ------------- ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................ $ 798,135 $ -- $31,984,000
Working capital (deficiency)........................ 179,445 (710,190) 31,548,810
Total assets........................................ 4,576,265 3,778,130 35,762,130
Long-term debt (including current portion).......... 477,510 477,510 202,510
Total stockholders' equity.......................... 1,112,994 223,359 32,482,359
</TABLE>
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(1) Net revenues represent revenues earned for our services less volume and
broker discounts.
(2) We have elected to be taxed as an S corporation for federal and state income
tax purposes since our inception. Accordingly, no provision has been made
for federal or certain state income taxes. Pro forma net income has been
computed as if we had been fully subject to federal, state and city taxes.
Immediately prior to the effective date of this offering, we will terminate
the S corporation election and, thereafter, become a C corporation.
(3) We intend to pay to Ms. Resnick and Mr. Druckenmiller final S corporation
distributions based on current year earnings, to the extent of available
cash balances. At September 30, 1999, this amount would have been $798,135.
Pro forma adjustments reflect (a) our pro forma S corporation distributions
for this amount and (b) the deferred tax liability resulting from the
termination of our S corporation election.
(4) As adjusted to reflect the sale of 3,300,000 shares of common stock offered
at an assumed initial public offering price of $11.00 per share, the
mid-point of the filing range, and the application of the estimated net
proceeds from this offering.
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE YOU DECIDE TO BUY
OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS MAY SUFFER. AS A RESULT, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF
THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
WE DEPEND ON CONTINUED GROWTH IN USE OF THE INTERNET FOR EMAIL DIRECT MARKETING
AND E-COMMERCE.
The business of email direct marketing and e-commerce is new and rapidly
evolving. Our business would be adversely affected if Internet usage for the
exchange of information and for commerce does not continue to grow because
advertisers might feel less compelled to use our services as opposed to more
traditional advertising services. Internet usage may be inhibited for a number
of reasons, such as:
- inadequate network infrastructure;
- security concerns;
- inconsistent quality of service; and
- lack of availability of cost-effective, high-speed service.
THE ACCEPTANCE AND EFFECTIVENESS OF INTERNET OPT-IN EMAIL DIRECT MARKETING IS
RELATIVELY UNPROVEN.
Our future success will depend on an increase in the use of the Internet as
an opt-in marketing medium or for opt-in email generally. The opt-in email
direct marketing industry is new and rapidly evolving. Consequently, current
indications of its effectiveness compared to traditional postal direct marketing
may not be supported as the industry matures. As a result, there generally is
significant uncertainty about the demand and market acceptance for opt-in email
marketing solutions or Internet advertising solutions.
Many of our current or potential customers may have little or no experience
using the Internet for direct marketing purposes. The adoption of Internet
direct marketing, particularly by those entities that have historically relied
upon traditional media and mailings for marketing, requires the acceptance of a
new way of conducting business. These companies may find email direct marketing
to be less effective for promoting their products and services as compared to
traditional mass media and postal marketing.
We cannot assure you that the market for email direct marketing will
continue to emerge, or will become sustainable.
INTERNET, SOFTWARE OR HARDWARE FAILURES OR SHORTCOMINGS COULD ADVERSELY AFFECT
OUR BUSINESS IN DIVERSE WAYS.
We depend on software, hardware, and the Internet to collect, store,
retrieve and process email addresses and other data and to send email for our
direct marketing customers. The third-party Web sites which we rely upon to
collect email addresses are less likely to collect additional email addresses
for us if their operations are disrupted or slowed by Internet, software or
hardware failures or shortcomings or if such occurrences discourage potential
visitors from using the Internet or visiting their sites. Direct marketers are
less likely to utilize our services if potential customers are prevented or
discouraged from using the Internet and receiving promotional messages due to
Internet, software, or hardware failures or shortcomings.
Many of the Internet service providers and Web site operators on whom we
depend have experienced significant service slowdowns, malfunctions, outages and
capacity limitations. We also depend upon the reliability, speed, data capacity,
ease of use, accessibility and security of the Internet as well as its continued
development and acceptance for commercial use generally.
The Internet infrastructure may not be able to support the increasing
demands placed on it at acceptable service levels as Internet usage grows. An
individual's satisfactory Internet experience may also depend on the proper
functioning and the continued development of equipment such as high speed modems
and personal computers. Not all software and equipment protocols and standards
are compatible. Users may experience difficulties due to computer-related,
telecommunications, or
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other equipment, software, or system failures or shortcomings unrelated to our
services.
In addition, some of our systems' infrastructure is not yet supported by
redundant servers. Any failure in our system that is not backed up by redundant
servers could cause significant delays in our business operations.
If we experience a temporary or permanent business interruption, whether due
to casualty, an operating malfunction, a power outage or otherwise, we may have
to reconfigure our software, hardware and Internet infrastructure to address our
customers' needs and orders. We may be unable to do so effectively or rapidly
enough to avoid loss of business or damage to our reputation. Any interruption
of service would be potentially harmful to our business and reputation because
even a short interruption in the midst of performing a time-sensitive project
for a customer could be very damaging to our relationship with that customer. In
certain instances, such as power outages or Internet service provider outages,
we may be unable to do anything other than wait for the restoration of service
and suffer the consequences of business interruption.
OUR BUSINESS COULD BE NEGATIVELY AFFECTED BY YEAR 2000 ISSUES.
Historically, most computer databases, as well as embedded microprocessors
in computer systems and industrial equipment, were designed with date data using
only two digits of the year. Most computer programs, computers and embedded
microprocessors controlling equipment were programmed to assume that all two
digit dates were preceded by "19," causing "00" to be interpreted as the year
1900. This formerly common practice now could result in a computer system or
embedded microprocessor which fails to recognize properly a year that begins
with "20," rather than "19." This in turn could result in computer system
miscalculations or failures, as well as failures of equipment controlled by date
sensitive microprocessors, and is generally referred to as the "Year 2000"
issue.
It is uncertain what impact the Year 2000 issue will have on the Internet,
but major disruption is possible. We rely on telecommunications carriers to
transmit our Internet traffic over local and long distance networks, on Internet
service providers for access to the Internet, and on electric utilities for
power for our systems and the operation of our business. We may not be able to
operate if the networks and systems of the telecommunications carriers, Internet
service providers, or electric utilities on which we rely fail due to the Year
2000 issue. There is no assurance that we would be able to make alternative
arrangements effectively, in timely fashion, or at all to avoid loss of business
or damage to our reputation in the event of any such failure.
The third-party Web sites upon which we rely for collection of email
addresses rely upon those same types of utility and service providers, and upon
the operation of hardware and software for their operations. Our direct
marketing clients depend upon services and equipment of that type for their own
operations and for access to our online services. The Web site visitors whose
email addresses we seek to collect and to whom we seek to send email for our
customers depend on services and equipment of that type in order to access and
utilize the Internet. Web sites would not be able to collect email addresses,
direct marketing clients would not be able to access our online services and
might be unable to operate and generate revenues to pay for our services, and
consumers might be unable to visit Web sites or receive email or otherwise
utilize the Internet if the networks and systems of the telecommunications
carriers, Internet service providers, electric utilities, hardware or software
on which any of them rely fail due to the Year 2000 issue. Any occurrence of
that type would adversely affect our business.
Our own software was designed to be Year 2000 compliant when configured and
used in accordance with the related documentation and provided that the
underlying operating system of the host machine and any other software used with
or in the host machine or our service are Year 2000 compliant. However, we have
not yet tested our software or software obtained from third parties for Year
2000 compliance. We are seeking assurances from our vendors that licensed
software is Year 2000 compliant but
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have not yet received them. Even with such assurances the software may contain
undetected errors or defects associated with Year 2000 date functions.
We are evaluating our material internal information technology systems,
including both our software products and third-party software and hardware
technology, to determine whether that software is Year 2000 compliant. We have
not yet initiated a similar assessment of our non-information technology systems
although we expect to complete a Year 2000 compliance evaluation of that
software before the end of 1999. We may experience significant unanticipated
problems and costs caused by undetected errors or defects in the technology used
in our internal information technology and non-information technology systems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or future customers may incur significant
expenses to achieve Year 2000 compliance. If our customers are not Year 2000
compliant, our business may be harmed because they may experience material costs
to remedy problems, they may face litigation costs, and they may delay purchases
or implementation of our service.
We estimate that we have incurred nominal costs to date in connection with
our Year 2000 plan which we have funded from cash balances and for which we have
not separately accounted. We currently estimate the total costs of completing
our Year 2000 plan, including costs incurred to date, to be less than $250,000,
but the costs of implementing and developing any plan may be significant if we
discover that problems have been overlooked by ourselves or by our vendors or
suppliers. We expect to be unable to develop any contingency plan to deal with
Year 2000-related service outages by the telecommunications carriers, Internet
service providers, and electric utilities upon which we rely. We plan to develop
contingency plans to deal with Year 2000 compliance issues which we may discover
in our internal systems after we complete our evaluations for Year 2000
compliance, but there can be no assurance that we will be able to develop and
implement effective contingency plans in timely fashion or at all, and failure
to address Year 2000 compliance problems could materially adversely affect us.
We estimate that our evaluation will be completed by December 1, 1999.
There is considerable risk of litigation arising due to Year 2000 compliance
issues. Because of the unprecedented nature of litigation of that type, it is
uncertain whether or to what extent we may be affected by litigation in the
event that our service is interrupted or experiences other problems due to Year
2000 issues.
YOU MAY HAVE DIFFICULTY EVALUATING OUR BUSINESS AND PROSPECTS OR PROJECTING OUR
FUTURE OPERATING RESULTS BECAUSE WE HAVE A RELATIVELY LIMITED OPERATING HISTORY
AND WE WILL ENCOUNTER RISKS AND DIFFICULTIES AS AN EARLY-STAGE COMPANY IN A NEW
AND RAPIDLY EVOLVING MARKET.
We have been in the business of providing Internet marketing services since
we commenced operations in 1995. During 1996, our principal service offerings
transitioned from that of Web site design and promotion to opt-in email
marketing services. It is unlikely that the growth rates we have experienced are
sustainable as our business and the market for opt-in email marketing services
mature and more competitors enter the field.
We will encounter risks and difficulties frequently experienced by
early-stage companies in new and rapidly evolving markets, including our ability
to:
- anticipate and adapt to our evolving market;
- implement sales and marketing initiatives;
- develop and introduce new products and services;
- enhance our brands;
- attract, retain and motivate qualified personnel;
- respond to actions taken by our competitors;
- effectively manage our growth by building a solid base of management,
operations and technology; and
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- integrate acquired businesses, technologies and services.
We may not successfully address any of these risks.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SEASONALLY SO THE RESULTS OF ONE
QUARTER ARE NOT NECESSARILY INDICATIVE OF RESULTS IN THE SUCCEEDING QUARTER AND
THE PRICE OF OUR SECURITIES MAY FLUCTUATE IN RESPONSE TO THOSE FLUCTUATIONS.
The traditional postal direct marketing industry tends to have higher
revenues in the fourth quarter of the year, when direct marketers send out
holiday promotions, and somewhat lower revenues during the summer, when direct
marketing activity is reduced overall. To date, because of the rapid growth of
the email direct marketing industry, our revenues have grown sequentially from
quarter to quarter. Therefore, our revenues have not followed the seasonal
patterns of the traditional postal direct marketing industry. We anticipate,
however, that as our business matures, our revenues will track more closely the
seasonal patterns experienced in the traditional postal direct marketing
industry.
OUR FUTURE REVENUES ARE UNPREDICTABLE, AND OUR FINANCIAL RESULTS MAY FLUCTUATE.
Our historical financial data is not reliable as a basis upon which to
predict our future revenues or operating expenses for a number of reasons,
including our limited operating history, the emerging nature of our industry
category, and our growth strategy. Furthermore, there is no guarantee that the
seasonal fluctuations that we have experienced in our operating results to date
will continue as before as our business and the industry evolve and grow.
Our financial results may fluctuate significantly because of several
factors, such as the following, all of which are beyond our control except for
the incurrence of expenses:
- Revenues in any quarter are substantially dependent on orders booked and
delivered in that quarter;
- Demand by direct marketers for use of opt-in email addresses in our
database may fluctuate due to seasonal and cyclical marketing campaigns;
- The market in which we compete is relatively new and rapidly evolving;
- We expect to increase our expense levels in the near future in an attempt
to grow our database and our market share more rapidly. As a result, any
delay in generating or recognizing revenues could cause significant
variations in our operating results from quarter to quarter and could
result in operating losses;
- The relatively new industry in which we are engaged has not been tested in
a recessionary economic environment where budget constraints and
contraction in income available for discretionary purchases could reduce
the use of our services;
- Competition is increasing in our industry, and we anticipate that this
could result in changes in our sales, pricing policies or expenses or
those of our competitors; and
- General economic conditions and economic conditions specific to the
Internet and the online direct marketing industry may vary.
THERE IS NO ASSURANCE THAT WE WILL CONTINUE TO BE PROFITABLE, AND WE MAY INCUR
LOSSES IN THE FUTURE.
We had net income of $605,863 in 1998 and $260,349 in 1997. On a pro forma
basis, to adjust net income as if it had been fully subject to Federal, state
and city taxes as a C corporation, rather than an S corporation, we had net
income of $362,091 in 1998 and $154,377 in 1997. As of September 30, 1999, we
had retained earnings of $1,092,619 and shareholder's equity of 1,112,994. We
had net income of $2,597,569 ($1,557,924 pro forma) for the nine months ended
September 30, 1999, as compared with net income of $357,330 ($213,930 pro forma)
for the nine months ended September 30, 1998. We may not be able to sustain our
current levels of profitability and may incur losses in the future.
We expect to increase our expenditures on sales and marketing, research and
development,
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and general and administrative expenses in order to expand our business. If we
acquire other businesses in connection with our planned expansion, we may have
to write off goodwill and/or other intangibles associated with any such
acquisition. Increased competition in our industry may also adversely affect our
profitability as may other conditions which may be beyond our control. In
addition, many of our direct marketing customers are not profitable and may not
have resources available in the future to rent our lists or pay for our
services.
IF OUR DIRECT MARKETING CUSTOMERS CEASE TO DO BUSINESS WITH US, WE MIGHT BE
UNABLE TO REPLACE LOST REVENUES.
We have no long-term contracts with any of our direct marketing customers.
There is no guarantee that any of the direct marketers who have previously used
our services will use our lists in any particular quarter or that they will
continue to use our lists in the future. Substantially all of the contracts with
our direct marketing customers can be terminated on short notice without
penalty.
WE ARE DEPENDENT ON THIRD PARTIES TO GENERATE A SUFFICIENT NUMBER OF EMAIL
ADDRESSES AND, IF THEY TERMINATE THEIR AGREEMENTS WITH US, OUR BUSINESS COULD BE
SERIOUSLY HARMED.
We depend on our network of third-party Web sites to post sign-up forms on
their sites and encourage visitors to their sites to sign up to receive
commercial email messages from our direct marketing customers about topics of
interest. Several high-traffic sites with which we signed agreements in the past
have not been successful in generating significant numbers of opt-in email
addresses for our database. Furthermore, the sites in the network:
- are not within our control;
- may incorporate into their Web sites the sign-up forms of other email
marketing companies in addition to or in place of our sign-up form; and
- are not obligated to continue to build lists for us.
Less than five Web sites have left our network. We have terminated our
relationship with four Web sites with which we did not desire to continue to do
business. We intend to increase the size of our database through partnership
agreements with high-traffic Web sites, but there is no assurance that we will
do so in timely fashion or at all. Our increasing expenditures to develop this
channel could materially adversely affect our operating margins and our cash
flow. If we fail to successfully implement this strategy, our business,
financial condition and results of operations could be materially adversely
affected.
THE INTERNET USERS WHO SIGN UP TO RECEIVE OUR MAILINGS CAN OPT OUT, OR REMOVE
THEMSELVES FROM OUR LISTS, OR MAY CHANGE THEIR EMAIL ADDRESSES AT ANY TIME.
We provide detailed instructions at the top of every email message we send
out allowing Internet users to remove themselves from our lists. Because this is
a new business model, we do not know how long the average Internet user will
stay on our lists or how many mailings they will accept before opting out.
Currently, the opt-out rate is less than one percent on any given mailing.
However, as more and more marketers use our lists and send out offers, the
number of mailings sent to names on our lists also increases and the number of
those opting out may increase as well. If the rate of list removal requests were
to increase substantially, our fees for the use of our lists could decrease and
our business, financial condition, and results of operations could be materially
adversely affected.
In addition, it is possible that some of the Internet users in our database
could change their email addresses, thus making some of our direct marketing
customers' messages undeliverable. If a message sent to an Internet user is
returned to us because the email address is invalid, we remove that email
address from our database. If a large number of Internet users in our database
change their email addresses and do not update the information in our database,
or if they delay before opting in again or do not opt in again, then our
business, financial condition or results of operations could be materially
adversely affected.
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OUR BUSINESS COULD BE SERIOUSLY AFFECTED BY THE PRIVACY CONCERNS OF INTERNET
USERS.
Our opt-in email direct marketing service collects consumer preference and
profile information each time an Internet user visits a participating Web site
and volunteers information in response to survey questions. Privacy concerns may
cause users to resist signing up for our lists and providing the personal data
necessary to support the growth and expansion of our database. More importantly,
even the perception of privacy concerns, whether or not valid, may indirectly
inhibit market acceptance of our service.
WE DEPEND ON ADDING TO AND RETAINING OUR MARKETING CUSTOMER BASE.
We have sent email messages for direct marketing campaigns to email
addresses in our database on behalf of over 1,500 email direct marketing
customers. However, 15 customers accounted for approximately 45% of our net
revenues in the first nine months of 1999. On July 5, 1999, we terminated our
email list management agreement to manage opt-in email addresses collected from
YesMail.com's Web site. We also terminated our email list brokerage agreement
whereby we agreed that YesMail.com would earn brokerage discounts on orders for
use of opt-in email addresses in our database by YesMail.com's email direct
marketing customers. YesMail.com, using the email addresses in the NetCreations
database, resold use of certain of those lists to its own email direct marketing
customers to account for approximately 7% of our net revenues in 1998 and
approximately 11% of our net revenues for the first nine months of 1999. In
addition, 3.3% and 0.8% of our net revenues in 1998 and the first nine months of
1999, respectively, were generated by selling use of opt-in email addresses
collected from the YesMail.com Web site, of which YesMail.com is the email list
owner, to our email direct marketing customers. Our ability to attract new
marketing customers will depend on a variety of factors, including the
responsiveness, scalability, reliability and cost-effectiveness of our email
marketing services and our ability to effectively market these services.
Many of our current marketing customers initially use a small number of our
lists for testing purposes. If such a test mailing is successful, the customer
may repeat his mailing to a much larger universe of lists and continue to use
our lists in the future. If we fail to generate repeat and expanded business
from our current and future customers, our business, financial condition and
results of operations would be seriously harmed.
WE RELY ON RESELLERS AND INTEND TO INCREASE OUR RELIANCE ON RESELLERS.
We intend to increase the proportion of our marketing customers obtained
through our reseller channels, which include email address list brokers,
interactive advertising agencies, Web design firms and Web sites that attract
small business owners. Such parties are typically referred to as "resellers"
because they place orders in their own names for use of opt-in email addresses
in our database on behalf of their email direct marketing customers. We bill the
reseller our customary fees for use of opt-in email addresses in our database by
their email direct marketing customers, less any applicable volume discounts,
but we also grant a brokerage discount to the reseller. In 1998, resellers were
responsible for approximately 38% of our net revenues and represented
approximately 44% of our net revenues for the first nine months of 1999.
While we intend to expand our own sales force, we believe that we can grow
our business more rapidly by relying on the larger aggregate sales force
represented by those reseller channels. If we fail to grow our business,
competitors may be able to enter our industry or find ways to compete more
effectively with us for our customers. Consequently, if we fail to increase the
proportion of our marketing customers obtained through reseller channels, our
business, financial condition and results of operations could be materially
adversely affected.
Because we give resellers discounts, any sales through resellers will have
lower gross margins than direct sales of the same email addresses. To the extent
we increase the proportion of sales through resellers, our net revenues and
gross profits could decrease. Our
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agreements with such resellers are generally not exclusive and, in many cases,
may be terminated by either party without cause. These resellers do not have
minimum purchase or resale requirements. Many of these resellers market email
lists that are competitive with our email lists. These resellers may not give a
high priority to the marketing of our lists or may not continue to carry our
lists. They may give a higher priority to other lists, including their own lists
or the lists of our competitors. We may not retain any of our current resellers
or successfully recruit new resellers.
THE PLANNED EXPANSION OF OUR BUSINESS WILL STRAIN OUR MANAGEMENT SYSTEMS AND
OTHER RESOURCES.
Since inception, our net revenues have grown from $102,000 in 1995, to
$3.4 million in 1998, to $10.2 million for the first nine months of 1999. We had
two employees in 1995, 10 at the end of 1998 and 29 on September 30, 1999. In
addition, the pursuit of our business strategy will continue to place a
significant strain upon our managerial, operational and financial resources.
We will need to improve our financial and management controls, reporting
systems and procedures. We will also have to continue to expand, train and
manage our work force for marketing, sales and technical support, product
development, and infrastructure management, and manage multiple relationships
with customers and other third parties. We also plan to expand the geographic
scope of our customer base and operations. We will need to continually expand
and upgrade our technology infrastructure and systems and ensure continued high
levels of service, speedy operation, and reliability. To achieve our objectives,
we may acquire technologies or products or enter into strategic alliances or
acquisitions, although we have no plans or agreements to do so at the present
time.
Our senior management is not experienced in managing the kind of rapid
growth that we currently envision. In addition, three members of our management
team, our Chief Financial Officer, our Vice President of Sales, and our Vice
President of Business Development, have joined us in the past three months and
therefore have a short history of working together.
WE FACE INTENSE COMPETITION AND MAY BE UNABLE TO COMPETE SUCCESSFULLY.
The market for our service is intensely competitive, evolving and subject to
rapid technological change. We expect the intensity of competition to increase
in the future. We believe that we must rapidly expand our business and market
share. If we fail to do so, competitors may copy our business strategy or take
other steps to prevent us from achieving our goals.
Our competitors include other email direct marketing companies;
incentive-based direct marketers; providers of permission-based outsourced email
solutions; email list owners that manage their own email lists in-house; banner
advertising companies; and postal direct marketing companies. In addition,
because there are relatively low barriers to entry in the email direct marketing
business, we expect additional competition from other established and emerging
companies as the email direct marketing business continues to develop and
expand. We expect to face competition in the future from other companies
entering the field as email address list owners, managers and brokers. Companies
that operate banner advertising networks have entered the email marketing
business through acquisitions of competing email marketing companies.
Many of our competitors have longer operating histories; significantly
greater financial, technical, marketing and other resources; significantly
greater name recognition; and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
our current and potential customers, have extensive knowledge of our industry
and are capable of offering complementary services and products that are beyond
the scope of our current business operations but might be attractive to
customers seeking to purchase services in addition to email direct marketing
services. As a result, our competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to
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devote greater resources to the development, promotion and sale of their
services than we can.
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 services to address customer needs. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. We also expect that competition
will increase as a result of industry consolidations.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE.
Our future success depends on our ability to:
- adapt to rapidly changing technologies;
- adapt our services to evolving industry standards; and
- improve the performance, features and reliability of our service and
product offerings in response to competitive product and service offerings
and evolving demands of the marketplace.
We cannot assure you that we will succeed in addressing these issues. Our
efforts to upgrade our software or introduce new software may not be completed
in a timely fashion or at all and may result in errors which could seriously
harm us. In addition, the widespread adoption of new Internet networking
technologies or other technological changes could require us to expend
substantial amounts of capital to change our services or infrastructure.
Moreover, these changes may involve new technologies which may not be measurable
by our current methods.
WE EXPECT TO EXPAND OUR OPERATIONS OVERSEAS BUT YOU WILL NOT BE ABLE TO QUANTIFY
THE RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION.
We intend to pursue international expansion during the next 12 months but do
not have a specific geographic focus, detailed plan for implementation or
schedule to do so at this time. International operations are subject to risks
that may materially adversely affect our business, results of operations and
financial condition. In particular, opt-in email direct marketing might not
become an acceptable form of advertising internationally. In addition, privacy
regulations in some other countries, including the European Union, are more
stringent than in the United States. These regulations could hinder our ability
to collect demographic data on potential consumers, which could have a material
adverse affect on our business. Other risks of international operations are:
- regulatory requirements;
- reduced protection for intellectual property rights in some countries;
- difficulties and costs of staffing and managing foreign operations;
- political and economic instability; and
- fluctuations in currency exchange rates.
WE ARE HIGHLY DEPENDENT UPON ROSALIND RESNICK AND RYAN SCOTT DRUCKENMILLER, OUR
FOUNDERS, AND OUR OTHER EMPLOYEES AND THE LOSS OF THEIR SERVICES COULD HARM US.
Rosalind Resnick, our Chief Executive Officer, President and Chairman of our
board of directors, and Ryan Scott Druckenmiller, our Chief Technology Officer
and a member of our board of directors, founded us and are essential to the
continued viability of the business. We have key man life insurance in the
amount of $5 million each, and disability insurance in the amount of $3 million
each, on Ms. Resnick and on Mr. Druckenmiller. We cannot assure you that this
coverage will be adequate to compensate us for the loss of services of either
one of our founders.
Our future success depends on the continued service of our senior
management, sales, marketing, customer service, administrative, and technology
personnel. Both our management team and our work force are currently small. As
of September 30, 1999, we had 29 employees. The loss of the services of one or
more of our key personnel could seriously harm our business, financial condition
and results of operations. Although Ms. Resnick and Mr. Druckenmiller, as well
as our Chief Financial Officer, our Vice President of Sales and our Vice
President of Business Development
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have all executed and delivered employment contracts with us which will expire
on December 31, 2002, the employees may terminate the contracts at any time. In
addition, the balance of our work force are employed on an at-will and
short-term basis.
Our future success also depends on our continuing ability to attract, hire,
train and retain other highly skilled managerial, technical, sales, marketing
and customer service personnel in order to accommodate the growth of our
business. In addition, we are likely to need to recruit additional senior
management personnel as our business grows, particularly in the international
arena. Competition for such personnel is intense, and we may fail to retain our
key employees, or attract, assimilate or retain other highly qualified personnel
in the future.
WE MAY NOT BE ABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY.
Although we are a marketing company, we also depend heavily on technology to
operate our business. We have developed proprietary technology to enable Web
site visitors to opt in to receive targeted advertising information from our
direct marketing customers. The software also enables our direct marketing
customers and email address list brokers to target email addresses in our
database associated with persons with specific demographics, and allows direct
marketers to track the response rates to their mailings. We have developed a
double opt-in confirmation system which sends Internet users a confirmation
email message after they have signed up their email address in our database and
requires them to verify that they would like to begin receiving commercial email
messages from our marketing clients. We have filed a patent application for this
technology. We also have know-how and trade secrets, including the identities
and other information concerning our direct marketing customers and the
information in our email address database, which we seek to protect. If we do
not adequately protect our intellectual property, our business, financial
condition and results of operations will be materially adversely affected.
While we are unable to determine the extent to which piracy of our
technology exists, software piracy can be expected to be a persistent problem.
In addition, the laws of some foreign countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. Our means of
protecting our proprietary rights may not be adequate. Our competitors may
independently develop similar technology, duplicate our technology design around
patents issued to us or our other intellectual property, attempt to copy aspects
of our service, or obtain and use our proprietary information that we regard as
proprietary.
There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. It is possible that, in the future,
third parties may claim that our current or potential future technologies
infringe upon their intellectual property. We have not performed any
comprehensive analysis of patents of others that may limit our ability to do
business.
We expect that as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps infringement claims will be made more frequently. Any such claims, with
or without merit, could be time-consuming, result in costly litigation and
diversion of management resources, cause product shipment delays or require us
to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all, which could seriously harm our business, financial condition and results of
operations.
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR OUR SERVICE, WHICH
COULD SERIOUSLY HARM OUR BUSINESS.
As Internet marketing and commerce evolves, we expect that federal, state or
foreign governments will increasingly adopt laws and regulations which could
hinder the acceptance of the Internet as a communications and commercial medium
or otherwise harm our business. We expect that laws or regulations will
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be enacted in various jurisdictions covering issues such as:
- the transmission of unsolicited email marketing messages;
- user privacy;
- content of email messages;
- quality of products and services; and
- the solicitation, collection, processing and distribution of
personal/customer information,
which could adversely affect our business. Such laws and regulations could
adversely affect the demand for our services if direct marketers perceive that
we will be hindered from reaching a substantial targeted audience or that
substantial liability might arise due to technical breaches of such
restrictions, such as limitations on content or transmission. Our own business
exposure might increase substantially if we were to be held responsible for the
content or quality of email messages which we transmit on behalf of our direct
marketing customers. If we are forced to bear additional administrative burdens
in collecting, storing or maintaining data, our expenses would increase and
market conditions might preclude us from passing our increased costs on to our
direct marketing customers. While we seek to respect Web site visitor privacy
and do not send unsolicited email messages to our database, user privacy laws
and regulations might be designed so restrictively as to make it increasingly
difficult to obtain opt-in email addresses or sell the use of those addresses to
our direct marketing customers.
Laws and regulations regulating the transmission of unsolicited email
marketing messages are being considered by many jurisdictions. Legislation of
that type has recently been adopted by the States of California, Virginia and
Washington, and similar legislation is pending in the State of New York and in
Congress. The Telecommunications Act of 1996 prohibits some types of information
and content from being transmitted over the Internet. The prohibition's scope
and the liability associated with a Telecommunications Act violation are
currently unsettled. In addition, although substantial portions of the
Communications Decency Act were held to be unconstitutional, we cannot be
certain that similar legislation will not be enacted and upheld in the future.
The European Union adopted a Directive on Privacy, effective on October 24,
1998, which establishes minimum standards for the collection and use of personal
identifying information in the European Union and prohibits the transfer of this
information to countries whose privacy standards are deemed inadequate.
ROSALIND RESNICK AND RYAN SCOTT DRUCKENMILLER CONTROL US, AND THEIR INTERESTS
MAY CONFLICT WITH YOUR INTERESTS.
