<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 SEPTEMBER 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 November 13, 2000, there were 15,534,000 shares of the registrant's
Common stock outstanding, with a $.01 par value.
<PAGE>
NetCreations, Inc.
Index to Quarterly Report on Form 10-Q
Quarter Ended September 30, 2000
Items in Form 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFROMATION
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 13
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 13
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. - Financial Statements
NetCreations, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999 *
------------ -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 30,217,424 $ 41,305,814
Accounts receivable (net of allowance for doubtful
accounts of $600,000 and $150,000) 9,072,934 5,636,967
Prepaid commissions 6,899,117 3,000,000
Other current assets 705,279 132,395
------------ -------------
Total current assets 46,894,754 50,075,176
Equipment (net of accumulated
depreciation and amortization) 3,763,912 2,268,225
Deferred income taxes 1,150,821 -
Email address lists 6,320,571 -
Other assets 99,012 48,014
------------ -------------
Total assets $ 58,229,070 $ 52,391,415
============ =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable $ 513,960 $ 1,825,896
Accrued expenses 1,148,432 939,405
Commissions payable 5,899,696 3,696,466
Current portion of capital lease obligations 101,655 112,350
Income taxes payable 77,989 325,552
Deferred income taxes - 128,500
------------ -------------
Total current liabilities 7,741,732 7,028,169
73,419 101,225
------------ -------------
Capital lease obligations
Total liabilities 7,815,151 7,129,394
Common stock, $.01 par value; 50,000,000 shares authorized;
15,534,000 and 15,495,000 shares issued and outstanding 155,340 154,950
Additional paid-in capital 45,689,361 46,512,376
Deferred compensation (799,766) (2,313,171)
Retained earnings 5,368,984 907,866
------------ -------------
Total stockholders' equity 50,413,919 45,262,021
------------ -------------
Total liabilities and stockholders' equity $ 58,229,070 $ 52,391,415
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
* Information derived from audited financial statements.
2
<PAGE>
NetCreations, Inc.
Condensed Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $14,184,293 $4,930,020 $44,826,776 $10,202,614
Cost of revenues 9,536,907 2,383,700 26,761,005 4,961,667
----------- ---------- ----------- -----------
Gross profit 4,647,386 2,546,320 18,065,771 5,240,947
Operating expenses
Selling and marketing 1,363,586 516,923 4,305,966 1,118,883
Technology, support and development 519,766 147,710 1,351,687 339,515
General and administrative 1,803,990 424,259 4,681,708 789,148
Depreciation and amortization 394,477 34,605 1,001,383 79,756
----------- ---------- ----------- -----------
Total operating expenses 4,081,819 1,123,497 11,340,744 2,327,302
----------- ---------- ----------- -----------
Operating income 565,567 1,422,823 6,725,027 2,913,645
Interest income 553,647 - 1,647,651 -
Interest expense 3,463 6,106 10,881 13,721
----------- ---------- ----------- -----------
Net interest income (expense) 550,184 (6,106) 1,636,770 (13,721)
----------- ---------- ----------- -----------
Income before income tax provision 1,115,751 1,416,717 8,361,797 2,899,924
Income tax provision 539,404 144,355 3,900,679 302,355
----------- ---------- ----------- -----------
Net income $ 576,347 $1,272,362 $ 4,461,118 $2,597,569
=========== ========== =========== ==========
Net income per common share
Basic $0.04 $0.11 $0.29 $0.22
===== ===== ===== =====
Diluted $0.04 $0.11 $0.28 $0.22
===== ===== ===== =====
Weighted average common shares outstanding
For basic net income per share 15,498,429 11,700,000 15,496,142 11,700,000
For diluted net income per share 15,675,463 11,700,000 15,754,871 11,700,000
Pro forma data
Historical income before income taxes $ 1,115,751 $1,416,717 $ 8,361,797 $ 2,899,924
Pro forma income tax provision 539,404 665,000 3,900,679 1,342,000
----------- ---------- ----------- -----------
Pro forma net income $ 576,347 $ 751,717 $ 4,461,118 $ 1,557,924
=========== ========== =========== ===========
Pro forma net income per common share
Basic $0.04 $0.06 $0.29 $0.13
====== ===== ===== =====
Diluted $0.04 $0.06 $0.28 $0.13
====== ===== ===== =====
Pro forma weighted average common shares outstanding
For basic net income per share 15,498,429 11,700,000 15,496,142 11,700,000
For diluted net income per share 15,675,463 11,700,000 15,754,871 11,700,000
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
NetCreations, Inc.
