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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(AMENDMENT NO.1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): August 20, 1999
MESSAGEMEDIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
000-21751 33-0612860
(Commission File No.) (IRS Employer Identification No.)
6060 SPINE ROAD
BOULDER, COLORADO 80301
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (303) 440-7550
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ITEM 5. OTHER EVENTS.
Attached hereto as Appendix A is a discussion of our business, risks associated
with our business and an investment in our company, selected historical
consolidated financial data for the period March 11, 1994 (inception) to
December 31, 1994 and for the fiscal years ended December 31, 1995, 1996, 1997
and 1998, and for the six months ended June 30, 1998 and 1999, management's
discussion and analysis of financial condition and results of operations and pro
forma combined results of operations. The information referred to above will be
incorporated by reference into our existing registration statements on Form S-3
and Form S-8.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
1. Revnet Systems, Inc. Financial Statements filed as Exhibit 99.3.
2. Decisive Technology Corporation Financial Statements filed as
Exhibit 99.4.
(b) PRO FORMA FINANCIAL INFORMATION.
Unaudited Pro Forma Combined Financial Information of the Company,
Revnet Systems, Inc. and Decisive Technology Corporation filed as
Exhibit 99.5.
(c) EXHIBITS.
2.1* Agreement and Plan of Merger and Reorganization dated July 22,
1999 among the Registrant, Revnet Systems, Inc. and MM1
Acquisition Corporation
2.2* Agreement and Plan of Merger and Reorganization dated July 27,
1999 among the Registrant, Decisive Technology Corporation and
MM2 Acquisition Corporation
4.1* Registration Rights Agreement among the Registrant, the
Securityholders' Agent and James Clayton
4.2* Registration Rights Agreement among the Registrant, the
Securityholders' Agent and William Blair & Company, LLC
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of PricewaterhouseCoopers LLP
99.1* Press Release dated August 10, 1999
99.2* Press Release dated August 17, 1999
99.3 Revnet Systems, Inc. Financial Statements
99.4 Decisive Technology Corporation Financial Statements
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99.5 Unaudited Pro Forma Combined Financial Information of the
Company, Revnet System, Inc. and Decisive Technology Corporation
* Previously filed as exhibit to our Current Report on Form 8-K,
filed with the SEC August 24, 1999.
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SIGNATURE
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 hereunto duly authorized.
MESSAGEMEDIA , INC.
Dated: September 23, 1999 By: /s/ Larry Jones
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Larry Jones
Chief Executive Officer
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APPENDIX A
OUR COMPANY
We are a leading provider of an integrated, comprehensive set of
permission-based e-messaging solutions. E-messaging is our term to describe our
suite of services that utilizes the medium of e-mail to develop and foster
permission-based relationships with our customers. Our e-messaging solutions,
available either on an outsourced-subscription basis or as in-house packaged
software, enable businesses to use e-messaging as a strategic tool to increase
sales, improve customer communication and develop long-term customer loyalty.
Specifically, our suite of services and products, including Internet-based
marketing, customer care, survey and information distribution solutions, allows
businesses to establish and enhance two-way customer dialogue across multiple
functions within the business enterprise, from marketing to sales to customer
service. By leveraging the cost-effective reach, flexibility and widespread
acceptance of e-mail, our solutions enable businesses to create, deliver and
continually refine targeted, permission-based e-messaging campaigns. Our expert
staff of client service professionals assists our clients in building their
businesses through the strategic implementation and use of our suite of service
applications.
The dramatic growth of the Internet and the proliferation of e-mail have
changed the way businesses and customers communicate. Online businesses are
increasingly in need of strategic business applications that foster customer
loyalty and provide personalized, one-to-one communication. Permission-based or
"opt-in" e-mail is emerging as a highly reliable, cost-effective and timely way
for businesses to create a personal, two-way dialogue with their customers.
Because creating strong and effective e-messaging programs requires a broad
range of technology and industry expertise, we believe that businesses are
increasingly seeking an outsourced solution for their e-messaging applications.
Forrester Research predicts that outsourced e-mail messages will grow from three
billion in 1998 to 250 billion in 2002.
Through our professional staff of client service representatives, we deliver
e-messaging services specifically tailored to each client's business objectives.
After a contract is signed with a client, we appoint an account management team
to act as the client's primary point of contact for all relationship and
campaign management issues. We provide end-to-end e-messaging mailing and
campaign management solutions, including creating a detailed specification of
customer needs, developing the web interfaces, customizing the database,
implementing project plans and campaign roll-out and conducting post-mailing
analysis. Our proprietary technology allows us to track and review current and
past e-messaging campaigns, providing valuable information that allows us to
tailor and fine-tune our clients e-messaging campaigns to optimize
effectiveness. Our services provide clients with the following benefits:
o a comprehensive set of e-messaging solutions designed to increase
sales, improve customer communication and develop long-term customer
loyalty;
o permission-based e-messaging that facilitates an immediate two-way
dialogue with customers;
o tools to track, review and refine e-messaging campaigns by leveraging
our expertise and proprietary technology;
o rapidly deployable, cost-effective outsourced solutions which eliminate
the need to invest in the technology, hardware and human resources
necessary to implement and manage a comprehensive set of e-messaging
services; and
o a readily scalable solution that manages large volumes of simple or
complex customer communications and easily integrates more advanced
e-messaging applications.
Our clients cover a broad range of industry segments, including
Internet/e-commerce, publishing, computer hardware/software and financial
services. We currently provide e-messaging services to over 200 clients,
including America Online, Inc., Apple Computer, Inc., CMP Group, Inc., E*Trade
Securities, Inc., Microsoft Corporation and PeopleSoft, Inc., and have sold our
e-messaging products to over 4,000 customers.
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OUR STRATEGY
The key elements of our growth strategy include:
o expand our customer base and increase sales to current customers;
o broaden our industry-leading service offerings;
o extend our brand and position MessageMedia as the industry
standard in permission-based e-messaging;
o pursue strategic acquisitions; and
o develop an international presence.
HISTORY AND STRATEGIC RELATIONSHIPS
In June 1998, we were recapitalized by SOFTBANK Corp. and its affiliates, a
leading investor in the Internet sector. We intend to leverage our strategic
relationship with SOFTBANK through introductions to companies within the
SOFTBANK family of investments and capitalize on the expertise and advice of its
partners with respect to building e-businesses. In August 1998, we made a
strategic decision to focus exclusively on e-messaging and related services, and
to phase out our Internet payment system offerings. In furtherance of this
strategic shift, in December 1998, we acquired two e-messaging companies, E-mail
Publishing, Inc., or Epub, and Distributed Bits, LLC, or Dbits, and changed our
name from First Virtual Holdings Inc. to Message Media, Inc. In March 1999,
Pequot Capital Management, Inc. and affiliates bought approximately 2.4 million
shares of our common stock, from which we derived net proceeds of approximately
$10 million, and in August 1999 we acquired two additional e-messaging
companies, Revnet Systems and Decisive Technology, to further broaden our suite
of e-messaging solutions and our customer base.
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially and adversely
affected. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
WE HAVE A HISTORY OF OPERATING LOSSES AND FUTURE LOSSES ARE LIKELY.
We have incurred net losses applicable to common shares of approximately
$45.0 million from our inception in March 1994 through December 31, 1998,
approximately $14.0 million for the year ended December 31, 1998 and
approximately $13.2 million for the six month period ended June 30, 1999. As of
June 30, 1999, our accumulated deficit was approximately $56.9 million. We have
not achieved profitability and expect to continue to incur operating losses at
least into 2001. We intend to continue to invest heavily in acquisitions,
infrastructure development and marketing. Accordingly, we expect to continue to
incur significant operating and capital expenditures and, as a result, we will
need to generate significant revenue to achieve and maintain profitability.
Although our revenue has grown in recent quarters, we cannot assure you that we
will achieve sufficient revenue for profitability. Even if we do achieve
profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future. If revenue grows
slower than we anticipate, or if operating expenses exceed our expectations or
cannot be adjusted accordingly, our business, results of operations and
financial condition will be materially and adversely affected.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY AND RECENTLY HAVE CHANGED OUR BUSINESS MODEL.
We were incorporated in March 1994 for the purpose of developing an Internet
payment system. In 1998 we changed our business model to focus exclusively on
providing e-messaging solutions and acquired two e-messaging companies, Epub and
Dbits. In August 1999, we acquired two additional e-messaging companies, Revnet
Systems and Decisive Technology. An investor in our common stock must consider
the risks and difficulties frequently encountered by early stage companies in
new and rapidly evolving markets, including the Internet e-messaging market.
These risks include our:
o ability to sustain historical revenue growth rates;
o need to manage our expanding operations;
o need to successfully integrate our recent and any future acquisitions;
o competition;
o ability to attract, retain and motivate qualified personnel;
o ability to maintain our current, and develop new, strategic relationships;
o ability to anticipate and adapt to the changing Internet market; and
o ability to attract and retain a large number of customers from a variety of
industries.
We also depend on the growing use of the Internet for marketing, advertising,
commerce and communication. We cannot assure you that our business strategy will
be successful or that we will successfully address these risks.
OUR MARKETS ARE RELATIVELY NEW AND UNPROVEN AND OUR SUCCESS DEPENDS ON MARKET
ACCEPTANCE AND THE EFFECTIVENESS OF OUR E-MESSAGING SERVICES.
Demand and market acceptance for Internet e-messaging solutions is
uncertain. Our future success is highly dependent on an increase in the use of
the Internet as a marketing, advertising and communications medium. The adoption
of Internet e-messaging, particularly by those entities that historically have
relied upon traditional media for marketing and advertising, requires the
acceptance of a new way of conducting business, exchanging information and
marketing products and services. Many of our current or potential e-messaging
customers have little or no experience
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using the Internet for marketing and advertising purposes and they have
allocated only a limited portion of their budgets to Internet e-messaging.
Moreover, our customers may find Internet e-messaging to be less effective for
promoting their products and services relative to traditional marketing and
advertising media. If the messaging platform fails to meet customers' demands,
the use of our e-messaging services may decline over time and our business would
suffer.
WE ADOPTED OUR CURRENT BUSINESS MODEL IN THE FOURTH QUARTER OF 1998 AND ITS
PROFIT POTENTIAL IS UNCERTAIN.
The profit potential for our business model, which is to generate revenue
solely by providing Internet e-messaging solutions to our customers, is
unproven. To be successful, both Internet marketing and our future and current
service offerings, including information distribution, e-mail marketing,
e-customer care, e-commerce messaging and e-surveys, will need to achieve broad
market acceptance. Our ability to generate significant revenue will depend, in
part, on our ability to contract with a sufficient number of customers. The
intense competition among Internet e-messaging companies has led to the creation
of a number of pricing alternatives for Internet e-messaging solutions. These
alternatives make it difficult for us to project future levels of revenue and
applicable gross profit that can be sustained by us or the Internet e-messaging
industry in general.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE EPUB, DBITS, REVNET SYSTEMS AND
DECISIVE TECHNOLOGY OR FUTURE ACQUISITIONS.
In December 1998, we acquired Epub and Dbits and in August 1999 we acquired
Revnet Systems and Decisive Technology. As a result, companies that had
previously operated independently and with distinct business models must now
work together. The integration will require significant effort from our
personnel and the personnel of the acquired companies who are now our employees.
We may not be able to profitably consolidate these businesses.
The following risks are common to the integration of different companies,
and may be associated with recent or future acquisitions, including our recent
acquisitions of Revnet Systems and Decisive Technology:
o the difficulty of incorporating new operations, technology and personnel
into one company;
o the potential effects on operating results from increases in goodwill
amortization, acquired in-process technology, stock compensation expense and
increased compensation expense resulting from newly hired employees;
o the diversion of management attention from other aspects of our business;
o the potential disruption of our ongoing business;
o the potential reduction of the value of our e-messaging solutions or
reputation if an acquired company turns out to be a poor performer;
o the maintenance of uniform standards, controls, procedures and policies;
o the potential of disputes with the sellers of one or more acquired entities;
o the possible failure to retain key acquired personnel;
o the assumption of most or all of the liabilities of the acquired companies,
some of which may be hidden, significant or not reflected in the final
acquisition price; and
o the impairment of relationships with employees and customers.
As part of our business strategy, we intend to focus on acquiring, or making
significant investments in, additional companies, products and technologies that
complement our business. The successful implementation of this strategy depends
on our ability to identify suitable acquisition candidates, acquire those
companies on acceptable terms and integrate their operations successfully with
our business. If we make additional acquisitions, we could have difficulty in
assimilating the acquired products, services or technologies into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our results
of operations. Furthermore, we may incur debt or issue equity securities to pay
for any future acquisitions. The issuance of equity securities could be dilutive
to our existing stockholders.
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OUR FAILURE TO ENHANCE OUR EXISTING PRODUCTS AND INTRODUCE NEW PRODUCTS ON A
TIMELY BASIS COULD CAUSE OUR REVENUE TO FALL.
We are continually developing significant enhancements for our e-messaging
services and products. Any delay or difficulty associated with the introduction
of these enhancements could significantly harm our business, results of
operations and financial condition. We also may not be able to develop the
underlying core technologies necessary to create new products or enhancements,
or to license those products from third parties.