We anticipate that after we complete this offering, Rosalind Resnick will
beneficially own 5,967,000 shares, or approximately 39.8% of our outstanding
common stock, and Ryan Scott Druckenmiller will beneficially own 5,733,000
shares, or approximately 38.2% of our common stock. In addition to being our
founders, as well as executive officers and members of our board of directors,
Ms. Resnick and Mr. Druckenmiller have chosen to be partners in life.
Ms. Resnick and Mr. Druckenmiller disclaim beneficial ownership of each other's
shares. However, if Ms. Resnick and Mr. Druckenmiller were to act in concert
they would be able to exercise control over all matters requiring approval by
our shareholders, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change in control of our company and
of giving Ms. Resnick and Mr. Druckenmiller the opportunity to substantially
impact all matters requiring approval by our shareholders even if Ms. Resnick
and Mr. Druckenmiller do not act in concert.
WE FACE UNCERTAINTY OF ADDITIONAL FINANCING FOR OUR CAPITAL NEEDS.
We currently anticipate that the net proceeds from this offering, together
with our funds from operations, will be sufficient to meet our anticipated need
for working capital, capital expenditures and business expansion for at least
the next twelve months. If we are unable to increase our revenues as
anticipated, we will
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need to raise additional funds. We may need more money sooner if we:
- decide to expand faster than planned;
- develop new or enhanced services or products ahead of schedule;
- need to respond to competitive pressures; or
- need to acquire complementary products, businesses or technologies.
We currently do not have any commitments for additional financing. We cannot
be certain that additional financing will be available when and to the extent
required or that, if available, it will be on acceptable terms. If adequate
funds are not available on acceptable terms, we may not be able to fund our
expansion, develop or enhance our products or services or respond to competitive
pressures.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
Errors, omissions or defects in or other performance problems with our
service could result in financial or other damages to our marketing customers
because our marketing customers use our service for time-critical communications
with their prospective customers. Our marketing customers could seek damages for
losses from us. Our license agreements typically contain provisions designed to
limit our exposure to such claims, but the protection afforded by such
provisions is dependent upon the solvency of the parties to our licensing
agreements and existing or future laws or unfavorable judicial decisions could
negate such limitation of liability provisions. We have not experienced any
liability claims to date. However, a liability claim brought against us, even if
not successful, would likely be time-consuming and costly. A liability claim
could materially adversely affect our business, financial condition and results
of operations.
WE MAY BE SUBJECT TO CLAIMS DUE TO THE ACTIVITIES OF OUR CUSTOMERS.
We cannot predict whether our role in facilitating our customers' promotion
of products and services would expose us to liability. If that should occur, we
could be required to expend significant management and financial resources to
address any such claim or to pay any fines or penalties which might result or we
could be required to alter or discontinue certain methods of doing business or
take other steps which could be materially adverse to our business, financial
condition, or results of operations. Our current insurance may not provide
adequate coverage against claims which could have an adverse effect on our
business.
THE FUTURE SALE OF SHARES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK
PRICE.
The 3,300,000 shares of common stock that we are offering will be freely
tradable without restriction except for any shares purchased by our "affiliates"
as defined in Rule 144 under the Securities Act. Ms. Resnick and
Mr. Druckenmiller are our only affiliates at this time although other persons
may be deemed to be our affiliates in the future. In addition, if the
underwriters exercise their over-allotment option in part or in full, up to
495,000 additional shares will be issued and freely tradable, except for shares
purchased by our "affiliates." 11,700,000 of our outstanding shares of common
stock are "restricted securities" as defined in Rule 144. We have also granted
options to purchase 232,500 of our shares of common stock to our employees other
than Ms. Resnick and Mr. Druckenmiller. In addition, we have granted options,
effective as of October 8, 1999, to purchase 100,000 shares of common stock to
each of Messrs. Levy, Slayton and York, our non-management directors. Our stock
option plan permits the issuance of options to purchase up to 1,170,000 shares
of our common stock.
Those shares may only be resold if there is an effective registration
statement under the Securities Act covering those shares or an exemption from
registration under Rule 144 or otherwise is available. Ms. Resnick and
Mr. Druckenmiller, the holders of all of our currently outstanding shares, have
agreed that they will not sell any shares without the prior consent of the
representative of the underwriters for a period of 180 days from the effective
date of this prospectus.
The market price of our common stock could decline as a result of sales by
Ms. Resnick
17
<PAGE>
or Mr. Druckenmiller and optionholders of a large number of shares of our common
stock in the market after this offering or because of the perception that such
sales could occur. We intend to register all shares of our common stock reserved
for issuance under our stock option plan. Shares covered by such registration
will be eligible for resale in the public market, subject to Rule 144
limitations applicable to "affiliates" and to the lock-up agreements described
above. These sales also might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate.
YOU WILL SUFFER DILUTION IN THE VALUE OF YOUR SHARES.
Investors purchasing shares in this offering will incur immediate and
substantial dilution in net tangible book value per share in the amount of $8.88
per share, assuming that the initial public offering price is $11.00 per share,
the mid-point of the filing range. We have granted to our employees options to
purchase 232,500 shares of our common stock that are exercisable at $5.00 per
share. In addition, we have granted options, effective as of October 8, 1999, to
purchase 100,000 shares of common stock to each of Messrs. Levy, Slayton and
York, our non-management directors, at an exercise price per share equal to the
lesser of $10.00 or the initial pubic offering price. To the extent outstanding
options to purchase common stock are exercised at less than the initial public
offering price, there will be further dilution.
THE MARKET PRICE OF OUR STOCK MAY BE ADVERSELY AFFECTED BY MARKET VOLATILITY.
The stock market has experienced extreme price and volume fluctuations,
particularly with respect to Internet-related stocks. The trading price of our
common stock could be subject to wide fluctuations in response to a various
factors, such as the following:
- fluctuations in our quarterly or annual results of operations;
- changes in published earnings estimates by analysts and whether our
earnings meet or exceed such estimates;
- announcement of significant developments, such as the gain or loss of
contracts or relationships or innovations or product introductions by us
or our competitors;
- additions or departures of key personnel;
- changes in the rating or price targets of investment research analysts;
and
- changes in overall stock market conditions, including the stock prices of
other Internet companies.
In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation. If we
were subject to securities class action litigation, it could result in
substantial costs and a diversion of our management's attention and resources.
OUR OFFERING PRICE DOES NOT NECESSARILY RELATE TO ANY ESTABLISHED CRITERIA OF
VALUE, AND SO OUR STOCK MAY TRADE AT MARKET PRICES BELOW THE OFFERING PRICE.
The initial public offering price for the shares will be determined by
negotiations among us and the representative of the underwriters. This initial
price may not be indicative of prices that will prevail in the trading market.
WE DO NOT PLAN TO PAY CASH DIVIDENDS EVEN THOUGH WE MADE DISTRIBUTIONS TO OUR
SHAREHOLDERS WHEN WE WERE A PRIVATE COMPANY.
From the date of commencement of our business, we have elected to be taxed
as an S corporation under United States federal and state laws. In connection
with that election, we typically have made large distributions of income to our
shareholders each year, who were subject to all federal and substantially all
state taxes levied in respect of our earnings. Our shareholders paid taxes at
their personal tax rates on that income and we did not pay federal corporate
income taxes on that income. Upon consummation of this offering, we will cease
to be an S corporation and we will be taxed as a C corporation. As a result, we,
rather than our shareholders, will be taxed on income that we earn after the
date on which we cease to be an
18
<PAGE>
S corporation. We do not currently intend to pay any cash dividends from or
after that date.
CERTAIN ANTI-TAKEOVER PROVISIONS MAY ADVERSELY AFFECT OUR SHARE PRICE AND IMPEDE
"CHANGE OF CONTROL" TRANSACTIONS.
Our restated certificate of incorporation includes provisions (1) requiring
advance notice to us before nominating any person to be elected a director or
concerning any other matter to be voted upon by our shareholders,
(2) precluding shareholders from taking actions by written consent in lieu of a
meeting, (3) requiring a majority of our shareholders or our president, chairman
of our board of directors or a majority of our board to call a special meeting
of shareholders, and (4) requiring the affirmative vote of at least two-thirds
of our shareholders to amend these provisions. Our bylaws include corresponding
provisions, as well as a provision permitting our board of directors to fill
vacant directorships or increase the size of our board of directors.
Section 912 of the New York Business Corporation Law prohibits an "interested
shareholder" from engaging in a "business combination" with us for a period of
five years from the date that person first became an interested shareholder
unless certain conditions are met. Those provisions could, together or
separately:
- discourage potential acquisition proposals;
- delay or prevent a change in control; and
- limit the price that certain investors might be willing to pay in the
future for shares of our common stock.
In particular, our restated certificate of incorporation permits our board
of directors to issue up to 5,000,000 shares of preferred stock with rights and
privileges that might be senior to our common stock, without the consent of the
holders of common stock. Those rights and privileges could include voting rights
that could effectively eliminate the rights of common shareholders to control us
and direct our affairs.
19
<PAGE>
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements within the meaning of the federal securities laws. These statements
are not historical facts, but rather are based on our current expectations,
assumptions, estimates and projections about us and our industry, and certain
beliefs and assumptions. Words including "may," "could," "would," "will,"
"anticipates," "expects," "intends," "plans," "projects," "believes," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and other factors, some of which are
beyond our control, are difficult to predict and could cause actual results to
differ materially from those expressed or forecasted in the forward-looking
statements. These risks and uncertainties are described in "Risk Factors" and
elsewhere in this prospectus. We caution you not to place undue reliance on
these forward-looking statements, which reflect our management's view only as of
the date of this prospectus.
TERMINATION OF S CORPORATION STATUS
At our founding, we elected to be taxed as an S corporation. An S
corporation is exempt from federal and certain state and local taxes with the
owners being taxed instead of the business entity. As a result, our shareholders
during this period, Ms. Resnick and Mr. Druckenmiller, were subject to all
federal and certain state taxes levied on our earnings.
Immediately prior to the effective date of this offering, we will terminate
the S corporation election and, thereafter, become a C corporation. Adjustments
were necessary to reflect income tax expense in our pro forma statements of
operations to show the tax expense that would have been recorded had we been
taxed as a C corporation.
We agreed with Ms. Resnick and Mr. Druckenmiller that, if any adjustment is
made to our taxable income for any period through the date on which the S
corporation election is terminated that increases their tax liability, we will
reimburse them to the extent our tax liability is decreased. If an adjustment
during that period increases our tax liability, they will reimburse us to the
extent their tax liability is decreased. These reimbursements to Ms. Resnick and
Mr. Druckenmiller must also compensate them for any taxes due as a result of our
reimbursement to them.
We intend to pay to Ms. Resnick and Mr. Druckenmiller final S corporation
distributions based on current year earnings, to the extent of available cash
balances. At September 30, 1999, this amount would have been $798,135.
20
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common
stock in this offering will be approximately $32.3 million. If the underwriters
fully exercise the over-allotment option, the net proceeds of the shares sold by
NetCreations will be approximately $37.3 million. Net proceeds is the amount
NetCreations expects to receive after paying the underwriting discount and other
expenses related to the offering. For the purpose of estimating net proceeds,
NetCreations is assuming that the public offering price will be $11.00 per
share.
We intend to use the net proceeds as follows:
- approximately $7.5 million to expand our NetCreations Network of
third-party Web sites and our database of email addresses. Although we
have no commitments or agreements with any third-party at this time, we
may explore this expansion through the acquisition of, or partnership
with, other Web sites or through other means that we may consider from
time to time;
- approximately $7.0 million to expand the sales and marketing functions
of our business;
- approximately $4.0 million to expand and continue to upgrade our
hardware to support the rapid growth of our business, including
co-locating our servers and increasing the redundancy of our networks
and database storage systems;
- approximately $1.0 million to pursue continued research and development
of our systems to improve the services we provide to our list owners
and marketers as well as to ensure the quality of the delivery of
messages to our subscribers;
- approximately $0.3 million to repay the outstanding balance under our
line of credit; and
- approximately $12.5 million to fund general corporate purposes,
including working capital.
To achieve our expansion and growth plans, we may also use a portion of the
net proceeds to acquire or invest in companies, technologies or expertise
complementary to our business. From time to time, we evaluate potential
acquisitions of companies, technologies and expertise. We have no agreements for
acquisitions or investments of that nature at this time.
The timing and amount of NetCreations' actual expenditures will be based on
many factors, including changes in technology, the availability of human
resources and cash flow from operations. The proposed use of the net proceeds of
the offering represents our management's best estimate of the expected
utilization of funds to finance our activities in accordance with our
management's current objectives and market conditions. Our management and board
of directors may actually allocate the funds in significantly different
proportions depending upon their assessment of our needs at that time.
Until NetCreations uses the net proceeds of the offering, NetCreations will
invest the funds in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have made distributions to our shareholders during the time we were
deemed an S corporation. Immediately prior to the closing of this offering, we
will change our status to a C corporation. At that same time, we intend to pay
to Ms. Resnick and Mr. Druckenmiller final S corporation distributions based on
current year earnings, to the extent of available cash balances. At
September 30, 1999, this amount would have been $798,135. We anticipate that we
will retain earnings to support operations and to finance the growth and
development of our business. Therefore, we do not expect to pay cash dividends
in the foreseeable future. Any future determination to pay cash dividends will
be at the discretion of our board of directors and will be dependent on the
financial condition, operating results, capital requirements and other factors
that our board deems relevant.
21
<PAGE>
CAPITALIZATION
The following table should be read in conjunction with our financial
statements and the notes included elsewhere in this prospectus. The following
table shows the capitalization of NetCreations as of September 30, 1999. Our
capitalization is presented (1) on an actual basis, (2) on a pro forma basis and
(3) on an as adjusted basis.
The number of issued and outstanding shares in the following table excludes
1,170,000 shares of common stock reserved for issuance under our stock option
plan of which options to purchase (1) 232,500 shares have been granted,
effective as of September 14, 1999, at an exercise price of $5.00 per share and
(2) 100,000 shares have been granted, effective as of October 8, 1999, to each
of our three non-management directors at an exercise price per share equal to
the lesser of $10.00 or our initial public offering price.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (1) AS ADJUSTED (1)(2)
----------- ------------- ------------------
<S> <C> <C> <C>
Short-term debt, including current portion of
long-term debt............................... $ 357,261 $ 357,261 $ 82,261
=========== =========== ===========
Long-term debt, less current portion........... 120,249 120,249 120,249
----------- ----------- -----------
Stockholders' equity:
Preferred Stock, no par value; no shares
authorized, issued or outstanding, actual
and pro forma; 5,000,000 shares authorized,
no shares issued and outstanding, as
adjusted................................... -- -- --
Common Stock, $.01 par value; 50,000,000
shares authorized, 11,700,000 shares issued
and outstanding, actual and pro forma;
50,000,000 shares authorized, 15,000,000
shares issued and outstanding, as
adjusted................................... 117,000 117,000 150,000
Additional paid-in capital(1)................ 1,279,000 1,481,984 33,707,984
Deferred compensation........................ (1,375,625) (1,375,625) (1,375,625)
Retained earnings(1)......................... 1,092,619 -- --
----------- ----------- -----------
Total stockholders' equity................. 1,112,994 223,359 32,482,359
----------- ----------- -----------
Total capitalization..................... $ 1,233,243 $ 343,608 $32,602,608
=========== =========== ===========
</TABLE>
- ------------------------
(1) Pro forma adjustments reflect:
- Our final S corporation distribution. We intend to pay to Ms. Resnick and
Mr. Druckenmiller final S corporation distributions based on current year
earnings, to the extent of available cash balances. At September 30, 1999,
this amount would have been $798,135;
- An additional deferred tax liability of $91,500 resulting from the
termination of our status as an S corporation; and
- Reclassification of balance in retained earnings to additional paid in
capital, after the distribution to shareholders upon conversion to a
C corporation.
(2) As adjusted to reflect:
- The sale of 3,300,000 shares of common stock offered at an assumed initial
public offering price of $11.00 per share, the mid-point of the filing
range; and
- The application of the estimated net proceeds from this offering.
22
<PAGE>
DILUTION
Purchasers of the common stock in this offering will experience immediate
and substantial dilution in the pro forma net tangible book value of the common
stock from the initial public offering price. NetCreations' net tangible book
value on September 30, 1999 was approximately $492,357, or $0.04 per share, and
$(397,278), or $(0.03) per share, on a pro forma basis after giving effect to
the final S corporation distribution and the deferred tax liability resulting
from the termination of our S corporation election. "Net tangible book value" is
total assets minus the sum of liabilities and intangible assets. "Net tangible
book value per share" is net tangible book value divided by the total number of
shares outstanding before the offering.
After giving effect to adjustments relating to the offering, NetCreations'
pro forma net tangible book value on September 30, 1999, would have been
$31,861,722 or $2.12 per share. The adjustments made to determine pro forma net
tangible book value per share are the following:
- An increase in total assets to reflect the net proceeds of the offering as
described under "Use of Proceeds," assuming that the public offering price
will be $11.00 per share.
- The addition of the number of shares offered by this prospectus to the
number of shares outstanding.
The following table illustrates the pro forma increase in net tangible book
value of $2.15 per share and the dilution (the difference between the offering
price per share and net tangible book value per share) to new investors:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $11.00
Net tangible book value per share as of September 30,
1999...................................................... $0.04
Pro forma S corporation distribution and deferred tax
liability................................................. (0.07)
-----
Pro forma net tangible book value per share as of
September 30, 1999........................................ (0.03)
Increase in net tangible book value per share attributable
to this offering.......................................... 2.15
-----
Pro forma net tangible book value per share as of
September 30, 1999 after giving effect to this
offering.................................................. 2.12
------
Dilution per share to new investors......................... $ 8.88
======
</TABLE>
The following table shows the difference between existing stockholders and
new investors with respect to the number of shares purchased from NetCreations,
the total consideration paid and the average price paid per share. The table
assumes that the public offering price will be $11 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------------- -------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 11,700,000 78.0% $ 1,000 0.0% $0.00
New investors................ 3,300,000 22.0 36,300,000 100.0 11.00
---------- ---- ----------- ----- -----
Total...................... 15,000,000 100.0% $36,301,000 100.0% $2.42
========== ==== =========== ===== =====
</TABLE>
23
<PAGE>
SELECTED FINANCIAL DATA
This section presents selected historical financial data of NetCreations.
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
you should read carefully the financial statements included in this prospectus,
including the notes to the financial statements. The selected data in this
section is not intended to replace the financial statements.
NetCreations derived the statement of operations data for the years ended
December 31, 1996, 1997 and 1998, and balance sheet data as of December 31, 1997
and 1998 from the audited financial statements in this prospectus. Those
financial statements were audited by Grant Thornton LLP, independent certified
public accountants. NetCreations derived the balance sheet data as of
December 31, 1996 from audited financial statements that are not included in
this prospectus. NetCreations derived the statement of operations data for the
period from NetCreations' inception to December 31, 1995 and the balance sheet
data as of December 31, 1995 from unaudited financial statements prepared by
management. In the opinion of management, such information has been prepared on
the same basis as the audited financial statements included elsewhere in this
prospectus. NetCreations derived the statement of operations data for the nine
months ended September 30, 1998 and 1999 and balance sheet data as of
September 30, 1999 from the unaudited financial statements included in this
prospectus. NetCreations' management believes that the unaudited historical
financial statements contain all adjustments needed to present fairly the
information included in those statements, and that the adjustments made consist
only of normal recurring adjustments. Historical results are not necessarily
indicative of the results to be expected in the future. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of the results to be expected for the entire year.
24
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
INCEPTION TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------------------------- ------------------------
1995 1996 1997 1998 1998 1999
------------- -------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues............... $101,652 $476,190 $1,100,781 $3,446,539 $2,062,333 $10,202,614
Cost of revenues........... 8,213 43,090 173,124 1,509,776 812,547 4,961,667
-------- -------- ---------- ---------- ---------- -----------
Gross profit............... 93,439 433,100 927,657 1,936,763 1,249,786 5,240,947
-------- -------- ---------- ---------- ---------- -----------
Operating expenses:
Selling and marketing.... 29,482 195,451 289,904 492,004 332,164 1,118,883
Technology, support and
development............ 28,275 177,923 193,554 373,746 232,429 339,515
General and
administrative......... 12,893 60,734 151,307 369,508 268,587 783,494
Depreciation and
amortization........... -- 554 9,515 23,414 16,676 79,756
Equity-based expense..... -- -- -- -- -- 19,375
-------- -------- ---------- ---------- ---------- -----------
Total operating expenses... 70,650 434,662 644,280 1,258,672 849,856 2,341,023
-------- -------- ---------- ---------- ---------- -----------
Income (loss) before income
tax provision............ 22,789 (1,562) 283,377 678,091 399,930 2,899,924
Income tax provision....... -- 7,434 23,028 72,228 42,600 302,355
-------- -------- ---------- ---------- ---------- -----------
Net income (loss).......... $ 22,789 $ (8,996) $ 260,349 $ 605,863 $ 357,330 $ 2,597,569
======== ======== ========== ========== ========== ===========
Net income (loss) per
share-basic and
diluted.................. $ 0.00 $ (0.00) $ 0.02 $ 0.05 $ 0.03 $ 0.22
======== ======== ========== ========== ========== ===========
Shares used in per share
computation (000's
omitted)................. 11,700 11,700 11,700 11,700 11,700 11,700
PRO FORMA DATA: (1)
Historical income (loss)
before income tax
provision................ $ 22,789 $ (1,562) $ 283,377 $ 678,091 $ 399,930 $ 2,899,924
Pro forma income tax
provision (benefit)...... 3,500 (1,000) 129,000 316,000 186,000 1,342,000
-------- -------- ---------- ---------- ---------- -----------
Pro forma net income
(loss)................... $ 19,289 $ (562) $ 154,377 $ 362,091 $ 213,930 $ 1,557,924
======== ======== ========== ========== ========== ===========
Pro forma basic and diluted
net income (loss) per
share.................... $ 0.00 $ (0.00) $ 0.01 $ 0.03 $ 0.02 $ 0.13
======== ======== ========== ========== ========== ===========
Shares used in per share
computation (000's
omitted)................. 11,700 11,700 11,700 11,700 11,700 11,700
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1999
------------------------------ --------------------------
1996 1997 1998 ACTUAL PRO FORMA(2)
-------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash...................................... $ 32,981 $ 54,002 $ 96,855 $ 798,135 --
Working capital (deficiency).............. (16,593) 68,698 339,981 179,445 (710,190)
Total assets.............................. 59,372 233,489 943,804 4,576,265 3,778,130
Long-term debt (including current
portion)................................ -- -- 44,511 477,510 477,510
Total stockholders' equity (deficiency)... (5,459) 121,129 476,992 1,112,994 223,359
</TABLE>
- ------------------------------
(1) We have elected to be taxed as an S corporation for federal and state income
tax purposes, since our inception. Accordingly, no provision has been made
for federal and certain state income taxes. Pro forma net income has been
computed as if the Company had been fully subject to federal, state and city
income taxes. Immediately prior to the effective date of this offering, we
will terminate the S corporation election and, thereafter, become a C
corporation.
(2) We intend to pay to Ms. Resnick and Mr. Druckenmiller final S corporation
distributions based on current year earnings, to the extent of available
cash balances. At September 30, 1999, this amount would have been $798,135.
Pro forma adjustments reflect our (a) pro forma S corporation distributions
for this amount and (b) the deferred tax liability resulting from the
termination of our S corporation election.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THIS DISCUSSION TOGETHER WITH THE FINANCIAL STATEMENTS AND
OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We provide Internet-based opt-in email direct marketing services that enable
direct marketers to target promotional campaigns to consumers who have given
their permission to receive email messages regarding selected topical
categories. In addition, our technology provides direct marketers, as well as
list brokers who purchase use of our email address lists on behalf of their
customers, with real-time, online email address selection and ordering as well
as response-tracking.
As of September 30, 1999, we had over 4.3 million email addresses in our
database. The email addresses in our database were collected from consumers who
opted in through our Web site or a third-party Web site, and have not
subsequently opted out or been removed from our database because an email to
that address had been returned as undeliverable. We currently manage opt-in
email address lists for over 175 Web sites. Each Web site in the NetCreations
Network accumulates email addresses by placing a sign-up template on one or more
of its Web pages which allows consumers to opt in to receive email messages in a
selection of topical categories that the Web site owner believes will be of
greatest interest to the Web site's visitors. We currently have email addresses
listed in more than 3,000 topical categories in our database.
In the first nine months of 1999, we generated over 95% of our net revenues
by providing Internet opt-in email direct marketing services to our advertising
customers. We charge direct marketers for each use of an opt-in email address
from our database. In some cases, we grant volume discounts to our customers.
Additionally, for the first nine months of 1999, we earned less than 5% of our
net revenue by charging for delivery of email for customers sending messages to
email addresses owned by such customers.
Some of our customers consist of resellers. These resellers, principally
consisting of email list brokers but also including interactive advertising
agencies, Web design firms and Web sites that attract small business owners,
place orders in the reseller's own name for use of opt-in email addresses in our
database by the reseller's email direct marketing customers. We bill the
reseller our customary fees for that use of opt-in email addresses, less any
applicable volume discounts. In addition, we grant a brokerage discount to the
reseller. Revenue earned for our services after volume and broker discounts, is
reported in our financial statements as net revenues and is recognized when
email messages are transmitted to the selected email addresses.
We typically pay to the applicable Web site owner a commission of 50% of the
revenue we have earned, less volume discounts, if applicable, each time we send
an email message to the email addresses owned by that Web site owner. In the
event that an email address appears on more than one email address list selected
by our customer, the 50% commission is only paid to the Web site owner whose
email address list is designated by our customer as the preferred list. These
commissions, along with amounts incurred in implementing the Web site's sign-up
program are reported as cost of revenues in our financial statements. In the
first nine months of 1999, commissions accounted for over 98% of cost of
revenue. We do not incur these commissions when customers select names from our
own email address lists. As of September 30, 1999, we derived approximately 6.0%
of the total email addresses in our database from our own Web site, but the
proportion of email addresses in our database that are derived from our Web site
has been decreasing and we expect that proportion will continue to decrease over
time.
26
<PAGE>
For the year ended December 31, 1998, we had net revenues of $3,446,539 and
net income of $605,863. For the first nine months of 1999, we had net revenues
of $10,202,614 and net income of $2,597,569. We intend to implement our business
strategy by increasing expenditures on sales and marketing, new product
offerings, technology, and infrastructure development. Incremental costs
relating to any new products that may be introduced in the immediately
foreseeable future would be primarily for increased personnel but would likely
also include nominal costs for technological enhancements. Those expenditures,
as well as various factors beyond our control, including increased competition,
may negatively impact our operating margins and our profitability in the future.
Additionally, future profits are likely to be negatively impacted by the initial
granting of stock options to employees under our 1999 Stock Option Plan. To the
extent that options are granted at an exercise price which is below fair market
value on the date of grant a charge will result to our operations under
Financial Accounting Standards Board Statement No. 123 ("FASB 123"), "Accounting
for Stock-Based Compensation." We have granted options to acquire 232,500 shares
of our common stock to our employees other than Ms. Resnick and Mr.
Druckenmiller at $5.00 per share, which we anticipate will be below our initial
public offering price. During the three months ended September 30, 1999, we
recorded deferred compensation of $1,395,000 of which $19,375 was amortized to
expense. In addition, we have granted options, effective as of October 8, 1999,
to purchase 100,000 shares of common stock to each of our three non-management
directors at an exercise price per share equal to the lower of $10.00 or the
initial public offering price.
As permitted by FASB 123, we have elected to follow Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and
related interpretations in accounting for our stock options. Under APB 25, when
the exercise price of stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recorded. If
the exercise price of the stock option is less than the market price of the
underlying stock on the date of grant, we will record an expense equal to the
difference between the market price on the date of grant and the exercise price.
Such expense will be recorded in our statements of income, ratably over the
vesting periods of such stock options.
The amount of compensation expense that would be recognized subsequent to
September 30, 1999 over the next four years, relating to our options granted to
date, assuming an offering price of $11.00 per share, is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1999..................... $ 232,917
2000..................... 565,000
2001..................... 548,333
2002..................... 329,375
----------
Total.................. $1,675,625
==========
</TABLE>
27
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth our statement of operations expressed as a
percentage of total net revenues:
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
INCEPTION TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------------- -------------------
1995 1996 1997 1998 1998 1999
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................ 8.1 9.0 15.7 43.8 39.4 48.6
----- ------ ------ ------ -------- -------
Gross profit........................ 91.9 91.0 84.3 56.2 60.6 51.4
Operating expenses
Selling and marketing................. 29.0 41.0 26.3 14.3 16.1 11.0
Technology, support and development... 27.8 37.4 17.6 10.8 11.3 3.3
General and administrative............ 12.7 12.8 13.7 10.7 13.0 7.7
Depreciation and amortization......... -- 0.1 0.9 0.7 0.8 0.8
Equity-based expense.................. -- -- -- -- -- 0.1
----- ------ ------ ------ -------- -------
Total operating expenses............ 69.5 91.3 58.5 36.5 41.2 22.9
----- ------ ------ ------ -------- -------
Income (loss) before income tax
provision............................. 22.4 (0.3) 25.8 19.7 19.4 28.5
Income tax provision.................... -- 1.6 2.1 2.1 2.1 3.0
----- ------ ------ ------ -------- -------
Net income (loss)................... 22.4% (1.9)% 23.7% 17.6% 17.3% 25.5%
===== ====== ====== ====== ======== =======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
NET REVENUES. Net revenues increased 394.7% from $2,062,333 for the nine
months ended September 30, 1998, to $10,202,614 for the nine months ended
September 30, 1999. This increase was the result of continued growth in the
number of email messages delivered for our customers as well as in the number of
customers utilizing our opt-in email address database. The number of opt-in
email addresses in our database grew from approximately 1.7 million at the end
of September 1998, to approximately 4.3 million by the end of September 1999,
primarily as a result of the addition of opt-in email addresses to our database
from third-party Web sites added to our NetCreations Network.
For the nine months ended September 30, 1998, volume and broker discounts
were $172,695 and $98,729, respectively. For the nine months ended
September 30, 1999, volume and broker discounts were $1,548,754 and $1,530,867,
respectively. The increase in volume discounts is attributable to the growth in
demand for our email marketing services and the increase in broker discounts is
attributable to the growth in utilization of our services by resellers. For the
nine months ended September 30, 1998, resellers accounted for approximately 21%
of our net revenues compared to approximately 44% of our net revenues for the
nine months ended September 30, 1999. We intend to increase the proportion of
our marketing customers obtained through our reseller channels. To the extent we
increase the proportion of sales through resellers, our net revenues and gross
profits could decrease.