Condensed Statement of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
2000 1999
------------ -------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,461,118 $ 2,597,569
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Depreciation and amortization 1,001,383 79,756
Provision for doubtful accounts, accounts receivable 450,000 41,000
Amortization of prepaid commissions 2,913,050 -
Deferred income taxes (1,279,321) (1,000)
Equity-based compensation 439,780 19,375
Tax benefit from exercise of stock options 56,000 -
Changes in assets and liabilities:
Accounts receivable (3,885,967) (2,075,458)
Prepaid commissions (6,812,167) -
Other current assets (572,884) (10,146)
Other assets (50,998) (36,222)
Accounts payable and accrued expenses (1,102,909) 275,759
Commissions payable 2,203,230 1,887,351
Income taxes payable (247,563) 133,349
------------ -------------
Net cash (used in) provided by operating activities (2,427,248) 2,911,333
------------ -------------
Cash flows from investing activities
Capital expenditures (2,497,070) (98,426)
Purchase of email address lists (6,320,571) -
------------ -------------
Net cash used in investing activities (8,817,641) (98,426)
------------ -------------
Cash flows from financing activities
Distributions to shareholders - (1,980,942)
Borrowings under line of credit - 275,000
Payments of offering costs - (352,637)
Payments on capital lease obligations (38,501) (53,078)
Proceeds from exercise of stock options 195,000 -
------------ -------------
Net cash (used in) provided by financing activities 156,499 (2,111,657)
------------ -------------
Net change in cash and cash equivalents (11,088,390) 701,250
Cash and cash equivalents at beginning of period 41,305,814 96,885
------------ -------------
Cash and cash equivalents at end of period $30,217,424 $ 798,135
============ =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 5,427,563 $ 170,804
============ =============
Interest $ 10,881 $ 13,721
============ =============
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
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 marketers, 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 nine months ended September 30, 2000 and
1999 is unaudited. The condensed financial statements as of September
30, 2000 and for the quarter and nine months ended September 30, 2000
and 1999 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 annual financial
statements. In the opinion of the Company's management, the September
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 nine months ended September
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 of commissions and exclusivity
fees under third-party list management agreements that are accounted
for as prepaid commissions. As of September 30, 2000, the Company has
recorded prepaid commissions of $6,899,117. Commission expense is
generally recognized when revenue is earned by the Company upon the
transmission of applicable email messages and applied against the
advances of commissions or exclusivity fees. Management assesses 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 non-recoverable, a charge to operations will be made in
that period to reduce the balance to the amount estimated to be
recoverable. The Company determined that the prepaid commissions that
were capitalized in connection with its contract with ICQ were not
fully recoverable and, therefore, has recorded a $1,000,000 write down
of the advance as of September 30, 2000 which was included in cost of
sales.
5
<PAGE>
NOTE C - PURCHASE OF EMAIL ADDRESS LISTS
In late September 2000 the Company purchased lists of approximately 3.8
million email addresses from Web site owners who were part of the
NetCreations Network for approximately $6,300,000. Through these
purchases, the Company's ownership of email addresses has increased to
approximately 25% of its database as of September 30, 2000. The cost of
these email address lists will be amortized over their expected useful
lives, which are estimated to be two years. The Company will evaluate
the recoverability of the capitalized address lists at each reporting
period and if the Company determines that the life of the email address
lists is less than two years, the Company will record a charge to
operations as of such date to reduce the carrying value of the asset to
its net realizable value.