WE NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL AND MAY NOT BE ABLE TO DO SO.
Our success depends on the continued service of our key senior management
personnel, in particular, A. Laurence Jones, our Chief Executive Officer. The
loss of any member of our senior management team could have a material adverse
effect on our future operating results. Our future success also depends on our
continuing to attract, retain and motivate highly skilled employees. We face
significant competition for individuals with the skills and experience required
to perform in required roles and may not be able to attract or retain such
individuals in the future. Our management team is new and may not be able to
function effectively.
OUR MANAGEMENT TEAM HAS ONLY WORKED TOGETHER FOR A SHORT PERIOD OF TIME AND MAY
NOT WORK WELL TOGETHER.
Virtually all of our executive officers, including our Chief Executive
Officer, Vice President of Sales and Marketing and Vice President of Corporate
Development, have joined our company in 1999. Due to the fact that many of our
executive officers are new to our company and never have worked together, our
management may not be able to function effectively, individually or as a team.
WE ANTICIPATE FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS.
We expect that our future operating results will fluctuate significantly.
These fluctuations may be due to a number of factors, many of which are beyond
our control. Some of the factors that may cause fluctuations include the
following:
o Market response to our e-messaging services;
o Difficulties in the development or deployment of new messaging products or
services;
o The timing and rate at which we increase our expenses to support projected
growth;
o Fluctuating market demand for our products and services;
o The degree of acceptance of the Internet as a medium for communicating with
customers;
o Product introductions and service offerings by our competitors;
o The mix of the products and services provided by us; and
o The cost of compliance with applicable government regulations, including
anti-SPAM, or unsolicited commercial e-mail, legislation.
Our revenue for the foreseeable future will remain dependent on e-messaging
activity, the fees that we charge for our services and license fees for software
products. These future revenues are difficult to forecast. In addition, we plan
to significantly increase our operating expenses to increase our sales and
marketing operations, to upgrade and enhance our e-messaging solutions and to
market and support our solutions. We may be unable to adjust spending quickly
enough to offset any unexpected revenue shortfall. If we have a shortfall in
revenue in relation to our expenses, or if our expenses precede increased
revenue, then our business, results of operations and financial condition would
be materially and adversely affected. This would likely affect the market price
of our common stock in a manner which may be unrelated to our long-term
operating performance.
We believe that marketing and advertising sales in traditional media, such
as television and radio, generally are lower in the first calendar quarter of
each year. Seasonal or cyclical patterns may develop in our industry if our
market makes the transition from an emerging to a more developed medium. Our
revenue may also be affected by seasonal and cyclical patterns in Internet
e-messaging spending if they emerge.
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We believe that period-to-period comparisons of our operating results are
not meaningful and should not be relied upon as an indication of our future
performance. Due to the factors we have listed above and other factors, it is
likely that our future operating results will at times not meet the expectations
of market analysts or investors. If our operating results fail to meet
expectations, the price of our common stock could fall.
WE NEED TO EFFECTIVELY MANAGE OUR GROWTH.
An effective planning and management process is required to successfully
implement our business plan in the rapidly evolving market for Internet
e-messaging. We continue to increase the scope of our operations, and we have
grown our workforce substantially. As of January 1, 1995, we had 5 employees
and, as of August 17, 1999, we had 208 employees. In addition, we plan to
continue to expand our sales and marketing and service offerings. This growth
has placed, and our anticipated future growth in our operations will continue to
place, a significant strain on our management systems and resources. We expect
that we will need to continue to improve our financial and managerial controls
and reporting systems and procedures, and will need to continue to expand, train
and manage our workforce. Our future performance also may depend on the
effective integration of acquired businesses. Such integration, even if
successful, may take a significant period of time and expense, and may place a
significant strain on our resources. We recently relocated a computer processing
center from San Diego, California to a facility in Colorado. Our business,
results of operations and financial condition will be materially and adversely
affected if we are unable to effectively manage our expanding operations or the
relocation of our computer processing center.
WE DEPEND ON THIRD-PARTY PROVIDERS OVER WHOM WE HAVE NO CONTROL TO OPERATE OUR
MESSAGING PLATFORM.
We depend heavily on several third-party providers of Internet and related
telecommunication services, including hosting and co-location companies, in
operating our messaging platform. These companies may not continue to provide
services to us without disruptions in service, at the current cost, or at all.
Although we believe that we could obtain these services from other sources if
need be, the costs associated with any transition to a new service provider
would be substantial, requiring us to reengineer our computer systems and
telecommunications infrastructure to accommodate a new service provider. This
process would be both expensive and time-consuming.
In addition, failure of our Internet and related telecommunications
providers to provide the data communications capacity in the time frame required
by us could cause interruptions in the services we provide. Despite precautions
taken by us, unanticipated problems affecting our computer and
telecommunications systems in the future could cause interruptions in the
delivery of our e-messaging services, causing a loss of revenue and potential
loss of customers.
WE RELY ON A FEW CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUE.
A significant portion of our revenues are generated by a limited number of
customers. We expect that we will continue to depend on large contracts with a
small number of significant customers. This situation can cause our revenue and
earnings to fluctuate between quarters based on the timing of contracts. None of
our customers has any obligation to purchase additional products or services
from us. Consequently, if we fail to develop relationships with significant new
customers, our business and financial condition will suffer.
COMPETITION IN OUR INDUSTRY IS INTENSE.
We know of no competitor that offers the full range of solutions provided by
us. However, the market for our products and services is intensely competitive.
There are no substantial barriers to entry into our business, and we expect that
established and new entities will enter the market for e-messaging services and
interactive Internet communications in the near future.
Our principal competitors in the e-messaging services arena include 24x7,
Inc., Axciom, Inc., Cyber Data Systems, Inc., DoubleClick, Inc., eGain
Communications Corporation, EmailChannel, Inc., Exactis.com, Inc., Experian,
Inc., Kana Communications, Inc., MarketHome, Inc., MatchLogic, Inc., Mustang
Software, Inc., NetCreations, Inc., PostX Corporation and ReplyNet, Inc. We also
compete with BroadVision, Inc., Digital Impact, E-Care Group and Mypoints.com,
Inc. for one-to-one marketing.
We may experience additional competition from Internet service providers, or
ISPs, and other large established businesses that enter the market for
e-messaging services. Companies such as ADVO Inc., America Online, Inc., AT&T,
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IBM Corporation, Harte-Hanks, Inc., Hewlett-Packard Company, Integrion Financial
Network LLC, The Interpublic Group of Companies, Inc., Microsoft Corporation,
Netscape Communications and Foote Cone & Belding, some of whom are current
clients of ours, which possess large, existing customer bases, substantial
financial resources and established distribution channels could develop, market
or resell a number of messaging services.
The Internet, in general, and our e-messaging solutions, in particular, also
must compete for a share of advertisers' total advertising budgets with
traditional advertising media such as television, radio, cable and print.
Consequently, we compete with advertising and direct marketing agencies. To the
extent that e-messaging is perceived to be a limited or ineffective advertising
medium, companies may be reluctant to devote a significant portion of their
advertising budget to our e-messaging solutions, which could limit the growth of
e-messaging and would negatively effect our business.
We also expect that competition may increase as a result of industry
consolidation. Potential competitors may choose to enter the market for
e-messaging services by acquiring one or more of our existing competitors or by
forming strategic alliances with such competitors. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our potential e-messaging
customers. Accordingly, it is possible that new competitors or alliances may
emerge and rapidly acquire significant market share. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
share, any of which would have a material adverse effect on our business,
results of operations and financial condition. We also may experience
competition from internal information systems and development groups of our
current and prospective clients that have better access to senior management.
Many of our current and potential competitors have longer operating
histories, greater name recognition, larger customer bases, more diversified
lines of products and services and significantly greater resources than we do.
These competitors may be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and make more attractive offers to
potential customers. In addition, many of our current or potential competitors
have broad distribution channels that may be used to bundle competing products
or services directly to end-users or purchasers. If these competitors bundle
competing products or services for their customers, the demand for our products
and services could substantially decline. As a result of the above factors, we
cannot assure you that we will compete effectively with current or future
competitors or that competitive pressures will not have a material adverse
effect on our business, financial condition and results of operations.
THE MARKETS FOR OUR PRODUCTS ARE UNDEVELOPED AND RAPIDLY CHANGING, WHICH MAKES
AN INVESTMENT IN OUR COMPANY RISKY.
The Internet and Internet e-messaging markets are characterized by rapidly
changing technologies, evolving industry standards, frequent new product and
service introductions, changing customer demands and increasing numbers of
services providers. Our products and services are designed around current
technical standards and our revenue depends on continued industry acceptance of
these standards. While we intend to provide compatibility with the most popular
industry standards, widespread adoption of a proprietary or closed standard
could prevent us from doing so. The standards on which our products and services
are or will be based may not be accepted by the industry.
New market entrants have introduced or are developing products and services
for use on the Internet and the World Wide Web that compete with our products.
The products, services or technologies developed by others may render our
products and services noncompetitive or obsolete. Accordingly, our future
success will depend on our ability to adapt to rapidly changing technologies and
to enhance existing solutions and develop and introduce a variety of new
solutions to address new industry standards and our customers' changing demands.
We may experience difficulties that could delay or prevent the successful
design, development, introduction or marketing of our solutions. In addition,
our new solutions or enhancements must meet the requirements of our current and
prospective customers and must achieve significant market acceptance. Material
delays in introducing new solutions and enhancements may cause customers to
forego purchases of our solutions and purchase those of our competitors.
The degree to which our messaging platform is accepted and used in the
marketplace will depend on continued growth in the use of e-mail as a primary
means of communications by businesses and consumers. An increase in the use of
e-messaging also will depend on market acceptance of e-mail as a method for
targeted marketing of products and services. Our ability to successfully
differentiate our services from random mass e-mailing products and services
which have encountered substantial resistance from consumers will also be
important. Businesses that already have invested substantial resources in
traditional or other methods of conducting business may be reluctant to adopt
new commercial
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methods or strategies that may limit or compete with their existing businesses.
Individuals with established patterns of purchasing goods and services may be
reluctant to alter those patterns.
WE FACE RISKS OF DEFECTS AND DEVELOPMENT DELAYS IN OUR PRODUCTS AND SERVICES.
Products and services based on sophisticated software and computing systems
often encounter development delays. Our underlying software may contain hidden
errors and failures when introduced or when usage increases. It is possible that
we may experience delays in the development of the software and computing
systems underlying our services. Despite testing that our clients and we
conduct, we may not locate errors if they occur. Also, we may experience
development delays. These occurrences could harm our reputation and revenue
growth.
IF CURRENT GROWTH RATES CONTINUE, THE CAPACITY OF OUR SOFTWARE OR HARDWARE COULD
BE STRAINED, LEADING TO SLOWER RESPONSE TIMES OR SYSTEM FAILURES.
If the volume of messages that our systems process significantly increases,
the capacity of our software or hardware could be strained. This could lead to
slower response time or system failures. We have made and intend to continue to
make substantial investments to increase our server capacity by adding new
servers and upgrading our software as necessary. However, our products and
services may not be able to meet the growing demand as the number of World Wide
Web and Internet users increases. We also depend, as do our customers, on Web
browsers, e-mail clients and Internet and online service providers for access to
our services. Some users of our services have experienced difficulties due to
system failures unrelated to our system, products or services. If we cannot
effectively address these capacity constraints, our business and financial
condition could be materially and adversely affected.
THE SUCCESS OF OUR MESSAGING PLATFORM DEPENDS ON INCREASED USAGE AND THE
STABILITY OF THE INTERNET.
Our success will depend, in large part, upon the maintenance of the Internet
infrastructure, such as a reliable network backbone with the necessary speed,
data capacity and security, and timely development of enabling products such as
high speed modems, for providing reliable Internet access and services and
improved content. We cannot assure you that the Internet infrastructure will
continue to effectively support the demands placed on it as the Internet
continues to experience increased numbers of users, frequency of use or
increased bandwidth requirements of users. Even if the necessary infrastructure
or technologies are developed, we may have to spend considerable amounts to
adapt our solutions accordingly. Furthermore, the Internet has experienced a
variety of outages and other delays due to damage to portions of its
infrastructure. Any future outages or delays could impact the Internet sites of
customers using our solutions.
We believe that the future of the Internet as a center for commerce will
depend in significant part on the following factors:
o Continued rapid growth in the number of households and commercial,
educational and government institutions with access to the Internet;
o The level of usage by individuals;
o The number and quality of products and services designed for use on the
Internet; and
o Expansion of the Internet infrastructure.