On July 5, 1999, we terminated our email list management and email list
brokerage agreements with YesMail.com. Use of email addresses in our database by
YesMail.com as an email address list reseller accounted for approximately 7% of
our net revenues in 1998 and approximately 11% of our net revenues for the first
nine months of 1999. Although we can give no assurance, we anticipate that
substantially all of such net revenues will be replaced by selling our services,
either directly or indirectly through other email address list brokers, to
direct marketers, including direct marketers represented by YesMail.com as well
as other direct marketing customers. In addition, net revenues generated by
selling use of the email address list in our database collected from
YesMail.com's Web site and, therefore,
28
<PAGE>
owned by YesMail.com as an email address list owner, represented 3.3% and 0.8%
in 1998 and the first nine months of 1999, respectively.
COST OF REVENUES. Cost of revenues increased 510.6% from $812,547, or 39.4%
of net revenues, for the nine months ended September 30, 1998, to $4,961,667, or
48.6% of net revenues, for the nine months ended September 30, 1999. This
increase was the result of an increase in commissions due to a greater
proportion of opt-in email addresses being added to our database from
third-party Web sites.
SELLING AND MARKETING. Selling and marketing expenses increased 236.8% from
$332,164 for the nine months ended September 30, 1998, to $1,118,883 for the
nine months ended September 30, 1999. Selling and marketing expenses consisted
primarily of personnel costs and direct expenditures for advertising,
promotional programs and other related activities. This increase was the result
of our business expansion and is attributable to an increase in the number of
employees. As of September 30, 1999, we had 18 employees in sales and marketing
functions as compared to four employees as of September 30, 1998. Additionally,
advertising expenditures increased by $282,637 in connection with our efforts to
enhance recognition of our company and the services we provide.
TECHNOLOGY, SUPPORT AND DEVELOPMENT. Technology, support and development
expenses increased 46.1% from $232,429 for the nine months ended September 30,
1998, to $339,515 for the nine months ended September 30, 1999. Technology,
support and development expenses consisted primarily of personnel costs and
expenditures for software and related supplies. This increase was the result of
the hiring of four employees during the first nine months of 1999, in connection
with our efforts to improve the efficiency of our WWW.POSTMASTERDIRECT.COM Web
site and expand its capabilities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
191.7% from $268,587 for the nine months ended September 30, 1998, to $783,494
for the nine months ended September 30, 1999. General and administrative
expenses consisted primarily of personnel, facilities, communication costs and
professional fees. This increase was attributable to the addition of two
employees to support growth in business activity, space expansion at our current
location, professional fees in connection with various legal matters relating to
customer and employment agreements, intellectual property and employee benefit
matters, and accounting and auditing fees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 378.3% from $16,676 for the nine months ended September 30, 1998, to
$79,756 for the nine months ended September 30, 1999. Depreciation and
amortization expenses consisted primarily of depreciation of computer equipment.
This increase was primarily a result of investments in computer equipment.
INCOME TAXES. As we had elected to be taxed as an S corporation for federal
and certain state tax purposes, the provision for income taxes for the first
nine months of 1998 and 1999 represents state and local taxes only to the extent
they do not recognize the S corporation status, based on the pre-tax operating
results for each year.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET REVENUES. Net revenues increased 213.1% from $1,100,781 for the year
ended December 31, 1997, to $3,446,539 for the year ended December 31, 1998.
This increase was the result of continued growth in the number of email messages
delivered for our customers as well as in the number of customers utilizing our
opt-in email address database. The number of opt-in email addresses in our
database grew from approximately 675,000 at the end of 1997, to approximately
1.9 million by the end of 1998, primarily as a result of the addition of opt-in
email addresses to our database from third-party Web sites added to our
NetCreations Network.
For the year ended December 31, 1997, volume discounts were $16,181 and
there were no broker discounts. For the year ended December 31, 1998, volume and
broker discounts were $357,733 and
29
<PAGE>
$317,549, respectively. The increase in volume discounts is attributable to the
growth in demand for our email marketing services. The increase in broker
discounts is attributable to our use of resellers as an additional sales channel
in 1998. During 1998, resellers accounted for approximately 38% of our net
revenues.
COST OF REVENUES. Cost of revenues increased 772.1% from $173,124, or 15.7%
of net revenues, for the year ended December 31, 1997, to $1,509,776, or 43.8%
of net revenues, for the year ended December 31, 1998. This increase was the
result of an increase in commissions due to a greater proportion of opt-in email
addresses being added to our database from third-party Web sites.
SELLING AND MARKETING. Selling and marketing expenses increased 69.7% from
$289,904 for the year ended December 31, 1997, to $492,004 for the year ended
December 31, 1998. Of this increase, $145,000 was attributable to rising
personnel costs, including the addition of four employees. Additionally,
advertising expenditures increased by approximately $54,000 to heighten market
awareness of our company and the email marketing services we provide.
TECHNOLOGY, SUPPORT AND DEVELOPMENT. Technology, support and development
expenses increased 93.1% from $193,554 for the year ended December 31, 1997, to
$373,746 for the year ended December 31, 1998. This increase was attributable to
a combination of hiring additional employees and utilizing consultants to
enhance the business support system and improving the infrastructure and
capabilities of our WWW.POSTMASTERDIRECT.COM Web site.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
144.2% from $151,307 for the year ended December 31, 1997, to $369,508 for the
year ended December 31, 1998. This was generally attributable to growth in
business activities and the establishment of an office facility, replacing our
former home-based office.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 146.1% from $9,515 for the year ended December 31, 1997, to $23,414
for the year ended December 31, 1998. This increase was primarily a result of
investments in computer equipment.
INCOME TAXES. As we had elected to be taxed as an S corporation for federal
and certain state tax purposes, the provision for income taxes for 1997 and 1998
represents state and local taxes only to the extent that they do not recognize
the S corporation status, based on the pre-tax operating results for each year.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Net revenues increased 131.2% from $476,190 for the year
ended December 31, 1996, to $1,100,781 for the year ended December 31, 1997.
This increase was the result of a shift in the focus of our business from Web
site design and promotion to email direct marketing and the growth in the number
of email messages delivered for our customers as well as in the number of
customers utilizing our opt-in email address database.
For the year ended December 31, 1996, there were no volume or broker
discounts. For the year ended December 31, 1997, volume discounts were $16,181
and there were no broker discounts.
COST OF REVENUES. Cost of revenues increased 301.8% from $43,090, or 9.0%
of net revenues, for the year ended December 31, 1996, to $173,124, or 15.7% of
net revenues, for the year ended December 31, 1997. This increase was the result
of a shift in the focus of our business from Web site promotion to email direct
marketing and the increase in the number of opt-in email addresses being added
to our database through third-party Web sites, the majority of which were added
during 1997. The lower amount in 1996 represents higher utilization of opt-in
email addresses from our own email
30
<PAGE>
address list, as compared with use of opt-in email address lists in our database
that are owned by third-party Web sites.
SELLING AND MARKETING. Selling and marketing expenses increased 48.3% from
$195,451 for the year ended December 31, 1996, to $289,904 for the year ended
December 31, 1997. This was primarily attributable to increases in advertising
expenditures in various marketing publications and attendance at industry
related trade shows and conferences.
TECHNOLOGY, SUPPORT AND DEVELOPMENT. Technology, support and development
expenses increased 8.8% from $177,923 for the year ended December 31, 1996, to
$193,554 for the year ended December 31, 1997 as a result of additional
personnel costs incurred during the year.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
149.1% from $60,734 for the year ended December 31, 1996, to $151,307 for the
year ended December 31, 1997. This increase was generally attributable to
additional employees hired to support growth in business activity,
infrastructure development expenses and various legal and accounting services.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 1,617.5% from $554 for the year ended December 31, 1996, to $9,515 for
the year ended December 31, 1997. This increase was primarily as a result of
investments in computer equipment and furniture.
INCOME TAXES. As we had elected to be taxed as an S corporation for federal
and certain state tax purposes, the provision for income taxes for 1996 and 1997
represents state and local taxes only to the extent they do not recognize the
S corporation status, based on the pre-tax operating results for each year.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly information for
each quarter of fiscal year 1998 and the first three quarters of 1999. This
quarterly information has been prepared on a basis consistent with the audited
financial statements and, we believe, includes all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the
information shown. Our quarterly operating results may fluctuate significantly
as a result of a variety of factors and operating results for any quarter are
not necessarily indicative of results for a full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
1998 1999
-------------------------------------------------- --------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
--------- -------- ------------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................ $476,545 $709,653 $876,135 $1,384,206 $1,694,505 $3,578,089 $4,930,020
Cost of revenues.................... 139,913 282,580 390,054 697,229 827,152 1,750,815 2,383,700
-------- -------- -------- ---------- ---------- ---------- ----------
Gross profit.................... 336,632 427,073 486,081 686,977 867,353 1,827,274 2,546,320
Operating expenses
Selling and marketing............. 82,870 119,422 129,872 159,840 294,328 307,632 516,923
Technology, support and
development..................... 55,169 82,762 94,498 141,317 85,981 105,824 147,710
General and administrative........ 71,500 82,361 114,727 100,920 138,866 233,638 410,990
Depreciation and amortization..... 4,130 5,352 7,193 6,739 17,354 27,797 34,605
Equity-based expense.............. -- -- -- -- -- -- 19,375
-------- -------- -------- ---------- ---------- ---------- ----------
Total operating expenses........ 213,669 289,897 346,290 408,816 536,529 674,891 1,129,603
-------- -------- -------- ---------- ---------- ---------- ----------
Income before income tax
provision......................... 122,963 137,176 139,791 278,161 330,824 1,152,383 1,416,717
Income tax provision................ 13,100 14,600 14,900 29,628 36,300 121,700 144,355
-------- -------- -------- ---------- ---------- ---------- ----------
Net income...................... $109,863 $122,576 $124,891 $ 248,533 $ 294,524 $1,030,683 $1,272,362
======== ======== ======== ========== ========== ========== ==========
</TABLE>
31
<PAGE>
Our operating results for these fiscal quarters expressed as a percentage of
sales were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
1998 1999
-------------------------------------------------- --------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
--------- -------- ------------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................... 29.4 39.8 44.5 50.4 48.8 48.9 48.4
-------- -------- -------- ---------- ---------- ---------- --------
Gross profit.................... 70.6 60.2 55.5 49.6 51.2 51.1 51.6
Operating expenses
Selling and marketing............. 17.3 16.8 14.8 11.5 17.4 8.6 10.5
Technology, support and
development..................... 11.6 11.7 10.8 10.2 5.1 3.0 3.0
General and administrative........ 15.0 11.6 13.1 7.3 8.2 6.5 8.3
Depreciation and amortization..... 0.9 0.8 0.8 0.5 1.0 0.8 0.7
Equity-based expense.............. -- -- -- -- -- -- 0.4
-------- -------- -------- ---------- ---------- ---------- --------
Total operating expenses........ 44.8 40.9 39.5 29.5 31.7 18.9 22.9
-------- -------- -------- ---------- ---------- ---------- --------
Income before income tax
provision......................... 25.8 19.3 16.0 20.1 19.5 32.2 28.7
Income tax provision................ 2.7 2.0 1.7 2.1 2.1 3.4 2.9
-------- -------- -------- ---------- ---------- ---------- --------
Net income...................... 23.1% 17.3% 14.3% 18.0% 17.4% 28.8% 25.8%
======== ======== ======== ========== ========== ========== ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have primarily financed our business using the cash
flow generated from operations. We borrow under our revolving line of credit
with Citibank, N.A. to supplement operating cash. Borrowings of up to $500,000
under this line of credit are payable on demand, plus interest at 1% above the
bank's announced base rate and are collateralized by our accounts receivable. As
of September 30, 1999, the line of credit bears interest at the rate of 9.25%.
These borrowings are personally guaranteed by Ms. Resnick and
Mr. Druckenmiller. At September 30, 1999, $275,000 was outstanding under the
line of credit.
Net cash provided by operating activities was $40,518 for the year ended
December 31, 1996, $205,737 for the year ended December 31, 1997, $375,566 for
the year ended December 31, 1998, and $2,911,333 for the nine months ended
September 30, 1999.
Net cash used in investing activities was $11,074 for the year ended
December 31, 1996, $50,955 for the year ended December 31, 1997, $79,422 for the
year ended December 31, 1998, and $98,426 for the nine months ended
September 30, 1999. Cash used in investing activities was used for capital
expenditures, primarily computer hardware and software for the operation and
support of our business activities.
Net cash used in financing activities was none for the year ended
December 31, 1996, $133,761 for the year ended December 31, 1997, $253,261 for
the year ended December 31, 1998, and $2,111,657 for the nine months ended
September 30, 1999. Cash used in financing activities was primarily for
distributions to the shareholders relating to our election to be taxed as
an S corporation.
As of September 30, 1999, we had $798,135 of cash and our principal
commitments consisted of $202,510 of obligations under our capital lease
financing arrangement. Although we have no material commitments for capital
expenditures, we expect to increase our capital expenditures and lease
commitments consistent with our expected growth in operations, infrastructure
and personnel.
We believe that the proceeds from this offering, together with anticipated
cash flow from operations and funds available from our credit facility, will be
sufficient to satisfy our working capital and capital expenditure requirements
for at least the next 12 months. We believe that we would be able to satisfy our
working capital requirements for our current level of operations with
anticipated cash flows from operations and funds available from our credit
facility. However, if we do not obtain the proceeds of this offering, we would
implement our expansion program more slowly and we might be
32
<PAGE>
unable to make large expenditures, such as acquisitions of other companies that
we might otherwise have the necessary funds to complete from time to time. In
connection with our expansion program, we plan to make substantial expenditures
over the near term primarily in connection with (1) additional costs related to
the expansion of our network of third-party Web sites, (2) increased staffing of
our sales and service groups, (3) increased advertising and marketing
activities, (4) additional capital expenditures, primarily for computer
equipment and (5) continued research and development of our systems to improve
our services. Changes in our operating plans, acceleration of our expansion
plans, lower than anticipated sales, increased expenses, potential acquisitions
or other events may cause us to seek additional financing sooner than
anticipated. Additional financing may not be available on acceptable terms, or
at all. Failure to obtain additional financing as needed could have a material
adverse effect on our business and results of operations.
SEASONALITY
The traditional postal direct marketing industry tends to have higher
revenues in the fourth quarter of the year, when direct marketers send out
holiday promotions, and somewhat lower revenues during the summer, when direct
marketing activity is reduced overall. To date, because of the rapid growth of
the email direct marketing industry, our revenues have grown sequentially from
quarter to quarter. Therefore, our revenues have not followed the seasonal
patterns of the traditional postal direct marketing industry. We anticipate,
however, that as our business matures, our revenues will track more closely the
seasonal patterns experienced in the traditional postal direct marketing
industry.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The disclosures prescribed in SFAS No. 131 are effective for the year
ended December 31, 1998. The Company has determined that it operates as one
business segment, a provider of Internet marketing services.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities," which defines derivatives, requires that all derivatives be carried
at fair value, and provides for hedge accounting when certain conditions are
met. SFAS No. 133 is effective for us in 2002. Although we have not fully
assessed the implications of SFAS No. 133, we do not believe that the adoption
of this statement will have a material impact on our financial position or
results of operations.
In April 1998, Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities" was issued by the Accounting Standards Executive Committee.
SOP 98-5 provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred, and is effective for fiscal years beginning
after December 15, 1998. The adoption of this SOP will not have a material
effect on our operations.
THE YEAR 2000
The "Year 2000 issue" refers generally to the problems that some software
may have in determing the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
OUR STATE OF YEAR 2000 READINESS. We designed our current software to be
Year 2000 compliant when configured and used in accordance with the related
documentation, and provided that the
33
<PAGE>
underlying operating system of the host machine and any other software used with
or in the host machine or our service are Year 2000 compliant. However, we have
not tested our software for Year 2000 compliance.
We have not tested software obtained from third parties. However, we are
seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite assurances from developers of software incorporated into our
software, our software may contain undetected errors or defects associated with
Year 2000 date functions. Known or unknown errors or defects in our software
could result in delay or loss of revenues, diversion of development resources,
damage to our reputation, or increased service and warranty costs, any of which
could seriously harm our business, financial condition and results of
operations. Some commentators have predicted significant litigation regarding
Year 2000 compliance issues, and we are aware of such lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, it is
uncertain whether or to what extent we may be affected by it.
We are assessing our material internal information technology systems,
including both our own software products and third-party software and hardware
technology, but we have not initiated an assessment of our non-information
technology systems. We expect to complete testing of our information technology
systems in 1999. To the extent that we are not able to test the technology
provided by third-party vendors, we are seeking assurances from such vendors
that their systems are Year 2000 compliant. We are not currently aware of any
significant operational issues or costs associated with preparing our internal
information technology and non-information technology systems for the Year 2000.
However, we may experience significant unanticipated problems and costs caused
by undetected errors or defects in the technology used in our internal
information technology and non-information technology systems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or future customers may incur significant
expenses to achieve Year 2000 compliance. If our customers are not Year 2000
compliant, they may experience material costs to remedy problems, they may face
litigation costs and they may delay purchases or implementation of our service.
Year 2000 issues could reduce or eliminate the budgets that current or potential
customers could have for purchases of our service. As a result, our business,
financial condition and results of operations could be seriously harmed.
THE COSTS TO ADDRESS OUR YEAR 2000 ISSUES. We estimate that we have
incurred nominal costs to date in connection with our Year 2000 plan. We
currently estimate the total costs of completing our Year 2000 plan, including
costs incurred to date, to be less than $250,000. This estimate is based on
currently available information and will be updated as we continue our
assessment of third-party relationships, proceed with our testing and
implementation and design contingency plans.
THE RISKS OF OUR YEAR 2000 ISSUES. If any information technologies or
embedded microprocessor technology systems critical to our operations have been
overlooked, there could be a material adverse effect on our business or results
of operations of a magnitude which we have not yet fully analyzed. If the
vendors of our important goods and services or the suppliers of our necessary
energy, telecommunications and transportation needs fail to provide us with
(1) the materials and services which are necessary to sell our products and
services, (2) the electrical power and other utilities necessary to sustain our
operations, or (3) reliable means of transportation, such failure could affect
our ability to sell our products and services which could have a material
adverse effect on our business or results of operations.
OUR CONTINGENCY PLAN. We have not yet fully developed a contingency plan to
address situations that may result if we are unable to achieve Year 2000
readiness of our critical operations. The cost of developing and implementing
such a plan may itself be significant. Although we expect to have a plan to deal
with Year 2000 compliance issues pertaining to our internal systems soon after
December 1, 1999, we expect to be unable to deal with Year 2000-related service
outages by the telecommunications carriers, Internet service providers, and
electric utilities upon which we rely. In addition, enhancements and revisions
to any contingency plan will be continuously considered and implemented as
appropriate.
34
<PAGE>
BUSINESS
INDUSTRY BACKGROUND
THE INTERNET AND ONLINE COMMERCE. The Internet is an increasingly
significant global medium for communications, content and commerce.
International Data Corporation estimates that the number of Web users worldwide
was approximately 142 million at the end of 1998 and will grow to approximately
399 million by the end of 2002. Email was originally viewed as a simple personal
communications tool, but it is increasingly used as a powerful and
cost-effective business tool. Consequently, it has become one of the most
popular Internet applications.
The increasing functionality, accessibility and overall usage of the
Internet and online services have made them an attractive commercial medium. The
Internet and other online services are evolving into a unique sales and
marketing channel, similar to retail stores, mail-order catalogs and television
shopping. According to International Data Corporation, the number of Web buyers
worldwide is estimated to increase from 30.8 million in 1998 to 133.9 million in
2002, which represents a compounded annual growth rate of 44%. International
Data Corporation also estimates that the total value of goods and services
purchased worldwide over the Web will increase from $50.4 billion in 1998 to
$733.6 billion in 2002. The growing use of the Internet has led businesses to
develop e-commerce strategies to drive traffic to their Web sites, attract
customers and facilitate transactions.
ADVERTISING. Businesses use two forms of advertising to attract customers:
brand advertising and direct marketing. Brand advertisements, including
television, radio, magazine displays, and billboards, target a mass audience to
generate awareness of a particular company, product or service. The goal of
direct marketing, by contrast, is to target specific individuals who appear from
behavioral patterns or demographic data to be likely purchasers of products or
services. Direct marketing includes direct mail, telemarketing, and direct
response advertising in newspapers, magazines and on radio and television.
According to the DMA, approximately $162.7 billion, representing 57% of the
total advertising expenditures in the United States, was spent on direct
marketing in 1998. Furthermore, the DMA projects direct marketing spending to
grow to $221.5 billion by 2003.
INTERNET ADVERTISING. The rise of the Internet and its fast-growing
popularity among consumers and business owners has led both brand advertisers
and direct marketers to begin experimenting with advertising and marketing
online. According to Forrester Research, Internet advertising expenditures are
expected to increase from $3.3 billion in 1999 to $24.1 billion in 2003
worldwide, and from $2.8 billion in 1999 to $17.2 billion in 2003 in the United
States. According to the DMA, online direct marketing expenditures in the United
States are expected to increase from $1.1 billion in 1999 to $5.3 billion in
2003.
Currently, the most popular form of Internet advertising is banner
advertising. Web sites display advertising banners which users can click through
to visit the advertiser's Web site and obtain more information about a company's
product or service. However, while banners provide advertisers with the ability
to reach broad audiences and establish brand awareness, they have proven to be
less than effective as vehicles for direct marketing. Response rates, or
click-throughs, from banner advertisements averaged approximately 0.7% as
reported by Forrester Research in March 1999.
Email advertising campaigns are cheaper and faster than traditional direct
marketing. However, the practice of sending unsolicited commercial email, or
"spam," is strongly opposed by many Internet users. Spam lists are databases of
email addresses gathered without the recipients' knowledge or consent from
Internet newsgroups, chat rooms, Web sites, and member directories. While spam
lists may be inexpensive to rent, costing less than $1 for 1,000 addresses, the
hostile reaction they can generate among Internet users can be very costly to a
marketer's reputation. Spamming can also result in attacks on the marketer's
corporate mail server by the automated transmission of extremely large volumes
of angry email messages. Moreover, a marketer who engages in spamming risks
being disconnected from its Internet service provider or having all subsequent
email transmission attempts
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blocked. Over the last few years, spam transmitters have been successfully sued
by Internet service providers such as America Online and Earthlink and several
states have passed legislation barring or restricting the transmission of
unsolicited email messages.
Businesses attempt to utilize the most cost-effective advertising source to
maximize their advertising dollar. Drawbacks to traditional direct mail include
the high costs involved, the delay in response and the difficulty in tracking
responses. Banner advertising is not a cost-effective form of direct marketing
because of its relatively low click-through rate. Unsolicited email advertising
is generally not desirable because of privacy concerns and potential damage to
marketers' reputations.
OUR BUSINESS
We provide Internet-based opt-in email direct marketing services. Our opt-in
email marketing system enables direct marketers to target promotional campaigns
to consumers who choose (1) whether or not they would like to receive commercial
messages, (2) the type or categories of information that they would like to
receive and (3) the amount of personal data that they are willing to disclose.
The users can opt out, or stop receiving these messages, at any time. Unlike
some "permission-based" email marketing companies that do not always verify the
election of their list members to receive email messages, we have developed a
double opt-in confirmation system. We require each Internet user to confirm
their desire to receive messages by responding to a verification email. This
way, no Internet user can be signed up for our lists by an unauthorized third
party.
Our opt-in email direct marketing business offers direct marketers three key
advantages over postal direct marketing and banner advertising:
- SPEED. Opt-in email campaigns can be sent out immediately without waiting
days or weeks at a postal lettershop. We believe that email campaigns also
generate results in a shorter period of time than traditional direct mail,
producing leads and sales within 24 to 48 hours, compared to six to eight
weeks offline.
- RESPONSIVENESS. Opt-in email campaigns typically generate higher response
rates than postal mail or banner ad campaigns. We believe that opt-in
email campaigns typically generate response rates ranging from 5% to 15%,
although Forrester Research estimates that opt-in email campaigns
generated average response rates of 18% as of March 1999. This greatly
exceeds the typical banner advertising response rate of 0.7% and typical
postal direct mail response rates, which we believe to be approximately
2%. We also believe, based on the response rates reported to us by our
direct marketing customers, that our double opt-in system contributes to
our lists generating higher response rates than other email lists in the
market. In addition, we can confirm to Internet service providers that
messages sent are not unsolicited spam. As a result, NetCreations' and our
direct marketers' email messages are allowed to travel freely through the
networks of all of the major Internet service providers.
- COST. Opt-in email campaigns cost less than postal mail campaigns.
Forrester Research estimates that the typical costs for email campaigns
range from 15 to 45 cents per email message sent (to rent a list and have
an email service bureau send it out). This compares to an average cost of
60 cents per delivery for a postal direct mail campaign, including the
list rental, printing, postage and processing fees. While banner ads may
cost less than email campaigns, on a CPM (cost per thousand) basis, banner
campaigns often end up costing more because of their low response rates.
Our customers include Web sites that collect email addresses and direct
marketers, including advertisers and email address list brokers. Our service
allows demographic selection of email addresses based on the personal data
provided by Internet users when their sign-up forms were completed.
Additionally, it provides real-time, online list selection and ordering. We also
provide an optional response-tracking program that allows marketers to monitor
and improve the effectiveness of their email marketing campaigns.
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Our email address database offers direct marketers and email address list
brokers more than 4.3 million email addresses gathered from a network of more
than 175 third-party Web sites, including sites such as Internet.com, NetZero,
Entrepreneur Magazine, CMPnet, LinkExchange, CDROM Guide, Regards.com and
Volition. We provide marketers and e-commerce retailers a selection of targeted
email address lists designed to achieve maximum response to their offers. We
currently have email addresses listed in our database in over 3,000 topical
categories, from general consumer lists to business-to-business lists.
Our services enable Web site owners to compile email address lists and
demographic profiles of
their members. We then make these lists available to direct marketers on our
WWW.POSTMASTERDIRECT.COM online store, providing incremental revenue
opportunities in the form of commissions for Web sites when email addresses
owned by those Web sites are used by marketers. In addition, our Web site
provides marketing, mailing, merging of lists, purging of duplicate email
addresses, and subscribe/ unsubscribe services to users of our email addresses.
OUR STRATEGY
Our goal is to become the leader in opt-in direct marketing services on the
Internet. Key elements of our strategy include the following:
- MAINTAIN AND EXTEND MARKET LEADERSHIP IN OPT-IN EMAIL DIRECT MARKETING. We
intend to maintain and extend our leadership role in email direct
marketing by aggressively expanding our network of third-party Web sites
with additional Web sites worldwide. We are exploring ways to encourage
third-party Web sites currently participating in our NetCreations Network
to refer additional Web sites to join our network. In addition, we may
participate in cooperative databases, in which we would agree to share
opt-in email addresses and fees. We may also acquire other Web sites in an
effort to aggregate more opt-in email addresses. In connection with our
worldwide list expansion, we intend to develop capabilities for adding
email addresses to our database from non-English language consumers. We
also plan on hiring additional business development personnel to assist us
in obtaining more list members.
- ENRICH OUR DATABASE WITH OPT-IN TRANSACTION DATA. We intend to develop
mechanisms to provide direct marketers with lists of consumers who have
purchased specified products on the Internet. We plan to work with leading
e-commerce and catalog sites to incorporate an opt-in sign-up form that
will allow Internet consumers to elect to receive targeted offers related
to the products and services that they have purchased. By doing so, we
will build a large, comprehensive database of consumer purchase behavior
on the Internet which we believe will be attractive to direct marketers.
- DEVELOP NEW INTERNET MARKETING PRODUCTS AND SERVICES. We intend to expand
our direct marketing services to additional applications on the Internet
such as incentive programs and sweepstakes promotions. We also intend to
expand the use of our current response-tracking system to create an
end-to-end system that measures responses all the way from the message
delivery to the sale. In addition, we intend to develop email delivery and
tracking capabilities for non-English languages and character sets to
facilitate our worldwide list expansion and marketing plans.
- EXPAND OUR SALES CHANNELS. In addition to our direct sales efforts, we
market our services through indirect sales channels such as list brokers,
advertising agencies, Web design firms and other resellers. We intend to
develop additional sales channels to penetrate vertical markets such as
small business/home office, technology, publishing and manufacturing. In
addition, we continuously work with our existing indirect sales channels
to further the growth of sales through these sales channels. We recently
launched an online list brokerage program that enables Web sites that
target small business owners and entrepreneurs to private-label our email
address list rental program and earn commissions by referring customers to
us.
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- LEVERAGE OUR SCALEABLE TECHNOLOGY PLATFORM. We have developed and rely
upon our proprietary software and intend to capitalize on its modular
design to easily expand our capabilities to process increasing demand for
email messaging by our direct marketing customers. Our platform also
enables the addition of new features and products to satisfy the needs of
our customers for quality, innovative products and services.
OUR SERVICES
We provide Internet-based opt-in email address list management, email
address list brokerage, a response management system, and email delivery
services through our WWW.POSTMASTERDIRECT.COM Web site.
EMAIL ADDRESS LIST MANAGEMENT. We currently aggregate and manage opt-in
email addresses across a network of more than 175 third-party Web sites. Once a
Web site joins our network, we provide a sign-up template for the site to place
on one or more of its Web pages. Generally, this is a page that receives a large
number of visitors, such as a registration page or a page thanking visitors for
entering a contest or downloading some software. Our template allows the
participating site to facilitate the gathering of opt-in email addresses in a
variety of topical categories, including business, investing, sports, travel,
computing, contests, and entertainment. Although our system is capable of
processing elections to receive email messages relating to more than 3,000
topical categories, most Web sites post the selection of category choices that
they believe will be of greatest interest to their visitors. The sign-up form
also includes a demographic profile asking the visitor for an email address,
postal address, age, income, gender, occupation, title and other information.
However, the only information a user is required to submit is their email
address.