NOTE D - 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 September 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 pro forma 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 E - STOCK OPTION PLAN
Options granted during the nine months ended September 30, 2000 were at
exercise prices equal to the fair market value of the common stock on
the date of grant. Option activity under the Company's stock option
plan for the quarter and nine months ended September 30, 2000 is as
follows:
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
2000 2000
----- ----
<S> <C> <C>
Options outstanding at beginning of period 1,302,000 546,000
Exercised (39,000) (39,000)
Granted 122,000 1,433,000
Cancelled or forfeited (209,000) (774,500)
--------- ---------
Options outstanding at end of period 1,176,000 1,176,000
========= =========
</TABLE>
6
<PAGE>
NOTE F - CHANGES IN STOCKHOLDERS' EQUITY
The increase in stockholders' equity at September 30, 2000 as compared
to December 31, 1999 is attributable to the net income for the nine
month period as well as the proceeds of $195,000 received on exercise
of stock options, the tax benefit of $56,000 from such exercise, and
the reduction in deferred compensation resulting from amortization of
$439,780 in deferred compensation.
NOTE G - NET INCOME 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 of common stock 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares used in the computation of
basic shares 15,498,429 11,700,000 15,496,142 11,700,000
Potential common shares 177,034 - 258,729 -
---------- ---------- ---------- ----------
Shares used in the computation
of diluted shares 15,675,463 11,700,000 15,754,871 11,700,000
========== ========== ========== ==========
</TABLE>
NOTE H - SUBSEQUENT EVENTS
(1) Merger Agreement
On October 2, 2000, DoubleClick Inc. ("DoubleClick"), Genesis Merger
Sub, Inc. ("Merger Sub"), a wholly owned subsidiary of DoubleClick, and
the Company entered into a merger agreement that provides for the
merger of the Company and Merger Sub. As a result of the merger, the
Company will become a wholly owned subsidiary of DoubleClick.
Shareholders of the Company will become stockholders of DoubleClick
following the merger, and each share of the Company's common stock will
be exchanged for 0.41 shares of DoubleClick common stock. This merger
is subject to shareholder approval.
7
<PAGE>
(2) Litigation
On October 17, 2000, a complaint was filed in New York Supreme Court on
behalf of Mr. Brian Wu against the Company, its board of directors and
DoubleClick. The complaint alleges that the defendants breached their
fiduciary duties of due care and loyalty to the Company's public
shareholders in connection with the proposed merger with DoubleClick.
The complaint asks the court to (i) enjoin the consummation of the
merger (ii) award unspecified damages from the defendants, (iii)
invalidate the termination fee provision of the merger agreement and
(iv) award plaintiff his costs and disbursements, including reasonable
counsel and experts' fees and expenses. The Company believes the claims
asserted in the complaint are without merit and intends to vigorously
contest them.
(3) Stock options and Employee Stock Purchase Plan
On October 2, 2000 the non-employee director stock options were amended
to permit them to be exercisable for up to the original term of such
option grants, notwithstanding their termination as directors upon the
closing of the merger. The Company estimates that such modification
would result in a charge to operations in the fourth quarter of 2000 of
approximately $400,000.
Effective July 1, 2000, the shareholders of the Company approved the
2000 Employee Stock Purchase Plan ("ESPP"). Pursuant to the plan,
eligible employees may elect to withhold a portion of their
compensation in order to purchase shares of the Company's common stock
at a discount. Amounts withheld are credited to the participant's
account balance, which do not accrue interest. Purchases of common
stock are made quarterly with the purchase price being determined based
on the lower of 85% of the market price at the beginning and end of
each period. The Company reserved 1,000,000 shares of stock for
issuance pursuant to the plan.
8
<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, general economic
conditions, the impact of competitive products and pricing, product supply and
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 188% to $14,184,293 for the three months
ended September 30, 2000, from $4,930,020 for the three months ended September
30, 1999. For the nine months ended September 30, 2000, net revenues increased
339% to $44,826,776 from $10,202,614 for the nine months ended September 30,
1999. The increase for the quarter and nine 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. While the
Company has experienced period over period growth, the Company has experienced
slower growth than in the past, and has been adversely affected by the decline
in marketing-related expenses associated with its business-to-consumer dot-com
customers. In conjunction with this slowdown, the Company is experiencing
increasing competition which could result in a shift in pricing models, such as
a shift toward a "cost-per-click" and/or "cost-per-action" pricing models.