The degree to which e-mail will become a common method of communication
depends on the extent that users increasingly prefer e-mail over traditional
means of communication. The growth of e-mail also depends on widespread access
to reliable and affordable e-mail services by individuals, businesses and other
organizations. Because usage of the Internet as a medium for on-line exchange of
information, advertising, merchandising and entertainment is a recent
phenomenon, it is difficult to predict whether the number of users drawn to the
Internet will continue to increase and whether any significant market for our
e-messaging platform, or any substantial commercial use of the Internet, will
develop. We cannot assure you that Internet usage patterns, and reliance on
e-mail communication in particular, will continue to grow and will not decline
as the newness of this method of communication wears off. It also is uncertain
whether the cost of Internet access will decrease. If either the Internet or
e-mail communication fails to achieve increased acceptance and does not become
accessible to a broad audience at moderate costs, the market for our products
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<PAGE> 13
and services will be jeopardized. The success of our business also depends on a
significant expansion of the Internet infrastructure to provide adequate
Internet access and proper management of Internet traffic.
ANY SYSTEM FAILURE MAY HARM OUR BUSINESS OR REPUTATION.
The continuing and uninterrupted performance of our computer systems and our
customers' computer systems is critical to our ability to provide outsourced
services. Sustained or repeated system failures would reduce the attractiveness
of our solutions to our customers and could harm our business reputation. Slower
response time or system failures may also result from straining the capacity of
our deployed software or hardware due to an increase in the volume of
e-messaging delivered through our servers. To the extent that we do not
effectively address any capacity constraints or system failures, our business,
results of operations and financial condition would be materially and adversely
affected.
Our operations are dependent on our ability to protect our computer systems
against damage from fire, power loss, water damage, telecommunications failures,
vandalism, infection by computer viruses, other malicious acts and similar
unexpected adverse events. In addition, interruptions in our solutions could
result from the failure of our Internet and related telecommunications providers
to provide the necessary data communications capacity in the time frame we
require. Despite precautions we have taken, unanticipated problems affecting our
systems have from time to time in the past caused, and in the future could
cause, interruptions in the delivery of our solutions. Most of our back-end
systems for disaster recovery presently are redundant and we expect all of our
back-end systems to be fully redundant by December 1, 1999. Our business,
results of operations and financial condition could be materially and adversely
affected by any damage or failure that interrupts or delays our operations.
WE FACE SECURITY RISKS AND POTENTIAL LIABILITY ASSOCIATED WITH MISAPPROPRIATION
OF CONFIDENTIAL INFORMATION.
We currently retain highly confidential customer information in a secure
database server. We cannot assure you, however, that we will be able to prevent
unauthorized individuals from gaining access to this database server. Any
unauthorized access to our servers could result in the theft of confidential
customer information such as e-mail addresses. It also is possible that one of
our employees could attempt to misuse confidential customer information,
exposing us to liability. We use disclaimers and limitation of warranty
provisions in our client agreements in an attempt to limit our liability to
clients, including liability arising out of systems failure. However, such
provisions may not be enforceable or effective in limiting our exposure to
damage claims.
OUR INSURANCE COVERAGE MAY NOT BE ADEQUATE TO COMPENSATE US FOR ALL POTENTIAL
LOSSES.
Although we carry insurance, which we believe to be adequate, the coverage
it provides may not be adequate to compensate us for all losses that may occur.
We are in the process of taking precautions to protect both our company and our
customers from events that could interrupt delivery of our products and services
or that could result in a loss of transaction or customer data. However, these
measures will not eliminate a significant risk to our operations from a natural
disaster or systems failure. We cannot guarantee that these measures would
protect the company from an organized effort to inundate our servers with
massive quantities of e-mail or other Internet message traffic which could
overload our systems and result in a significant interruption of service. Our
business interruption insurance would not fully compensate us for lost revenue,
income, additional costs or increased costs that we would experience during the
occurrence of any disruption of our computer systems. We cannot guarantee that
we will be able to obtain sufficient coverage on reasonable terms or at all in
the future.
OUR MEANS OF PROTECTING OUR PROPRIETARY RIGHTS MAY BE INADEQUATE AND OUR
COMPETITORS MAY DEVELOP SIMILAR TECHNOLOGY.
We rely on a combination of trade secret, copyright and trademark laws,
nondisclosure agreements, and other contractual provisions and technical
measures to protect our proprietary rights. We believe that, due to the rapid
pace of technological innovation for Internet products, our ability to establish
and maintain a position of technology leadership in the industry depends more on
the skills of our development personnel than upon the legal protections afforded
our existing technology. Trade secret, copyright and trademark protections may
not be adequate to safeguard the proprietary software underlying our products
and services. We may not have adequate remedies for any breach and our trade
secrets may otherwise become known. Moreover, notwithstanding our efforts to
protect our intellectual property, competitors may be able to develop
functionally equivalent e-messaging technologies without infringing any of our
intellectual
A-9
<PAGE> 14
property rights. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use products or
technology that we consider proprietary, and third parties may attempt to
develop similar technology independently. In addition, effective protection of
intellectual property rights may be unavailable or limited in certain countries.
Accordingly, our means of protecting our proprietary rights may not be adequate
and our competitors may independently develop similar technology.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our solutions or technologies. We cannot assure you that the steps we have taken
will prevent misappropriation of our solutions or technologies, particularly in
foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States.
We have licensed, and we may license in the future, elements of our
trademarks, trade dress and similar proprietary rights to third parties. While
we attempt to ensure that the quality of our brand is maintained by these
business partners, such partners may take actions that could materially and
adversely affect the value of our proprietary rights or our reputation. In
addition, we currently license certain software and communication systems from
third parties. Our failure to maintain these licenses, or to find replacements
for such technology in a timely and cost-effective manner, could have a material
adverse effect on our business, results of operations and financial condition.
WE HAVE IN THE PAST, AND MAY IN THE FUTURE, BECOME INVOLVED IN PATENT
INFRINGEMENT CLAIMS WHICH RESULT IN A SIGNIFICANT DRAIN ON OUR RESOURCES AND
PREVENT OUR MANAGEMENT TEAM FROM FOCUSING ON MORE PROFITABLE TASKS.
As the volume of Internet commerce increases, and the number of products and
service providers that support Internet commerce increases, we believe that
Internet commerce technology providers may become increasingly subject to
infringement claims. We have been subject to claims of alleged infringement of
intellectual property rights in the past, and may become involved in additional
claims in the future. For example, on October 19, 1998, Exactis.com, Inc. filed
a complaint against our subsidiary Epub in the Federal District Court of
Colorado. The complaint alleges infringement of a patent held by Exactis.com,
Inc. The complaint seeks injunctive relief and unspecified damages. Any such
claims, with or without merit, could be time consuming, result in costly
litigation, disrupt or delay the enhancement or shipment of our products and
services or require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable or favorable to us, which could have a material adverse effect on our
business, financial condition and results of operations.
In addition, we may initiate claims or litigation against third parties for
infringement of our proprietary rights or to establish the validity of our
proprietary rights. On October 29, 1998, we filed a complaint in the U.S.
District Court for the Southern District of California against Exactis.com, Inc.
The complaint alleges infringement of a patent held by us and seeks injunctive
relief and unspecified damages. Litigation to determine the validity of any
claims could result in significant expense to us and divert the efforts of our
technical and management personnel from productive tasks, whether or not such
litigation is determined in our favor. In addition, patent litigation such as
the Exactis.com, Inc. lawsuit often gives rise to counterclaims by the
defendants, which could include challenges to the validity of patents held by
us. In the event of an adverse ruling in any such litigation, we may be required
to pay substantial damages, discontinue the use and sale of infringing products,
expend significant resources to develop non-infringing technology or obtain
licenses to infringing technology. Our failure to develop or license a
substitute technology could have a material adverse effect on our business.
IN THE FUTURE, WE MAY BE SUBJECT TO INCREASED GOVERNMENT REGULATION.
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. We believe that we are not
currently subject to direct regulation by any government agency in the United
States, other than regulations that are generally applicable to all businesses
and newly enacted laws prohibiting unsolicited commercial e-mail, or spam, or
laws intended to protect minors. A number of legislative and regulatory
proposals are under consideration by federal and state lawmakers and regulatory
bodies and may be adopted with respect to the Internet. Some of the issues that
such laws or regulations may cover include user privacy, obscenity, fraud,
pricing and characteristics and quality of products and services. The adoption
of any such laws or regulations may decrease the growth of the Internet, which
could in turn decrease the projected demand for our products and services or
increase our cost of doing business. Moreover, the applicability to the Internet
of existing U.S. and international laws governing
A-10
<PAGE> 15
issues such as property ownership, copyright, trade secret, libel, taxation and
personal privacy is uncertain and developing. Any new legislation or regulation,
or application or interpretation of existing laws, could have a material adverse
effect on our business.
OUR STOCK PRICE HAS BEEN VOLATILE IN THE PAST AND MAY BE VOLATILE IN THE FUTURE,
REGARDLESS OF OUR ACTUAL OPERATING PERFORMANCE.
The stock market in general, and Internet companies in particular, including
our company, have experienced extreme price and volume fluctuations that often
have been unrelated or disproportionate to operating performance. The trading
prices of many Internet companies' stocks are at or near historical highs and
these trading prices and price to earnings multiples are substantially above
historical levels. These trading prices and multiples may not be sustained.
Broad market and industry factors may reduce our stock price, regardless of our
actual operating performance. In addition, the trading price of our common stock
could fluctuate in response to factors such as:
o quarterly fluctuations in our revenue and financial results both in absolute
terms and relative to analyst and investor expectations;
o changes in recommendations of securities analysts;
o announcements of technological innovations or new services or products;
o publicity regarding actual or potential results with respect to
technologies, services or products under development;
o disputes or other developments concerning proprietary rights, including
copyright and litigation matters; and
o other events or factors, many of which are beyond our control.
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 the object of securities class action litigation, it could result in
substantial costs and a diversion of management's attention and resources.
POTENTIAL YEAR 2000 PROBLEMS WITH OUR INTERNAL OPERATING SYSTEMS COULD HARM OUR
BUSINESS.
Many computer systems and software products are coded to accept only
two-digit entries in date code fields. Beginning in the year 2000, these date
code fields will need to accept four-digit entries to distinguish 21st century
dates from 20th century dates. As a result, in less than one year, computer
systems and/or software used by many companies may need to be upgraded to comply
with "year 2000" requirements. Since we just recently developed the software for
our messaging platform and are adding new enhancements and functionality
regularly, we believe that our messaging platform is year 2000 compliant. Coding
errors or other defects may be discovered in the future as more testing is
completed or new functionality added.
We rely on a number of software and communications systems provided by third
parties to operate our messaging platform. Any of these could contain coding
which is not year 2000 compliant. These systems include server software used to
operate the network servers, software controlling routers, switches and other
components of the data network, disk management software used to control the
data disk arrays, firewall, security, monitoring and back-up software used by
us, as well as desktop PC applications software. In each case, we employ widely
available software applications from leading third party vendors, and expect
that such vendors will provide any required upgrades or modifications in a
timely fashion. However, if any third party software or communication systems
suppliers fail to provide year 2000 compliant versions of the software or system
components we rely upon, our operations, including our messaging platform, could
be disrupted. We have contacted and monitor each of our key suppliers to
validate their efforts to ensure that their software products and communication
systems are year 2000 compliant and will continue to do so throughout the course
of this process.
Year 2000 compliance problems also could undermine the general
infrastructure necessary to support our operations. For instance, we depend on
third-party internet service providers, or ISPs, to provide connections to the
Internet and to customer information systems. Any interruption of service from
ISPs could result in a temporary interruption of our e-messaging and other
services. We have attempted to address this risk by obtaining the same service
capacity from multiple ISPs. In addition, we rely on two third-party data
centers to house some servers and communications systems. Any
A-11
<PAGE> 16
interruption in the security, access, monitoring or power systems at the
third-party data centers could result in an interruption of services. Moreover,
it is difficult to predict what effects year 2000 compliance problems will have
on the integrity and stability of the Internet. If businesses and consumers are
not able to reliably access the Internet, or if the ISPs on which we rely fail
to provide us with uninterrupted service, our reputation could be harmed and the
demand for our services could decline, resulting in an adverse impact to our
business, financial condition and results of operations.
With respect to any particular customer, our ability to provide services to
that customer could be adversely affected if that customer fails to ensure that
its software systems are year 2000 compliant. Disruptions in the information
systems of significant customers could temporarily prevent such customers from
accessing or using the messaging platform, which could materially affect our
operating results. The messaging platform is designed to interface with customer
databases and communications systems to retrieve relevant information from
customers' electronic commerce systems or customer databases and to allow
customers to independently control certain features of the service, including
the content of transmitted messages. We cannot assess or control the degree of
year 2000 compliance in our customers' information systems. To address the risk
of disruptions in customer information systems, we designed our messaging
platform to include redundant manual control features which can be used by such
customers. Nevertheless, certain customers may elect to discontinue use of the
e-messaging services until their internal information technology problems have
been alleviated, which would adversely affect our business, financial condition
and results of operations. The spending patterns of current or potential
customers may be affected by year 2000 issues as companies expend significant
resources to correct or update their systems for year 2000 compliance. Because
of these expenditures, our customers may have less money available to pay for
services, which could have a material adverse affect on our business, financial
condition and results of operations.
SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR LARGE STOCKHOLDERS COULD CAUSE OUR
STOCK PRICE TO FALL.