Our double opt-in process protects Internet users' privacy by preventing
anyone from signing them up without authorization. Whenever a visitor to a
participating Web site opts in to receive email, the sign-up request is
immediately transmitted to our server. Our server then sends the visitor a
confirmation message requiring the person to click on an embedded link in the
message and enter a special code on our WWW.POSTMASTERDIRECT.COM Web site. When
the visitor confirms the sign-up request and becomes an email list member, the
visitor's email address is added to our database and is made available to our
direct marketing customers. However, the Web site from which the email address
was derived continues to own its list of email addresses which are included in
our database. We typically pay to the applicable Web site owner a commission of
50% of the revenue we have earned less volume discounts, if applicable, each
time we send an email message to the email addresses owned by that Web site
owner. In the event that an email address appears on more than one email address
list selected by our customer, the 50% commission is only paid to the Web site
owner whose email address list is designated by our customer as the preferred
list. We currently do not charge the list owners any additional setup,
processing or maintenance fees for our service.
EMAIL ADDRESS LIST BROKERAGE. We provide marketers and e-commerce retailers
with a selection of targeted email address lists designed to achieve the maximum
response rates to their offers. Direct marketers can make their own list
selections and place their own orders through our Web site. On-screen menus and
instructions help direct marketers pick lists and choose selection criteria.
Alternatively, our sales and customer service staff provides assistance with
email address list recommendations, order placement, and, occasionally,
copywriting of email messages. Orders placed by 5 PM Eastern Time are generally
sent out that night. Orders placed through our online marketplace by the direct
marketers themselves are generally paid by credit card.
Our service allows direct marketers to:
- open a customer account;
- search for email address lists by topical category or keyword, such as
"travel" or "sports;"
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- select demographic data characteristics, such as age, income and zip code,
to define the email addresses to which they would like to send email
messages (but they do not actually access demographic data in our
database); and
- aggregate the various email address lists the direct marketer wants to use
and remove any duplicate addresses.
TRACKBOT EMAIL RESPONSE MANAGEMENT SYSTEM. Through TrackBot, we can provide
campaign results to our customers, but only on an anonymous, aggregate basis
that does not violate an individual's expectation that personal data will not be
disclosed without their permission. TrackBot offers direct marketers, if they
elect to use this service, a way to track aggregate responses to their mailings
through the responder's click-through, allowing direct marketers to gauge the
success of their campaigns quickly and to focus their campaigns on the
best-performing email address lists. TrackBot provides a simple one-click setup
through WWW.POSTMASTERDIRECT.COM's automated Web ordering system and easy to
read charts that display aggregate response rates by list or by offer. Direct
marketers who select email address lists from our email marketing service simply
place their order in their online accounts and TrackBot automatically generates
customized hypertext links for insertion into the email messages sent out. The
click-throughs produced by the campaign are then tracked and recorded by our
servers. TrackBot is a free service to companies that use our opt-in email
address lists. We intend to upgrade our current response-tracking system to
create an end-to-end system that would permit us to measure responses from the
message delivery to the sale.
EMAIL LIST DELIVERY. In addition to emailing messages for our direct
marketing customers' campaigns, our email list delivery service provides
high-volume email distribution for delivery of email for customers sending
messages to email addresses owned by such customers. Our sophisticated email
infrastructure is available to direct marketers, publishers, list managers,
online merchants and Web site owners seeking a fast, affordable way to
communicate with their own customers by email.
OUR CUSTOMERS
EMAIL ADDRESS LIST MANAGEMENT CUSTOMERS. We manage email address lists for
our NetCreations Network, which currently consists of more than 175 third-party
Web sites. Our network sites include a variety of Web sites such as
Internet.com, NetZero, Entrepreneur Magazine, CMPnet, LinkExchange, CDROM Guide,
Regards.com and Volition.
EMAIL ADDRESS LIST BROKERAGE CUSTOMERS. Our email direct marketing
customers consist of advertisers and email list brokers. As of September 30,
1999, we have sent email messages on behalf of more than 1,500 direct marketing
customers, from large companies such as Dell, Compaq, Ziff-Davis and J. Crew to
small retailers selling items over the Web, such as Vermont Nutrition,
Cyberswap, Inc., Technology Marketing Corp., and Intratech Alliance Corp.
On July 5, 1999 we terminated our email list management and email list
brokerage agreements with YesMail.com. Use of email addresses in our database by
YesMail.com as an email address list reseller accounted for approximately 7% of
our net revenues in 1998 and approximately 11% of our net revenues for the first
nine months of 1999. Although we can give no assurance, we anticipate that
substantially all of such net revenues will be replaced by selling our services,
either directly or indirectly through other email address list brokers, to
direct marketers, including direct marketers represented by YesMail.com as well
as other direct marketing customers. In addition, net revenues generated by
selling use of the email address list in our database collected from
YesMail.com's Web site, and therefore, owned by Yesmail.com as an email address
list owner, represented 3.3% and 0.8% in 1998 and the first nine months of 1999,
respectively.
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SALES AND MARKETING
We market our services through our direct sales organization and through
indirect distribution channels, including email list brokers, advertising
agencies, Web design firms and other resellers. We sell our services to direct
marketers primarily through our direct sales organization. As of September 30,
1999, our direct sales organization included 16 employees responsible for
account management, business development and support, and we had two employees
engaged in separate marketing activities.
Our sales organization is complemented by independent resellers, such as
list brokers, advertising agencies and Web design firms. These resellers
purchase our service at a discount for resale to their own marketing customers
and may provide list selection, support and customer service to end users. In
1998, resellers were responsible for approximately 38% of our net revenues and
represented approximately 44% of our net revenues for the first nine months of
1999. We anticipate that the percentage of our total revenues derived from
indirect sales will increase in the future.
RESEARCH AND DEVELOPMENT
Our research and development efforts include product architecture, core
technology, product testing, quality assurance and expanding the ability of our
products to operate with the leading email software and Web browser platforms.
In addition, our research and development group also provides some customer
support activities. Currently we have three employees, including our Chief
Technology Officer, Ryan Scott Druckenmiller, who devote a substantial portion
of their time to our research and development efforts. We believe that research
and development expenses will increase in the future and that we will need to
hire more developers as our operations expand.
We believe that our future performance will depend in large part on our
ability to:
- scale our technology platform;
- maintain and enhance its speed, reliability, capacity, and connectivity
across multiple platforms; and
- assure its ease-of-use by customers, flexibility and effectiveness in
satisfying evolving customer requirements.
TECHNOLOGY
We employ a combination of hardware and custom and third-party software to
implement our opt-in direct marketing services. We believe that this results in
a highly scaleable, secure, reliable, and modular architecture that blends our
internal expertise with industry-standard technology to create a proprietary
infrastructure.
We intend to continue expanding our technology infrastructure to support the
growth of our business. This will include, among other things, co-locating our
servers and increasing the redundancy of our networks and database storage
systems.
CONNECTIVITY. We currently have redundant T1 Internet connections provided
by Globix and Frontier Communications, enabling us to deliver approximately two
million email messages per day. We believe that the scaleable nature of our
system's design will allow us to increase our email delivery capacity as needed.
We are in the process of establishing a new T3 Internet connection which we
anticipate will provide us more than sufficient Internet bandwidth for at least
the next 12 months.
Our online ordering system provides for secure e-commerce credit card
purchases and for email delivery. We believe that this encourages use of our
online marketplace.
HARDWARE. Multiple servers and personal computers are dedicated to specific
functions within our network architecture. We utilize two ALPHA servers from
Digital Equipment Corporation running Digital Unix operating systems. One server
utilizes an Oracle database to aggregate, sort, and store the
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data we manage from our network of Web sites. The second DEC machine serves as
the primary Web server for our WWW.POSTMASTERDIRECT.COM Web site. In addition,
we plan on installing in the next few months a third server, which will be used
to back up system information and increase processing power and redundancy.
Intel-based servers are dedicated to sending out email messages and allowing
tens of thousands of users per day to access the list sign-up forms on our
third-party Web sites, to opt in to receive email messages on topics of
interest, and to confirm that their elections to receive commercial email
messages are valid. We utilize a dedicated server to balance the load among our
email delivery servers and to provide redundancy within the email delivery
system. We currently have a server which is dedicated for system backup. In
addition, a separate server is dedicated to monitoring system activity and will
notify an administrator if a problem arises. All of these servers run Linux
operating systems from Red Hat Software; we believe that more servers can be
added to increase capacity as needed.
We employ a Network Associates firewall to protect our computer systems from
unauthorized access.
SOFTWARE. Our research and development team developed proprietary software
using MetaHTML, PERL and SQL. This software enables Internet users to opt in to
receive targeted advertising information from our marketing customers through
sign-up forms on our network of more than 175 third-party Web sites. In
addition, this software enables our direct marketing customers and email address
list brokers to target Internet users with specific demographics who have opted
in to our database. This process allows our marketing customers to send specific
advertising messages to recipients who have indicated an interest in receiving
messages on the topic.
Our software is modular. Modularity enhances our ability to add, remove, or
replace system applications as needed. For example, we recently implemented
TrackBot, a proprietary software application which allows marketers to track the
response rates to their mailings. We can continue to enhance TrackBot, or any
other application, as well as add additional software elements as needed.
We have also developed a double opt-in list subscription confirmation system
which sends Internet users a confirmation email message after they have signed
up for a list and requires them to verify that they would like to begin
receiving commercial email messages from our marketing clients. We developed the
double opt-in system in November 1997 and have filed a patent application for
this technology.
COMPETITION
The market for our email address list management and brokerage services is
intensely competitive, evolving and subject to rapid technological change. We
expect the intensity of competition to increase in the future. Competitors vary
in size and in the scope and breadth of the services offered. While no
competitor, to our knowledge, currently has a network of third-party Web sites
similar to ours that generates double opt-in email address lists, we face
intense competition for companies' Internet-based direct marketing budgets.
We face direct competition from companies in the following categories:
- email direct marketers such as YesMail.com, BulletMail and 24/7 Media;
- incentive-based direct marketers such as MyPoints.com and Netcentives; and
- permission-based outsourced email direct marketers such as Exactis.com and
MessageMedia.
In addition, we presently indirectly compete with companies in the following
categories:
- email address list owners who manage their own email address lists, such
as Xoom.com;
- banner advertising managers such as DoubleClick and Flycast
Communications; and
- postal direct marketing companies such as Direct Media (Acxiom) and
American List Counsel;
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In addition, because there are relatively low barriers to entry in the email
direct marketing business, we expect additional competition from other
established and emerging companies as the email direct marketing business
continues to develop and expand. We also expect to face competition in the
future from other companies entering the field as email address list owners,
managers and brokers.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
our current and potential marketing customers, have extensive knowledge of our
industry and are capable of offering non-email based advertising and marketing
products that are beyond the scope of our current business operations but might
be attractive to customers seeking to purchase services in addition to email
direct marketing services. As a result, our competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their services than we can. 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 services to
address their customers' needs. Accordingly, it is possible that new competitors
or alliances among competitors may emerge and rapidly acquire significant market
share. We also expect that competition will increase as a result of industry
consolidations.
We may not be able to compete successfully against current and future
competitors, because increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
seriously harm our business, financial condition and results of operations.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
While we provide a direct marketing service, we are also a technology
company. A large part of our success depends on protecting our intellectual
property, which is one of our most important assets. If we do not adequately
protect our intellectual property, our business, financial condition and results
of operations would be seriously harmed.
We have developed and continue to develop our proprietary software and make
it available for our customers' use over the Internet. This way, we never allow
our customers access to our source code. In addition, we require employees,
contractors and other persons with access to our proprietary information to
execute confidentiality and non-compete agreements with us. We seek to protect
our software, documentation and other written materials under trade secret and
other intellectual property laws, which afford only limited protection.
We have one pending United States patent application. This application seeks
to protect our "double opt-in" system of verifying the requests of Internet
users who ask to join our targeted email lists. We have no issued foreign
patents, nor do we have any pending foreign patent applications. It is possible
that no patent will issue from the currently pending patent application. It is
also possible that any potential future patents may be found invalid or
unenforceable, or otherwise be successfully challenged. Also, any patent issued
to us may not provide us with any competitive advantages. We may not develop
future proprietary products or technologies that are patentable, and the patents
of others may seriously limit our ability to do business. In this regard, we
have not performed any comprehensive analysis of patents of others that may
limit our ability to do business.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and, while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate, and our
competitors may independently develop similar technology, duplicate our products
or design around patents issued to us or our other intellectual property.
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There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. It is possible, that in the future,
third parties may claim that our current or potential future products infringe
upon their intellectual property. We expect that persons, such as ourselves,
that develop software will increasingly be subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all, which could seriously harm our
business, financial condition and results of operations.
We integrate third-party software in our software products. We license
server software from Digital Equipment Corporation and Universal Access, Inc.
The third-party software may not continue to be available to us on commercially
reasonable terms. We may not be able to renew these agreements or develop
alternative technology. If we cannot maintain licenses to key third-party
software, develop similar technology or license similar technology from another
source on a timely or commercially feasible basis, our business, financial
condition and results of operations could be seriously harmed.
GOVERNMENT REGULATION
Currently, there are relatively few laws and regulations directly applicable
to access to or commerce on the Internet. However, due to the increasing
popularity and use of the Internet, it is likely that a growing number of laws
and regulations will be adopted and that existing laws or regulations may be
applied differently with respect to the Internet and email direct marketing
services covering issues such as user privacy, pricing, content, copyrights,
distribution, antitrust, and characteristics and quality of products and
services. Also, the growth and development of the market for email direct
marketing may lead to more stringent consumer protection laws and regulations
that may impose additional burdens on those companies conducting business
online. In addition, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes, libel and personal privacy is uncertain and may take years to
resolve. Any such new laws or regulations or new applications of those existing
laws or regulations could hinder the growth of the Internet or email direct
marketing, which could, in turn, decrease the demand for our products and
services and increase our cost of doing business or otherwise adversely affect
our business.
Legislation has recently been enacted in several states relating to
spamming. The federal government and several states, including New York, are
considering, or have considered, similar legislation. The provisions of these
current and contemplated laws vary, but they generally limit or prohibit both
the transmission of unsolicited emails and the use of familiar spamming
techniques such as the use of forged or fraudulent routing and header
information. Some states, including California, require that unsolicited emails
include opt-out instructions and that senders of such emails honor any opt-out
requests, a requirement that is consistent with our own permission email
policies. We believe that our opt-in email system will not be affected by such
legislation because we do not send unsolicited messages and because our current
practices are intended to comply with current and proposed legislation. However,
there can be no assurance that such legislation or similar legislation will not
also affect permission email marketing in a way that could force us to change
our business practices, particularly in light of the rapidly evolving state of
the law in this area. In such event, our business could suffer.
EMPLOYEES
As of September 30, 1999, we had a total of 29 employees, including 16 in
sales and customer service, seven in technology, four in administration, and two
in marketing. All of these employees were located at our headquarters in New
York City. None of our employees is represented by a collective bargaining
agreement, and we believe our employee relations to be good.
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FACILITIES
We lease our principal sales, marketing, technology, and administrative
facility of approximately 7,400 square feet in New York City at an annual cost
of approximately $195,000 with customary escalation clauses. The lease expires
on March 1, 2003. We have no other offices at this time. We believe that our
existing facilities are adequate for our current needs and that suitable
additional or alternative space will be available in the future as required on
commercially reasonable terms.
LEGAL PROCEEDINGS
As of the date of this prospectus, we are not a party to any litigation.
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MANAGEMENT
Our executive officers and directors as of October 10, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ---------------------------------------------------------
<S> <C> <C>
Rosalind B. Resnick........ 40 Chief Executive Officer, President, Chairman of the Board
of Directors, and Treasurer
Ryan Scott Druckenmiller... 30 Chief Technology Officer, Vice President, Secretary and
Director
Gary Sindler............... 53 Chief Financial Officer
Larry Mahon................ 36 Vice President of Sales
Daniel Sweeney 24 Vice President of Business Development
Michael Levy (1)(2)........ 52 Director
Gregory W. Slayton 40 Director
(1)(2).....................
Mitchell York (1)(2)....... 42 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
ROSALIND B. RESNICK has served as our Chief Executive Officer, President and
Chairman of our board of directors since our inception. In September 1995,
Ms. Resnick developed America Online's NetGirl Forum, a dating and relationships
area of the America Online service which she hosted until September 1996.
Ms. Resnick began her career in the newspaper industry in 1980 as an intern at
the BALTIMORE SUN. From 1984 to 1989, Ms. Resnick worked as a business writer at
THE MIAMI HERALD. Her articles have appeared in INTERNET WORLD, NETGUIDE,
COMPUTER LIFE, PC TODAY, HOME OFFICE COMPUTING, and other leading computer
magazines. In 1995, she co-authored THE INTERNET BUSINESS GUIDE, and from 1994
to 1997, she served as the editor and publisher of INTERACTIVE PUBLISHING ALERT,
a semi-monthly newsletter tracking trends and developments in online publishing
and advertising. She is also a contributing editor to PHILLIPS' INTERACTIVE P.R.
AND MARKETING NEWS NEWSLETTER. Ms. Resnick received B.A. and M.A. degrees from
Johns Hopkins University.
RYAN SCOTT DRUCKENMILLER has served as our Chief Technology Officer and a
member of our board of directors since our inception. Mr. Druckenmiller is an
award-winning Web programmer who created the software that powers
WWW.POSTMASTERDIRECT.COM's online list store, list member sign-up process, and
list owner accounting system. Mr. Druckenmiller's prolific software output also
includes the PostMaster URL Announcement Service, which submits Web sites to
over 400 leading search engines and directories; PostMaster BannerNet, a free
banner network; TrackBot, an advertising tracking tool, and PinPoint, a
personalized search engine interface. Prior to joining NetCreations, from 1990
to 1995, Mr. Druckenmiller developed video games for the Amiga platform and
published an Amiga newsletter, providing software and information for Amiga
computer users.
GARY SINDLER has been our Chief Financial Officer since June 1999. From
February 1999 to June 1999, Mr. Sindler was a consultant to FTI
Consulting, Inc., a provider of litigation, applied sciences and expert
financial consulting services based in Annapolis, Maryland. From July 1996 to
February 1999, Mr. Sindler was Executive Vice President, Secretary and Chief
Financial Officer of FTI. From August 1993 to July 1996, Mr. Sindler was Chief
Financial Officer of Aon Risk Services, Inc. of New York. Prior to 1993, he held
various senior-level positions in finance and administration with Willis
Corroon, PLC and Alexander & Alexander Services Inc., two international
insurance brokerage firms. Mr. Sindler holds a B.S. degree in accounting from
the University of Baltimore and is a certified public accountant.
LARRY MAHON joined us as our Vice President of Sales in June 1999. From
July 1985 through January 1999, Mr. Mahon was employed by AlphaNet
Solutions, Inc., a systems integration firm that provides computer products and
IT services to Fortune 1000 clients, in various capacities, chiefly from
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November 1996 through January 1999 as Vice President of Sales, New York, from
July 1993 to October 1996 as Vice President of Operations and from August 1990
to July 1993 as Vice President of Client Services.
DANIEL SWEENEY joined us as Vice President of Business Development in
September 1999. From February 1998 to August 1999, Mr. Sweeney was the Network
Manager for The @dventure Network, a direct marketing/sales firm in New York.
From August 1997 to December 1997, Mr. Sweeney was a manager of operations for
Adbot, Inc., an Internet advertising auction business based in Chicago,
Illinois. From 1993 to June 1997, Mr. Sweeney was a student at Harvard
University where he received his A.B. degree in Economics.
MICHAEL LEVY has been a member of our board of directors since October 1999.
He has served as the President, Chief Executive Officer and Chairman of the
Board of SportslineUSA, Inc. since its inception in February 1994. From 1979
through March 1993, Mr. Levy served as President, Chief Executive Officer and as
a Director of Lexicon Corporation, a high technology company specializing in
data communications and signal processing technology. From January 1988 to June
1993, Mr. Levy also served as Chairman of the Board and Chief Executive Officer
of Sports-Tech International, Inc., a company engaged in the development,
acquisition, integration, and sale of computer software, equipment, and
computer-aided video systems used by professional, collegiate and high school
sports programs. Between June 1993 and February 1994 Mr. Levy was a private
investor. Mr. Levy also serves as a member of the board of directors of iVillage
Inc. Mr. Levy received a B.S. in Electrical Engineering from the Georgia
Institute of Technology.
GREGORY W. SLAYTON has been a member of our board of directors since October
1999. He has served as President, Chief Executive Officer and a member of the
board of directors of ClickAction Inc. since December 1997. From March 1996 to
July 1997, Mr. Slayton was the President, Chief Operating Officer, and Director
of ParaGraph International. In August 1994, Mr. Slayton co-founded Worlds, Inc.
and served as Senior Vice President and Chief Financial Officer until November
1995. Prior to founding Worlds, Inc., Mr. Slayton served as Vice President and
Chief Financial Officer of Paramount Technology Group of Paramount
Communications Inc. Mr. Slayton was also a management consultant with McKinsey &
Company for four years. Mr Slayton serves on the board of directors of inTest
Corporation, and he is on the board of directors of Opportunity International, a
non-profit organization. Mr. Slayton holds a B.A. in Economics from Dartmouth
College and an M.B.A. from Harvard Business School.
MITCHELL YORK has been a member of our board of directors since October
1999. He has served as President of LendingTree, Inc., a leading online loan
marketplace, from September 1998 to September 1999. During that time he oversaw
LendingTree's marketing, technology and other key business areas. Prior to this,
Mr. York was, for 17 years, an executive of CMP Media Inc., a worldwide
technology information and marketing services company. As vice president of
CMP's Internet division, he lead the company's entry into online media by
launching TechWeb, an information service for information technology
professionals. Prior to launching TechWeb, Mr. York was a publisher of several
of CMP's major technology titles, including VARBusiness magazine. He also was
the founding editor of the company's Travel division, which was later sold to
Miller Freeman. Mr. York received a bachelor's degree with honors from
Northwestern University and an M.B.A. from the Columbia Graduate School of
Business.
BOARD COMPOSITION
We currently have five directors. Each director is elected at the annual
general meeting of our shareholders, by a vote of the holders of a plurality of
the voting power represented at such meeting. Each director holds office until
the annual general meeting of our shareholders or until his or her successor has
been elected.
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Our non-management directors serve on the audit committee and the
compensation committee of the board. The executive officers serve at the
discretion of the board.
BOARD COMMITTEES
In July 1999, our board of directors established an audit committee and a
compensation committee. Our board of directors does not currently have and does
not currently intend to establish an executive committee or a nominating
committee, as those functions are to be performed by our entire board of
directors.
AUDIT COMMITTEE. The audit committee of the board of directors consists of
Messrs. Levy, Slayton and York. This committee makes recommendations to the
board of directors with respect to various auditing and accounting matters,
including the recommendation of our auditors, the scope of the annual audits,
fees to be paid to the auditors, the performance of our independent auditors and
our accounting practices. The audit committee has responsibility for, among
other things, the planning and review of our annual and periodic reports and
accounts and the involvement of our auditors in that process, focusing
particularly on compliance with legal requirements and accounting standards and
the related rules of the Nasdaq, the Securities and Exchange Commission, and the
United States, and the establishment of an effective system of internal
accounting controls.
COMPENSATION COMMITTEE. The compensation committee of the board of
directors consists of Messrs. Levy, Slayton and York. This committee recommends,
reviews and oversees the salaries, benefits and stock option plans for our
employees, consultants, directors and other individuals compensated by us. The
compensation committee also administers our compensation plans.
DIRECTOR COMPENSATION
None of our directors receive cash compensation for their service on our
board of directors, although our management directors receive cash compensation
for their services as our officers. All directors, however, are reimbursed for
reasonable expenses incurred in connection with serving as a director. We have
granted options, effective as of October 8, 1999, to purchase 100,000 shares of
our common stock to each of our non-management directors, Messrs. Levy, Slayton
and York, at an exercise price per share equal to the lesser of $10.00 or our
initial public offering price. The options granted to our three non-management
directors vest one-third upon the consummation of our initial public offering.
The remaining two-thirds vest in equal installments on each of the next eight
quarterly anniversaries following the consummation of our initial public
offering. We anticipate that our board of directors will hold regularly
scheduled meetings quarterly.
EXECUTIVE COMPENSATION
The following table sets forth all compensation received during the
indicated years by our Chief Executive Officer and President and our Chief
Technology Officer in their capacities as officers. In these fiscal years we had
no other executive officers and no other employee earned in excess of $100,000.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
------------------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER OPTIONS COMPENSATION(1)
- --------------------------- --------------------- -------- -------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Rosalind Resnick,
Chief Executive Officer,
President and Chairman of the
Board of Directors............... 1998-$185,000 -- -- -- 1998-$155,000
1997-$120,000 -- -- -- 1997-$96,880
1996-$198,000 -- -- -- 1996- --
Ryan Scott Druckenmiller,
Chief Technology Officer and
member of the Board of
Directors........................ 1998-$185,000 -- -- -- 1998-$155,000
1997-$120,000 -- -- -- 1997-$96,880
1996-$198,000 -- -- -- 1996-$30,000
</TABLE>
- ------------------------
(1) Includes contributions to our pension plan of $30,000 and $30,000 for the
benefit of each of Ms. Resnick and Mr. Druckenmiller in 1998 and 1997,
respectively, and $30,000 for the benefit of Mr. Druckenmiller in 1996. Also
includes distributions to the shareholders which were made in accordance
with our election to be taxed as an S corporation. Such distributions are
common for S corporations.
STOCK OPTION INFORMATION
We granted options, effective as of September 14, 1999, to purchase 232,500
shares of our common stock at an exercise price of $5.00 per share under our
1999 Stock Option Plan. Those options were granted to our employees other than
Ms. Resnick and Mr. Druckenmiller. Those options are exercisable for a period of
five years, but not until they have vested. Those options vest in equal one-
third installments on each of the three anniversaries of the date of grant,
subject to the optionees' continued employment with us. Ms. Resnick and
Mr. Druckenmiller have received, and will continue to receive until the
consummation of our initial public offering, S corporation distributions. Upon
termination of our status as an S corporation immediately prior to the effective
date of this offering, we intend to pay Ms. Resnick and Mr. Druckenmiller final
S corporation distributions based on current year earnings to the extent of
available cash balances. At September 30, 1999, this amount would have been
$798,135. Ms. Resnick and Mr. Druckenmiller have received no options or other
stock-based compensation. In addition, we have granted options, effective as of
October 8, 1999, to purchase 100,000 shares of common stock to each of our
non-management directors, Messrs. Levy, Slayton and York, at an exercise price
per share equal to the lesser of $10.00 or the initial public offering price.
The options granted to our three non-management directors are also exercisable
for a period of five years, but not until they have vested. These options vest
one-third upon the consummation of our initial public offering. The remaining
two-thirds of the options vest in equal installments on each of the next eight
quarterly anniversaries following the consummation of our initial public
offering. Vesting also depends on continued service as our director, subject to
acceleration under certain circumstances. All the outstanding options granted to
our non-management directors would be accelerated, and all of our other
outstanding options may be accelerated, as to vesting and exercisability, in the
event of certain transactions, including certain changes in our control, certain
mergers and reorganizations, and certain dispositions of substantially all of
our assets. The vesting and exercisability of the options issued to our
non-management directors would also be accelerated if those directors are not
re-elected to office,
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except if they are unable to serve or choose not to serve, or if they are
removed from office, except for cause or material non-performance of their
duties. We have granted no other options and no stock appreciation rights.
EMPLOYMENT AGREEMENTS
We have entered into one-year employment agreements with six of our
technology employees. These agreements are automatically renewable and are
terminable by either the employee or us upon 90 days' notice. The remaining
non-management employees are employed on an at-will basis. All of our
non-management employment arrangements provide, among other things, that each of
the employees shall provide services to us on a full-time basis. All of our
non-management employees have also entered into agreements with us which contain
restrictive covenants relating to non-competition with us, non-solicitation of
our customers, non-dealing with our customers and non-solicitation of our
suppliers and employees. In addition, each of these agreements contains an
express obligation of confidentiality in respect of our trade secrets and
confidential information and provide for us to own any intellectual property
rights created by our employees in the course of their employment.
We have entered into employment agreements with Rosalind Resnick, as our
Chief Executive Officer, President, and Chairman of our board of directors, Ryan
Scott Druckenmiller, as our Chief Technology Officer, Gary Sindler, as our Chief
Financial Officer, Larry Mahon, as our Vice President of Sales, and Daniel
Sweeney, as our Vice President of Business Development, all of which expire on
December 31, 2002. The executives are entitled to base salaries per annum,
initially as follows: Rosalind Resnick, $175,000; Ryan Scott Druckenmiller,
$175,000; Gary Sindler, $150,000; Larry Mahon, $100,000; and Daniel Sweeney,
$100,000. The executives are entitled to annual bonuses as the compensation
committee of our board of directors may determine based upon their performance
and achievement of specified goals to be established and mutually agreed upon by
each of them and the compensation committee prior to the beginning of their
bonus period as follows: Rosalind Resnick, up to $175,000 per year; Ryan Scott
Druckenmiller, up to $175,000 per year; Gary Sindler, up to $75,000 per year;
Larry Mahon, up to $100,000 per year; and Daniel Sweeney, up to $50,000 per
year. Ms. Resnick and Mr. Druckenmiller are also entitled to additional
performance bonuses, if any, as may be determined from time to time by the
compensation committee upon the achievement of performance goals to be mutually
agreed upon by each of Ms. Resnick and Mr. Druckenmiller, as the case may be,
and the compensation committee. Each of Ms. Resnick and Mr. Druckenmiller have
agreed not to compete with us in providing direct email marketing services to
third parties for compensation during the term of employment and for at least
three years after their employment is terminated other than a termination
without cause or a termination during the first year following a change in
control. Each of the remaining executives has agreed not to compete with us in
providing direct email marketing services to third parties for compensation
during the term of employment and for at least two years after their employment
is terminated other than a termination without cause or a termination during the
first year following a change in control. The executives are entitled to
customary medical, life insurance, vacation, and other benefits under each of
the agreements. Each of the executives will be eligible to be granted options
under our 1999 Stock Option Plan, at the discretion of the committee
administering that plan. Pursuant to each of their employment agreements,
Messrs. Sindler, Mahon and Sweeney have been granted 117,000, 20,000 and 20,000
stock options respectively, under our 1999 Stock Option Plan. Ms. Resnick and
Mr. Druckenmiller have not been granted any options. Each of the contracts
include customary provisions entitling us to terminate the executive's
employment for cause, upon extended disability of the executive, upon the
executive's death, and otherwise without cause. Each executive is entitled to
terminate the executive's employment upon material breach of the contract by us
and without cause upon prior notice to us. The contracts contain customary
provisions to protect our confidential information and to ensure that we will
own inventions and improvements developed by the executive during the
executive's employment activities.