The number of opt-in email addresses in our database grew to over 15.7 million
at September 30, 2000, from approximately 4.3 million at September 30, 1999,
primarily as a result of the addition of third-party Web sites added to our
NetCreations Network, which exceeded 380 at September 30, 2000.
For the three months ended September 30, 2000, volume and broker discounts were
$3,232,790 and $2,111,464, respectively. Similar amounts for the nine months
ended September 30, 2000 were $10,600,390 and $6,205,818, respectively. For the
three months ended September 30, 1999, volume and broker discounts were $886,102
and $588,852, respectively. Similar amounts for the nine months ended September
30, 1999 were $1,548,754 and $1,530,867, respectively. The increase in volume
discounts for the quarter and nine 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 September 30, 2000, resellers accounted for
approximately 64% of our net revenues compared to approximately 44% 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 300% to $9,536,907, or 67% of net
revenues for the three months ended September 30, 2000, from $2,383,700, or 48%
of net revenues, for the comparative 1999 period. For the nine months ended
September 30, 2000, cost of revenues increased 439% to $26,761,005, or 60%, of
net revenues from $4,961,667 or 49% of net revenues, for the comparative 1999
period. The increase in the cost of revenues for the quarter and nine 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 $496,580 and $1,086,830, respectively, for the
quarter and nine months ended
9
<PAGE>
September 30, 2000. There were no such amounts in 1999. The increase in the cost
of revenue to net revenue percentage for the quarter and nine month periods is
primarily attributed to the result of the $1,000,000 write down in prepaid
commissions relating to ICQ, an increase in the utilization of our services by
resellers, resulting in higher broker discounts, and 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 164% to
$1,363,586 for the three months ended September 30, 2000, from $516,923 for the
three months ended September 30, 1999. Similar amounts for the nine months ended
September 30, 2000 and 1999 were $4,305,966 and $1,118,883, respectively,
reflecting a 285% 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 14 sales and marketing employees
from September 30, 1999 to September 30, 2000. Additionally, there was an
increase in advertising expenditures of $215,306 for the quarter and $647,408
for the nine month period 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 252% to $519,766 for the three months ended September 30,
2000, from $147,710 for the three months ended September 30, 1999. Similar
amounts for the nine months ended September 30, 2000 and 1999 were $1,351,687
and $339,515, respectively, reflecting a 298% 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 9 employees from September 30, 1999 to September 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 325%
to $1,803,990 for the three months ended September 30, 2000, from $424,259 for
the three months ended September 30, 1999. Similar amounts for the nine months
ended September 30, 2000 and 1999 were $4,681,708 and $789,148, respectively,
reflecting a 493% increase. General and administrative expenses consisted
primarily of personnel, facilities, communication costs and professional fees.
The increase was primarily attributable to the addition of 6 employees from
September 30, 1999 to September 30, 2000 to support growth in business activity
and increased overhead. In addition, a portion of the increase for the quarter
and nine month periods is attributable to $78,216 and $439,780, respectively, of
expenses relating to the amortization of the equity-based compensation granted
in the third quarter of 1999 at less than fair market value.
Depreciation and Amortization. Depreciation and amortization expenses increased
1,040% to $394,477 for the three months ended September 30, 2000, from $34,605
for the three months ended September 30, 1999. Similar amounts for the nine
months ended September 30, 2000 and 1999 were $1,001,383 and $79,756,
respectively, reflecting a 1,156% increase. Depreciation and amortization
expenses consisted primarily of depreciation of computer equipment. This
increase for the quarter and nine month periods is primarily a result of
investments in computer equipment during the latter part of 1999.