We have a limited number of stockholders that hold a large portion of our
common stock. To the extent our large stockholders sell substantial amounts of
our common stock in the public market, the market price of our common stock
could fall.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL OF OUR COMPANY AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.
Provisions in our charter documents may delay, defer or prevent a change in
control of our company that a stockholder may consider favorable, may discourage
bids for our common stock at a premium over the market price of our common stock
and may adversely affect the market price of our common stock and the voting and
other rights of the holders of our common stock. These provisions include:
o authorizing the issuance of preferred stock without stockholder approval;
o providing for a classified board of directors with staggered, three-year
terms;
o prohibiting cumulative voting in the election of directors;
o requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
o limiting the persons who may call special meetings of stockholders; and
o prohibiting stockholder actions by written consent.
Other provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us.
OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES EXERCISE SIGNIFICANT CONTROL
OVER OUR COMPANY.
Our directors and executive officers, and certain of their affiliates,
individually and as a group, effectively control us and direct our affairs and
business, including any determination with respect to the acquisition or
disposition of assets by us, future issuances of common stock or other
securities by us, declaration of dividends on our common stock and the election
of directors. This concentration of ownership may also have the effect of
delaying, deferring or preventing a change in control of our company.
A-12
<PAGE> 17
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS BECAUSE THEY ARE INHERENTLY
UNCERTAIN.
This Current Report on Form 8-K/A contains certain forward-looking
statements that involve risks and uncertainties. We use words such as
"anticipate", "believe", "expect", "future", "intend", "plan" and similar
expressions to identify forward-looking statements. These statements are only
predictions. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of
this amendment. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us and described on the preceding pages and elsewhere herein.
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to predict
accurately or over which we have no control. The risk factors listed above, as
well as any cautionary language in this Current Report on Form 8-K/A, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of the events described in these risk factors and elsewhere herein
could have a material adverse effect on our business, operating results,
financial condition and stock price.
A-13
<PAGE> 18
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated statement of operations data for years
ended December 31, 1996, 1997 and 1998, and the selected historical consolidated
balance sheet data as of December 31, 1997 and 1998, are derived from, and are
qualified by reference to, the audited consolidated financial statements of
MessageMedia, included in our Report on Form 10-K, filed with the SEC on March
31, 1999. The selected historical statement of operations data for the period
March 11, 1994 (inception) through December 31, 1994 and the year ended December
31, 1995, and the selected historical consolidated balance sheet data as of
December 31, 1994, 1995 and 1996, have also been derived from audited financial
statements of the Company. The selected historical statement of operations data
for the six months ended June 30, 1998 and 1999 and the selected historical
consolidated balance sheet data as of June 30, 1999 have been derived from
unaudited financial statements of the Company appearing in our Report on Form
10-Q, filed with the SEC on August 4, 1999. The selected consolidated financial
data set forth below is not necessarily indicative of results to be expected for
any future period. The selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the MessageMedia Consolidated Financial Statements
and Notes thereto.
In connection with our strategic decision to focus on e-messaging solutions,
in 1998 we ceased operation of our Internet payment system and related services.
The selected consolidated financial data presented below distinguishes between
revenue and cost of revenue from e-messaging solutions and revenue and cost of
revenue from our Internet payment system which was phased out. We consider this
segregation between e-messaging solutions and our Internet payment system
helpful in understanding our results of operations for the periods presented.
EBITDA is defined as operating income (loss) before interest, taxes,
depreciation and amortization. The primary measure of operating performance is
net earnings (loss). Although EBITDA is a measure commonly used in our industry,
it should not be construed as an alternative to net earnings (loss), determined
in accordance with generally accepted accounting principals, or GAAP, as an
indicator of operating performance or as an alternative to cash flows from
operating activities, determined in accordance with GAAP. EBITDA may not be
calculated in the same way as reported in similarly titled captions by other
companies.
A-14
<PAGE> 19
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
MARCH 11, 1994
(INCEPTION)
THROUGH
DECEMBER 31, FISCAL YEAR ENDED DECEMBER 31,
--------------- ------------------------------------------------------------------
1994 1995 1996 1997 1998
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Revenue from e-messaging
solutions ..................... $ -- $ -- $ -- $ -- $ 424,564
Revenue from Internet
payment system ................ 3,580 197,902 695,866 1,450,598 863,226
------------ ------------ ------------ ------------ ------------
Total revenue ..................... 3,580 197,902 695,866 1,450,598 1,287,790
------------ ------------ ------------ ------------ ------------
Cost of revenue:
Cost of e-messaging
solutions revenue ............. -- -- -- -- 29,394
Cost of revenue from
Internet payment system ....... -- 123,375 265,900 270,416 68,159
------------ ------------ ------------ ------------ ------------
Total cost of revenue ............. -- 123,375 265,900 270,416 97,553
------------ ------------ ------------ ------------ ------------
Gross profit ...................... 3,580 74,527 429,966 1,180,182 1,190,237
Operating expenses:
Marketing and sales ........... 143,678 346,400 1,836,545 5,424,110 1,934,486
Research, development and
engineering ................... 307,315 530,809 4,652,582 6,687,177 4,828,277
General and administrative .... 358,790 1,292,781 4,237,638 4,377,688 3,810,073
Depreciation and
amortization .................. 16,327 106,628 524,124 1,097,716 2,470,917
Restructure charge ............ -- -- -- -- 812,166
Write-off of in-process
technology .................... -- -- -- -- 1,300,000
------------ ------------ ------------ ------------ ------------
Total operating expenses .......... 826,110 2,276,618 11,250,889 17,586,691 15,155,919
------------ ------------ ------------ ------------ ------------
Net loss from operations .......... (822,530) (2,202,091) (10,820,923) (16,406,509) (13,965,682)
Interest income (expense) ......... (13,149) (67,890) 130,983 459,227 133,659
------------ ------------ ------------ ------------ ------------
Net loss .......................... (835,679) (2,269,981) (10,689,940) (15,947,282) (13,832,023)
Dividends imputed on
preferred stock ............... -- -- -- (1,250,000) (153,126)
Net loss applicable to
common shares ................. $ (835,679) $ (2,269,981) $(10,689,940) $(17,197,282) $(13,985,149)
============ ============ ============ ============ ============
Net loss per share, basic
and diluted ................... $ (0.26) $ (0.54) $ (2.33) $ (1.94) $ (0.63)
Shares used in per share
computation, basic and
diluted ....................... 3,185,606 4,170,231 4,588,262 8,842,367 22,304,902
OTHER OPERATING DATA:
EBITDA ............................ (806,203) (2,095,463) (10,296,799) (15,308,793) (11,494,765)
Cash flow information:
Net cash used by operating
activities .................... (717,679) (1,769,719) (7,417,419) (15,119,785) (11,104,790)
Net cash used by investing
activities .................... (261,568) (181,276) (2,379,299) (717,872) (1,221,741)
Net cash provided by
financing activities .......... 994,094 4,027,799 24,833,038 5,040,745 10,654,847
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------ ------------
1998 1999
------------ ------------
<S> <C> <C>
Revenue:
Revenue from e-messaging
solutions ..................... $ 25,700 $ 2,055,644
Revenue from Internet
payment system ................ 472,594 --
------------ ------------
Total revenue ..................... 498,294 2,055,644
------------ ------------
Cost of revenue:
Cost of e-messaging
solutions revenue ............. -- 380,803
Cost of revenue from
Internet payment system ....... 34,637 --
------------ ------------
Total cost of revenue ............. 34,637 380,803
------------ ------------
Gross profit ...................... 463,657 1,674,841
Operating expenses:
Marketing and sales ........... 1,213,499 2,312,422
Research, development and
engineering ................... 2,896,745 1,789,004
General and administrative .... 2,230,721 2,985,323
Depreciation and
amortization .................. 840,075 6,815,048
Restructure charge ............ 812,166 1,025,000
Write-off of in-process
technology .................... -- --
------------ ------------
Total operating expenses .......... 7,993,206 14,926,797
------------ ------------
Net loss from operations .......... (7,529,549) (13,251,956)
Interest income (expense) ......... (8,497) 96,202
------------ ------------
Net loss .......................... (7,538,046) (13,155,754)
Dividends imputed on
preferred stock ............... (153,126) --
Net loss applicable to
common shares ................. $ (7,691,172) $(13,155,754)
============ ============
Net loss per share, basic
and diluted ................... $ (0.69) $ (0.31)
Shares used in per share
computation, basic and
diluted ....................... 11,183,418 42,286,890
OTHER OPERATING DATA:
EBITDA ............................ (6,689,474) (6,436,908)
Cash flow information:
Net cash used by operating
activities .................... (6,392,393) (6,502,467)
Net cash used by investing
activities .................... (248,689) (320,800)
Net cash provided by
financing activities .......... 6,611,512 12,276,024
</TABLE>
A-15
<PAGE> 20
HISTORICAL BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------- JUNE 30, 1999
1994 1995 1996 1997 1998 (UNAUDITED)
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments..... $ 14,847 $2,091,651 $17,327,971 $6,331,059 $ 4,659,375 $10,112,132
Furniture, equipment, software
and information technology,
net ....................... 261,638 417,653 2,023,861 1,878,893 1,475,720 1,225,095
Intangibles .................. -- -- -- -- 23,894,715 17,661,312
Total assets ................. 320,421 2,574,826 19,692,557 9,048,089 31,220,981 30,408,530
Current liabilities .......... 148,672 662,403 3,236,037 4,769,958 2,670,602 2,047,057
Notes and amounts payable,
non-current ............... 713,400 1,200,000 1,912,500 162,500 53,786 6,935
Series A redeemable
convertible preferred
stock...................... -- -- -- 4,687,500 -- --
Stockholders' equity (net
capital deficiency) ....... (541,651) 752,423 14,944,020 (571,869) 28,483,510 28,354,538
</TABLE>
A-16
<PAGE> 21
PRO FORMA COMBINED RESULTS OF OPERATIONS
The following table sets forth certain pro forma combined results of
operations data for the periods indicated and assumes that the following
transactions occurred on January 1, 1996:
o our acquisition of Epub;
o our acquisition of Dbits;
o our acquisition of Revnet Systems; and
o our acquisition of Decisive Technology.
We prepared the unaudited pro forma financial information for the years
ended December 31, 1996, 1997 and 1998 and the six months ended June 30, 1998 by
combining the historical results of the four companies we acquired with our
historical results. We have presented this information to give you a better
picture of what our business might have looked like had we acquired these four
companies as of January 1, 1996. These companies might have performed
differently if they had been combined with our operations. You should not rely
on the unaudited pro forma information as being indicative of the historical
results that we would have had after the acquisitions or the future results that
we will experience.
The unaudited pro forma financial information for the six months ended June
30, 1999 has been derived by combining our unaudited financial statements with
those of Revnet Systems and Decisive Technology. The unaudited financial
statements include all adjustments, consisting of only normal recurring
adjustments, which we consider necessary for a fair presentation of our
financial position and results of operations for this period. Operating results
for the six months ended June 30, 1999 are not necessarily indicative of the
results that we will experience for the entire year. Historical results are not
necessarily indicative of the results to be experienced in the future.
The unaudited pro forma combined results of operations data in the following
table includes the goodwill associated with all acquisitions. Had the
acquisitions actually occurred on January 1, 1996, all related goodwill would
have been amortized over a two-year period and therefore goodwill would have
been fully amortized on December 31, 1997. However, due to the pro forma
presentation of this information, a full year of amortization has been included
for all the full years presented. In the opinion of our management, we consider
this helpful for a complete presentation of the information for the periods
presented.
This unaudited pro forma information was not prepared in accordance with
Regulation S-X. The difference primarily is due to the inclusion of the results
of operations of all of the acquired companies, including pro forma goodwill
amortization, beginning on January 1, 1996 regardless of when each of the four
companies actually was acquired. Unaudited pro forma financial information
prepared in accordance with Regulation S-X is included in Exhibit 99.5.
EBITDA is defined as operating income (loss) before interest, taxes,
depreciation and amortization. The primary measure of operating performance is
net earnings (loss). Although EBITDA is a measure commonly used in our industry,
it should not be construed as an alternative to net earnings (loss), determined
in accordance with GAAP, as an indicator of operating performance or as an
alternative to cash flows from operating activities, determined in accordance
with GAAP. EBITDA may not be calculated in the same way as reported in similarly
titled captions by other companies.
