<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 001-14875
NETCREATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
NEW YORK 11-3300476
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
379 WEST BROADWAY, SUITE 202
NEW YORK, NEW YORK 10012
(Address of Principal Executive Officer and Zip Code)
(212) 625-1370
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
As of August 14, 2000, there were 15,495,000 shares of the registrant's
Common stock outstanding, with a $.01 par value.
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NetCreations, Inc.
Index to Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
Quarter Ended June 30, 2000
Items in Form 10-Q
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements 2
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosure About Market Risk None
PART II OTHER INFORMATION
Item 1 Legal Proceedings None
Item 2 Changes in Securities and Use of Proceeds None
Item 3 Defaults Upon Senior Securities None
Item 4 Submission of Matters to a Vote of Security Holders None
Item 5 Other Information None
Item 6 Exhibits and Reports on Form 8-K 11
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PART 1 - FINANCIAL INFORMATION
Item 1. - Financial Statements
NetCreations, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 *
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 38,332,991 $ 41,305,814
Accounts receivable (net of allowance for doubtful
accounts of $350,000 and $150,000) 10,981,150 5,636,967
Prepaid commissions 7,133,400 3,000,000
Other current assets 385,327 132,395
------------ ------------
Total current assets 56,832,868 50,075,176
Equipment (net of accumulated
depreciation and amortization) 3,273,750 2,268,225
Deferred income taxes 514,225 --
Other assets 86,176 48,014
------------ ------------
Total assets $ 60,707,019 $ 52,391,415
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable $ 53,013 $ 1,825,896
Accrued expenses 918,083 939,405
Commissions payable 9,263,761 3,696,466
Current portion of capital lease obligations 105,850 112,350
Income taxes payable 798,989 325,552
Deferred income taxes -- 128,500
------------ ------------
Total current liabilities 11,139,696 7,028,169
Capital lease obligations 58,967 101,225
------------ ------------
Total liabilities 11,198,663 7,129,394
Common stock, $.01 par value; 50,000,000 shares authorized;
15,495,000 shares issued and outstanding 154,950 154,950
Additional paid-in capital 46,078,751 46,512,376
Deferred compensation (1,517,982) (2,313,171)
Retained earnings 4,792,637 907,866
------------ ------------
Total stockholders' equity 49,508,356 45,262,021
------------ ------------
Total liabilities and stockholders' equity $ 60,707,019 $ 52,391,415
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
* Information derived from audited financial statements.
2
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NetCreations, Inc.
Condensed Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 16,234,177 $ 3,578,089 $ 30,642,483 $ 5,272,594
Cost of revenues 9,351,818 1,750,815 17,224,098 2,577,967
------------ ------------ ------------ ------------
Gross profit 6,882,359 1,827,274 13,418,385 2,694,627
Operating expenses
Selling and marketing 1,562,481 307,632 2,942,380 601,960
Technology, support and development 401,964 105,824 831,921 191,805
General and administrative 1,659,971 229,003 2,877,718 364,889
Depreciation and amortization 336,746 27,797 606,906 45,151
------------ ------------ ------------ ------------
Total operating expenses 3,961,162 670,256 7,258,925 1,203,805
------------ ------------ ------------ ------------
Operating income 2,921,197 1,157,018 6,159,460 1,490,822
Interest income 526,685 0 1,094,004 0
Interest expense 3,709 4,635 7,418 7,615
------------ ------------ ------------ ------------
Net interest income (expense) 522,976 (4,635) 1,086,586 (7,615)
------------ ------------ ------------ ------------
Income before income tax provision 3,444,173 1,152,383 7,246,046 1,483,207
Income tax provision 1,595,775 121,700 3,361,275 158,000
------------ ------------ ------------ ------------
Net income $ 1,848,398 $ 1,030,683 $ 3,884,771 $ 1,325,207
============ ============ ============ ============
Net income per common share
Basic and diluted $ 0.12 $ 0.09 $ 0.25 $ 0.11
============ ============ ============ ============
Weighted average common shares outstanding
For basic net income per share 15,495,000 11,700,000 15,495,000 11,700,000
For dilutive net income per share 15,766,477 11,700,000 15,825,363 11,700,000
Pro forma data
Historical Income before income taxes $ 3,444,173 $ 1,152,383 $ 7,246,046 $ 1,483,207
Pro forma income tax provision 1,595,775 522,800 3,361,275 677,000
------------ ------------ ------------ ------------
Pro forma net income $ 1,848,398 $ 629,583 $ 3,884,771 $ 806,207
============ ============ ============ ============
Pro forma net income per common share
Basic and diluted $ 0.12 $ 0.05 $ 0.25 $ 0.07
============ ============ ============ ============
Pro forma weighted average common shares outstanding
For basic net income per share 15,495,000 11,700,000 15,495,000 11,700,000
For dilutive net income per share 15,766,477 11,700,000 15,825,363 11,700,000
</TABLE>
The accompanying notes are an integral part of these statements.