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STOCK OPTION PLAN
Our 1999 Stock Option Plan was adopted by the board of directors in July
1999. The Plan provides for the grant of options to our directors, officers,
employees and certain consultants. There are 1,170,000 shares reserved for
issuance under the 1999 Stock Option Plan. We have granted options, effective as
of September 14, 1999, to purchase 232,500 shares of our common stock at an
exercise price of $5.00 per share. In addition, we have granted options,
effective as of October 8, 1999, to purchase 100,000 shares of our common stock
to each of our three non-management directors at an exercise price per share
equal to the lesser of $10.00 or the initial public offering price.
The 1999 Stock Option Plan provides for the grant of options intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended, and non-qualified stock options. The board of
directors or a committee designated by the board is authorized to administer the
Plan, including the selection of individuals eligible for grants of options, the
terms of such grants, possible amendments to the terms of such grants, and the
interpretation of the terms of the Plan. The maximum term of any stock option
granted under the Plan is ten years, except that with respect to incentive stock
options granted to a person possessing more than 10% of our combined voting
power, the term of their options shall be for no more than five years.
The exercise price of incentive stock options granted under the Plan must be
at least equal to the fair market value of our common stock on the date of
grant. However, for any employee holding more than 10% of our combined voting
power, the exercise price must be at least 110% of the fair market value of our
common stock. The exercise price of non-qualified stock options is set by the
administrator of the Plan.
The aggregate fair market value on the date of grant of the common stock for
which incentive stock options are exercisable for the first time by an employee
during any calendar year may not exceed $100,000. Also, the aggregate number of
options granted to any one optionee may not exceed 468,000 shares.
Options granted under the 1999 Stock Option Plan may be exercised at any
time or from time to time or only after a period of time in installments, as our
compensation committee or the board of directors determines. Our compensation
committee or the board of directors may in its sole discretion accelerate the
date on which any option may be exercised or determine to provide in an option
agreement that an option may become partially or fully exercisable in the event
of certain transactions, including certain changes in our control, certain
mergers and reorganizations, and certain dispositions of substantially all of
our assets. The exercise price of options granted under the 1999 Stock Option
Plan will be as determined by the relevant administrator, although the exercise
price of incentive stock options must be at least equal to the fair market value
of our common stock on the date of grant. Our board of directors may amend,
modify or terminate the 1999 Stock Option Plan at any time as long as such
amendment, modification or termination does not impair vesting rights of plan
participants. The 1999 Stock Option Plan will terminate in 2009, unless
terminated earlier by the board of directors.
PENSION PLAN
In 1997 and 1996, we had a money purchase pension and profit sharing plan
for our officers and directors, who were also our only shareholders. Upon
termination of that plan, we established a defined contribution plan in 1998 for
eligible employees under Section 401(k) of the Internal Revenue Code. Employees
must complete one year of service to be eligible to participate in the 401(k)
plan. In 1996, 1997 and 1998, we incurred contribution expenses of $30,000,
$60,000 and $60,000, respectively, relating to these plans. The 401(k) plan is
administered by us.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of October 15, 1999 by:
- each person or group of affiliated persons who we know owns beneficially
5% or more of our common stock,
- each of our directors,
- our executive officers listed in the Summary Compensation Table, and
- all of our directors and executive officers as a group.
Percentage of ownership is calculated as required by Commission
Rule 13d-3(d)(1). Except as otherwise indicated below, the persons named in this
table have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them, subject to community property laws.
The address for each individual is: 379 West Broadway, Suite 202, New York, New
York 10012.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
SHARES -------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING
- ---------------- ------------ -------- --------
<S> <C> <C> <C>
Rosalind B. Resnick......................................... 5,967,000 51.0% 39.8%
Ryan Scott Druckenmiller.................................... 5,733,000 49.0% 38.2%
Michael Levy(1)............................................. 33,333 * *
Gregory W. Slayton(1)....................................... 33,333 * *
Mitchell York(1)............................................ 33,333 * *
All directors and executive officers as a group (8
persons).................................................. 11,799,999 100.0% 78.1%
</TABLE>
- ------------------------
* Less than 1% of the outstanding common stock.
(1) Consists of options to purchase 33,333 shares of common stock which are
exercisable within 60 days following the date of this prospectus.
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DESCRIPTION OF CAPITAL STOCK
The following information describes our common stock and preferred stock, as
well as some provisions of our restated certificate of incorporation and our
amended and restated bylaws as in effect upon the closing of this offering. This
description is only a summary. You should also refer to the certificate and
bylaws which have been filed with the SEC as exhibits to our registration
statement, of which this prospectus forms a part.
Our authorized capital stock consists of 50,000,000 shares of common stock,
par value $0.01 per share, and 5,000,000 shares of preferred stock, $0.01 par
value per share.
COMMON STOCK
As of September 30, 1999, there were 11,700,000 shares of common stock
outstanding and held of record by two shareholders. Based upon the number of
shares outstanding and giving effect to the issuance of the 3,300,000 shares of
common stock offered hereby, there will be 15,000,000 shares of common stock
outstanding upon the closing of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available for that purpose, subject to any preferential dividend
rights of any outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of common stock are, and the shares offered by us in this offering will
be, when issued in consideration for payment thereof, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which we may designate and issue in the
future. Upon the closing of this offering, there will be no shares of preferred
stock outstanding.
PREFERRED STOCK
The board of directors is authorized, without further shareholder approval,
to issue from time to time up to an aggregate of 5,000,000 shares of preferred
stock in one or more series and to fix or alter the designations, powers,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption (including sinking
fund provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of such series. We have
no present plans to issue any shares of preferred stock.
OPTIONS
We have granted options, effective as of September 14, 1999, to purchase
232,500 shares of our common stock at an exercise price of $5.00 per share under
our 1999 Stock Option Plan. Those options have been granted to our employees
other than Rosalind Resnick and Ryan Scott Druckenmiller. In addition, we have
granted options, effective as of October 8, 1999, to purchase 100,000 shares of
our common stock to each of our three non-management directors at an exercise
price per share equal to the lesser of $10.00 or the initial public offering
price. The options are exercisable for a period of five years, but not until
they have vested. The options, other than the options granted to our three non-
management directors, vest in equal one-third installments on each of the three
anniversaries of the date of the grant, subject to the optionees' continued
employment with us. The options granted to our three non-management directors
vest one-third upon the consummation of our initial public offering. The
remaining two-thirds vest in equal installments on each of the next eight
quarterly anniversaries
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following the consummation of our initial public offering. The vesting period
for all the outstanding options granted to our non-management directors would be
accelerated, and all of our other outstanding options may be accelerated, if we
do not survive a "change in control," as defined in the option instrument, and
the surviving company or the acquiror in a change in control transaction does
not make appropriate arrangements to continue the rights of the optionholder
under the option. The acceleration provisions do not apply to a change in
control as a consequence of this offering, an acquisition of thirty percent
(30%) or more of our shares after which Ms. Resnick and Mr. Druckenmiller
continue to hold the largest indivdual percentages of our outstanding shares of
common stock, or to certain restructurings that will be completed prior to the
offering in connection with the termination of our S corporation election and
related estate planning by Ms. Resnick and Mr. Druckenmiller. The vesting period
of the options granted to our employees would be accelerated in the event that
the employee is terminated within one year after a change in control. The
vesting period of the options granted to our three non-management directors
would also be accelerated if those directors are not re-elected to office,
except if they are unable to serve or choose not to serve, or if they are
removed from office, except for cause or material non-performance of their
duties. The holders of the options do not have any rights as our shareholders
until they exercise their options.
REGISTRATION RIGHTS
After this offering, Ms. Resnick and Mr. Druckenmiller will be entitled to
registration rights with respect to their shares. These holders can require us
to register all or part of their shares at any time following 180 days after
this offering. Subsequent to that time, Ms. Resnick and Mr. Druckenmiller may
sell, dispose of or transfer their shares in accordance with Rule 144 or other
available exemptions. In addition, these holders may also require us to include
their shares for sale in future registration statements, subject to such
restrictions, and unless acquired by one of our affiliates, purchasers of those
shares will have freely tradable shares.
Also, we intend to register the shares of common stock underlying any stock
options issued or issuable pursuant to our stock option plan. Upon registration,
the registered shares are freely tradable in the public market without
restriction, unless held by an affiliate of ours, within the meaning of
applicable securities laws.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF NEW YORK LAW AND OUR RESTATED
CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BYLAWS
GENERAL. A number of provisions of New York law, our restated certificate
of incorporation and our bylaws could make any attempt to acquire us by means of
a tender offer, a proxy contest or otherwise and the removal of incumbent
officers and directors more difficult. These provisions are intended to
discourage certain types of coercive takeover practices and inadequate takeover
bid, even though such a transaction may offer our shareholders the opportunity
to sell their stock at a price above the prevailing market price. This also
encourages persons seeking to acquire control of us to negotiate with us first.
NEW YORK TAKEOVER STATUTE. We are subject to the "business combination"
provisions of Section 912 of the New York Business Corporation Law and expect to
continue to be so subject if and for so long as we have a class of securities
registered under Section 12 of the Securities Exchange Act of 1934. Section 912
provides, with some exceptions (which include, among others, transactions with
shareholders who became interested prior to the effective date of an amendment
to our Certificate of Incorporation providing that we would be subject to
Section 912 if such corporation did not then have a class of stock registered
pursuant to Section 12 of the Exchange Act), that a New York corporation may not
engage in a "business combination" (e.g., merger, consolidation,
recapitalization or disposition
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of stock) with any "interested shareholder" for a period of five years from the
date that such person first became an interested shareholder unless:
(1) the transaction resulting in a person becoming an interested
shareholder was approved by the board of directors of the corporation prior
to that person becoming an interested shareholder; or
(2) the business combination is approved by the holders of a majority of
the outstanding voting stock not beneficially owned by such interested
shareholder; or
(3) the business combination is approved by the disinterested
shareholders at a meeting called no earlier than five years after the
interested shareholder's stock acquisition date; or
(4) the business combination meets certain valuation requirements for
the stock of the New York corporation.
An "interested shareholder" is defined as any person that (a) is the
beneficial owner of 20% or more of the outstanding voting stock of a New York
corporation or (b) is an affiliate or associate of the corporation that at any
time during the prior five years was the beneficial owner, directly or
indirectly, of 20% or more of the then outstanding voting stock.
A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested shareholder.
Subject to certain exceptions, an "interested shareholder" is a person who,
together with affiliates and associates, owns, or within five years did own, 20%
or more of the corporation's outstanding voting stock. This statute could
prohibit or delay the accomplishment of mergers or other takeover or change in
control attempts with respect to us and, accordingly, may discourage attempts to
acquire us. These provisions are likely to impose greater restrictions on an
unaffiliated shareholder than on the existing shareholders who will continue to
own a majority of our outstanding common stock after this offering.
The "stock acquisition date," with respect to any person and any New York
corporation, means the date that such person first becomes an interested
shareholder of such corporation.
In addition, some provisions of our certificate of incorporation and bylaws
summarized in the following paragraphs may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that a
shareholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
shareholders.
BOARD OF DIRECTORS VACANCIES. Our bylaws authorize the board of directors
to fill vacant directorships or increase the size of the board of directors.
This may deter a shareholder from removing incumbent directors and
simultaneously gaining control of the board of directors by filling the
vacancies created by such removal with its own nominees.
ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND NOMINEES. Our bylaws establish
an advance notice procedure for shareholders to make nominations of candidates
for election as directors or bring other business before any meeting of our
shareholders. The shareholder notice procedure provides that only persons who
are nominated by, or at the direction of, the board, or by a shareholder who has
given timely written notice prior to the meeting at which directors are to be
elected, will be eligible for election as directors and that, at a shareholders'
meeting, only such business may be conducted as has been brought before the
meeting by, or at the direction of, the board of directors or by a shareholder
who has given timely written notice of such shareholder's intention to being
such business before such meeting.
Under the shareholder notice procedure, for notice of shareholder
nominations or other business to be made at a shareholders' meeting to be
timely, such notice must be received by us not less than 60 days prior to the
meeting.
54
<PAGE>
A shareholder's notice to us proposing to nominate a person for election as
a director or proposing other business must contain information specified in the
bylaws, including the identity and address of the nominating shareholder, a
representation that the shareholder is a record holder of our stock entitled to
vote at the meeting and information regarding each proposed nominee or each
proposed matter of business that would be required under the federal securities
laws to be included in a proxy statement soliciting proxies for the proposed
nominee or the proposed matter of business.
The shareholder notice procedure may have the effect of precluding a contest
for the election of directors or the consideration of shareholder proposals if
the proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to us
and our shareholders.
SPECIAL MEETINGS OF SHAREHOLDERS. Our restated certificate of incorporation
provides that special meetings of shareholders can be only called by a majority
of the board of directors, the Chairman of the Board, the President or the
holders of at least 50% of the outstanding shares of stock entitled to vote at
the meeting.
SHAREHOLDER ACTION. Our restated certificate of incorporation provides that
shareholders may act only at duly called annual or special meetings of
shareholders, not by written consent.
AMENDMENT OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS. Our restated
certificate of incorporation and bylaws require the affirmative vote of at least
two-thirds of our shareholders of our capital stock entitled to vote to amend
certain provisions of the certificate or to amend our bylaws.
AUTHORIZED BUT UNISSUED SHARES. Our authorized but unissued shares of
common stock and preferred stock are available for future issuance without
shareholder approval, subject to certain limitations imposed by the Nasdaq
National Market. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued and unreserved common stock and preferred stock could
render more difficult or discourage an attempt to obtain control of us by means
of a proxy contest, tender offer, merger or otherwise.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the New York Business Corporation Law, our restated
certificate of incorporation provides that a director will not be personally
liable to us or our shareholders for damages for any breach of duty in his or
her capacity as a director unless a judgment or other final adjudication adverse
to such director establishes that (1) his or her acts or omissions were in bad
faith or involved intentional misconduct or a knowing violation of law,
(2) such director personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled or (3) his or her acts
violated Section 719 of the New York Business Corporation Law.
This provision is intended to afford directors protection, and limit their
potential liability, from suits alleging a breach of the duty of care by a
director. We believe this provision will assist us in maintaining and securing
the services of directors who are not employees of NetCreations. As a result of
the inclusion of such a provision, shareholders may be unable to recover
monetary damages against directors for actions taken by them that constitute
negligence or gross negligence or that are in violation of their fiduciary
duties, although it may be possible to obtain injunctive or other equitable
relief with respect to those actions. If equitable remedies are found not to be
available to shareholders for any particular case, shareholders may not have any
effective remedy against the challenged conduct This provision does not affect
the directors' responsibilities, under any other laws, such as the Federal
securities laws or state or Federal environmental laws.
55
<PAGE>
Our restated certificate of incorporation also provides that directors and
officers shall be indemnified against liabilities arising from their service as
directors or officers to the fullest extent permitted by law, which generally
requires that the individual have acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to NetCreations' best interests. No
indemnification may be made to or on behalf of any directors or officers if a
judgment or other final adjudication adverse to him or her established that his
or her acts were committed in bad faith or were the result of active and
deliberate dishonesty and were material to the cause of action so adjudicated,
or that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled.
New York law provides further that the indemnification permitted under New
York law shall not be deemed exclusive of any other rights to which the
directors and officers may be entitled under our bylaws, any agreement, a vote
of shareholders or otherwise.
We have also entered into agreements to indemnify our directors and
executive officers, in addition to the indemnification provided for in our
bylaws. We believe that these provisions and agreements are necessary to attract
and retain qualified directors and executive officers. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions, regardless of whether New
York law would permit indemnification. We have obtained directors' and officers'
liability insurance for our officers and directors.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under our restated certificate of incorporation, bylaws,
or any indemnification agreement. We are not aware of any threatened litigation
or proceeding that may result in a claim for such indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer and Trust Company.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
When the offering is completed, NetCreations will have a total of 15,000,000
shares of common stock outstanding. The 3,300,000 shares offered by this
prospectus will be freely tradable unless they are purchased by "affiliates" of
NetCreations, as defined in Rule 144 under the Securities Act of 1933. The
remaining 11,700,000 shares are "restricted," which means they were originally
sold in offerings that were not subject to a registration statement filed with
the Securities and Exchange Commission. These restricted shares may be resold
only through registration under the Securities Act of 1933 or under an available
exemption from registration, such as provided through Rule 144. Under Rule 144,
all of the restricted shares may be sold subject to applicable volume and other
restrictions, commencing 90 days after the consummation of this offering.
However, the holders of these 11,700,000 shares of common stock have agreed to a
180-day "lock-up" with respect to their shares. This generally means that they
cannot sell these shares during the 180 days following the date of this
prospectus. After the 180-day lock-up period expires, or sooner if earlier
terminated by the underwriters, these shares may be sold in accordance with
Rule 144.
In addition, 232,500 shares are issuable upon exercise of options that have
been granted as of September 14, 1999 and 300,000 shares are issuable upon
exercise of options that have been granted as of October 8, 1999. If any options
are exercised, the shares issued upon exercise will also be restricted, but may
be sold under Rule 144 after the shares have been held for one year. Sales under
Rule 144 may be subject to volume limitations and other conditions.
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, the
underwriters named below are acting through their representatives, Friedman,
Billings, Ramsey & Co., Inc.; C.E. Unterberg, Towbin; fbr.com, a division of FBR
Investment Services, Inc., which is an affiliate of Friedman, Billings, Ramsey &
Co., Inc.; and Fidelity Capital Markets, a division of National Financial
Services Corporation. The representatives have agreed with us, subject to the
terms and conditions of the underwriting agreement, to purchase from us the
number of shares of common stock shown opposite their names below. Other than
the shares covered by the over-allotment option, the underwriters are obligated
to purchase and accept delivery of all the shares of common stock if any are
purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc.......................
C.E. Unterberg, Towbin......................................
fbr.com, a division of FBR Investment Services, Inc.........
Fidelity Capital Markets, a division of National Financial
Services Corporation......................................
---------
Total............................................... 3,300,000
=========
</TABLE>
The underwriters propose initially to offer the shares of common stock in
part directly to the public at the initial public offering price shown on the
cover page of this prospectus and in part to dealers, including the
underwriters, at this price less a discount not in excess of $ per share.
The underwriters may allow, and such dealers may re-allow other dealers, a
discount not in excess of $ per share.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us. These amounts represent the public offering
price per share minus the amount paid by the underwriters per share and are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock. The underwriters' compensation was
determined through negotiations between their representatives and us. The table
also includes other expenses we expect to incur in connection with this
offering. All these other expenses, other than the SEC registration fee, the
NASD filing fee and the Nasdaq National Market listing fee are estimates.
<TABLE>
<CAPTION>
EXERCISE NO EXERCISE FULL EXERCISE
- -------- ----------- -------------
<S> <C> <C>
Total underwriting fees.............................. $ $
Underwriting fees per share.................... $ $
Other offering expenses:
SEC registration fee............................... $ 15,985 $ 15,985
NASD filing fee.................................... $ 6,250 $ 6,250
Nasdaq National Market listing fee................. $ $
Legal fees and expenses............................ $ $
Accounting fees and expenses....................... $ $
Printing and engraving............................. $ $
Blue sky fees and expenses......................... $ $
Transfer agent fees................................ $ $
Miscellaneous...................................... $ $
Total other offering expenses........................ $1,500,000 $1,500,000
Other offering expenses per share.............. $ $
</TABLE>
58
<PAGE>
OVER-ALLOTMENT. The underwriters have an option, exercisable within
30 days after the date of this prospectus, to purchase up to an aggregate of
495,000 additional shares of common stock at the public offering price less the
underwriting discounts and commissions. The underwriters may exercise this
option solely to cover over-allotments, if any, made in this offering. If the
underwriters exercise this option, each underwriter will purchase shares in
approximately the same proportion as indicated in the table above.
INDEMNITY. NetCreations, Rosalind Resnick and Ryan Scott Druckenmiller have
agreed to indemnify the underwriters against some types of liabilities,
including liabilities under the Securities Act provided that the underwriters
will not assert any claim for indemnification against Ms. Resnick or
Mr. Druckenmiller unless NetCreations has failed to so indemnify the
underwriters for any amounts properly due to the underwriters within 365 days of
their request for indemnification. These parties have also agreed to contribute
to payments that the underwriters may be required to make with respect to any of
those liabilities. In addition, we have agreed to make the underwriters insured
parties under our directors and officers insurance policy prior to the
consummation of the offering.
FUTURE SALES. NetCreations, its executive officers, directors and our
existing stockholders, have agreed not to offer, pledge, sell, hedge or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock for a period of 180 days from the date of this prospectus.
Transfers or dispositions can be made sooner with the prior written consent of
Friedman, Billings, Ramsey & Co., Inc. Such consent may be given at any time
without public notice. During such 180-day period, we have agreed not to file
any registration statement with respect to any shares of our common stock.
OFFERS IN OTHER JURISDICTIONS. Neither we nor the underwriters have taken
any action that would permit a public offering of the shares of common stock
offered by this prospectus in any jurisdiction other than the United States
where action for that purpose is required. The shares of common stock offered by
this prospectus may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisements related to the offer
and sale of these shares of common stock be distributed or published, in any
jurisdiction, except under circumstances that will result in compliance with the
applicable rules and regulations of such jurisdiction. This prospectus is not an
offer to sell or a solicitation of an offer to buy any shares of common stock
offered hereby in any jurisdiction in which such an offer or solicitation is
unlawful.
DISCRETIONARY ACCOUNT SALES. Friedman, Billings, Ramsey & Co., Inc. has
advised us that the underwriters do not expect discretionary sales by the
underwriters to exceed five percent of the shares offered by this prospectus.
DIRECTED SHARE PROGRAM. At our request, the underwriters have reserved up
to 330,000 shares of common stock to be issued by us and offered for sale by
this prospectus, at the initial public offering price, to directors, officers,
employees, business associates and related persons of NetCreations, Inc. The
number of shares of common stock available for sale to the general public will
be reduced to the extent these individuals purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered by this
prospectus.
INTERNET DISTRIBUTION. fbr.com, a division of FBR Investment Services,
Inc., is acting as an underwriter in this offering. The underwriters have agreed
to allocate a limited number of shares to fbr.com for sale to its online
brokerage account holders and to participants in our directed share program. An
electronic prospectus is available on the Web site maintained by fbr.com. Other
than the prospectus in electronic format, the information on this Web site
relating to this offering is not a part of this prospectus and has not been
approved and/or endorsed by us or any underwriter, and should not be relied upon
by prospective investors.
59
<PAGE>
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic dissemination of information through the Internet,
intranet and other proprietary electronic technology.
STABILIZATION. In connection with this offering, the underwriters may
engage in transactions on the Nasdaq National Market or the over-the-counter
market or otherwise that stabilize, maintain or otherwise affect the price of
the common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of common stock. In addition, Friedman, Billings Ramsey &
Co., Inc., on behalf of the underwriters, may reclaim selling concessions
allowed to an underwriter or dealer for distributing the common stock in the
offering if the syndicate repurchases previously distributed shares of common
stock to cover syndicate short positions, in stabilizing transactions or
otherwise. These activities may stabilize or maintain the market price of the
common stock above independent market levels. The underwriters are not required
to engage in these activities and may discontinue any of these activities at any
time.
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for our common stock. As a result, the initial public offering price for
the common stock will be determined by negotiations between us and the
underwriters. Among the factors to be considered in determining the public
offering price will be:
- prevailing market conditions;
- our results of operations in recent periods;
- the present stage of our development;
- the market capitalizations and development stages of other companies that
we and the underwriters believe to be comparable to us; and
- estimates of our growth potential.
60
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Greenberg Traurig, New York, New York. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Fulbright & Jaworski L.L.P., New York, New York.
EXPERTS
The financial statements as of December 31, 1997 and December 31, 1998 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus have been audited by Grant Thornton LLP, independent certified
public accountants, as stated in their report appearing herein, and are included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission in connection with this offering. In addition, upon
completion of the offering, we will be required to file annual, quarterly and
current reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy the registration statement and any
other documents filed by us at the Securities and Exchange Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the Public Reference Room. Our Securities and Exchange Commission filings
will also be available to the public at the Securities and Exchange Commission's
Internet site at www.sec.gov.
This prospectus is part of the registration statement and does not contain
all of the information included in the registration statement. Whenever a
reference is made in this prospectus to any of our contracts or our other
documents, the reference may not be complete and you should refer to the
exhibits that are a part of the registration statement for a copy of the
contract or document.
After the offering, we expect to provide annual reports to our shareholders
containing audited financial statements and quarterly reports for the first
three quarters of each year containing unaudited interim financial information.
61
<PAGE>
INDEX TO
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Financial Statements:
Balance Sheets............................................ F-3
Statements of Operations.................................. F-4
Statement of Stockholders' Equity......................... F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
NETCREATIONS, INC.
We have audited the accompanying balance sheets of NetCreations, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NetCreations, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
June 25, 1999 (except for Note B-8 as to which
the date is September 14, 1999)
F-2
<PAGE>
NETCREATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
(UNAUDITED)
DECEMBER 31, -----------------------
------------------- PRO FORMA
1997 1998 ACTUAL (NOTE G)
ASSETS -------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Current assets
Cash........................................... $ 54,002 $ 96,885 $ 798,135 $ --
Accounts receivable (net of allowance for
doubtful accounts of $41,000 at
September 30, 1999).......................... 120,739 673,706 2,708,164 2,708,164
Prepaid income taxes........................... 6,317 -- --
Other current assets........................... -- 6,022 16,168 16,168
-------- -------- ---------- ----------
Total current assets....................... 181,058 776,613 3,522,467 2,724,332
Equipment (net of accumulated depreciation and
amortization).................................. 51,960 155,740 385,488 385,488
Deferred offering costs.......................... -- -- 620,637 620,637
Other assets..................................... 471 11,451 47,673 47,673
-------- -------- ---------- ----------
Total assets............................... $233,489 $943,804 $4,576,265 $3,778,130
======== ======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings on credit line........................ $ -- $ -- $ 275,000 $ 275,000
Accounts payable and accrued expenses............ 11,158 24,663 583,423 583,423
Commissions payable.............................. 32,902 293,000 2,180,351 2,180,351
Accrued pension.................................. 60,000 60,000 45,000 45,000
Current portion of capital lease obligations..... -- 14,331 82,261 82,261
Income taxes payable............................. -- 12,138 145,487 145,487
Deferred income taxes............................ 8,300 32,500 31,500 123,000
-------- -------- ---------- ----------
Total current liabilities.................. 112,360 436,632 3,343,022 3,434,522
Capital lease obligations........................ -- 30,180 120,249 120,249
-------- -------- ---------- ----------
Total liabilities.......................... 112,360 466,812 3,463,271 3,554,771
Common stock, $.01 par value; 50,000,000 shares
authorized, 100 issued and outstanding at
December 31, 1997 and 1998 and 11,700,000
issued and outstanding at September 30, 1999
(unaudited).................................... 1 1 117,000 117,000
Additional paid-in capital....................... 999 999 1,279,000 1,481,984
Deferred compensation............................ -- -- (1,375,625) (1,375,625)
Retained earnings................................ 120,129 475,992 1,092,619 --
-------- -------- ---------- ----------
Total stockholders' equity................. 121,129 476,992 1,112,994 223,359
-------- -------- ---------- ----------
Total liabilities and stockholders'
equity................................... $233,489 $943,804 $4,576,265 $3,778,130
======== ======== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-3
<PAGE>
NETCREATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................. $ 476,190 $ 1,100,781 $ 3,446,539 $ 2,062,333 $10,202,614
Cost of revenues.............. 43,090 173,124 1,509,776 812,547 4,961,667
----------- ----------- ----------- ----------- -----------
Gross profit............ 433,100 927,657 1,936,763 1,249,786 5,240,947
Operating expenses
Selling and marketing....... 195,451 289,904 492,004 332,164 1,118,883
Technology, support and
development............... 177,923 193,554 373,746 232,429 339,515
General and
administrative............ 60,734 151,307 369,508 268,587 783,494
Depreciation and
amortization.............. 554 9,515 23,414 16,676 79,756
Equity-based expense........ -- -- -- -- 19,375
----------- ----------- ----------- ----------- -----------
Total operating
expenses.............. 434,662 644,280 1,258,672 849,856 2,341,023
----------- ----------- ----------- ----------- -----------
Income (loss) before
income tax
provision............. (1,562) 283,377 678,091 399,930 2,899,924
Income tax provision.......... 7,434 23,028 72,228 42,600 302,355
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)....... $ (8,996) $ 260,349 $ 605,863 $ 357,330 $ 2,597,569
=========== =========== =========== =========== ===========
Basic and diluted net income
(loss) per common share..... $ (0.00) $ 0.02 $ 0.05 $ 0.03 $ 0.22
=========== =========== =========== =========== ===========
Weighted-average common shares
outstanding used for basic
and diluted net income
(loss) per share............ 11,700,000 11,700,000 11,700,000 11,700,000 11,700,000
=========== =========== =========== =========== ===========
Pro forma data (unaudited)
Historical income (loss)
before income tax
provision................. $ (1,562) $ 283,377 $ 678,091 $ 399,930 $ 2,899,924
Pro forma income tax
provision (benefit)....... (1,000) 129,000 316,000 186,000 1,342,000
----------- ----------- ----------- ----------- -----------
Pro forma net income (loss)... $ (562) $ 154,377 $ 362,091 $ 213,930 $ 1,557,924
=========== =========== =========== =========== ===========
Pro forma basic and diluted
net income (loss) per common
share....................... $ (0.00) $ 0.01 $ 0.03 $ 0.02 $ 0.13
=========== =========== =========== =========== ===========
Pro forma weighted-average
common shares outstanding
used for basic and diluted
net income (loss) per
share....................... 11,700,000 11,700,000 11,700,000 11,700,000 11,700,000
=========== =========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE>
NETCREATIONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN DEFERRED RETAINED
STOCK CAPITAL COMPENSATION EARNINGS TOTAL
-------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996.......... 1 $ 999 -- $ 2,537 $ 3,537
Net loss............................ -- (8,996) (8,996)
------- ---------- ----------- ---------- ----------
Balance at December 31, 1996........ 1 999 -- (6,459) (5,459)
Net income.......................... -- 260,349 260,349
S corporation distributions to
shareholders...................... -- (133,761) (133,761)
------- ---------- ----------- ---------- ----------
Balance at December 31, 1997........ 1 999 -- 120,129 121,129
Net income.......................... -- 605,863 605,863
S corporation distributions to
shareholders...................... -- (250,000) (250,000)
------- ---------- ----------- ---------- ----------
Balance at December 31, 1998........ 1 999 -- 475,992 476,992
Net income (unaudited).............. -- 2,597,569 2,597,569
Grant of stock options
(unaudited)....................... 1,395,000 (1,375,625) 19,375
Stock split (unaudited)............. 116,999 (116,999) -- -- --
S corporation distributions to
shareholders (unaudited).......... -- (1,980,942) (1,980,942)
------- ---------- ----------- ---------- ----------
Balance at September 30, 1999
(unaudited)....................... 117,000 $1,279,000 $(1,375,625) $1,092,619 $1,112,994
======= ========== =========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-5
<PAGE>
NETCREATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
-------- --------- --------- --------- -----------
(UNAUDITED)
Cash flows from operating activities
Net income (loss)....................... $ (8,996) $ 260,349 $ 605,863 $ 357,330 $ 2,597,569
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Depreciation and amortization....... 554 9,515 23,414 16,676 79,756
Provision for doubtful accounts..... -- -- 3,613 -- 41,000
Deferred taxes...................... (2,220) 10,520 24,200 -- (1,000)
Equity based expense................ -- -- -- -- 19,375
Changes in assets and liabilities
Accounts receivable............... (13,037) (107,702) (556,580) (230,197) (2,075,458)
Prepaid income taxes.............. -- (6,317) 6,317 -- --
Other current assets.............. -- -- (6,022) -- (10,146)
Other assets...................... (614) 143 (10,980) (11,050) (36,222)
Accounts payable and accrued
expenses........................ 19,665 (8,507) 13,505 33,766 290,759
Commissions payable............... 14,019 18,883 260,098 136,374 1,887,351
Accrued pension................... 30,000 30,000 (15,000) (15,000)
Income taxes payable.............. 1,147 (1,147) 12,138 17,697 133,349
-------- --------- --------- --------- -----------
Net cash provided by operating
activities.................... 40,518 205,737 375,566 305,596 2,911,333
-------- --------- --------- --------- -----------
Cash flows from investing activities
Capital expenditures.................... (11,074) (50,955) (79,422) (59,195) (98,426)
-------- --------- --------- --------- -----------
Net cash used in investing
activities.................... (11,074) (50,955) (79,422) (59,195) (98,426)
-------- --------- --------- --------- -----------
Cash flows from financing activities
Distributions to shareholders........... -- (133,761) (250,000) (150,000) (1,980,942)
Borrowings under line of credit......... -- -- 284,240 -- 275,000
Payments on line of credit.............. -- -- (284,240) --
Payments of offering costs.............. -- -- -- -- (352,637)
Payments on capital lease obligation.... -- -- (3,261) -- (53,078)
-------- --------- --------- --------- -----------
Net cash used in financing
activities.................... (133,761) (253,261) (150,000) (2,111,657)
-------- --------- --------- --------- -----------
NET INCREASE IN CASH............ 29,444 21,021 42,883 96,401 701,250
Cash at beginning of period............... 3,537 32,981 54,002 54,002 96,885
-------- --------- --------- --------- -----------
Cash at end of period..................... $ 32,981 $ 54,002 $ 96,885 $ 150,403 $ 798,135
======== ========= ========= ========= ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for income
taxes............................... $ 8,500 $ 18,825 $ 28,825 $ 31,062 $ 170,804
======== ========= ========= ========= ===========
Noncash financing activities:
</TABLE>
Capital lease obligations of $47,772, $11,335, and $211,078 during the year
ended December 31, 1998 and the nine months ended September 30, 1998 and 1999,
respectively, were incurred when the Company entered into leases for new
equipment.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-6
<PAGE>
NETCREATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
NOTE A--NATURE OF OPERATIONS
NetCreations, Inc. (the "Company") was incorporated and commenced operations
in 1995. NetCreations, Inc. is a provider of opt-in email marketing services on
the Internet. The Company manages an extensive database of email addresses
gathered from its own and from third-party Web sites. These lists are available
for rental, including list rental, email delivery, and merge/purge. The Company
also maintains a Web site at www.postmasterdirect.com as a vehicle for its
services and another Web site that contains its corporate information at
www.netcreations.com.