A-17
<PAGE> 22
PRO FORMA COMBINED RESULTS OF OPERATIONS:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------ ------------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Revenue from e-messaging
solutions ..................... $ 647,700 $ 1,910,287 $ 5,905,692 $ 2,672,863 $ 5,101,266
Revenue from Internet
payment system ................ 695,866 1,450,598 863,226 472,594 --
------------ ------------ ------------ ------------ ------------
Total revenue ..................... 1,343,566 3,360,885 6,768,918 3,145,457 5,101,266
------------ ------------ ------------ ------------ ------------
Cost of revenue:
Cost of e-messaging
solutions revenue ............. 100,000 490,436 1,773,255 747,148 1,571,344
Cost of revenue from
Internet payment system ....... 265,900 270,416 68,159 34,637 --
------------ ------------ ------------ ------------ ------------
Total cost of revenue ............. 365,900 760,852 1,841,414 781,785 1,571,344
------------ ------------ ------------ ------------ ------------
Gross profit ...................... 977,666 2,600,033 4,927,504 2,363,672 3,529,922
Operating expenses:
Marketing and sales ........... 4,896,080 9,200,404 6,020,483 3,401,382 4,061,214
Research, development
and engineering ............... 6,007,161 9,754,296 7,550,817 4,663,299 2,479,134
General and
administrative ................ 5,474,033 6,373,492 7,845,251 3,971,900 4,677,072
Depreciation and
amortization .................. 53,663,673 54,357,856 54,778,924 27,512,392 27,205,846
Restructure charge ............ -- -- 1,563,166 812,166 1,025,000
Write-off of in-process
technology .................... -- -- 1,300,000 -- --
------------ ------------ ------------ ------------ ------------
Total operating expenses .......... 70,040,947 79,686,048 79,058,641 40,361,139 39,448,266
------------ ------------ ------------ ------------ ------------
Net loss from operations .......... (69,063,281) (77,086,015) (74,131,137) (37,997,467) (35,918,344)
Interest income (expense) ......... 115,133 424,583 (19,982) (149,437) 54,469
------------ ------------ ------------ ------------ ------------
Net loss .......................... (68,948,148) (76,661,432) (74,151,119) (38,146,904) (35,863,875)
Dividends imputed on preferred
stock ......................... -- (1,250,000) (153,126) (153,126) --
------------ ------------ ------------ ------------ ------------
Net loss applicable to
common shares ................. (68,948,148) (77,911,432) (74,304,245) (38,300,030) (35,863,875)
============ ============ ============ ============ ============
OTHER DATA:
EBITDA ............................ (15,399,608) (22,728,159) (19,352,213) (10,485,075) (8,712,498)
</TABLE>
A-18
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the related notes included in our Report on Form 10-Q, filed with
the SEC on August 4, 1999, and in our Report on Form 10-K, filed with the SEC on
March 31, 1999, as well as the financial statements included as Exhibits to this
Current Report on Form 8-K/A.
OVERVIEW
We provide permission-based, comprehensive e-messaging solutions.
E-messaging is our term to describe our suite of services that utilize the
medium of e-mail to develop and foster permission-based relationships with our
customers. Our suite of services and products, including Internet-based
marketing, customer care, survey and information distribution solutions, enable
businesses to use e-messaging as a strategic tool to increase sales, improve
customer communication and develop long-term customer loyalty. Our e-messaging
solutions, available either on an outsourced-subscription basis or using
in-house, packaged software, allow businesses to establish and enhance two-way
customer dialogue across the extended enterprise, from marketing to sales to
customer service. Because e-messaging is permission-based, customers are more
receptive to these communications and grow to rely on e-messaging as a dynamic
channel for interacting with businesses. Moreover, our proprietary technology
and expert staff of client services professionals allow us to track and review
current and past e-messaging campaigns, providing valuable information that
allows us to tailor and fine-tune our clients' e-messaging campaigns to optimize
the effectiveness of future campaigns. Our clients cover a broad range of
industry segments, including Internet/e-commerce, publishing, computer
hardware/software and financial services. We currently provide e-messaging
services to over 200 clients, including America Online, Inc., Apple Computer,
Inc., CMP Group, Inc., E*Trade Securities, Inc., Microsoft Corporation and
PeopleSoft, Inc., and have sold our e-messaging products to over 4,000
customers.
HISTORY AND RECENT ACQUISITIONS
We commenced operations in 1994. From inception through 1998, our revenues
principally derived from our Internet payment system and related services. In
June 1998, we were recapitalized by SOFTBANK Corp. and affiliates through a
series of transactions resulting in their acquisition of approximately 19.1
million shares of our common stock. In 1998, we made a strategic decision to
focus exclusively on e-messaging and related services, leveraging the expertise
of our key technical personnel and our existing proprietary technology from the
Internet payment system, which was phased out. In December 1998, we changed our
name from First Virtual Holdings Inc. to MessageMedia, Inc. in connection with
our acquisitions of two e-messaging companies, Epub and Dbits. As a result of
the acquisitions, Epub and Dbits became our wholly-owned subsidiaries. These
acquisitions enabled us to expand our suite of e-messaging services. In August
1999, we acquired two additional e-messaging companies, Revnet Systems and
Decisive Technology, to further broaden our comprehensive suite of e-messaging
solutions and our customer base. All of these acquisitions were accounted for as
purchase transactions. A summary of these acquisitions follows:
o Epub. Epub, based in Boulder, Colorado, was a leading provider of
outsourced e-mail message delivery services to businesses and
organizations. On December 9, 1998, we acquired all of the common stock
of Epub in exchange for 5,582,676 shares of our common stock and the
assumption by us of options and warrants to acquire up to approximately
417,324 additional shares of our common stock. The purchase price was
calculated to be approximately $20.8 million.
o Dbits. Dbits, based in Chicago, Illinois, was a development stage
company developing customer e-mail management systems and solutions. On
December 11, 1998, we acquired all equity interests in Dbits in
exchange for 1,350,000 shares of our common stock and warrants to
purchase an additional 500,000 shares of our common stock. The purchase
price was calculated to be approximately $5.6 million.
o Revnet Systems. Revnet Systems, based in Huntsville, Alabama, was a
leading developer and supplier of software solutions providing
businesses and organizations with "in-house" e-mail message delivery
capability and outsourced e-mail message deliver services. On August 9,
1999, we acquired all of the common stock of Revnet Systems in exchange
for 3,262,120 shares of our common stock and the assumption by us of
options to purchase up to approximately 681,675 additional shares of
our common stock. The purchase price was calculated to be approximately
$41.8 million.
A-19
<PAGE> 24
o Decisive Technology. Decisive Technology, based in Mountain View,
California, was a leading provider of online customer intelligence
solutions such as e-surveys. On August 16, 1999, we acquired all of the
common stock of Decisive Technology in exchange for 2,054,498 shares of
our common stock and the assumption by us of options and warrants to
acquire up to approximately 466,818 additional shares of our common
stock. The purchase price was calculated to be approximately $39.6
million.
SOURCES OF REVENUE AND REVENUE RECOGNITION
E-MESSAGING SOLUTIONS
We currently derive our revenue from outsourced e-messaging services and
software products and related support services. Our outsourced e-messaging
services include information distribution, e-mail marketing, e-customer care,
e-commerce messaging and e-survey. Our software products provide e-messaging and
e-survey capabilities for clients desiring an in-house solution. We sell our
software products on-line and through our direct sales force and distributor
network.
o Outsourced e-messaging services. Revenue from information distribution,
e-mail marketing, e-customer care and e-commerce messaging is
recognized as earned in accordance with individual customer contracts,
which typically provide for monthly minimums and varying revenue on a
per message basis, depending upon monthly message volumes and message
complexity. We recognize revenue from e-survey service agreements on a
percentage-of-completion basis and typically bill customers as services
are provided. Accordingly, revenue recognized in advance of billing
milestones is recorded as unbilled accounts receivable, and collections
resulting from billing milestones achieved in advance of recognizing
revenue are recorded as deferred revenue on the balance sheet.
o Software products and support services. We recognize revenue at the
time of shipment of the related software products net of a provision
for estimated future returns and exchanges. Typically, no significant
post shipment obligations exist after the software sale. A substantial
number of our customers that purchase our software products also enter
into annual support and maintenance contracts. Revenue attributable to
annual support and maintenance contracts is recognized ratably over the
term of the respective agreement.
INTERNET PAYMENT SYSTEM
In connection with our strategic decision to focus exclusively on
e-messaging solutions, in 1998 we phased out our Internet payment system and
related services. Revenue related to the Internet payment system, including
consumer and merchant registrations, transaction, marketing and merchandising
revenue, consulting fees and interactive advertising development, are separately
reported as "Internet payment system" revenue. We currently do not generate any
Internet payment system revenue. Revenue from registration fees and the related
direct costs of processing such registrations was recognized over a 12 month
period. Transaction and marketing revenue was recognized when earned.
COSTS AND EXPENSES
Cost of e-messaging solutions revenue. The cost of e-messaging solutions
revenue consists of salaries, benefits, consulting fees and operational costs
related to providing our outsourced e-messaging services and software packaging
and distribution costs.
Cost of revenues from Internet payment system. The cost of Internet payment
system revenue consists of fees paid to third parties for processing
transactions, costs of setting up new accounts and communication expenses
related to providing services from our Internet payment system.
Marketing and sales expenses. Marketing and sales expenses include salaries
and wages, consulting fees, advertising, trade shows, travel and other marketing
expenses.
Research, development and engineering expenses. Research, development and
engineering expenses include salaries and wages and consulting fees to support
the development, enhancement and maintenance of our products and services.
General and administrative expenses. General and administrative expenses
consist primarily of salaries and wages, professional, legal and consulting fees
and other expenses associated with general management and administration.
A-20
<PAGE> 25
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998
E-messaging solutions revenue. For the six months ended June 30, 1999,
revenue from e-messaging solutions increased to approximately $2.0 million from
a negligible amount for the six months ended June 30, 1998. This increase
resulted from our change in business strategy to focus exclusively on
e-messaging solutions, our acquisition of Epub in December 1998 and the
integration of Epub's customer base and e-messaging services platform with ours.
In addition, we expanded our service offerings to include e-marketing,
e-customer care and e-commerce messaging. The e-messaging service revenue earned
for the six months ended June 30, 1998 was earned while we completed final
testing of the e-messaging services before its official release in July 1998.
Internet payment system revenue. For the six months ended June 30, 1999, no
revenue from our Internet payment system was generated due to our strategic
decision to focus exclusively on e-messaging solutions and phase out our
Internet payment system.
Cost of e-messaging solutions revenue. For the six months ended June 30,
1999, the cost of e-messaging solutions revenue increased from a negligible
amount to $380,803 due to our strategic decision to focus exclusively on
e-messaging solutions and phase out our Internet payment system. Additionally,
we incurred no cost of Internet payment system revenue.
Marketing and sales expenses. For the six months ended June 30, 1999,
marketing and sales expenses increased approximately $1.1 million, or 91%, to
$2.3 million, from $1.2 million for the six months ended June 30, 1998. This
increase resulted primarily from additions in our sales, client services and
marketing staff related to the increased promotion of our e-messaging services.
Research, development and engineering expenses. For the six months ended
June 30, 1999, research, development and engineering expenses decreased
approximately $1.1 million, or 38%, to $1.8 million, from $2.9 million for the
six months ended June 30, 1998. This decrease resulted primarily from a
reduction in our development staff and consultants due to our decision to phase
out our Internet payment system and focus exclusively on e-messaging solutions.
Research, development and engineering expenses are expected to increase in
future periods as we expand and enhance our suite of e-messaging services and
products.
General and administrative expenses. For the six months ended June 30, 1999,
general and administrative expenses increased approximately $800,000, or 34%, to
$3.0 million, from $2.2 million for the six months ended June 30, 1998. This
increase resulted primarily from approximately $300,000 of expenses associated
with additional headcount, including the hiring of several members of our senior
management team, increased legal expenses of approximately $300,000 incurred for
patent litigation and a general increase in spending to support our relocation
to Boulder, Colorado.
Restructuring charge. Restructuring expense was $1,025,000 and $812,166 for
the six months ended June 30, 1999 and 1998, respectively.
For the six months ended June 30, 1999, the restructuring charge of
$1,025,000 related to our decision to relocate our corporate headquarters from
San Diego, California to a new facility in Boulder, Colorado. Additionally,
restructuring costs for the six months ended June 30, 1999 include the merger
integration and restructuring activities of MessageMedia, Epub and Dbits, which
included the elimination of jobs.
For the six months ended June 30, 1998, the restructuring charge of $812,166
related to our decision to phase out our Internet payment system. Expenses
included severance costs related to a reduction in staff and consultants, and
other expenses related to shutting down our Internet payment system.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997
E-messaging solutions revenue. We introduced our new e-messaging services in
July 1998. For the year ended December 31, 1998, e-messaging solutions revenue
was $424,564. We had no e-messaging solutions revenue for the year ended
December 31, 1997.
Internet payment system revenue. Internet payment system revenue decreased
approximately $600,000, or 41%, to $863,226, from $1.5 million for the year
ended December 31, 1997. The decrease resulted from our decision to focus
exclusively on e-messaging solutions and phase out our Internet payment system.
A-21
<PAGE> 26
Cost of e-messaging solutions revenue. For the year ended December 31, 1998,
the cost of e-messaging solutions revenue was $29,394.
Cost of Internet payment system revenue. For the year ended December 31,
1998, the cost of Internet payment system revenue decreased approximately
$200,000, or 75%, to $68,159, from $270,416 for the year ended December 31,
1997. The decrease resulted from our decision to focus exclusively on
e-messaging solutions.