Net Interest Income (Expense). The Company earned net interest income of
$550,184 for the three months ended September 30, 2000 compared to an expense of
$6,106 for the three months ended September 30, 1999. For the nine months ended
September 30, 2000 the Company earned income of $1,636,770 in comparison to an
expense of $13,721 for the nine months ended September 30, 1999. These increases
are due to the Company investing the proceeds from its Initial Public Offering
in November 1999. Interest expense on the Company's capital leases is included
in this caption for all periods presented.
10
<PAGE>
Income Taxes. Income taxes for the three and nine months ended September 30,
2000 reflect all Federal, state and local taxes on an accrual basis. As the
Company 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.
Liquidity and Capital Resources
Net cash used in operating activities was $2,427,248 for the nine months ended
September 30, 2000 compared with net cash provided by operations of $2,911,333
for the nine months ended September 30, 1999. Cash flows used in operations in
2000 consisted primarily of increases in prepaid commissions and accounts
receivable of $6,812,167 and $3,885,167, respectively, a decrease in accounts
payable and accrued expenses of $1,102,909; offset by net income of $4,461,118,
non-cash items of $3,580,892 and increases in commissions payable of $2,203,230.
Prepaid commissions increased because the Company entered into additional list
management agreements during the nine months ended September 30, 2000.
Net cash used in investing activities was $8,817,641 for the nine months ended
September 30, 2000 compared with $98,426 for the nine months ended September 30,
1999. Cash used in investing activities consisted of capital expenditures of
$2,497,070 for computer hardware and software for the operation and support of
business activities. Additionally, as of September 30, 2000, the Company had
purchased lists of 3.8 millions email addresses from website owners who were
part of the NetCreations network for $6,320,571.
Net cash provided by financing activities was $156,499 for the nine months ended
September 30, 2000 compared with $2,111,657 used in the nine months ended
September 30, 1999. During 2000, we received proceeds of $195,000 upon the
exercise of employee stock options and had $38,501 of payments on capital lease
obligations, while in 1999 the uses were primarily for distributions to the
shareholders relating to our election to be taxed as an S corporation.
Cash and cash equivalents were $30,217,424 at September 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, the Company's revenues have not followed the seasonal
patterns of the traditional postal direct marketing industry. While the Company
anticipates that as its business matures, its revenues will track more closely
to the seasonal patterns experienced in the traditional postal direct marketing
industry, the Company cannot assure you that our revenues will reflect such
seasonality.
11
<PAGE>
Recently Issued Accounting Standards
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 2001. The Company does not
believe that the adoption of this statement will have a material impact on its
financial position or results of operations.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 17, 2000, a complaint was filed in New York Supreme Court on behalf
of Mr. Brian Wu against the Company, its board of directors and DoubleClick. The
complaint alleges that the defendants breached their fiduciary duties of due
care and loyalty to the Company's public shareholders in connection with the
proposed merger with DoubleClick. The complaint asks the court to (i) enjoin the
consummation of the merger (ii) award unspecified damages from the defendants,
(iii) invalidate the termination fee provision of the merger agreement and (iv)
award plaintiff his costs and disbursements, including reasonable counsel and
experts' fees and expenses. The Company believes the claims asserted in the
complaint are without merit and intends to vigorously contest them.
Item 6. Exhibits and Reports on Form 8-K
27 Exhibits
27.1 Financial Data Schedule
99 During the quarter ended September 30, 2000, and until the
date of the filing of this document, the Company filed the
following Reports on Form 8-K:
o Report dated October 2, 2000, with respect to the
Registrant entering into an Agreement and Plan of
Merger and Reorganization with DoubleClick, Inc. and
Genesis Merger Sub, Inc.
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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: November 14, 2000 /s/ Rosalind B. Resnick
-----------------------------------
Rosalind B. Resnick
Chief Executive Officer, President,
Chairman of the Board of Directors,
and Treasurer (Principal
Executive Officer)
Date: November 14, 2000 /s/ Robert A. Mattes
-----------------------------------
Robert A. Mattes
Chief Financial Officer
(Principal Financial and
Accounting Officer)
14