The Company's primary revenue source is the rental of opt-in email lists.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. REVENUE RECOGNITION
The Company recognizes revenue when email messages are transmitted to
selected addresses, net of volume discounts and broker discounts.
2. EQUIPMENT
Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
ranging from three to five years. Amortization of assets under capital leases is
computed using the straight-line method over the lesser of the lease term or the
estimated useful lives of the assets, generally three to five years.
3. INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
4. USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
5. ADVERTISING
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1996, 1997 and 1998 amounted to $10,000, $74,000 and
$128,000, respectively.
F-7
<PAGE>
NETCREATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6. COST OF REVENUES
Cost of revenues consists primarily of commissions to the Web site owners
that are incurred for each emailing to the email addresses owned by the Web
sites.
7. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Information in the accompanying financial statements for the nine months
ended September 30, 1998 and 1999 is unaudited.
The condensed financial statements as of September 30, 1999 and for the nine
months then ended have been prepared in accordance with generally accepted
accounting principles applicable to interim financial information and the rules
and regulations promulgated by the Securities and Exchange Commission.
Accordingly, such condensed financial statements do not include all of the
information and footnote disclosures required by generally accepted accounting
principles.
In the opinion of the Company's management, the September 30, 1998 and 1999
unaudited condensed interim financial statements include all adjustments,
consisting of normal recurring adjustments necessary for a fair presentation of
such financial statements. The results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the entire year.
8. NET INCOME (LOSS) PER SHARE:
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share," which requires public companies to present
basic net income per share, and, if applicable, diluted net income (loss) per
share. Basic and diluted net income (loss) per share are included, in accordance
with SFAS No. 128, for all periods presented. Basic net income (loss) per share
is computed by dividing the net income (loss) per share for the period by the
weighted-average number of common shares outstanding during the period. The
weighted average shares have been adjusted retroactively to give effect to a
117,000-to-1 share split effective September 14, 1999. Diluted net income (loss)
per share is computed by dividing the net income (loss) for the period by the
weighted-average number of common shares adjusted for the dilutive effect of any
potential shares issuable outstanding during the period. The Company did not
have any potential common shares outstanding during the periods presented in
these financial statements.
Reference is made to Note G.
9. OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Other
comprehensive income, as defined, includes all changes in equity during a period
from non-owner sources. To date, the Company has not had any transactions that
are required to be reported as other comprehensive income.
F-8
<PAGE>
NETCREATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The disclosures prescribed in SFAS No. 131 are effective for the year
ended December 31, 1998. The Company has determined that it operates as one
business segment, a provider of internet marketing services.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities," which defines derivatives, requires that all derivatives be carried
at fair value, and provides for hedge accounting when certain conditions are
met. SFAS No. 133 is effective for the Company in 2002. Although the Company has
not fully assessed the implications of SFAS No. 133, the Company does not
believe that the adoption of this statement will have a material impact on the
Company's financial position or results of operations.
11. TECHNOLOGY, SUPPORT AND DEVELOPMENT EXPENSES
Technology, support and development costs, which consist principally of
salaries, including that of the Company's Chief Technology Officer, have been
expensed as incurred.
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (the SOP) is effective for the Company
beginning with its fiscal year ending December 31, 1999. The adoption of this
SOP had no effect for the period ended September 30, 1999. Costs incurred that
meet the criteria under this SOP will be capitalized prospectively.
NOTE C--EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Computer equipment....................................... $62,029 $177,342
Office equipment......................................... -- 11,881
------- --------
62,029 189,223
Less accumulated depreciation............................ (10,069) (33,483)
------- --------
$51,960 $155,740
======= ========
</TABLE>
Assets under capital lease at December 31, 1998 were $47,772 and related
accumulated amortization was $4,060 at December 31, 1998.
NOTE D--INCOME TAXES
The Company is an S corporation for Federal and state income tax purposes.
Accordingly, no provision has been made for Federal and certain state income
taxes in the accompanying financial statements, since the income of the Company
is included in the personal income tax returns of the
F-9
<PAGE>
NETCREATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
NOTE D--INCOME TAXES (CONTINUED)
stockholders. The Company is, however, responsible for taxes in jurisdictions
which do not recognize S corporation status (e.g., New York City.) Provision is
made for income taxes relating to these jurisdictions. In addition, the Company
files its tax returns on the cash basis of accounting.
The S corporation status will terminate immediately upon the effective date
of the Initial Public Offering (see Note I-3). The Company will convert to a
C corporation and will be subject to Federal and all applicable state and local
income taxes, prospectively. Any income tax adjustment required as a result of
the conversion will be reflected in the period in which it becomes effective
(see Note G-1).
The components of income tax expense are as follows at December 31:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current--state and local.................................... $9,654 $12,508 $48,028
Deferred--state and local................................... (2,220) 10,520 24,200
------ ------- -------
$7,434 $23,028 $72,228
====== ======= =======
</TABLE>
The differences between income tax expense shown in the statements of
operations and the computed income tax expense based on the Federal statutory
corporate rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
<S> <C> <C> <C>
1996 1997 1998
------ -------- --------
Computed income tax expense (benefit) based on the Federal
statutory rate of 34%..................................... $ -- $ 96,000 $231,000
State and local income taxes, net of Federal benefit........ 7,434 33,000 80,000
Effect of S corporation..................................... -- (105,972) (238,772)
------ -------- --------
$7,434 $ 23,028 $ 72,228
====== ======== ========
</TABLE>
The significant components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
<S> <C> <C>
1997 1998
------- -------
Deferred tax liabilities--current
Accounts receivable and prepaid expenses.................. $13,000 $73,100
Deferred tax assets--current
Accounts payable and accrued expenses..................... (4,700) (40,600)
------- -------
Net deferred tax liability............................ $ 8,300 $32,500
======= =======
</TABLE>
F-10
<PAGE>
NETCREATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
NOTE E--LINE OF CREDIT
The Company had an unused line of credit in the amount of $175,000 at
December 31, 1998.
NOTE F--COMMITMENTS AND CONTINGENCIES
1. CAPITAL LEASE OBLIGATIONS
The annual maturities of capital lease obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1999................................................... $19,856
2000................................................... 19,856
2001................................................... 14,793
-------
54,505
Less amount representing interest...................... (9,994)
-------
Present value of net minimum lease payments including
current portion of $14,331........................... $44,511
=======
</TABLE>
2. OPERATING LEASE COMMITMENTS
The Company leases office space under the terms of operating leases that
expire in 2003. Future minimum payments under noncancellable operating leases
consisted of the following at December 31, 1998:
<TABLE>
<S> <C>
1999................................................... $115,000
2000................................................... 124,000
2001................................................... 124,000
2002................................................... 124,000
2003................................................... 10,000
--------
$497,000
========
</TABLE>
The Company paid $49,600 in rent expense for the year ended December 31,
1998. No rent expense was incurred for the years ended December 31, 1996 and
1997, since the stockholders provided minimum facilities in those years.
3. DEFINED CONTRIBUTION PLAN
In 1996 and 1997, the Company had a money purchase pension and profit
sharing plan for its officers/shareholders. Upon termination, the Company
established a defined contribution plan in 1998 for eligible employees under
Section 401(k) of the Internal Revenue Code. Employees must complete one year of
service to be eligible to participate in the 401(k) plan. In 1996, 1997 and
1998, the Company incurred contribution expenses of $30,000, $60,000 and
$60,000, respectively, relating to these plans.
F-11
<PAGE>
NETCREATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
NOTE G--PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
1. PRO FORMA BALANCE SHEET
The Company intends to make a final S corporation distribution based on
current period earnings to the extent of available cash. Such distribution will
not be paid out of proceeds of the planned IPO. The pro forma balance sheet
reflects adjustments at September 30, 1999 for pro forma S corporation
distributions of $798,135, an additional deferred tax liability of $91,500
resulting from the termination of our S corporation election and the
reclassification of the undistributed retained earnings to additional paid in
capital.
2. PRO FORMA INCOME TAXES
As disclosed in Note A, the Company has elected to be taxed as an
S corporation pursuant to the Internal Revenue Code. Pro forma adjustments in
the statements of operations for each of the three years in the period ended
December 31, 1998 and for the nine months ended September 30, 1998 and 1999,
reflect a pro forma provision for income taxes based upon pre-tax income as if
the Company had been subject to all applicable Federal, state and local income
taxes. As disclosed in Note D, the Company is a cash basis taxpayer.
Accordingly, the pro forma tax provision is calculated assuming that taxes are
reported on a cash basis.
The pro forma provision for income taxes, after giving effect to the Federal
statutory rate of 34% and an applicable state and local tax provision consists
of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -----------------------
1996 1997 1998 1998 1999
-------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Current
Federal............................... $ 5,000 $ 52,000 $115,000 $ 68,000 $ 816,000
State and local....................... 4,000 33,000 71,000 42,000 542,000
-------- -------- -------- -------- ----------
Total current....................... 9,000 85,000 186,000 110,000 1,358,000
-------- -------- -------- -------- ----------
Deferred
Federal............................... (6,000) 27,000 80,000 47,000 (10,000)
State and local....................... (4,000) 17,000 50,000 29,000 (6,000)
-------- -------- -------- -------- ----------
Total deferred...................... (10,000) 44,000 130,000 76,000 (16,000)
-------- -------- -------- -------- ----------
Total................................... $ (1,000) $129,000 $316,000 $186,000 $1,342,000
======== ======== ======== ======== ==========
</TABLE>
F-12
<PAGE>
NETCREATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
NOTE G--PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
The differences between pro forma provision for income taxes shown in the
statements of operations and the pro forma computed income tax expense based on
the Federal statutory corporate rate are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------- -------- -------- -------- ----------
Computed income taxes based
on Federal statutory rate of 34%........ $ -- $ 96,000 $231,000 $136,000 $ 986,000
State and local income taxes,
net of Federal benefit.................. (1,000) 33,000 85,000 50,000 356,000
Other..................................... -- -- --
------- -------- -------- -------- ----------
$(1,000) $129,000 $316,000 $186,000 $1,342,000
======= ======== ======== ======== ==========
</TABLE>
The significant components of the pro forma net deferred tax liability,
assuming a 34% Federal statutory rate and an applicable state and local tax
provision are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998 SEPTEMBER 30, 1999
-------- --------- ------------------
<S> <C> <C> <C>
Deferred tax liability--current
Accounts receivable and prepaid expenses............. $ 55,000 $ 309,000 $ 1,275,000
Deferred tax asset--current
Accounts payable and accrued expenses................ (20,000) (172,000) (1,152,000)
-------- --------- -----------
Net deferred tax liability..................... $ 35,000 $ 137,000 $ 123,000
======== ========= ===========
</TABLE>
NOTE H--CONCENTRATIONS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and trade receivables.
The Company places its cash investments with high quality financial institutions
and does not maintain balances that exceed FDIC-insured limits. Concentrations
of credit risk with respect to trade receivables are limited due to the
Company's large number of customers and their dispersion across many different
industries and countries worldwide. The Company had no significant
concentrations of credit risk. No single customer represented more than 10% of
the Company's revenues during the years ended December 31, 1996, 1997 and 1998.
For the nine months ended September 30, 1999 one reseller accounted for
approximately 11% of net revenues. In addition, net revenues derived from this
reseller as a list owner represented 0.8% of the Company's net revenues for the
nine months ended September 30, 1999. For the year ended December 31, 1998, this
reseller accounted for approximately 7% of net revenues as a reseller and 3.3%
of net revenues as a list owner. In July 1999, the Company terminated its
agreement with this reseller.
F-13
<PAGE>
NETCREATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
NOTE I--SUBSEQUENT EVENTS (UNAUDITED)
1. FINANCING
On June 3, 1999, the Company increased its line of credit to $500,000, of
which $275,000 is outstanding as of September 30, 1999. Borrowings are
guaranteed by the Company's stockholders/ officers.
Through September 30, 1999, the Company acquired equipment and obtained
additional equipment financing approximating $260,000.
2. STOCK OPTION PLAN
The Company adopted its 1999 Stock Option Plan (the "Plan") in July 1999.
The Plan provides for the granting of up to 1,170,000 options to directors,
officers, employees and consultants. The Plan provides for the granting of
options intended to qualify as incentive stock options under the Internal
Revenue Code and non-qualified options. The Plan will terminate in July 2009
unless terminated earlier. As of September 14, 1999 the Company granted 232,500
options to officers and employees other than the Company's officer/shareholders
at an exercise price of $5.00 per share. The options vest ratably over a
three-year period and may be accelerated under certain conditions. The officer/
shareholders of the Company did not receive any of the options granted on
September 14, 1999 nor any options or stock based compensation prior to that
date. The Company will recognize compensation expense for any excess of its IPO
price over $5.00 over the period of vesting. During the three months ended
September 30, 1999 the Company recorded deferred compensation of $1,395,000 of
which $19,375 was amortized to expense. In addition, the Company granted,
effective October 8, 1999, options to purchase 100,000 shares of common stock to
each of the three non-management directors at an exercise price per share equal
to the lower of $10.00 or the initial public offering price. These options vest
at a rate of one-third as of the date of the initial public offering and the
remainder vests quarterly over the next two years and may be accelerated under
certain conditions. No other options have been granted pursuant to the Plan. The
amount of compensation expense that would be recognized subsequent to
September 30, 1999 over the next four years, relating to the options that have
been granted to date, assuming an offering price of $11.00, is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1999...................................................... $ 232,917
2000...................................................... 565,000
2001...................................................... 548,333
2002...................................................... 329,375
----------
Total................................................... $1,675,625
==========
</TABLE>
3. INITIAL PUBLIC OFFERING AND DEFERRED OFFERING COSTS
The Company intends to offer shares of its common stock to the general
public through an initial public offering (the "IPO").
F-14
<PAGE>
NETCREATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
NOTE I--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
In connection with this planned IPO, the Company has deferred offering costs
of $620,637 as of September 30, 1999. These costs will be reflected as a
reduction of the proceeds of the offering. In the event the offering is not
consummated, these costs will be charged to operations.
4. EMPLOYMENT AGREEMENTS
The Company has entered into five employment agreements which expire on
December 31, 2002 with its five executive officers. The agreements provide for,
among other things, aggregate annual compensation of $700,000 and for bonuses
that will be earned upon the achievement of specified goals.
5. PREFERRED STOCK
The Company's restated certificate of incorporation authorizes the board of
directors to issue an aggregate of up to 5,000,000 shares of preferred stock. No
shares of preferred stock have been issued.
F-15
<PAGE>
[Inside back cover page]
[Description of Artwork]
Large NetCreations logo graphic.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH
THE OFFER OR SOLICITATION IS UNLAWFUL.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 7
Cautionary Notice Regarding Forward-
Looking Statements................. 20
Termination of S Corporation
Status............................. 20
Use of Proceeds...................... 21
Dividend Policy...................... 21
Capitalization....................... 22
Dilution............................. 23
Selected Financial Data.............. 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 26
Business............................. 35
Management........................... 45
Principal Shareholders............... 51
Description of Capital Stock......... 52
Shares Eligible For Future Sale...... 57
Underwriting......................... 58
Legal Matters........................ 61
Experts.............................. 61
Where You Can Find More Information.. 61
Index To Financial Statements........ F-1
</TABLE>
------------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,300,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FRIEDMAN BILLINGS RAMSEY
C.E. UNTERBERG, TOWBIN
FBR.COM
FIDELITY CAPITAL MARKETS
, 1999
- -------------------------------------------
- -------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the Registrant are as follows. All amounts other
than the SEC registration fee, the NASD filing fee and the Nasdaq National
Market listing fee are estimates.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID
------------
<S> <C>
SEC registration fee........................................ $ 15,985
NASD filing fee............................................. $ 6,250
Nasdaq National Market listing fee.......................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Printing and engraving...................................... *
Blue sky fees and expenses (including legal fees)........... *
Transfer agent fees......................................... *
Miscellaneous............................................... *
Total..................................................... $1,500,000
==========
</TABLE>
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The New York Business Corporation Law ("BCL") provides that if a derivative
action is brought against a director or officer of a corporation, the
corporation may indemnify him or her against amounts paid in settlement and
reasonable expenses, including attorneys' fees incurred by him or her, in
connection with the defense or settlement of such action, if such director or
officer acted in good faith for a purpose which he or she reasonably believed to
be in the best interests of the corporation, except that no indemnification
shall be made without court approval in respect of a threatened action, or a
pending action settled or otherwise disposed of, or in respect of any matter as
to which such director or officer has been found liable to the corporation. In a
nonderivative action or threatened action, the BCL provides that a corporation
may indemnify a director or officer against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees incurred by him or
her in defending such action, if such director or officer acted in good faith
for a purpose which he or she reasonably believed to be in the best interests of
the corporation.
Under the BCL, a director or officer who is successful, either in a
derivative or nonderivative action, is entitled to indemnification as outlined
above. Under any other circumstances, such director or officer may be
indemnified only if certain conditions specified in the BCL are met. The
indemnification provisions of the BCL are not exclusive of any other rights to
which a director or officer seeking indemnification may be entitled pursuant to
the provisions of the certificate of incorporation or the bylaws of a
corporation or, when authorized by such certificate of incorporation or bylaws,
pursuant to a shareholders' resolution, a directors' resolution or an agreement
providing for such indemnification.
The above is a general summary of certain provisions of the BCL and is
subject, in all cases, to the specific and detailed provisions of Sections
721-725 of the BCL.
Article VII, Section 1 of our bylaws contains provisions requiring
indemnification by NetCreations of our directors and officers against certain
liabilities and expenses which they may incur as directors and officers of
NetCreations or of certain other entities in accordance with Sections 722-723 of
the BCL.
II-1
<PAGE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS (CONTINUED)
Section 726 of the BCL also contains provisions authorizing a corporation to
obtain insurance on behalf of any director and officer against liabilities,
whether or not the corporation would have the power to indemnify against such
liabilities. We maintain insurance coverage under which our directors and
officers are insured, subject to the limits of the policy, against certain
losses, as defined in the policy, arising from claims made against such
directors and officers by reason of any wrongful acts as defined in the policy,
in their respective capacities as directors or officers.
Reference is also made to Section of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provision in
the Registrant's certificate of incorporation, bylaws and the indemnification
agreements entered into between the Registrant and each of its directors and
executive officers may be sufficiently broad to permit indemnification of the
Registrant's directors and executive officers for liabilities arising under the
Securities Act of 1933.
The Registrant has obtained liability and errors and omissions insurance for
its officers and directors.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere in this prospectus:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
- -------- --------------
<S> <C>
Underwriting Agreement...................................... 1.1
Form of Amended and Restated Certificate of Incorporation of
Registrant................................................ 3.2
Form of Restated Bylaws of Registrant....................... 3.4
Form of Indemnification Agreement........................... 10.7
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(1) On February 1, 1996, the Registrant issued a total of 100 shares of common
stock to the Registrant's founders for an aggregate consideration of $1,000.
The above securities were offered and sold by the Registrant in reliance
upon exemptions from registration pursuant to either (1) Section 4(2) of the
Securities Act of 1933 as transactions not involving any public offering, or
(2) Rule 701 promulgated under the Securities Act of 1933. No underwriters were
involved in connection with the sales of securities referred to in this Item 15.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1** Certificate of Incorporation.
3.2** Restated Certificate of Incorporation.
3.3** Bylaws.
3.4** Amended and Restated Bylaws.
4.1* Specimen common stock certificate.
5.1* Opinion of Greenberg Traurig.
10.1** Form of Employment Contract of Rosalind Resnick.
10.2** Form of Employment Contract of Ryan Scott Druckenmiller.
10.3** Form of Employment Contract of Gary Sindler.
10.4** Form of Employment Contract of Larry Mahon.
10.5** Form of Employment Contract of Daniel Sweeney.
10.6** NetCreations 1999 Stock Option Plan.
10.7** Form of Indemnification Agreement.
10.8* Registration Rights Agreement.
10.9* Form of Stock Option Agreement.
23.1 Consent of Independent Certified Public Accountants.
23.2* Consent of Greenberg Traurig (included in Exhibit 5.1).
24.1** Powers of Attorney (See Signature Page on Page II-5).
27.1** Financial Data Schedule.
27.2 Financial Data Schedule.
</TABLE>
(b) Financial Statement Schedules.
All financial statement schedules have been omitted because the required
information is not applicable or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the financial statements or the notes thereto.
- ------------------------
* To be filed by amendment
** Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
II-3
<PAGE>
ITEM 17. UNDERTAKINGS (CONTINUED)
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424 (b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in New York, New
York, on this 20th day of October, 1999.
<TABLE>
<S> <C> <C>
NETCREATIONS, INC.
By: /s/ ROSALIND B. RESNICK
-----------------------------------------
Rosalind B. Resnick
Chief Executive Officer and President
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Rosalind B. Resnick as such person's
attorney-in-fact, with full power of substitution for such person in any and all
capacities, to sign any and all amendments to this Registration Statement,
including post-effective amendments and any and all new registration statements
filed pursuant to Rule 462 under the Securities Act of 1933 in connection with
or related to the offering contemplated by this Registration Statement, as
amended, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney-in-fact or such person's
substitute may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
Chief Executive Officer,
/s/ ROSALIND B. RESNICK President, Chairman of the
------------------------------------------- Board of Directors, and October 20, 1999
Rosalind B. Resnick Treasurer (Principal
Executive Officer)
* Chief Technology Officer,
------------------------------------------- Vice President, Secretary October 20, 1999
Ryan Scott Druckenmiller and Director
* Chief Financial Officer
------------------------------------------- (Principal Financial and October 20, 1999
Gary Sindler Accounting Officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ MICHAEL LEVY
------------------------------------- Director October 20, 1999
Michael Levy
By: /s/ GREGORY W. SLAYTON
------------------------------------- Director October 20, 1999
Gregory W. Slayton
By: /s/ MITCHELL YORK
------------------------------------- Director October 20, 1999
Mitchell York
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROSALIND B. RESNICK
---------------------------------------
Rosalind B. Resnick October 20, 1999
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1** Certificate of Incorporation.
3.2** Restated Certificate of Incorporation.
3.3** Bylaws.
3.4** Amended and Restated Bylaws.
4.1* Specimen common stock certificate.
5.1* Opinion of Greenberg Traurig.
10.1** Form of Employment Contract of Rosalind Resnick.
10.2** Form of Employment Contract of Ryan Scott Druckenmiller.
10.3** Form of Employment Contract of Gary Sindler.
10.4** Form of Employment Contract of Larry Mahon.
10.5** Form of Employment Contract of Daniel Sweeney.
10.6** NetCreations 1999 Stock Option Plan.
10.7** Form of Indemnification Agreement.
10.8* Registration Rights Agreement.
10.9* Form of Stock Option Agreement.
23.1 Consent of Independent Certified Public Accountants.
23.2* Consent of Greenberg Traurig (included in Exhibit 5.1).
24.1** Powers of Attorney (See Signature Page on Page II-5).
27.1** Financial Data Schedule.
27.2 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
II-7
<PAGE>
EXHIBIT 1.1
DRAFT - - 10/14/99
NETCREATIONS, INC.
3,300,000 Shares of Common Stock
UNDERWRITING AGREEMENT
October __, 1999
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
C.E. UNTERBERG, TOWBIN
fbr.com, a division of FBR Investment Services, Inc.
FIDELITY CAPITAL MARKETS,
a division of National Financial Services Corporation
as Representatives of the several Underwriters
c/o Friedman, Billings, Ramsey & Co., Inc.
1001 19th Street North
Arlington, Virginia 22209
Dear Sirs:
NetCreations, Inc., a New York corporation (the "Company"),
Rosalind Resnick ("Resnick") and Ryan Scott Druckenmiller ("Druckenmiller")
confirm their agreement with each of the Underwriters listed on Schedule II
hereto (collectively, the "Underwriters"), for whom Friedman, Billings, Ramsey &
Co., Inc., C.E. Unterberg, Towbin, fbr.com and Fidelity Capital Markets are
acting as representatives (in such capacity, the "Representatives"), with
respect to (i) the sale by the Company set forth in Schedule I opposite its name
of 3,300,000 shares (the "Initial Shares") of Common Stock, par value $.01 per
share, of the Company ("Common Stock"), and the purchase by the Underwriters,
acting severally and not jointly, of the respective number of shares of Common
Stock set forth opposite the names of the Underwriters in Schedule II hereto,
and (ii) the grant of the option described in Section 1(b) hereof to purchase
all or any part of 495,000 additional shares of Common Stock to cover
over-allotments (the "Option Shares"), if any, by the Company to the
Underwriters, acting severally and not jointly, in the respective numbers of
shares of Common Stock set forth opposite the names of the Underwriters in
Schedule II hereto. The 3,300,000 shares of Common Stock to be purchased by the
Underwriters and all or any part of the 495,000 shares of Common Stock subject
to the option described in Section l(b) hereof are hereinafter called,
collectively, the "Shares".
The Company understands that the Underwriters propose to make
a public offering of the Shares as soon as the Underwriters deem advisable after
this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange
Commission (the "Commission"), a registration statement on Form S-1 (No.
333-84019) and a related preliminary prospectus for the registration of the
Shares under the Securities Act of 1933, as amended (the
<PAGE>
"Securities Act"), and the rules and regulations thereunder (the "Securities Act
Regulations"). The Company has prepared and filed such amendments thereto, if
any, and such amended preliminary prospectuses, if any, as may have been
required to the date hereof, and will file such additional amendments thereto
and such amended prospectuses as may hereafter be required. The registration
statement has been declared effective under the Securities Act by the
Commission. The registration statement as amended at the time it became
effective (including all information deemed (whether by incorporation by
reference or otherwise) to be a part of the registration statement at the time
it became effective pursuant to Rule 430A(b) of the Securities Act Regulations)
is hereinafter called the "Registration Statement," except that, if the Company
files a post-effective amendment to such registration statement which becomes
effective prior to the Closing Time (as defined below), "Registration Statement"
shall refer to such registration statement as so amended. Any registration
statement filed pursuant to Rule 462(b) of the Securities Act Regulations is
hereinafter called the "Rule 462(b) Registration Statement," and after such
filing the term "Registration Statement" shall include the 462(b) Registration
Statement. Each prospectus included in the registration statement, or amendments
thereof or supplements thereto, before it became effective under the Securities
Act and any prospectus filed with the Commission by the Company with the consent
of the Underwriters pursuant to Rule 424(a) of the Securities Act Regulations is
hereinafter called the "Preliminary Prospectus." The term "Prospectus" means the
final prospectus, as first filed with the Commission pursuant to paragraph (1)
or (4) of Rule 424(b) of the Securities Act Regulations, and any amendments
thereof or supplements thereto. The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus.