Marketing and sales expenses. For the year ended December 31, 1998,
marketing and sales expenses decreased approximately $3.5 million, or 64%, to
$1.9 million, from $5.4 million for the year ended December 31, 1997. This
decrease primarily resulted from the reduction in marketing staff, consulting
fees and promotional expenses due to the elimination of Internet payment system
sales efforts. Marketing and sales expenses are expected to increase in the
future as we continue to promote our e-messaging services and products.
Research, development and engineering expenses. For the year ended December
31, 1998, research, development and engineering expenses decreased approximately
$1.9 million, or 28%, to $4.8 million, from $6.7 million for the year ended
December 31, 1997. This decrease primarily resulted from the reduction in our
research, development and engineering staff and the elimination of development
consultants associated with the Internet payment system. Research, development
and engineering expenses are expected to increase in future periods as we expand
and enhance our suite of e-messaging services and products.
General and administrative expenses. For the year ended December 31, 1998,
general and administrative expenses decreased approximately $600,000, or 13%, to
$3.8 million, from $4.4 million for the year ended December 31, 1997. This
decrease primarily resulted from the reduction in our general and administrative
staff and a decrease in promotional expenses resulting from reducing public
relations and investor relations activities, offset in part by an increase in
legal expenses of approximately $300,000 related to patent litigation.
Write-off of in process research and development. In connection with our
$20.8 million acquisition of Epub in December 1998, we wrote-off $1.3 million of
in-process technology. This write-off was necessary because the acquired
technology had not yet reached technological feasibility and had no future
alternative uses. We used the acquired in-process technology to build future
functionality into our e-messaging platform and enhance our suite of e-messaging
services.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996
Internet payment system revenue. For the year ended December 31, 1997,
Internet payment system revenue increased approximately $800,000, or 109%, to
$1.5 million, from $695,866 for the year ended December 31, 1996. This increase
primarily resulted from bulk sales of consumer and merchant registrations for
the Internet payment system. We had no e-messaging solutions revenue for the
years ended December 31, 1997 or 1996.
Cost of Internet payment system revenue. For the year ended December 31,
1997, the cost of Internet payment system revenue remained relatively constant
at $270,416 compared to $265,900 for the year ended December 31, 1996.
Marketing and sales expenses. For the year ended December 31, 1997,
marketing and sales expenses increased approximately $3.6 million, or 195%, to
$5.4 million, from $1.8 million for the year ended December 31, 1996. This
increase primarily resulted from increased headcount and increased advertising
and promotional expenses related to the Internet payment system.
Research, development and engineering expenses. For the year ended December
31, 1997, research, development and engineering expenses increased approximately
$2.0 million, or 44%, to $6.7 million, from $4.7 million for the year ended
December 31, 1996. This increase primarily resulted from increased headcount and
the expansion of our research, development and engineering activities in San
Diego, California, which included the establishment of a second data processing
center.
General and administrative expenses. For the year ended December 31, 1997,
general and administrative expenses increased approximately $200,000, or 3%, to
$4.4 million, from $4.2 million for the year ended December 31, 1996. This
increase primarily resulted from increased headcount and public and investor
relations activities, offset by a $1.0 million, one-time charge incurred for the
year ended December 31, 1996 relating to a payment to Paymentech Merchant
Services, Inc. in consideration for the waiver of certain exclusive processing
rights.
A-22
<PAGE> 27
PRO FORMA COMBINED RESULTS OF OPERATIONS
The following discussion is based on our Pro Forma Combined Results of
Operations data included elsewhere in Appendix A to this Current Report on Form
8-K/A, which reflect the combined operations of MessageMedia, Epub, Dbits,
Revnet Systems and Decisive Technology as if they had been combined on January
1, 1996. This discussion is not based on the pro forma financial information
included in Exhibit 99.5
Pro forma revenue. Pro forma e-messaging solutions revenue increased
significantly for the six months ended June 30, 1999 compared with the six
months ended June 30, 1998, and for the year ended December 31, 1998 compared
with the year ended December 31, 1997. This increase reflects our strategic
decision to focus exclusively on e-messaging solutions and the expansion of our
service offerings to include e-marketing, e-customer care and e-commerce
messaging.
All of the pro forma e-messaging services revenue in 1996 was generated by
Decisive Technology. Decisive Technology experienced significant growth, with
revenue increasing from $600,000 in 1996 to $1.5 million in 1997, due primarily
to an increase in sales of its software survey products. Decisive Technology
realized a $1.6 million increase in revenue in 1998 from 1997 due to increased
e-survey services revenue.
Revnet Systems and Epub made commercial introductions of their e-messaging
services in 1997. Consequently, 1998 was the first full year of commercial
revenues for Revnet Systems and Epub, which had 1998 revenue of $1.1 million and
$1.2 million, respectively. MessageMedia introduced its e-messaging services in
1998 resulting in e-messaging solutions revenue of $425,000. Following the
December 1998 Epub acquisition, our strategic decision to focus exclusively on
e-messaging solutions and the expansion of our service offerings to include
e-marketing, e-customer care and e-commerce messaging, MessageMedia's
e-messaging revenues for the six months ended June 30, 1999 increased to $2.1
million.
In 1998, in connection with our decision to focus exclusively on
e-messaging, we phased out our Internet payment system and related services.
Pro forma cost of revenue. Pro forma cost of e-messaging solutions revenue
as a percentage of the related revenue increased to 31% for the six months ended
June 30, 1999 and the year ended December 31, 1998, compared to 26% for the year
ended December 31, 1997. This increase in pro forma e-messaging cost of revenue
is attributable to a change in product mix, as a larger percentage of overall
e-messaging solutions revenue was derived from outsourced e-messaging and
e-survey revenue, as compared to software revenue. Gross margins may continue to
decrease in the near-term as we continue to increase headcount and
infrastructure related to the expansion of our customer service operations.
Pro forma marketing and sales expenses. For the six months ended June 30,
1999, pro forma marketing and sales expenses increased approximately $700,000
compared with the six months ended June 30, 1998. This increase primarily
resulted from a larger sales and marketing staff and additional travel expenses
related to sales efforts at Epub and MessageMedia in connection with the
e-messaging services initiative, and increased sales and marketing expenses of
Revnet Systems. These increases were partially offset by a decrease in Decisive
Technology's sales and marketing expenses following the July 1998 restructuring
of activities which resulted in a substantial staff reduction. Pro forma
marketing and sales expenses decreased approximately $3.2 million in 1998
compared to 1997, primarily due to a $3.5 million decrease in marketing and
sales expenses at MessageMedia in connection with the decision to phase out the
Internet payment system.
Pro forma research, development and engineering expenses. Pro forma
research, development and engineering expenses decreased both for the six months
ended June 30, 1999 compared with the six months ended June 30, 1998, and for
the year ended December 31, 1998 compared with the year ended December 31, 1997.
These decreases resulted from our decision to phase out the Internet payment
system in 1998. Decisive Technology also experienced a decrease in research and
development expenses from 1997 to 1998 in connection with changing the emphasis
of its survey services from a software product to an e-survey service. Research,
development and engineering expenses are expected to increase in the future as
we expand and enhance our suite of e-messaging services and products.
Restructure charge. In addition to the restructuring charges incurred by
MessageMedia in its historical financial statements for the year ended December
31, 1998 and the six months ended June 30, 1999, the pro forma combined results
of operations reflect a $751,000 restructuring charge incurred by Decisive
Technology in 1998, resulting from its decision to cease the development and
promotion of its DecisionSource software products.
A-23
<PAGE> 28
PRO FORMA COMBINED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain pro forma combined statement of
operations data for the periods indicated, assuming that our acquisitions of
Epub, Dbits, Revnet Systems and Decisive Technology occurred on January 1, 1996,
for the six quarters ended June 30, 1999. The unaudited quarterly information
has been prepared on the same basis as our audited financial statements and
includes all adjustments, consisting only of normal recurring accruals, that
management considers necessary for a fair presentation of such information.
Operating results for any quarter are not necessarily indicative of results for
any future period.
In connection with our strategic decision to focus on e-messaging solutions
in 1998, we phased out our Internet payment system and related services. The pro
forma data presented below distinguishes between revenue and cost of revenue
from e-messaging solutions and revenue and cost of revenue from our Internet
payment system which was phased out. We consider this segregation between
e-messaging solutions and our Internet payment system helpful in understanding
our pro forma results of operations for the periods presented.
EBITDA is defined as operating income (loss) before interest, taxes,
depreciation and amortization. The primary measure of operating performance is
net earnings (loss). Although EBITDA is a measure commonly used in our industry,
it should not be construed as an alternative to net earnings (loss), determined
in accordance with GAAP, as an indicator of operating performance or as an
alternative to cash flows from operating activities, determined in accordance
with GAAP. EBITDA may not be calculated in the same way as reported in similarly
titled captions by other companies.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT 30, DEC 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Revenue from e-messaging
solutions ................ $ 1,139,682 $ 1,533,181 $ 1,424,324 $ 1,808,505 $ 2,181,816 $ 2,919,450
Revenue from Internet
payment system ........... 280,669 191,925 290,632 100,000 -- --
------------ ------------ ------------ ------------ ------------ ------------
Total revenue ................ 1,420,351 1,725,106 1,714,956 1,908,505 2,181,816 2,919,450
------------ ------------ ------------ ------------ ------------ ------------
Cost of revenue:
Cost of e-messaging
solutions revenue ........ 333,224 413,924 481,153 544,954 631,627 939,717
Cost of revenue from
Internet payment system .. 18,600 16,037 3,522 30,000 -- --
------------ ------------ ------------ ------------ ------------ ------------
Total cost of revenue ........ 351,824 429,961 484,675 574,954 631,627 939,717
------------ ------------ ------------ ------------ ------------ ------------
Gross profit ................. 1,068,527 1,295,145 1,230,281 1,333,551 1,550,189 1,979,733
Operating expenses:
Marketing and sales ...... 1,765,826 1,635,556 1,252,675 1,366,426 1,794,717 2,266,497
Research, development and
engineering .............. 2,407,152 2,256,147 1,587,641 1,299,877 1,187,431 1,291,703
General and administrative 1,794,701 2,177,199 1,804,218 2,069,133 2,106,246 2,570,826
Depreciation and
amortization ............. 13,723,465 13,788,926 13,646,960 13,619,572 13,603,111 13,602,734
Restructuring charge ..... -- 812,166 751,000 -- 1,025,000 --
Write-off of in-process
technology ............... -- -- -- 1,300,000 -- --
------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses ..... 19,691,144 20,669,994 19,042,494 19,655,008 19,716,505 19,731,760
Net loss from operations ..... (18,622,617) (19,374,849) (17,812,213) (18,321,457) (18,166,316) (17,752,027)
Interest income (expense) .... (127,506) (21,931) 82,146 47,309 204 54,265
------------ ------------ ------------ ------------ ------------ ------------
Net loss ..................... (18,750,123) (19,396,780) (17,730,067) (18,274,148) (18,166,112) (17,697,762)
Dividends imputed on preferred
stock .................... (87,502) (65,624) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net loss applicable to common
shares ................... (18,837,625) (19,462,404) (17,730,067) (18,274,148) (18,166,112) (17,697,762)
============ ============ ============ ============ ============ ============
OTHER DATA:
EBITDA ....................... (4,899,152) (5,585,923) (4,165,253) (4,701,885) (4,563,205) (4,149,293)
</TABLE>
Revenues increased substantially during the quarter ended June 30, 1999 due
to a significant increase in e-messaging revenue from MessageMedia resulting
from a broadening of our customer base and expansion of our service offerings to
A-24
<PAGE> 29
include e-marketing, e-customer care and e-commerce messaging. Research and
development expenses decreased for the quarter ended September 30, 1999 as a
result of a reduction in research and development employees and consultants
following our strategic decision to focus exclusively on e-messaging solutions
and phase out our Internet payment system. Research and development expenses are
expected to increase in the future as we expand and enhance our suite of
e-messaging services and products.
We expect to experience significant fluctuations in our future quarterly
operating results. These fluctuations will be due to several factors, many of
which are beyond our control, including:
o market response to our e-messaging services;
o difficulties encountered in the development or deployment of products
or services;
o difficulties encountered in acquiring and/or merging with other
companies or technologies;
o the degree of acceptance of the Internet as a marketing and customer
service medium;
o the timing and effectiveness of collaborative marketing efforts
initiated by our strategic partners;
o the timing of the introduction of new products and services offered by
us;
o the timing of the release of enhancements to our products and services;
o product introductions and service offerings by our competitors, and
other competitive conditions in our marketplace;
o the mix of the products and services provided by us;
o the timing and rate at which we increase our expenses to support
projected growth; and
o the cost of compliance with applicable government regulations.
In addition, the revenue earned by us for our solutions are subject to
change as we introduce new e-messaging services and products and assess our
marketing strategy and competitive position.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily from the net proceeds of our initial
public offering and subsequent sales of our preferred and common stock. In
December 1996, we received approximately $15.0 million in net proceeds upon the
closing of our initial public offering of 2.0 million shares of our common
stock. In October 1997, we received approximately $4.9 million in net proceeds
upon completion of a private placement of 1,000 shares of our preferred stock
and warrants to purchase 850,000 shares of our common stock. In June 1998, we
received net proceeds of approximately $6.6 million from the sale of
approximately 10.6 million shares of our common stock to SOFTBANK and
affiliates. In March 1999, we received approximately $10.0 million in net
proceeds from an additional sale of approximately 2.4 million shares of our
common stock to Pequot Capital Management, Inc. and affiliates. In connection
with our acquisition of Revnet Systems on August 9, 1999, we acquired
approximately $1.7 million in cash and cash equivalents.