3
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NetCreations, Inc.
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,884,771 $ 1,325,207
Adjustments to reconcile net income to
net cash (used in) provided by operating activities
Depreciation and amortization 606,906 45,151
Provision for doubtful accounts 200,000 --
Deferred income taxes (642,725) (1,000)
Equity-based compensation 361,564 --
Changes in assets and liabilities
Accounts receivable (5,544,183) (902,410)
Prepaid commissions (4,133,401) --
Other current assets (307,499) (1,033)
Other assets (38,163) (22,825)
Accounts payable and accrued expenses (1,739,636) 129,739
Commissions payable 5,567,295 733,495
Income taxes payable 473,437 133,349
------------ ------------
Net cash (used in) provided by operating activities (1,311,634) 1,439,673
------------ ------------
Cash flows from investing activities
Capital expenditures (1,612,431) (76,918)
------------ ------------
Net cash used in investing activities (1,612,431) (76,918)
------------ ------------
Cash flows from financing activities
Distributions to shareholders -- (881,632)
Borrowings under line of credit -- 25,000
Payments of offering costs -- (59,662)
Payments on capital lease obligations (48,758) (22,260)
------------ ------------
Net cash used in financing activities (48,758) (938,554)
------------ ------------
Net change in cash and cash equivalents (2,972,823) 424,201
Cash and cash equivalents at beginning of period 41,305,814 96,885
------------ ------------
Cash and cash equivalents at end of period $ 38,332,991 $ 521,086
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 3,530,427 $ 25,141
============ ============
Interest $ 7,418 $ 7,615
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
4
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NetCreations, Inc.
Notes to Condensed Financial Statements
NOTE A - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
NetCreations, Inc. (the "Company") was incorporated and commenced
operations in 1995. NetCreations, Inc. provides 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. The
technology allows real-time, online email address selection and ordering
by direct markets, as well as response tracking. The Company 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 charges direct marketers a fee each time it sends marketing
materials on their behalf to an email address they have selected from our
database. The Company generates substantially all of its revenues from the
fees obtained from its direct marketing customers. Generally, a percentage
of that fee is paid to the third-party Web sites in the Company's network
each time an email address they own is used for a particular email
marketing campaign.
The accompanying financial statements should be read in conjunction with
the following notes and with the Financial Statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. Information in the accompanying financial statements
for the quarter and six months ended June 30, 2000 and 1999 is unaudited.
The condensed financial statements as of June 30, 2000 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 June 30, 2000 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 quarter and six
months ended June 30, 2000 and 1999 are not necessarily indicative of the
results to be expected for the entire year.
NOTE B - LIST MANAGEMENT AGREEMENTS
The Company has paid certain advances and fees under third-party list
management agreements that are accounted for as prepaid commissions. As of
June 30, 2000 the Company has recorded prepaid commissions of $7,133,000.
Commission expense is generally recognized when revenue is earned by the
Company upon the transmission of applicable email messages and applied
against the advances. Should management determine that it is no longer
probable that sufficient revenue will be generated over the term of the
agreement to meet the minimum amounts advanced, the Company will amortize
the remaining advances at the greater of the method described in the
preceding sentence or the straight-line basis over the remaining term of
the agreement. Management will continue to assess the recoverability of
prepaid commissions at each reporting period. To the extent that it is
probable that some or all of the prepaid commissions have become
nonrecoverable, a charge to operations will be made in that period to
reduce the balance to the amount recoverable. There are no required
charges as of June 30, 2000.
5
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NOTE C - INCOME TAXES AND PROFORMA INCOME TAXES
The Company was an S Corporation for Federal and state income tax purposes
through the consummation of its IPO on November 12, 1999. Accordingly, no
provision has been made for Federal and certain state income taxes in the
June 30, 1999 financial statements, since the income of the Company was
included in the personal income tax returns of the stockholders. The
Company was, however, responsible for taxes in jurisdictions that do not
recognize S Corporation status (e.g., New York City). The Company has
included proforma income taxes on its income statement that reflect the
tax expense if the Company were subject to Federal and all state and local
taxes. Effective November 12, 1999, the Company terminated its S
Corporation status. The Company converted to a C Corporation and is now
subject to Federal and all applicable state income taxes.
On January 1, 2000 the Company became an accrual basis taxpayer pursuant
to the Internal Revenue Code. This change resulted in a reversal of the
deferred tax liabilities of $128,500, the recognition of a deferred tax
asset of approximately $443,000 and an additional current tax payable of
$141,000 as of January 1, 2000.