The Company and the Underwriters agree as follows:
1. SALE AND PURCHASE:
(a) INITIAL SHARES. Upon the basis of the warranties and
representations and other terms and conditions herein set forth, at the purchase
price per share of $________, the Company agrees to sell to the Underwriters the
number of Initial Shares set forth in Schedule I opposite its name, and each
Underwriter agrees, severally and not jointly, to purchase from the Company the
number of Initial Shares set forth in Schedule II opposite such Underwriter's
name, plus any additional number of Initial Shares which such Underwriter may
become obligated to purchase pursuant to the provisions of Section 8 hereof,
subject in each case, to such adjustments among the Underwriters as the
Representatives in their sole discretion shall make to eliminate any sales or
purchases of fractional shares. The Underwriters may from time to time increase
or decrease the public offering price after the initial public offering to such
extent as the Underwriters may determine.
(b) OPTION SHARES. In addition, upon the basis of the
warranties and representations and other terms and conditions herein set forth,
at the purchase price per share set forth in paragraph (a), the Company hereby
grants an option to purchase, in the number of shares of Common Stock set forth
opposite its name in Schedule I hereto, to the Underwriters, acting severally
and not jointly, in the respective numbers of shares of Common Stock set forth
opposite the names of the Underwriters in Schedule II hereto, plus any
additional number of
2
<PAGE>
Option Shares which such Underwriter may become obligated to purchase pursuant
to the provisions of Section 8 hereof. The option hereby granted will expire 30
days after the date hereof and may be exercised in whole or in part from time to
time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Initial Shares upon notice
by the Representatives to the Company setting forth the number of Option Shares
as to which the several Underwriters are then exercising the option and the time
and date of payment and delivery for such Option Shares. Any such time and date
of delivery (a "Date of Delivery") shall be determined by the Representatives,
but shall not be later than three full business days (or earlier, without the
consent of the Company, than two full business days) after the exercise of said
option, nor in any event prior to the Closing Time, as hereinafter defined. If
the option is exercised as to all or any portion of the Option Shares, the
Company will sell that proportion of the total number of Option Shares then
being purchased which the number of Initial Shares set forth in Schedule I
opposite the name of the Company bears to the total number of Initial Shares,
and each of the Underwriters, acting severally and not jointly, will purchase
that proportion of the total number of Option Shares then being purchased which
the number of Initial Shares set forth in Schedule II opposite the name of such
Underwriter bears to the total number of Initial Shares, subject in each case to
such adjustments among the Underwriters as the Representatives in their sole
discretion shall make to eliminate any sales or purchases of fractional shares.
The Underwriters may from time to time increase or decrease the public offering
price of the Option Shares after the initial public offering to such extent as
the Underwriters may determine.
2. PAYMENT AND DELIVERY:
(a) INITIAL SHARES. Payment of the purchase price for the
Initial Shares shall be made to the Company by wire transfer of immediately
available funds or certified or official bank check payable in federal
(same-day) funds at the offices of Fulbright & Jaworski L.L.P. located at 666
Fifth Avenue, New York, New York 10103 (unless another place shall be agreed
upon by the Representatives and the Company) against delivery of the
certificates for the Initial Shares to the Representatives for the respective
accounts of the Underwriters. Such payment and delivery shall be made at 9:30
a.m., New York City time, on the third (fourth, if pricing occurs after 4:30
p.m., New York City time) business day after the date hereof (unless another
time, not later than ten business days after such date, shall be agreed to by
the Representatives and the Company). The time at which such payment and
delivery are actually made is hereinafter sometimes called the "Closing Time."
Certificates for the Initial Shares shall be delivered to the Representatives in
definitive form registered in such names and in such denominations as the
Representatives shall specify. For the purpose of expediting the checking of the
certificates for the Initial Shares by the Representatives, the Company agrees
to make such certificates available to the Representatives for such purpose at
least one full business day preceding the Closing Time.
(b) OPTION SHARES. In addition, payment of the purchase price
for the Option Shares shall be made to the Company by wire transfer of
immediately available funds or certified or official bank check payable in
federal (same-day) funds at the offices of Fulbright & Jaworski L.L.P. located
at 666 Fifth Avenue, New York, New York 10103 (unless another place shall be
3
<PAGE>
agreed upon by the Representatives and the Company), against delivery of the
certificates for the Option Shares to the Representatives for the respective
accounts of the Underwriters. Such payment and delivery shall be made at 9:30
a.m., New York City time, on each Date of Delivery determined pursuant to
Section 1(b) above. Certificates for the Option Shares shall be delivered to the
Representatives in definitive form registered in such names and in such
denominations as the Representatives shall specify. For the purpose of
expediting the checking of the certificates for the Option Shares by the
Representatives, the Company agrees to make such certificates available to the
Representatives for such purpose at least one full business day preceding the
relevant Date of Delivery.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY: The Company, Resnick
and Druckenmiller represent and warrant to the Underwriters that:
(a) the Company has an authorized capitalization as set forth
in the Prospectus under the caption "Capitalization;" the outstanding shares of
capital stock of the Company have been duly and validly authorized and issued
and are fully paid and non-assessable; except as disclosed in the Prospectus,
there are no outstanding (i) securities or obligations of the Company
convertible into or exchangeable for any capital stock of the Company, (ii)
warrants, rights or options to subscribe for or purchase from the Company any
such capital stock or any such convertible or exchangeable securities or
obligations, or (iii) obligations of the Company to issue any shares of capital
stock, any such convertible or exchangeable securities or obligation, or any
such warrants, rights or options;
(b) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of New
York with full corporate power and authority to own its properties and to
conduct its business as described in the Registration Statement and Prospectus
and to execute and deliver this Agreement and to consummate the transactions
contemplated hereby;
(c) the Company is duly qualified or licensed by each
jurisdiction in which it conducts its business and in which the failure,
individually or in the aggregate, to be so qualified or licensed could have a
material adverse effect on the assets, business, operations, earnings,
prospects, properties or condition (financial or otherwise) of the Company;
other than as disclosed in the Prospectus, the Company does not own, directly or
indirectly, any capital stock or other equity securities of any other
corporation or any ownership interest in any partnership, joint venture or other
association;
(d) the Company is in compliance in all material respects
with all applicable laws, rules and regulations applicable to it, expect where
failure to comply could materially and adversely affect the financial condition
or business of the Company;
(e) the Company is not in breach of or in default under (nor
has any event occurred which with notice, lapse of time, or both would
constitute a breach of, or default under), its articles of incorporation or
by-laws, or in the performance or observance of any obligation, agreement,
covenant or condition contained in any license, indenture, mortgage, deed of
trust,
4
<PAGE>
loan or credit agreement or other agreement or instrument to which the Company
is a party or by which its properties are bound, except for such breaches or
defaults which would not have a material adverse effect on the assets, business,
operations, earnings, prospects, properties or condition (financial or
otherwise) of the Company, and the execution, delivery and performance of this
Agreement, and consummation of the transactions contemplated hereby will not
conflict with, or result in any breach of, or constitute a default under (nor
constitute any event which with notice, lapse of time, or both would constitute
a breach of, or default under), (i) any provision of the articles of
incorporation or bylaws of the Company, or (ii) any provision of any license,
indenture, mortgage, deed of trust, loan or credit agreement or other agreement
or instrument to which the Company is a party or by which it or its properties
may be bound or affected, or under any federal, state, local or foreign law,
regulation or rule or any decree, judgment or order applicable to the Company,
except in the case of this clause (ii) for such breaches or defaults which would
not have a material adverse effect on the assets, business, operations,
earnings, prospects, properties or condition (financial or otherwise) of the
Company; or result in the creation or imposition of any lien, charge, claim or
encumbrance upon any property or asset of the Company;
(f) this Agreement has been duly authorized, executed and
delivered by the Company, and assuming this Agreement constitutes a legal, valid
and binding agreement of each of the Underwriters, constitutes a legal, valid
and binding agreement of the Company enforceable in accordance with its terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally, and by general principles
equity, and except to the extent that the indemnification and contribution
provisions of Section 9 hereof may be limited by federal or state securities
laws and public policy considerations in respect thereof;
(g) no approval, authorization, consent or order of or filing
with any federal, state or local governmental or regulatory commission, board,
body, authority or agency is required in connection with the Company's
execution, delivery and performance of this Agreement, its consummation of the
transaction contemplated hereby, and its sale and delivery of the Shares, other
than (A) such as have been obtained, or will have been obtained at the Closing
Time or the relevant Date of Delivery, as the case may be, under the Securities
Act, (B) such approvals as have been obtained in connection with the approval of
the quotation of the Shares on the Nasdaq National Market and (C) any necessary
qualification under the securities or blue sky laws of the various jurisdictions
in which the Shares are being offered by the Underwriters;
(h) the Company has sufficient licenses, authorizations,
consents and approvals as are required for the conduct of its business and has
made sufficient filings required under any federal, state or local law,
regulation or rule as are required for the conduct of its business, and has
obtained all necessary authorizations, consents and approvals from other
persons, required in order to conduct its business as described in the
Prospectus, except to the extent that any failure to have any such licenses,
authorizations, consents or approvals, to make any such filings or to obtain any
such authorizations, consents or approvals would not, individually or in the
aggregate, have a material adverse effect on the assets, business,
5
<PAGE>
operations, earnings, prospects, properties or condition (financial or
otherwise) of the Company; the Company is not required by any applicable law to
obtain accreditation or certification from any governmental agency or authority
in order to provide the products and services which it currently provides or
which it proposes to provide as set forth in the Prospectus; the Company is not
in violation of, in default under, or has received any notice regarding a
possible violation, default or revocation of any such license, authorization,
consent or approval or any federal, state, local or foreign law, regulation or
rule or any decree, order or judgment applicable to the Company the effect of
which could be material and adverse to the assets, business, operations,
earnings, prospects, properties or condition (financial or otherwise) of the
Company taken as a whole; and no such license, authorization, consent or
approval contains a materially burdensome restriction that is not adequately
disclosed in the Registration Statement and the Prospectus;
(i) each of the Registration Statement and any Rule 462(b)
Registration Statement has become effective under the Securities Act and no stop
order suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement has been issued under the Securities Act and no
proceedings for that purpose have been instituted or are pending or, to the
knowledge of the Company, are threatened by the Commission, and any request on
the part of the Commission for additional information has been complied with;
(j) the Preliminary Prospectus and the Registration Statement
comply and the Prospectus and any further amendments or supplements thereto
will, when they have become effective or are filed with the Commission, as the
case may be, comply in all material respects with the requirements of the
Securities Act and the Securities Act Regulations; the Registration Statement
did not, and any amendment thereto will not, in each case as of the applicable
effective date, contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and the Preliminary Prospectus does not, and the
Prospectus or any amendment or supplement thereto will not, as of the applicable
filing date and at the Closing Time and on each Date of Delivery (if any),
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no warranty or representation with
respect to any statement contained in the Registration Statement or the
Prospectus in reliance upon and in conformity with the information concerning
the Underwriters and furnished in writing by or on behalf of the Underwriters
through the Representatives to the Company expressly for use in the Registration
Statement or the Prospectus (that information being limited to that described in
the last sentence of the first paragraph of Section 9(b) hereof);
(k) the Preliminary Prospectus was and the Prospectus
delivered to the Underwriters for use in connection with this offering will be
identical to the versions of the Preliminary Prospectus and Prospectus created
to be transmitted to the Commission for filing via the Electronic Data Gathering
Analysis and Retrieval System ("EDGAR"), except to the extent permitted by
Regulation S-T;
6
<PAGE>
(l) all legal or governmental proceedings, contracts or
documents of a character required to be filed as exhibits to the Registration
Statement or to be summarized or described in the Prospectus have been so filed,
summarized or described as required;
(m) there are no actions, suits, proceedings, inquiries or
investigations pending or, to the knowledge of the Company, threatened against
the Company or any of its officers and directors or to which the properties,
assets or rights of such entity are subject, at law or in equity, before or by
any federal, state, local or foreign governmental or regulatory commission,
board, body, authority, arbitral panel or agency which could result in a
judgment, decree, award or order having a material adverse effect on the assets,
business, operations, earnings, prospects, properties or condition (financial or
otherwise) of the Company;
(n) the financial statements, including the notes thereto,
included in the Registration Statement and the Prospectus present fairly the
financial position of the Company as of the dates indicated and the consolidated
results of operations and changes in financial position and cash flows of the
Company for the periods specified; such financial statements have been prepared
in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved and in accordance with Regulation
S-X promulgated by the Commission; the financial statement schedules included in
the Registration Statement and the amounts in the Prospectus under the captions
"Prospectus Summary - Summary Financial Data" and "Selected Financial Data"
fairly present the information shown therein and have been compiled on a basis
consistent with the financial statements included in the Registration Statement
and the Prospectus; the unaudited pro forma financial information (including the
related notes) included in the Prospectus or any Preliminary Prospectus complies
as to form in all material respects to the applicable accounting requirements of
the Securities Act and the Securities Act Regulations, and management of the
Company believes that the assumptions underlying the pro forma adjustments are
reasonable; such pro forma adjustments have been properly applied to the
historical amounts in the compilation of the information and such information
fairly presents with respect to the Company, the financial position, results of
operations and other information purported to be shown therein at the respective
dates and for the respective periods specified;
(o) Grant Thornton LLP, whose reports on the financial
statements of the Company are filed with the Commission as part of the
Registration Statement and Prospectus, are and were during the periods covered
by their reports independent public accountants as required by the Securities
Act and the Securities Act Regulations;
(p) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except as may be
otherwise stated in the Registration Statement or Prospectus, there has not been
(A) any material adverse change in the assets, business, operations, earnings,
prospects, properties or condition (financial or otherwise), present or
prospective, of the Company, whether or not arising in the ordinary course of
business, (B) any transaction, which is material to the Company, contemplated or
entered into by the Company, (C) any material obligation, contingent or
otherwise, directly or indirectly incurred by
7
<PAGE>
the Company or (D) any dividend or distribution of any kind declared, paid or
made by the Company on any class of its capital stock;
(q) the Shares conform in all material respects to the
description thereof contained in the Registration Statement and the Prospectus;
(r) there are no persons with registration or other similar
rights to have any equity securities, including securities which are convertible
into or exchangeable for equity securities, registered pursuant to the
Registration Statement;
(s) the Shares have been duly authorized and, when issued and
duly delivered against payment therefor as contemplated by this Agreement, will
be validly issued, fully paid and nonassessable, free and clear of any pledge,
lien, encumbrance, security interest or other claim, and the issuance and sale
of the Shares by the Company is not subject to preemptive or other similar
rights arising by operation of law, under the articles of incorporation or
by-laws of the Company, under any agreement to which the Company is a party or
otherwise;
(t) the Company has not taken, and will not take, directly or
indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares;
(u) the Company (i) is not required to register as a "broker"
or "dealer" in accordance with the provisions of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or the rules and regulations thereunder,
or (ii) directly, or indirectly through one or more intermediaries, controls or
has any other association with (within the meaning of Article I of the By-laws
of the National Association of Securities Dealers, Inc. (the "NASD")) any member
firm of the NASD;
(v) the Company has not relied upon the Representatives or
legal counsel for the Representatives for any legal, tax or accounting advice in
connection with the offering and sale of the Shares;
(w) any certificate signed by any officer of the Company
delivered to the Representatives or to counsel for the Underwriters pursuant to
or in connection with this Agreement shall be deemed a representation and
warranty by the Company to each Underwriter as to the matters covered thereby;
(x) the form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the articles of incorporation and by-laws of
the Company and the requirements of the Nasdaq National Market;
(y) the Company does not own any real property; the Company
has good title to personal property owned by it, in each case free and clear of
all liens, security interests,
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pledges, charges, encumbrances, mortgages and defects, except such as are
disclosed in the Prospectus or such as do not materially and adversely affect
the value of such property and do not interfere with the use made or proposed to
be made of such property by the Company; and any real property and buildings
held under lease by the Company are held under valid, existing and enforceable
leases, with such exceptions as are disclosed in the Prospectus or are not
material and do not interfere with the use made or proposed to be made of such
property and buildings by the Company;
(z) the descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein described
present fairly the information required to be shown, and there are no contracts,
leases, or other documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed as required;
(aa) the Company owns or possesses, or can acquire on
reasonable terms, adequate license or other rights to use all patents,
trademarks, service marks, trade names, copyrights, software and design
licenses, trade secrets, manufacturing processes, other intangible property
rights and know-how (collectively "Intangibles") necessary to entitle the
Company to conduct its business as described in the Prospectus, and the Company
has not received notice of infringement of or conflict with (and the Company
knows of no such infringement of or conflict with) asserted rights of others
with respect to any Intangibles which could materially and adversely affect the
business, prospects, properties, assets, results of operations or condition
(financial or otherwise) of the Company;
(bb) the Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences;
(cc) the Company has filed on a timely basis all necessary
federal, state, local and foreign income and franchise tax returns required to
be filed through the date hereof and have paid all taxes shown as due thereon;
and no tax deficiency has been asserted against it, nor does the Company know of
any tax deficiency which is likely to be asserted against it which if determined
adversely to the Company, could materially adversely affect the business,
prospects, properties, assets, results of operations or condition (financial or
otherwise) of the Company; all tax liabilities are adequately provided for on
the respective books of the Company; the Company has duly and properly filed an
election to be taxed as an S corporation for federal and state income tax
purposes (each an "S Election"), and each such S Election has been and will be
in full force and effect since its date of election (each an "S Election Date"),
without interruption through the day prior to the Closing Date; there has not
been any termination of any such S Election, including any inadvertent
termination which has been reinstated under Section 1362 of
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the Code and the rules and regulations promulgated thereunder and the
corresponding provisions of state income tax laws; from its inception to the S
Election Date, the Company was taxable as a C corporation for federal and state
income tax purposes;
(dd) the Company maintains insurance (issued by insurers of
recognized financial responsibility) of the types and in the amounts generally
deemed adequate for their respective businesses and consistent with insurance
coverage maintained by similar companies in similar businesses, including, but
not limited to, insurance covering real and personal property owned or leased by
the Company against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect;
(ee) the Company has not violated, or received notice of any
violation with respect to, any applicable environmental, safety or similar law
applicable to its business, nor has it violated, or received notice of any
violation with respect to, any federal or state law relating to discrimination
in the hiring, promotion or pay of employees, nor any applicable federal or
state wages and hours law, nor any provisions of the Employee Retirement Income
Security Act or the rules and regulations promulgated thereunder, nor any state
law precluding the denial of credit due to the neighborhood in which a property
is situated, the violation of any of which could have a material adverse effect
on the business, operations, earnings, prospects, properties or condition
(financial or otherwise) of the Company;
(ff) neither the Company nor any officer or director
purporting to act on behalf of the Company has at any time; (i) made any
contributions to any candidate for political office, or failed to disclose fully
any such contributions, in violation of law, (ii) made any payment to any state,
federal or foreign governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
allowed by applicable law, (iii) made any payment outside the ordinary course of
business to any investment officer or loan broker or person charged with similar
duties of any entity to which the Company sells or from which the Company buys
loans or servicing arrangements for the purpose of influencing such agent,
officer, broker or person to buy loans or servicing arrangements from or sell
loans to the Company, or (iv) engaged in any transactions, maintained any bank
account or used any corporate funds except for transactions, bank accounts and
funds which have been and are reflected in the normally maintained books and
records of the Company;
(gg) except as otherwise disclosed in the Prospectus, there
are no material outstanding loans or advances or material guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them;
(hh) neither the Company nor, to the knowledge of the Company,
any employee or agent of the Company, has made any payment of funds of the
Company or received or retained any funds in violation of any law, rule or
regulation or of a character required to be disclosed in the Prospectus;
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(ii) all securities issued by the Company have been issued and
sold in compliance with (i) all applicable federal and state securities laws,
(ii) the laws of the applicable jurisdiction of incorporation of the issuing
entity and, (iii) to the extent applicable to the issuing entity, the
requirements of the Nasdaq National Market;
(jj) in connection with this offering, the Company has not
offered and will not offer its Common Stock or any other securities convertible
into or exchangeable or exercisable for Common Stock in a manner in violation of
the Securities Act. The Company has not distributed and will not distribute any
Prospectus or other offering material in connection with the offer and sale of
the Shares;
(kk) the Company has not incurred any liability for any
finder's fees or similar payments in connection with the transactions herein
contemplated;
(ll) no relationship, direct or indirect, exists between or
among the Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is required by
the Securities Act and the Securities Act Regulations to be described in the
Registration Statement and the Prospectus and which is not so described;
(mm) the Company is not and, after giving effect to the
offering and sale of the Shares, will be an "investment company" or an entity
"controlled" by and "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(nn) there are no existing or, to the knowledge of the
Company, threatened labor disputes with the employees of the Company which are
likely to have individually or in the aggregate a material adverse effect on
assets, business, operations, earnings, prospects, properties or condition
(financial or otherwise) of the Company; and
(oo) except as disclosed in the Prospectus, all computer
software (including, without limitation software which forms a part of any
hardware) owned or used by the Company, or licensed by the Company, as licensor
or as licensee, other than any shrinkwrap software available generally to retail
customers, is "Year 2000 Compliant" (as hereinafter defined). For purposes of
this Agreement, "Year 2000 Compliant" shall mean (i) all such software shall
operate in 4-digit year format and, in all material respects, without errors in
the recognition, calculation and processing of date data relating to century
recognition, leap years, single and multi-century formulae, date values and
interfaces of date-related functionalities; (ii) all date processing shall be
conducted in a four-digit year format and all date sorting that includes a "year
field" or "year category" shall be based upon a four-digit year format; and
(iii) any date arithmetic programs or calculators in the software shall operate
in all material respects in accordance with the related user documentation in
the Year 2000, and the years following, without degrading functionality or
performance.
4. CERTAIN COVENANTS: The Company hereby agrees with each Underwriter:
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(a) to furnish such information as may be required and
otherwise to cooperate in qualifying the Shares for offering and sale under the
securities or blue sky laws of such states as the Representatives may designate
and to maintain such qualifications in effect as long as required for the
distribution of the Shares, provided that the Company shall not be required to
qualify as a foreign corporation or to consent to the service of process under
the laws of any such state (except service of process with respect to the
offering and sale of the Shares);
(b) to prepare the Prospectus in a form approved by the
Underwriters and file such Prospectus with the Commission pursuant to Rule
424(b) not later than 10:00 a.m. (New York City time), on the day following the
execution and delivery of this Agreement and to furnish promptly (and with
respect to the initial delivery of such Prospectus, not later than 10:00 a.m.
(New York City time) on the day following the execution and delivery of this
Agreement) to the Underwriters as many copies of the Prospectus (or of the
Prospectus as amended or supplemented if the Company shall have made any
amendments or supplements thereto after the effective date of the Registration
Statement) as the Underwriters may reasonably request for the purposes
contemplated by the Securities Act Regulations, which Prospectus and any
amendments or supplements thereto furnished to the Underwriters will be
identical to the version created to be transmitted to the Commission for filing
via EDGAR, except to the extent permitted by Regulation S-T;
(c) to advise the Representatives promptly and (if requested
by the Representatives) to confirm such advice in writing, when the Registration
Statement has become effective and when any post-effective amendment thereto
becomes effective under the Securities Act Regulations;
(d) to advise the Representatives immediately, confirming such
advice in writing, of (i) the receipt of any comments from, or any request by,
the Commission for amendments or supplements to the Registration Statement or
Prospectus or for additional information with respect thereto, or (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, or of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes and, if
the Commission or any other government agency or authority should issue any such
order, to make every reasonable effort to obtain the lifting or removal of such
order as soon as possible; to advise the Representatives promptly of any
proposal to amend or supplement the Registration Statement or Prospectus and to
file no such amendment or supplement to which the Representatives shall
reasonably object in writing;
(e) to furnish to the Underwriters for a period of five years
from the date of this Agreement (i) as soon as available, copies of all annual,
quarterly and current reports or other communications supplied to holders of
shares of Common Stock, (ii) as soon as practicable after the filing thereof,
copies of all reports filed by the Company with the Commission, the NASD or any
securities exchange and (iii) such other information as the Underwriters may
reasonably request regarding the Company;
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(f) to advise the Underwriters promptly of the happening of
any event known to the Company within the time during which a Prospectus
relating to the Shares is required to be delivered under the Securities Act
Regulations which, in the judgment of the Company, would require the making of
any change in the Prospectus then being used so that the Prospectus would not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, and,
during such time, to prepare and furnish, at the Company's expense, to the
Underwriters promptly such amendments or supplements to such Prospectus as may
be necessary to reflect any such change and to furnish to the Underwriters a
copy of such proposed amendment or supplement before filing any such amendment
or supplement with the Commission;
(g) to furnish promptly to each Representative a signed copy
of the Registration Statement, as initially filed with the Commission, and of
all amendments or supplements thereto (including all exhibits filed therewith or
incorporated by reference therein) and such number of conformed copies of the
foregoing as the Representative may reasonably request;
(h) to furnish to each Representative, not less than two
business days before filing with the Commission subsequent to the effective date
of the Prospectus and during the period referred to in paragraph (f) above, a
copy of any document proposed to be filed with the Commission pursuant to
Section 13, 14, or 15(d) of the Exchange Act;
(i) to apply the net proceeds of the sale of the Shares in
accordance with its statements under the caption "Use of Proceeds" in the
Prospectus;
(j) to make generally available to its security holders as
soon as practicable, but in any event not later than the end of the fiscal
quarter first occurring after the first anniversary of the effective date of the
Registration Statement an earnings statement complying with the provisions of
Section 11(a) of the Securities Act (in form, at the option of the Company,
complying with the provisions of Rule 158 of the Securities Act Regulations,)
covering a period of 12 months beginning after the effective date of the
Registration Statement;
(k) to use its best efforts to effect and maintain the
quotation of the Shares on the Nasdaq National Market and to file with the
Nasdaq National Market all documents and notices required by the Nasdaq National
Market of companies that have securities that are traded in the over-the-counter
market and quotations for which are reported by the Nasdaq National Market;
(l) to engage and maintain, at its expense, a registrar and
transfer agent for the Shares;
(m) to refrain during a period of 180 days from the date of
the Prospectus, without the prior written consent of the Representatives, from
(i) offering, pledging, selling, contracting to sell, selling any option or
contract to purchase, purchasing any option or contract
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<PAGE>
to sell, granting any option for the sale of, or otherwise disposing of or
transferring, directly or indirectly, any share of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
filing any registration statement under the Securities Act with respect to any
of the foregoing, or (ii) entering into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Shares to be sold hereunder, or (B) any
shares of Common Stock issued by the Company upon the exercise of an option
outstanding on the date hereof and referred to in the Prospectus;
(n) to not itself and to use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the underwriting syndicate contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in the
future reasonably be expected to cause or result in, the stabilization or
manipulation of the price of any security of the Company, to facilitate the sale
or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of the Shares or (iii) pay or agree to pay
to any person any compensation for soliciting any order to purchase any other
securities of the Company;
(o) if at any time during the 30-day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in the
reasonable opinion of the Representatives the market price of the Common Stock
has been or is likely to be materially affected (regardless of whether such
rumor, publication or event necessitates a supplement to or amendment of the
Prospectus) and after written notice from the Representatives advising the
Company to the effect set forth above, to forthwith prepare, consult with the
Representatives concerning the substance of, and disseminate a press release or
other public statement, reasonably satisfactory to the Representative,
responding to or commenting on such rumor, publication or event;
(p) at or prior to the time the Registration Statement becomes
effective, the Company shall make each of the Underwriters an insured party
under the Company's directors and officers insurance policy and shall provide
the Representatives a summary of such directors and officers insurance policy.
5. PAYMENT OF EXPENSES:
(a) The Company agrees to pay all costs and expenses incident
to the performance of its obligations under this Agreement, whether or not the
transactions contemplated hereunder are consummated or this Agreement is
terminated, including expenses, fees and taxes in connection with (i) the
preparation and filing of the Registration Statement, each Preliminary
Prospectus, the Prospectus, and any amendments or supplements thereto, and the
printing and furnishing of copies of each thereof to the Underwriters and to
dealers (including costs of mailing and shipment), (ii) the preparation,
issuance and delivery of the certificates for
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<PAGE>
the Shares to the Underwriters, including any stock or other transfer taxes or
duties payable upon the sale of the Shares to the Underwriters, (iii) the
printing of this Agreement and any dealer agreements and furnishing of copies of
each to the Underwriters and to dealers (including costs of mailing and
shipment), (iv) the qualification of the Shares for offering and sale under
state laws that the Company and the Representatives have mutually agreed are
appropriate and the determination of their eligibility for investment under
state law as aforesaid (including the legal fees and filing fees and other
disbursements of counsel for the Underwriters in the maximum amount of $75,000
assuming that the Common Stock is approved for quotation on the Nasdaq National
Market) and the printing and furnishing of copies of any blue sky surveys or
legal investment surveys to the Underwriters and to dealers, (v) filing for
review of the public offering of the Shares by the NASD (including the legal
fees and filing fees and other disbursements of counsel for the Underwriters
relating thereto), (vi) the fees and expenses of any transfer agent or registrar
for the Shares and miscellaneous expenses referred to in the Registration
Statement, (vii) the fees and expenses incurred in connection with the inclusion
of the Shares in the Nasdaq National Market, (viii) making road show
presentations with respect to the offering of the Shares and the reasonable road
show costs and expenses of the Underwriters, (ix) preparing and distributing
bound volumes of transaction documents for the Representatives and its legal
counsel and (x) the performance of the Company's other obligations hereunder.
Upon the request of the Representatives, the Company will provide funds in
advance for filing fees.
(b) The Company agrees to reimburse the Representatives for
reasonable out-of-pocket expenses, not to exceed $25,000 in the individual and
$50,000 in the aggregate, in connection with the performance of its activities
under this Agreement, including, but not limited to, costs such as printing,
facsimile, courier service, direct computer expenses, accommodations and travel,
but excluding the fees and expenses of the Underwriters' outside legal counsel
and any other advisors, accountants, appraisers, etc. (other than the fees and
expenses of counsel with respect to state securities or blue sky laws and
obtaining the filing for review of the public offering of the Shares by the
NASD, all of which shall be reimbursed by the Company pursuant to the provisions
of subsection (a) above).