During the six months ended June 30, 1999, our cash and cash equivalents
increased by approximately $5.5 million to $10.1 million. This change occurred
as we raised approximately $12.8 million in proceeds from the sale of common
stock, net of issuance costs, and used $6.9 million in cash to fund operating
activities. We experienced net decreases of $15.0 million, $10.8 million and a
net increase of $1.7 million in cash and cash equivalents during the years ended
December 31, 1996, 1997 and 1998, respectively. Cash utilized by operating
activities was $7.4 million, $15.1 million and $11.1 million during the years
ended December 31, 1996, 1997 and 1998, respectively. The cash utilized in each
of those periods primarily was for funding our net operating losses and working
capital requirements.
We will need to raise additional funds through the public or private sale of
our equity securities or debt securities or from other sources before the end of
1999. The timing and amount of our capital requirements will
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depend on a number of factors, including demand for our products and services,
the need to develop new or enhanced products and services and competitive
pressures. Additionally, we expect that we will acquire or invest in businesses,
products, services and technologies that complement or augment our service
offerings and customer base. We expect that we will pay for some of our
acquisitions by issuing additional common stock and this could dilute our
stockholders. If additional funds are raised through the issuance of equity
securities, the percentage ownership of our stockholders will be diluted and
such securities may have rights, preferences or privileges senior to those of
the holders of our common stock. There can be no assurance that additional
financing will be available when needed or that, if available, will include
terms favorable to us or our stockholders. If adequate funds are not available
on acceptable terms, we may be unable to develop or enhance our products or
services, take advantage of market opportunities or respond to competition.
Capital expenditures have primarily been for facilities, furniture and
capital equipment necessary to support the expansion of our operations and
information systems. Capital expenditures were approximately $323,000 and
$263,000 for the six months ended June 30, 1999 and 1998, respectively, and
$436,000, $930,000 and $2.1 million for the years ended December 31, 1998, 1997
and 1996, respectively.
YEAR 2000 COMPLIANCE
Many computer systems and software products are coded to accept only
two-digit entries in date year fields. Beginning in the year 2000, these date
year fields will need to accept four-digit entries to distinguish 21st century
dates from 20th century dates. As a result, in less than four months, computer
systems and/or software used by many companies may need to be upgraded to comply
with "year 2000" requirements. Since we just recently developed the software for
our e-messaging platform and are adding new enhancements and functionality
regularly, we believe that our e-messaging platform is year 2000 compliant.
There can be no assurance, however, that coding errors or other defects will not
be discovered in the future as more testing is completed or new functionality
added. We currently are undertaking a systematic effort to identify any year
2000 compliance problems in all of the components of our e-messaging platform.
We believe that compliance testing will require approximately 150-200 hours and
intend to complete compliance testing and remediation efforts on or before
October 31, 1999. To date, we have incurred minimal expenses related to year
2000 compliance. However, we expect to incur approximately $100,000 to $200,000
of expenses over the next several months related to year 2000 compliance. We
currently are developing contingency plans to take effect in the event we do not
complete any necessary remediation efforts and to assist clients and customers
in the event we experience unexpected year 2000-related problems.
We rely on a number of software and communications systems provided by third
parties to operate our e-messaging platform. Any of these could contain code
which is not year 2000 compliant. These systems include server software used to
operate the network servers, software controlling routers, switches and other
components of the data network, disk management software used to control the
data disk arrays, firewall, security, monitoring and back-up software used by
us, as well as desktop PC applications software. In each case, we employ widely
available software applications from leading third party vendors, and expect
that such vendors will provide any required upgrades or modifications in a
timely fashion. However, if any third party software or communication systems
suppliers fail to provide year 2000 compliant versions of the software or system
components we rely upon, our operations, including our e-messaging platform,
could be disrupted. We have contacted each of our key suppliers to validate
their efforts to ensure that their software products and communication systems
are year 2000 compliant and will continue to monitor their efforts throughout
the course of this process.
Year 2000 compliance problems also could undermine the general
infrastructure necessary to support our operations. For instance, we depend on
ISPs to provide connections to the Internet and to customer information systems.
Any interruption of service from ISPs could result in a temporary interruption
of our e-messaging and other services. We have attempted to address this risk by
obtaining the same service capacity from multiple ISPs. In addition, we rely on
two third-party data centers to house some servers and communications systems.
Any interruption in the security, access, monitoring or power systems at the
third-party data centers could result in an interruption of services. Moreover,
it is difficult to predict what effects year 2000 compliance problems will have
on the integrity and stability of the Internet. If businesses and consumers are
not able to reliably access the Internet, or if the ISPs on which we rely fail
to provide us with uninterrupted service, our reputation could be harmed and the
demand for our services could decline, resulting in an adverse impact to our
business, financial condition and results of operations.
With respect to any particular customer, our ability to provide services to
that customer could be adversely affected if that customer fails to ensure that
its software systems are year 2000 compliant. Disruptions in the information
systems of
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significant customers could temporarily prevent such customers from accessing or
using our e-messaging platform, which could materially affect our operating
results. Our e-messaging platform is designed to interface with customer
databases and communications systems to retrieve relevant information from
customers' electronic commerce systems or customer databases and to allow
customers to independently control certain features of the service, including
the content of transmitted messages. We cannot assess or control the degree of
year 2000 compliance in our customers' information systems. To address the risk
of disruptions in customer information systems, we designed our e-messaging
platform to include redundant manual control features which can be used by such
customers. Nevertheless, certain customers may elect to discontinue use of the
e-messaging services until their internal information technology problems have
been alleviated, which would adversely affect our business, financial condition
and results of operations. The spending patterns of current or potential
customers may be affected by year 2000 issues as companies expend significant
resources to correct or update their systems for year 2000 compliance. Because
of these expenditures, our customers may have less money available to pay for
our services, which could have a material adverse affect on our business,
financial condition and results of operations.
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BUSINESS
COMPANY OVERVIEW
We are a leading provider of an integrated, comprehensive set of
permission-based e-messaging solutions. E-messaging is our term to describe our
suite of services that utilizes the medium of e-mail to develop and foster
permission-based relationships with our customers. Our e-messaging solutions,
available either on an outsourced-subscription basis or as in-house packaged
software, enable businesses to use e-messaging as a strategic tool to increase
sales, improve customer communication and develop long-term customer loyalty.
Specifically, our suite of services and products, including Internet-based
marketing, customer care, survey and information distribution solutions, allows
businesses to establish and enhance two-way customer dialogue across multiple
functions within the business enterprise, from marketing to sales to customer
service. By leveraging the cost-effective reach, flexibility and widespread
acceptance of e-mail, our solutions enable businesses to create, deliver and
continually refine targeted, permission-based e-messaging campaigns. Our expert
staff of client service professionals assists our clients in building their
businesses through the strategic implementation and use of our suite of service
applications.
Our clients cover a broad range of industry segments, including
Internet/e-commerce, publishing, computer hardware/software and financial
services. We currently provide e-messaging services to over 200 clients,
including America Online, Inc., Apple Computer, Inc., CMP Group, Inc., E*Trade
Securities, Inc., Microsoft Corporation and PeopleSoft, Inc. In addition, we
have sold our e-messaging products to over 4,000 customers.
INDUSTRY BACKGROUND
CHANGING BUSINESS ENVIRONMENT AND NEED TO FOSTER CUSTOMER RELATIONSHIPS
The dramatic growth of the Internet and the proliferation of e-mail has
changed the way businesses and customers interact. Prior to the advent of
e-mail, businesses relied primarily on in-person interaction and physical
proximity to the customer as well as techniques such as direct mail and
telemarketing to foster customer relationships. Such methods, however, vary in
their degree of effectiveness and often are characterized by high costs and slow
response times. In the online environment, competitors are only a mouse click
away, increasing the need to quickly and cost-effectively build and strengthen
customer relationships.
As a result, online businesses increasingly are in need of strategic
applications that enable them to expand their customer base, foster customer
loyalty and provide personalized, one-to-one communication. Providing a high
quality service online is challenging due to the rapidly evolving nature of the
Internet, shifts in customer demand and customers' sensitivity to uninvited
business solicitation. To date, many attempts to leverage the Internet and
e-mail as a business-to-customer communication medium have faltered because of
the widespread use of blanketed, uninvited e-mail, or SPAM, which many customers
view as invasive. In the Internet world, unsatisfied customers not only can
effortlessly turn to a competitor, but can easily turn the Internet into their
personal soapbox to criticize the company.
PERMISSION-BASED E-MAIL CAN BE A HIGHLY STRATEGIC TOOL FOR ONLINE BUSINESS
In contrast, permission-based, or "opt-in", e-mail is a highly reliable,
cost-effective and timely way for businesses to create a personal, two-way
dialogue with their customers. Forrester Research predicts that outsourced
e-mail messages will grow from three billion in 1998 to 250 billion in 2002.
While most e-mails sent today are simple in nature, the complexity and
functionality of e-mail is changing dramatically. For example, e-mail can be
used for a variety of highly strategic functions such as marketing, customer
service and transaction confirmations. E-mail functions can also be quickly
customized or adapted to allow businesses to target and shape their
communications to meet the rapidly changing needs of their customers. As
businesses and consumers grow more comfortable with conducting commerce over the
Internet, e-mail volume associated with business communication and e-commerce is
expected to grow even more quickly. The Gartner Group estimates that by 2001
businesses will receive 25% of all customer contacts and inquiries via e-mail
and web-based forms. Furthermore, Forrester Research predicts that by the end of
2001 the typical online consumer will participate in eight to ten
commerce-related exchanges via e-mail per week. As e-mail grows in popularity,
businesses will face the pressing challenge of using e-mail as a strategic tool
for building customer relationships and responding to large volumes of inbound
e-mail communications.
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EMERGENCE OF E-MESSAGING
E-messaging is our term to describe our suite of services that utilize the
medium of e-mail to develop and foster permission-based relationships with
customers. We believe customers are far more receptive to business'
communications using our "opt-in" driven approach, forming the foundation for
longer lasting and valuable customer relationships. E-messaging has numerous
strategic applications. For example, it may be used as a strategic marketing
tool whereby highly personalized and targeted messages can be sent to customers
informing them of a special promotion or sale. The functionality of e-messaging
also extends easily to a variety of other functions across the business
enterprise, from gathering key customer feedback in e-mail based surveys to
serving as a platform to provide customer service to distributing newsletters to
sending notification and confirmation of e-commerce transactions. Moreover,
businesses utilizing e-messaging are able to capture all the data generated via
these range of electronic communications, which provides a wealth of information
to better understand client needs and preferences for future interactions.
COMPLEXITY OF E-MESSAGING AND TREND TOWARDS COMPREHENSIVE OUTSOURCED
SERVICES
To create strong and effective e-messaging programs, businesses will need a
broad range of technology and strategic expertise to adapt and implement
effective solutions in today's rapidly changing business and regulatory
environment. We believe this will lead to an increase in the outsourcing of
e-messaging applications. Forrester Research predicts that outsourced e-mail
messages will grow from three billion in 1998 to 250 billion in 2002. In order
to effectively leverage e-messaging as a key competitive tool, businesses must
not only be able to gather information about customer preferences and needs, but
employ systems that are robust enough to seamlessly and quickly respond to such
data. The implementation of effective e-messaging systems requires substantial
hardware, software, technical and administrative resources. As e-mail grows in
volume and sophistication, the resources and expertise required to
cost-effectively implement, enhance and scale e-messaging applications increase
exponentially. Moreover, on a strategic front, the proliferation of blanketed
and uninvited e-mail has spurred a wave of legislative and industry-group action
to regulate the use of commercial, non-permissive e-mail, which complicates the
use of e-mail for commercial purposes. Because of the complexities of these
strategic and technical problems and the need to deploy a solution quickly and
cost-effectively, businesses increasingly seek to outsource their e-messaging
services to "one-stop" outsourced providers.