NOTE D - STOCK OPTION PLAN
The Company granted 238,000 and 1,083,000 options covering shares during
the quarter and six months ended June 30, 2000, respectively, at exercise
prices equal to the fair market value of the common stock on the date of
grant. Option activity under the Plan for the quarter and six months ended
June 30, 2000 is as follows:
For the Six For the Three
Months Ended Months Ended
June 30, 2000 June 30, 2000
------------- -------------
Options outstanding at beginning of period 546,500 1,578,000
Exercised -- --
Granted 1,321,000 238,000
Cancelled or forfeited (565,500) (514,000)
---------- ----------
Options outstanding at end of period 1,302,000 1,302,000
========== ==========
NOTE E - CHANGES IN STOCKHOLDERS' EQUITY
The increase in stockholders' equity is attributable to the net income for
the year as well as the effects of amortization of $361,564 in
equity-based compensation expenses for the six months ended June 30, 2000.
6
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NOTE F - EARNINGS PER SHARE
Basic net income per common share is determined by dividing net income by
the weighted average number of shares of common stock outstanding. Diluted
net income per common share is determined by dividing net income by the
weighted number of shares outstanding and dilutive common equivalent
shares from stock options. The following table sets forth the
reconciliation of the weighted average shares used for basic and diluted
earnings per share:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Basic Shares 15,495,000 11,700,000 15,495,000 11,700,000
Dilution: Stock Options 271,477 -- 330,363 --
---------- ---------- ---------- ----------
Diluted Shares 15,766,477 11,700,000 15,825,363 11,700,000
========== ========== ========== ==========
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are subject
to risks and uncertainties including, but not limited to, the impact of
competitive products and pricing, product demand and market acceptance, reliance
on key strategic alliances, fluctuations in operating results and other risks
detailed form time to time in the Company's filings with the Securities and
Exchange Commission.
Results of Operations
Net Revenues. Net revenues increased 354% to $16,234,177 for the three months
ended June 30, 2000, from $3,578,089 for the three months ended June 30, 1999.
For the six months ended June 30, 2000, net revenues increased 481% to
$30,642,483 from $5,272,594. The increase for the quarter and six month periods
resulted from higher demand for email marketing services, which was supported by
the 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 to over 10.6
million at June 30, 2000, from approximately 3.2 million at June 30, 1999,
primarily as a result of the addition of third-party Web sites added to our
NetCreations Network, which exceeded 340 at June 30, 2000.
For the three months ended June 30, 2000, volume and broker discounts were
$3,807,607 and $2,332,477, respectively. Similar amounts for the six months
ended June 30, 2000 were $7,367,599 and $4,094,354, respectively. For the three
months ended June 30, 1999, volume and broker discounts were $390,841 and
$762,114, respectively. Similar amounts for the six months ended June 30, 1999
were $662,652 and $942,015, respectively. The increase in volume discounts for
the quarter and six month periods is attributable to the significant 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
quarter ended June 30, 2000, resellers accounted for proximately 65% of our net
revenues compared to approximately 40% of our net revenues for the comparative
1999 period. The proportion of our marketing customers obtained through our
reseller channels has continued to increase. To the extent we continue to
increase the proportion of sales through resellers, our net revenues and gross
profits could decrease.
Cost of Revenues. Cost of revenues increased 434% to $9,351,818, or 57% of net
revenues for the three months ended June 30, 2000, from $1,750,815, or 49% of
net revenues, for the comparative 1999 period. For the six months ended June 30,
2000, cost of revenues increased 568% to $17,224,098, or 56% of net revenues
from $2,577,967 or 49% of net revenues, for the comparative 1999 period. The
increase in the cost of revenues for the quarter and six month periods is
directly attributable to the overall growth in net revenues as well as the
amortization of list management fees paid to third-party partner web sites. Such
amortization was $456,250 and $590,250, respectively, for the quarter and six
months ended June 30, 2000. There were no such amounts in 1999. The increase in
the cost of revenue to net revenue percentage for the quarter and six month
periods is the result of an increase in the utilization of our services by
resellers, resulting in higher broker discounts, as well as an increase in the
proportion of opt-in email addresses added to our database from third-party Web
sites.
Selling and Marketing. Selling and marketing expenses increased 408% to
$1,562,481 for the three months ended June 30, 2000, from $307,632 for the three
months ended June 30, 1999. Similar amounts for the six
8
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months ended June 30, 2000 and 1999 were $2,942,380 and $601,960, respectively,
reflecting a 389% increase. 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 of 22 sales and marketing employees
from June 30, 1999 to June 30, 2000. Additionally, there was an increase in
advertising expenditures of $204,800 for the quarter and $470,604 for the six
month periods in connection with our efforts to broaden recognition of our
company and the services we provide.