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS: The obligations of the
Underwriters hereunder to purchase Shares at the Closing Time or on the Date of
Delivery, as applicable, are subject to the accuracy of the representations and
warranties on the part of the Company and the in all material respects on the
date hereof and at the Closing Time and on each Date of Delivery, as applicable,
the performance by the Company of its obligations hereunder in all material
respects and to the satisfaction of the following further conditions at the
Closing Time or on the Date of Delivery, as applicable:
(a) The Company shall furnish to the Underwriters at the
Closing Time and on each Date of Delivery an opinion of Greenberg Traurig LLP,
counsel for the Company, addressed to the Underwriters and dated the Closing
Time and each Date of Delivery and in form and substance satisfactory to
Fulbright & Jaworski L.L.P., counsel for the Underwriters, stating that:
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(i) the Company has an authorized capitalization as
set forth in the Prospectus under the caption "Capitalization"; the
outstanding shares of capital stock of the Company have been duly and
validly authorized and issued and are fully paid and non-assessable;
except as disclosed in the Prospectus, there are no outstanding (i)
securities or obligations of the Company convertible into or
exchangeable for any capital stock of the Company, (ii) warrants,
rights or options to subscribe for or purchase from the Company any
such capital stock or any such convertible or exchangeable securities
or obligations, or (iii) obligations of the Company to issue any shares
of capital stock, any such convertible or exchangeable securities or
obligation, or any such warrants, rights or options;
(ii) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of New York with full corporate power and authority to own
its properties and to conduct its business as described in the
Registration Statement and Prospectus and to execute and deliver this
Agreement and to consummate the transactions described in this
Agreement;
(iii) the Company is duly qualified or licensed by
each jurisdiction in which it conducts its business and in which the
failure, individually or in the aggregate, to be so licensed could have
a material adverse effect on the assets, business, operations,
earnings, prospects, properties or condition (financial or otherwise)
of the Company; other than as disclosed in the Prospectus, the Company
does not own, directly or indirectly, any capital stock or other equity
securities of any other corporation or any ownership interest in any
partnership, joint venture or other association;
(iv) the Company is in compliance in all material
respects with all applicable laws, orders, rules and regulations
applicable to it, except where failure to comply could materially and
adversely affect the financial condition and business of the Company;
(v) the Company is not in breach of, or in default
under (nor has any event occurred which with notice, lapse of time, or
both would constitute a breach of, or default under), any license,
indenture, mortgage, deed of trust, loan or credit agreement or any
other agreement or instrument to which the Company is a party or by
which it or its properties may be bound or affected or under any law,
regulation or rule or any decree, judgment or order applicable to the
Company, except such breaches or defaults which would not have a
material adverse effect on the assets, business, operations, earnings,
prospects, properties or condition (financial or otherwise) of the
Company;
(vi) the execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated by this Agreement do not and will not (A)
conflict with, or result in any breach of, or constitute a default
under (nor constitute any event which with notice, lapse of time, or
both would constitute a breach of or default under), (i) any provisions
of the articles of incorporation or by-laws of the Company, (ii) any
provision of any material license,
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indenture, mortgage, deed of trust, loan, credit or other agreement or
instrument to which the Company is a party or by which it or its
properties or assets may be bound or affected, (iii) any law or
regulation binding upon or applicable to the Company or any of their
respective properties or assets, or (iv) any decree, judgment or order
applicable to the Company; or (B) result in the creation or imposition
of any lien, charge, claim or encumbrance upon any property or assets
of the Company;
(vii) this Agreement has been duly authorized,
executed and delivered by the Company and, assuming due execution of
the Agreement by the other parties hereto, is a legal, valid and
binding agreement of the Company enforceable in accordance with its
terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, and by general principles of equity, and except that
enforceability of the indemnification and contribution provisions set
forth in Section 9 of this Agreement may be limited by the federal or
state securities laws of the United States or public policy underlying
such laws;
(viii) no approval, authorization, consent or order
of or filing with any federal or state governmental or regulatory
commission, board, body, authority or agency is required in connection
with the execution, delivery and performance of this Agreement, the
consummation of the transaction contemplated hereby, and the sale and
delivery of the Shares by the Company as contemplated hereby, other
than such as have been obtained or made under the Securities Act and
the Securities Act Regulations, and except that such counsel need
express no opinion as to any necessary qualification under the state
securities or blue sky laws of the various jurisdictions in which the
Shares are being offered by the Underwriters or any approval of the
underwriting terms and arrangements by the National Association of
Securities Dealers, Inc.;
(ix) the Company has sufficient material licenses,
authorizations, consents and approvals as are required for the conduct
of its business and has made sufficient filings required under any
federal, state or local law, regulation or rule as are required for the
conduct of its business, and has obtained all necessary authorizations,
consents and approvals from other persons, required to conduct its
business, as described in the Prospectus; to such counsel's knowledge
the Company is not in violation of, in default under, or has received
any notice regarding a possible violation, default or revocation of any
such material license, authorization, consent or approval or any
federal, state, local or foreign law, regulation or decree, order or
judgment applicable to the Company;
(x) assuming that the Underwriters purchase the
Shares pursuant to this Agreement for value, in good faith and without
notice of any adverse claim, the delivery of such Shares pursuant to
this Agreement will pass good and valid title to the Shares free and
clear of any security interest, mortgage, pledge, lien, encumbrance or
other claim;
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(xi) the issuance and sale of the Shares by the
Company is not subject to preemptive or other similar rights arising by
operation of law, under the articles of incorporation or by-laws of the
Company, or under any agreement to which the Company is a party or, to
such counsel's knowledge, otherwise;
(xii) there are no persons with registration or other
similar rights to have any equity securities, including securities
which are convertible into or exchangeable for equity securities,
registered pursuant to the Registration Statement or otherwise
registered by the Company under the Securities Act;
(xiii) the Shares conform in all material respects to
the descriptions thereof contained in the Registration Statement and
Prospectus;
(xiv) the form of certificate used to evidence the
Common Stock complies in all material respects with all applicable
statutory requirements, with any applicable requirements of the
articles of incorporation and by-laws of the Company and the
requirements of the Nasdaq National Market;
(xv) the Registration Statement has become effective
under the Securities Act and no stop order suspending the effectiveness
of the Registration Statement has been issued and, to such counsel's
knowledge, no proceedings with respect thereto have been commenced or
threatened;
(xvi) as of the effective date of the Registration
Statement, the Registration Statement and the Prospectus (except as to
the financial statements and other financial and statistical data
contained therein, as to which such counsel need express no opinion)
complied as to form in all material respects with the requirements of
the Securities Act and the Securities Act Regulations;
(xvii) the statements under the captions
"Capitalization," "Regulation", "Description of Capital Stock," and
"Shares Eligible for Future Sale," in the Registration Statement and
the Prospectus, insofar as such statements constitute a summary of the
legal matters referred to therein, constitute accurate summaries
thereof in all material respects;
(xviii) there are no actions, suits or proceedings,
inquiries, or investigations pending or threatened against the Company
or any of its officers and directors or to which the properties, assets
or rights of the Company are subject, at law or in equity, before or by
any federal, state, local or foreign governmental or regulatory
commission, board, body, authority, arbitral panel or agency which are
required to be described in the Prospectus but are not so described;
(xix) there are no contracts or documents of a
character which are required to be filed as exhibits to the
Registration Statement or required to be described or summarized in the
Prospectus which have not been so filed, summarized or described,
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and all such summaries and descriptions, in all material respects,
fairly and accurately set forth the material provisions of such
contracts and documents;
(xx) the Company owns or possesses, or can acquire on
reasonable terms, adequate license or other rights to use all patents,
trademarks, service marks, trade names, copyrights, software and design
licenses, trade secrets, manufacturing processes, other intangible
property rights and know-how (collectively "Intangibles") necessary to
entitle the Company to conduct its business as described in the
Prospectus, and the Company has not received notice of infringement of
or conflict with (and knows of no such infringement of or conflict
with) asserted rights of others with respect to any Intangibles which
could materially and adversely affect the business, prospects,
properties, assets, results of operations or condition (financial or
otherwise) of the Company;
(xxi) the Company has filed on a timely basis all
necessary federal, state, local and foreign income and franchise tax
returns required to be filed through the date hereof and have paid all
taxes shown as due thereon; and no tax deficiency has been asserted
against any such entity, nor does any such entity know of any tax
deficiency which is likely to be asserted against any such entity which
if determined adversely to any such entity, could materially adversely
affect the business, prospects, properties, assets, results of
operations or condition (financial or otherwise) of the Company.
In addition, such counsel shall state that they have participated
in conferences with officers and other representatives of the Company,
independent public accountants of the Company, representatives of the
Representatives, at which the contents of the Registration Statement and
Prospectus were discussed and, although such counsel is not passing upon and
does not assume responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or Prospectus, they have no
reason to believe that the Registration Statement, the Preliminary Prospectus or
the Prospectus, as of their respective effective or issue date, and as of the
date of such counsel's opinion, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading (it being understood
that, in each case, such counsel need express no view with respect to the
financial statements and other financial and statistical data included in the
Registration Statement, Preliminary Prospectus or Prospectus).
(b) The Representatives shall have received from Grant Thornton
LLP letters dated, respectively, as of the date of this Agreement, the Closing
Time and each Date of Delivery, as the case may be, addressed to the
Representatives, in form and substance satisfactory to the Representatives,
relating to the financial statements, including any pro forma financial
statements, of the Company, and such other matters customarily covered by
comfort letters issued in connection with registered public offerings.
(c) The Representatives shall have received at the Closing Time
and on each Date of Delivery the favorable opinion of Fulbright & Jaworski,
dated the Closing Time or such Date
19
<PAGE>
of Delivery, addressed to the Representatives and in form and substance
satisfactory to the Representatives.
(d) No amendment or supplement to the Registration Statement or
Prospectus shall have been filed to which the Underwriters shall have objected
in writing.
(e) Prior to the Closing Time and each Date of Delivery (i) no
stop order suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any Preliminary Prospectus or
Prospectus has been issued, and no proceedings for such purpose shall have been
initiated or threatened, by the Commission, and no suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes, has
occurred; and (ii) the Registration Statement and the Prospectus shall not
contain an untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(f) Between the time of execution of this Agreement and the
Closing Time or the relevant Date of Delivery (i) no material and unfavorable
change in the assets, business, operations, earnings, prospects, properties or
condition (financial or otherwise) of the Company shall occur or become known
(whether or not arising in the ordinary course of business), and (ii) no
transaction which is material and unfavorable to the Company shall have been
entered into by the Company.
(g) The Shares shall have been approved for inclusion in the
Nasdaq National Market.
(h) The NASD shall not have raised any objection with respect to
the fairness and reasonableness of the underwriting terms and arrangements.
(i) The Representatives shall have received lock-up agreements
from each stockholder of the Company, in the form of Exhibit B attached hereto,
and such letter agreements shall be in full force and effect.
(j) The Company will, at the Closing Time and on each Date of
Delivery, deliver to the Underwriters a certificate of its Chairman of the Board
and Chief Executive Officer, its Executive Vice President and Chief Technology
Officer, and its Chief Financial Officer, to the effect that, to each of such
officer's knowledge, the representations and warranties of the Company, Resnick
and Druckenmiller set forth in this Agreement are true and correct and the
conditions set forth in paragraphs (g), (h) and (i) have been satisfied, in each
case as of such date.
(k) The Company shall have furnished to the Underwriters such
other documents and certificates as to the accuracy and completeness of any
statement in the Registration Statement and the Prospectus, the representations,
warranties and statement of the Company contained herein, and the performance by
the Company of its covenants contained herein, and the
20
<PAGE>
fulfillment of any conditions contained herein, as of the Closing Time or any
Date of Delivery as the Underwriters may reasonably request.
(l) The Company shall have performed such of its obligations under
this Agreement as are to be performed by the terms hereof at or before the
Closing Time or the relevant Date of Delivery.
7. TERMINATION: The obligations of the Underwriters hereunder shall be
subject to termination in the absolute discretion of the Representatives, at any
time prior to the Closing Time or any Date of Delivery, (i) if any of the
conditions specified in Section 6 shall not have been fulfilled when and as
required by this Agreement to be fulfilled, or (ii) if there has been since the
respective dates as of which information is given in the Registration Statement,
any material adverse change, or any development involving a prospective material
adverse change, in or affecting the assets, business, operations, earnings,
prospects, properties, condition (financial or otherwise) or management of the
Company, whether or not arising in the ordinary course of business, or (iii) if
there has occurred outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic, political or other
conditions the effect of which on the financial markets of the United States is
such as to make it, in the judgment of the Representatives, impracticable to
market the Shares or enforce contracts for the sale of the Shares, or (iv) if
trading in any securities of the Company has been suspended by the Commission or
by Nasdaq, or if trading generally on the New York Stock Exchange or in the
Nasdaq over-the-counter market has been suspended (including automatic halt in
trading pursuant to market-decline triggers other than those in which solely
program trading is temporarily halted), or limitations on prices for trading
(other than limitations on hours or numbers of days of trading) have been fixed,
or maximum ranges for prices for securities have been required, by such exchange
or the NASD or Nasdaq or by order of the Commission or any other governmental
authority, or (v) any federal or state statute, regulation, rule or order of any
court or other governmental authority has been enacted, published, decreed or
otherwise promulgated which in the reasonable opinion of the Representatives
materially adversely affects or will materially adversely affect the business or
operations of the Company, or (vi) any action has been taken by any federal,
state or local government or agency in respect of its monetary or fiscal affairs
which in the reasonable opinion of the Representatives has a material adverse
effect on the securities markets in the United States.
If the Representatives elect to terminate this Agreement as
provided in this Section 7, the Company and the Underwriters shall be notified
promptly by telephone, promptly confirmed by facsimile.
If the sale to the Underwriters of the Shares, as contemplated by
this Agreement, is not carried out by the Underwriters for any reason permitted
under this Agreement or if such sale is not carried out because the Company
shall be unable to comply in all material respects with any of the terms of this
Agreement, the Company shall not be under any obligation or liability under this
Agreement (except to the extent provided in Sections 5 and 9 hereof) and the
Underwriters shall be under no obligation or liability to the Company under this
Agreement (except to the extent provided in Section 9 hereof) or to one another
hereunder.
21
<PAGE>
8. INCREASE IN UNDERWRITERS' COMMITMENTS: If any Underwriter shall default
at the Closing Time or on a Date of Delivery in its obligation to take up and
pay for the Shares to be purchased by it under this Agreement on such date the
Representatives shall have the right, within 36 hours after such default, to
make arrangements for one or more of the non-defaulting Underwriters, or any
other underwriters, to purchase all, but not less than all, of the Shares which
such Underwriter shall have agreed but failed to take up and pay for (the
"Defaulted Shares"). Absent the completion of such arrangements within such 36
hour period, (i) if the total number of Defaulted Shares does not exceed 10% of
the total number of Shares to be purchased on such date, each non-defaulting
Underwriter shall take up and pay for (in addition to the number of Shares which
it is otherwise obligated to purchase on such date pursuant to this Agreement)
the portion of the total number of Shares agreed to be purchased by the
defaulting Underwriter on such date in the proportion that its underwriting
obligations hereunder bears to the underwriting obligations of all
non-defaulting Underwriters; and (ii) if the total number of Defaulted Shares
exceeds 10% of such total, the Representatives may terminate this Agreement by
notice to the Company, without liability to any non-defaulting Underwriter.
Without relieving any defaulting Underwriter from its obligations
hereunder, the Company agrees with the non-defaulting Underwriters that it will
not sell any Shares hereunder on such date unless all of the Shares to be
purchased on such date are purchased on such date by the Underwriters (or by
substituted Underwriters selected by the Representatives with the approval of
the Company or selected by the Company with the approval of the
Representatives).
If a new Underwriter or Underwriters are substituted for a
defaulting Underwriter in accordance with the foregoing provision, the Company
or the non-defaulting Underwriters shall have the right to postpone the Closing
Time or the relevant Date of Delivery for a period not exceeding five business
days in order that any necessary changes in the Registration Statement and
Prospectus and other documents may be effected.
The term Underwriter as used in this Agreement shall refer to and
include any Underwriter substituted under this Section 8 with the like effect
as, if such substituted Underwriter had originally been named in this Agreement.
9. INDEMNITY AND CONTRIBUTION BY THE COMPANY, ROSALIND RESNICK, RYAN SCOTT
DRUCKENMILLER AND THE UNDERWRITERS:
(a) (i) The Company and each of Resnick and Druckenmiller jointly
and severally agree to indemnify, defend and hold harmless each Underwriter and
any person who controls any Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any loss,
expense, liability, damage or claim (including the reasonable cost of
investigation) which, jointly or severally, any such Underwriter or controlling
person may incur under the Securities Act, the Exchange Act or otherwise,
insofar as such loss, expense, liability, damage or claim arises out of or is
based upon (A) any breach of any representation, warranty or covenant of the
Company contained herein, (B) any failure on the part of the Company to comply
with any applicable law, rule or regulation relating to the offering of
securities being made pursuant to the Prospectus, or (C) any untrue statement or
alleged untrue
22
<PAGE>
statement of a material fact contained in the Registration Statement (or in the
Registration Statement as amended by any post-effective amendment thereof by the
Company) or in a Prospectus (the term Prospectus for the purpose of this Section
9 being deemed to include any Preliminary Prospectus, the Prospectus and the
Prospectus as amended or supplemented by the Company), or arises out of or is
based upon any omission or alleged omission to state a material fact required to
be stated in either such Registration Statement or Prospectus or necessary to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading, except insofar as any such loss, expense,
liability, damage or claim arises out of or is based upon any untrue statement
or alleged untrue statement or omission or alleged omission of a material fact
contained in and in conformity with information furnished in writing by the
Underwriters through the Representatives to the Company expressly for use in
such Registration Statement or such Prospectus, provided, however, that the
indemnity agreement contained in this subsection (a)(i) with respect to the
Preliminary Prospectus or the Prospectus shall not inure to the benefit of an
Underwriter (or to the benefit of any person controlling such Underwriter) with
respect to any person asserting any such loss, expense, liability, damage or
claim which is the subject thereof if the Prospectus or any supplement thereto
prepared with the consent of the Representatives and furnished to the
Underwriters prior to the Closing Time corrected any such alleged untrue
statement or omission and if such Underwriter failed to send or give a copy of
the Prospectus or supplement thereto to such person at or prior to the written
confirmation of the sale of Shares to such person, unless such failure resulted
from noncompliance by the Company with Section 4(b) above).
(b) Notwithstanding anything to the contrary in paragraph (a)
above, each Underwriter and each person who controls such Underwriter agrees not
to assert its rights to indemnity under paragraph (a) against Resnick or
Druckenmiller for losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) unless and until (i) such Underwriter or
controlling person has damages or liabilities (including any legal or other
expense reasonably incurred) and (ii) the Company does not reimburse in full
such Underwriter or controlling person for any such losses, claims, damages or
liabilities (including legal and other expenses) incurred after exhausting all
legal remedies to compel such payment. This indemnity obligation will be in
addition to any liability which Resnick or Druckenmiller may otherwise have.
(c) If any action is brought against an Underwriter or controlling
person in respect of which indemnity may be sought against the Company, Resnick
or Druckenmiller pursuant to subsection (a) above, such Underwriter shall
promptly notify the Company, Resnick and Druckenmiller in writing of the
institution of such action, and the Company shall assume the defense of such
action, including the employment of counsel and payment of expenses, provided,
however, that any failure or delay to so notify the Company, Resnick or
Druckenmiller will not relieve the Company, Resnick or Druckenmiller of any
obligation hereunder, except to the extent that its ability to defend is
actually impaired by such failure or delay. Such Underwriter or controlling
person shall have the right to employ its or their own counsel in any such case,
but the fees and expenses of such counsel shall be at the expense of such
Underwriter or such controlling person unless the employment of such counsel
shall have been authorized in writing by the Company, Resnick or Druckenmiller
in connection with the defense of such action, or the Company, Resnick or
Druckenmiller shall not have employed counsel to have charge of the
23
<PAGE>
defense of such action within a reasonable time or such indemnified party or
parties shall have reasonably concluded (based on the advice of counsel) that
there may be defenses available to it or them which are different from or
additional to those available to the Company, Resnick or Druckenmiller (in which
case none of the Company, Resnick or Druckenmiller shall have the right to
direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
Company, Resnick and Druckenmiller and paid as incurred (it being understood,
however, that none of the Company, Resnick or Druckenmiller shall be liable for
the expenses of more than one separate firm of attorneys for the Underwriters or
controlling persons in any one action or series of related actions in the same
jurisdiction (other than local counsel in any such jurisdiction) representing
the indemnified parties who are parties to such action). Anything in this
paragraph to the contrary notwithstanding, the Company, Resnick Druckenmiller
shall not be liable for any settlement of any such claim or action effected
without the Representatives' written consent.
(d) Each Underwriter agrees, severally and not jointly, to
indemnify, defend and hold harmless the Company, Resnick and Druckenmiller, the
Company's directors, the Company's officers that signed the Registration
Statement, and any person who controls the Company within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, from and against any
loss, expense, liability, damage or claim (including the reasonable cost of
investigation) which, jointly or severally, the Company, Resnick, Druckenmiller
or any such person may incur under the Securities Act, the Exchange Act or
otherwise, but only insofar as such loss, expense, liability, damage or claim
arises out of or is based upon any untrue statement or alleged untrue statement
of a material fact contained in and in conformity with information furnished in
writing by such Underwriter through the Representatives to the Company expressly
for use in the Registration Statement (or in the Registration Statement as
amended by any post effective amendment thereof by the Company) or in a
Prospectus, or arises out of or is based upon any omission or alleged omission
to state a material fact in connection with such information required to be
stated either in such Registration Statement or Prospectus or necessary to make
such information, in the light of the circumstances under which made, not
misleading. The statements set forth (i) in the last paragraph on the cover page
and (ii) under the caption "Underwriting" in the Preliminary Prospectus and the
Prospectus (to the extent such statements relate to the Underwriters) constitute
the only information furnished by or on behalf of any Underwriter through the
Representatives to the Company for purposes of Section 3(j) and this Section 9.
If any action is brought against the Company, Resnick,
Druckenmiller or any such person in respect of which indemnity may be sought
against any Underwriter pursuant to the foregoing paragraph, the Company,
Resnick, Druckenmiller or such person shall promptly notify the Representatives
in writing of the institution of such action and the Representatives, on behalf
of the Underwriters, shall assume the defense of such action, including the
employment of counsel and payment of expenses. The Company, Resnick,
Druckenmiller or such person shall have the right to employ its own counsel in
any such case, but the fees and expenses of such counsel shall be at the expense
of the Company, Resnick, Druckenmiller or such person unless the employment of
such counsel shall have been authorized in writing by the Representatives in
connection with the defense of such action or the Representatives shall not have
employed
24
<PAGE>
counsel to have charge of the defense of such action within a reasonable time or
such indemnified party or parties shall have reasonably concluded (based on the
advice of counsel) that there may be defenses available to it or them which are
different from or additional to those available to the Underwriters (in which
case the Representatives shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by such Underwriter and paid as incurred
(it being understood, however, that the Underwriters shall not be liable for the
expenses of more than one separate firm of attorneys in any one action or series
of related actions in the same jurisdiction (other than local counsel in any
such jurisdiction) representing the indemnified parties who are parties to such
action). Anything in this paragraph to the contrary notwithstanding, no
Underwriter shall be liable for any settlement of any such claim or action
effected without the written consent of the Representatives.
(e) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under subsections (a), (b), (c)and (d) of
this Section 9 in respect of any losses, expenses, liabilities, damages or
claims referred to therein, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, expenses,
liabilities, damages or claims (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company, Resnick, Druckenmiller on
the one hand, and the Underwriters on the other hand from the offering of the
Shares or (ii) if (but only if) the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company, Resnick, Druckenmiller and of the Underwriters in
connection with the statements or omissions which resulted in such losses,
expenses, liabilities, damages or claims, as well as any other relevant
equitable considerations. The relative benefits received by the Company,
Resnick, Druckenmiller and the Underwriters shall be deemed to be in the same
proportion as, the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by the Company
bear to the underwriting discounts and commissions received by the Underwriters.
The relative fault of the Company, Resnick, Druckenmiller and of the
Underwriters shall be determined by reference to, among other things, whether
the untrue statement or alleged untrue statement of a material fact or omission
or alleged omission relates to information supplied by the Company, Resnick,
Druckenmiller or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
claims, damages and liabilities referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any claim or action.
(f) The Company, Resnick, Druckenmiller and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this Section
9 were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to in subsection
(d)(i) and, if applicable (ii), above. Notwithstanding the provisions of this
Section 9, no Underwriter shall be required to contribute any amount in excess
of the
25
<PAGE>
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several in proportion to their respective underwriting commitments
and not joint.
10. SURVIVAL: The indemnity and contribution agreements contained in
Section 9 and the covenants, warranties and representations of the Company,
Resnick and Druckenmiller contained in Sections 3, 4 and 5 of this Agreement
shall remain in full force and effect regardless of any investigation made by or
on behalf of any Underwriter, or any person who controls any Underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, or by or on behalf of the Company, its directors and officers or any person
who controls the Company within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, and shall survive any termination of this
Agreement or the sale and delivery of the Shares. The Company, Resnick,
Druckenmiller and each Underwriter agree promptly to notify the others of the
commencement of any litigation or proceeding against it and, in the case of the
Company, against any of the Company's officers and directors, in connection with
the sale and delivery of the Shares, or in connection with the Registration
Statement or Prospectus.
11. NOTICES: Except as otherwise herein provided, all statements, requests,
notices and agreements shall be in writing or by telegram and, if to the
Underwriters, shall be sufficient in all respects if delivered to Friedman,
Billings, Ramsey & Co., Inc., 1001 19th Street North, Arlington, Virginia 22209,
Attention: Syndicate Department; if to the Company, shall be sufficient in all
respects if delivered to the Company, Resnick or Druckenmiller at the offices of
the Company at 379 West Broadway, Suite 202, New York, New York 10012.
12. GOVERNING LAW; HEADINGS: THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF VIRGINIA, WITHOUT
REGARD TO CONFLICTS OF LAWS PRINCIPLES. The section headings in this Agreement
have been inserted as a matter of convenience of reference and are not a part of
this Agreement.
13. PARTIES AT INTEREST: The Agreement herein set forth has been and is
made solely for the benefit of the Underwriters, the Company, and the
controlling persons, directors and officers referred to in Sections 9 and 10
hereof, and their respective successors, assigns, executors and administrators.
No other person, partnership, association or corporation (including a purchaser,
as such purchaser, from any of the Underwriters) shall acquire or have any right
under or by virtue of this Agreement.
14. COUNTERPARTS AND FACSIMILE SIGNATURES: This Agreement may be signed by
the parties in counterparts which together shall constitute one and the same
agreement among the parties. A facsimile signature shall constitute an original
signature for all purposes.
26
<PAGE>
If the foregoing correctly sets forth the understanding among the
Company, Resnick, Druckenmiller and the Underwriters, please so indicate in the
space provided below for the purpose, whereupon this Agreement shall constitute
a binding agreement among the Company, Resnick, Druckenmiller and the
Underwriters.
Very truly yours,
NETCREATIONS, INC.
By:
------------------------------------------
By:
Title:
------------------------------------------
Rosalind Resnick
------------------------------------------
Ryan Scott Druckenmiller
Accepted and agreed to as
of the date first above written:
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
C.E. UNTERBERG, TOWBIN
fbr.com, a division of FBR Investment Services, Inc.
FIDELITY CAPITAL MARKETS,
a division of National Financial Services Corporation
By:
-------------------------------------
Title:
For itself and as a Representative of the other
Underwriters named on Schedule II hereto.
27
<PAGE>
Schedule I
<TABLE>
<CAPTION>
Number of Initial Number of Option
NAME OF PARTY SELLING SHARES SHARES TO BE SOLD SHARES TO BE SOLD
- ----------------------------------------------------------------------------
<S> <C> <C>
NetCreations, Inc. [ ] [ ]
Total [ ] [ ]
----------------- -------------
----------------- -------------
</TABLE>
S-1
<PAGE>
Schedule II
<TABLE>
<CAPTION>
NUMBER OF INITIAL NUMBER OF OPTION
UNDERWRITER SHARES TO BE PURCHASED SHARES TO BE PURCHASED
- ------------------------------------------------------------------------------------
<S> <C> <C>
Friedman, Billings,
Ramsey & Co., Inc. [____________] [______]
C.E. Unterberg, Towbin [____________] [______]
fbr.com [____________] [______]
Fidelity Capital Markets [____________] [______]
Total.......................3,300,000 495,000
---------- -------
---------- -------
</TABLE>
S-2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated June 25, 1999, (except for Note B-8 as to
which the date is September 14, 1999) accompanying the financial statements of
NetCreations, Inc. contained in the Registration Statement and Prospectus. We
consent to the use of the aforementioned report in the Registration Statement
and Prospectus, and to the use of our name as it appears under the captions
"Selected Financial Data" and "Experts."
GRANT THORNTON LLP
New York, New York
October 18, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 798,135 405,544
<SECURITIES> 0 0
<RECEIVABLES> 2,708,164 778,037
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,522,467 1,202,532
<PP&E> 498,727 343,588
<DEPRECIATION> (113,239) (60,497)
<TOTAL-ASSETS> 4,576,265 1,520,086
<CURRENT-LIABILITIES> 3,343,022 707,067
<BONDS> 0 0
0 0
0 0
<COMMON> 117,000 0
<OTHER-SE> 1,112,994 813,019
<TOTAL-LIABILITY-AND-EQUITY> 4,576,265 1,520,086
<SALES> 0 0
<TOTAL-REVENUES> 10,202,614 2,062,333
<CGS> 0 0
<TOTAL-COSTS> 4,961,667 812,547
<OTHER-EXPENSES> 2,341,023 849,856
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 2,899,924 399,930
<INCOME-TAX> 302,355 42,600
<INCOME-CONTINUING> 2,597,569 357,330
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,597,569 357,330
<EPS-BASIC> 0.22 0.02
<EPS-DILUTED> 0.22 0.02
</TABLE>