Technology, Support and Development. Technology, support and development
expenses increased 280% to $401,964 for the three months ended June 30, 2000,
from $105,824 for the three months ended June 30, 1999. Similar amounts for the
six months ended June 30, 2000 and 1999 were $831,921 and $191,805, respectively
reflecting a 334% increase. Technology, support and development expenses
consisted primarily of personnel costs and expenditures for software and related
supplies. This increase was primarily attributed to the addition of 13 employees
from June 30, 1999 to June 30, 2000, in connection with our efforts to expand
our capabilities and improve the efficiency of our www.postmasterdirect.com Web
site.
General and Administrative. General and administrative expenses increased 625%
to $1,659,971 for the three months ended June 30, 2000, from $229,003 for the
three months ended June 30, 1999. Similar amounts for the six months ended June
30, 2000 and 1999 were $2,877,718 and $364,889, respectively, reflecting a 689%
increase. General and administrative expenses consisted primarily of personnel,
facilities, communication costs and professional fees. The increase was
primarily attributable to the addition of 8 employees from June 30, 1999 to June
30, 2000 to support growth in business activity and increased overhead. In
addition, a portion of the increase for the quarter and six month periods is
attributable to $198,964 and $361,564, respectively, of expenses relating to the
amortization of the equity-based compensation in the third quarter of 1999 at
less than fair market value.
Depreciation and Amortization. Depreciation and amortization expenses increased
1,111% to $336,746 for the three months ended June 30, 2000, from $27,797 for
the three months ended June 30, 1999. Similar amounts for the six months ended
June 30, 2000 and 1999 were $606,906 and $45,151, respectively, reflecting a
1,244% increase. Depreciation and amortization expenses consisted primarily of
depreciation of computer equipment. This increase for the quarter and six month
periods is primarily a result of investments in computer equipment during the
later part of 1999.
Net Interest Income (Expense). The Company earned net interest income of
$522,976 for the three months ended June 30, 2000 compared to an expense of
$4,635 for the three months ended June 30, 1999. For the six months ended June
30, 2000 the Company earned income of $1,086,586 in comparison to an expense of
$7,615 for the six months ended June 30, 1999. These changes are due to the
Company investing the proceeds from its Initial Public Offering in November
1999. Prior to that the Company incurred interest expense in conjunction with
its capital leases.
Income Taxes. Income taxes for the three and six months ended June 30, 2000
reflect all Federal, state and local taxes on an accrual basis. As we had
elected to be taxed as an S corporation for Federal and certain state tax
purposes until November 15, 1999, the 1999 provision for income taxes 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. The
Company was a cash basis taxpayer through December 31, 1999.
9
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Liquidity and Capital Resources
Net cash used in operating activities was $1,311,634 for the six months ended
June 30, 2000 compared with net cash provided by operations of $1,439,673 for
the six months ended June 30, 1999. The decrease in cash provided by operating
activities for 2000 is primarily attributable to payments made to third-party
partner web sites. The 1999 cash flow from operations is primarily attributed to
net income from operations.
Net cash used in investing activities was $1,612,431 for the six months ended
June 30, 2000 compared with $76,918 for the six months ended June 30, 1999. Cash
used in investing activities was used for capital expenditures consisting
primarily of computer hardware and software for the operation and support of our
business activities.
Net cash used in financing activities was $48,758 for the six months ended June
30, 2000 compared with $938,554 for the six months ended June 30, 1999. During
2000, the cash used in financing activities related to payments on capital lease
obligations, while the 1999 uses were primarily for distributions to the
shareholders relating to our election to be taxed as an S corporation.
Cash and cash equivalents was $38,332,991 at June 30, 2000 compared with
$41,305,814 at December 31, 1999. We believe that our cash and cash equivalents
on hand will be sufficient to satisfy our working capital and the anticipated
capital expenditure requirements for at least the next 12 months.
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.
10
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
27 Exhibits
27.1 Financial Data Schedule
o During the quarter ended June 30, 2000, and until the date of the
filing of this document, the Company filed the following Reports on
Form 8-K:
1. Report dated June 9, 2000 with respect to a press release
announcing the resignation of the President and Chief
Operating Officer of the Company (under Item 5 of Form 8-K).
2. Report dated July 10, 2000 with respect to a press release
announcing the resignation of the Chief Financial Officer of
the Company (under Item 5 of Form 8-K).
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized
Date: August 14, 2000 /s/ Rosalind B. Resnick
----------------------------------------
Rosalind B. Resnick
Chief Executive Officer,
Chairman of the Board of Directors,
and Treasurer (Principal
Executive Officer)
Date: August 14, 2000 /s/ Gary Sindler
----------------------------------------
Gary Sindler
Chief Financial Officer
(Principal Financial and
Accounting Officer)
12