MESSAGEMEDIA SOLUTION
We are a leading provider of permission-based, comprehensive e-messaging
solutions. Our suite of services and products, including Internet-based
marketing, customer care, survey and information distribution solutions, enable
businesses to use e-messaging as a strategic tool to increase sales, improve
customer communication and develop long-term customer loyalty. Because
e-messaging is permission-based, customers are far more receptive to these
communications and grow to rely on e-messaging as a dynamic channel for
interacting with businesses. We deliver a comprehensive suite of service
applications that are available either on an outsourced-subscription basis or as
packaged software for in-house use. Key benefits of our e-messaging solution
include:
o Comprehensive Suite of E-Messaging Services - We provide a
comprehensive set of e-messaging solutions for businesses that seek to
increase sales, improve customer communication and develop long-term
customer loyalty. Our solutions are designed to meet the objectives of
businesses whether they require a comprehensive marketing and customer
service solution or a single e-messaging application. We strive to be
the leading provider of value-added e-messaging solutions and
continually enhance our service offerings through in-house development
efforts and strategic acquisitions.
o Targeted, Permission-Based Customer Dialogue - We provide businesses
with effective ways to communicate with their customers. Our solutions
allow businesses to utilize permission-based e-messaging to create an
immediate two-way dialogue with their customers. Because e-messaging is
invited and customized, unlike traditional unsolicited e-mail marketing
campaigns, we deliver a highly effective range of solutions for our
clients.
o Adaptive Solutions - We provide a dynamic and adaptive approach to
e-messaging that is the product of our industry experience and
established best practices. Our database-driven learning systems are
seamlessly integrated with each of our applications and services
allowing our clients, in conjunction with our expert client services
team, to customize solutions for individual customers and continually
refine their e-messaging campaigns to reflect real-time customer
behavior and preferences. Our proprietary database technology and our
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professional client services staff work together to develop
action-oriented data that provides critical information on the
effectiveness of past e-messaging campaigns, which is the cornerstone
for creating and implementing more successful future e-messaging
campaigns.
o Cost-Effective and Rapidly Deployable Outsourced Solution - Our
services allow businesses to focus on their core competencies and
reduce costs by eliminating the need to lease, buy or continually
upgrade existing software or maintain dedicated personnel to administer
an in-house solution. Our services enable our clients to effectively
compete in the rapidly evolving online marketplace by quickly supplying
them with the platform and expertise to integrate e-messaging
applications across the business enterprise.
o Scalable Technology Platform - Our e-messaging platform is based on a
highly scalable messaging architecture that allows clients to manage
large volumes of simple or complex customer communications. We have
designed our solution using open standards to allow for the integration
of additional service offerings developed by our in-house research and
development efforts or obtained through strategic acquisitions.
THE MESSAGEMEDIA STRATEGY
Our goal is to become the leading end-to-end outsourced provider of
e-messaging solutions for businesses that seek to enhance their customer
relationships online. In order to achieve our strategic objectives, we intend to
do the following:
EXPAND CUSTOMER BASE AND DEEPEN CURRENT RELATIONSHIPS
We intend to significantly expand our sales and marketing activities while
focusing on the top one-hundred potential clients in our target markets. As a
result, we plan to hire additional seasoned sales professionals with specific
expertise and contacts within our focused markets. Additionally, we intend to
deepen our relationships with our current "blue chip" clients through the sale
of additional value-added services and e-messaging applications. Moreover, we
plan to further penetrate the market by expanding our indirect sales channels by
teaming with leading distributors and marketing partners.
BROADEN OUR INDUSTRY LEADING SERVICE OFFERINGS
To maintain our leadership position, we intend to continually enhance our
e-messaging capabilities. We plan to develop additional value-added services,
internally or through acquisitions, that extend our relationships with current
clients, attract new clients and allow us to further differentiate us as a
leading comprehensive provider of e-messaging solutions.
EXTEND OUR BRAND AND SET THE INDUSTRY STANDARD FOR PERMISSION-BASED
E-MESSAGING
We intend to further establish our brand name recognition to businesses that
are building an online presence through aggressive public relations, mass market
advertising, industry events, website and Internet promotion and targeted
industry marketing. Additionally, we believe that taking a leadership position
in promoting industry standards for permission-based e-messaging will enhance
our brand recognition and solidify our industry-leading position.
PURSUE STRATEGIC ACQUISITIONS
We plan to strategically target companies in our market that will enable us
to (i) broaden our product and service offerings, (ii) expand our technology
platform, (iii) expand our client base or (iv) facilitate entry into new
geographic markets. For example, in August 1999, we acquired Revnet Systems and
Decisive Technology, significantly expanding our client base, as well as our
product and service offerings.
DEVELOP INTERNATIONAL PRESENCE
We believe there is a substantial opportunity for outsourced e-messaging
services in non-U.S. markets. To gain market presence and market share overseas,
we plan to develop international sales and distribution capabilities and
strategic relationships in key markets. Initially, we intend to focus our
international expansion in Europe.
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LEVERAGE OUR STRATEGIC RELATIONSHIP WITH SOFTBANK
In June 1998, we were recapitalized by SOFTBANK and affiliates, a leading
investor in the Internet sector, having made more than 100 investments in
Internet companies. Some of its investments include E-Loan, Inc., E*Trade
Securities, Inc., Interliant, Inc., Net2Phone, Inc., Yahoo!, Inc. and Ziff
Davis. We intend to leverage our strategic relationship with SOFTBANK through
introductions to companies within the SOFTBANK family of investments and to
capitalize on the expertise and advice of its partners with respect to building
e-businesses.
OUR SUITE OF OUTSOURCED SOLUTIONS AND SOFTWARE PRODUCTS
We offer a comprehensive suite of e-messaging solutions to businesses. Our
products are built on a scalable, web-based architecture designed to meet the
growth in Internet-based communications. Our products also utilize
standards-based technologies which facilitate integration with existing customer
applications.
OUTSOURCED SERVICES
We deliver e-messaging solutions on an outsourced service basis, whereby our
applications are managed by our professional staff for a monthly service fee.
Even though our applications are designed to work closely with one another as an
integrated solution, some clients may choose to subscribe to our applications
individually. Average revenue per client ranges from $5,000 to $90,000 per
month depending on application complexity and volume. Our solution set includes
the following applications: e-information distribution, e-message marketing,
e-customer care, e-commerce messaging and e-survey.
E-Information E-Message E-Customer E-Commerce E-Survey
Distribution Marketing Care Messaging
DATABASE SERVICES
IN-BOUND MESSAGING SERVICES
OUTBOUND MESSAGING SERVICES
These solutions implement the following core competencies:
o Outbound Messaging Services. We manage all logistics of e-messaging
delivery, from time-scheduled outbound message distribution to highly
interactive and event-driven communications, such as e-commerce transaction
confirmation. E-messages, with personalized content, can carefully be
targeted to segments of our clients' e-mailing list. Our technology also
will determine which format the e-mail reader uses in order to maximize the
visual impact of the sender's message. We provide reliable, large-scale
delivery of messages, personalized and customized to each of our clients'
customers, as well as sophisticated error-handling, or "bounce," processing
to ensure a clean and current customer e-messaging list.
o Inbound Messaging Services. We manage all logistics of e-mail response
processing from our clients' customers, including response validation,
response tracking, performance of client defined actions and automated
database updates. Our response-handling capabilities enable our clients to
engage in interactive, two-way marketing campaigns, entirely via e-mail. The
ability to process and respond to customers' inquiries improves the quality
of
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the customer relationship by ensuring our clients' ability to receive, sort
and respond to requests in a personalized and timely manner.
o Database Services. We track and review the success of current and past
e-messaging campaigns and deliver multiple offers to separately defined
customer groups. Such active and intelligent e-message monitoring allows our
clients to identify successful and unsuccessful strategies and refine their
campaigns in a proactive manner. All messaging activity is automatically
tracked and logged into our database, creating a clear history of all
customer actions to help resolve individual requests as well as total
campaign analysis. This detailed customer record provides a wealth of
information and enables our clients to fine-tune their direct marketing
efforts and increase the return on investment in future campaigns.
Through our experienced professional staff of client service
representatives, we deliver e-messaging services specifically tailored to each
client's business objectives. After the initial sale is made, we appoint an
account management team to act as the client's primary point of contact for all
relationship and campaign management issues. We provide end-to-end e-messaging
mailing and campaign management solutions, including creating a detailed
specification of customer needs, developing the web interfaces, customizing the
database, implementing project plans and campaign roll-out and conducting
post-mailing analysis. To provide our clients with the highest level of
reliability, we have a 24 hours per day, seven days per week operations command
center as part of our standard service offering which monitors our network for
reliability and performance.
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Leveraging our core competencies, we deliver the following e-messaging
solutions on an outsourced service basis:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
SOLUTION DESCRIPTION APPLICATIONS TYPICAL CUSTOMERS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
E-Information o Subscriber o Subscription o Magazine and Book
Distribution o Acquisition/Order Acquisition and Renewal Publishers
Processing; o Customized Content o Membership Organization
Subscription Delivery and Associates
Database Management o Newsletter or Periodic o Information Service
o Subscriber Profiling Information Delivery Companies
o Content Development o Event Driven o Research Companies
and Optimization Information Delivery o Corporations
o Content Distribution o Corporate Newsletters
- -------------------------------------------------------------------------------------------------------------
E-Message Marketing o List and Database o Marketing Promotions o Internet Infrastructure
Management o Up-Sell/Cross-Sell Companies (ISPs,
o One-to-One Campaigns Portals, Free-Mail)
Personalized o Follow-Up Offers o Direct Marketing
Promotional Companies
Campaigns o Catalogue Companies
o Segmentation and o E-Commerce based
Targeted Consumer Products
Promotional Companies
Campaigns o All other Companies
o Permission-Based Experimenting with
Promotional Online Marketing
Campaigns
o Order and Reject
Response
Handling/Routing
o Response Reporting
o Content Optimization
- -------------------------------------------------------------------------------------------------------------
E-Customer Care o Solicited/Unsolicited o E-Mail Customer Service o Magazine Publishers
Response Handling o E-Mail Technical Help o Newsletter Publishers
o Processing o Customer Relationship o Information Service
Unsubscribers Programs Companies
o Auto Responders o Loyalty Programs o Research Service
o Routing/Tracking Companies
o Corporations
- -------------------------------------------------------------------------------------------------------------
E-Commerce Messaging o Order Confirmations o E-Business Application o Financial Services Firms
o Shipping Notices o Any Company with
o Welcome Messages E-Business Transactions
- -------------------------------------------------------------------------------------------------------------
E-Survey o Datamart Management o Client Service o Any Company with
o Dynamic Survey o All Areas of the Internet Customers
o Customer Customer Experience
Intelligence o Complex Database
Marketing
o Employee Survey
o Post E-Transaction
Survey
o Product Surveys
- -------------------------------------------------------------------------------------------------------------
</TABLE>
OUR PACKAGED SOFTWARE SOLUTIONS
While our primary solution is an outsourced offering, we also offer software
solutions to clients desiring in-house e-messaging capabilities. Pricing for our
e-mail distribution software packages range from $35.95 for an entry level
PC-based e-mail distribution tool to up to $60,000 for comprehensive
server-based software. Additionally, we also market a desktop e-mail survey
package that lists for $2,500. While these software applications assist
businesses conducting basic e-mail campaigns, we believe that as our software
customers adopt more sophisticated e-messaging campaigns, many of these
customers will migrate to our outsourced solutions. For our software products,
we provide help desk support 24 hours per day, seven days per week.
Additionally, we provide installation and integration services on a billable
basis.
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CUSTOMERS AND TARGET MARKETS
We currently offer e-messaging services to many large volume users in
selected markets. Our clients cover a broad range of industry segments,
including Internet/e-commerce, publishing, computer hardware/software and
financial services. We currently provide e-messaging services to over 200
clients. The following is a representative list of our clients to whom we
provide e-messaging services:
<TABLE>
<CAPTION>
<S> <C>
INTERNET/E-COMMERCE FINANCIAL SERVICES
America Online, Inc. Charles Schwab & Co., Inc.
Attachmate Corporation Countrywide Credit Industries, Inc.
Digital Media Services E*Trade Securities, Inc.
Intuit Inc. First Credit Card Services USA, LLC
MapQuest.com, Inc.
Powerize.com USA OTHER INDUSTRIES
ZD Events, Inc.
Advanstar Communications
PUBLISHING ALC Interactive Media, a division of American
List Counsel, Inc.
ACC Communications, Inc. - Workforce Online Centrobe, an EDS Company
CMP Group, Inc. Direct Marketing Association-QB
Conde Nast Publications, Inc. Duke Communications, Inc.
Doubleday (BOL, Ltd.) Estee Lauder Companies, Inc.
FEDWeek, LLC Hearst Communications, Inc.
Helmers Publishing, Inc. Impulse Buy! Network
Lakewood Publications, Inc. iXL-San Francisco, Inc.
Net Library, Inc. Mirage Resorts, Incorporated
Penn Well Publishing Modem Poppe.Tyson/Starbucks
Penton Media, Inc. New York Yankees
Reader's Digest Association, Inc. Proxima Corporation
RealAge, Inc. Vertex, Inc.
Trans World Entertainment Corporation
COMPUTER HARDWARE/SOFTWARE
Apple Computer, Inc.
Compaq Computer Corporation
Microsoft Corporation
PeopleSoft, Inc.
Sony Corporation
</TABLE>
In addition, we have sold our e-messaging software products to over 4,000
customers.
Following is an example of e-messaging solutions we have provided to our
clients:
Intuit Inc. In February 1999, we provided Intuit with a strategy for
increasing response rates to their text formatted Quicken.com newsletter by
optimizing the e-mail delivery to a graphically enriched, or html, format and
converting customers to this format. Employing this strategy, the February issue
of the newsletter was sent to approximately 1.4 million customers via multi-part
alternative format, which submits both html and text formats to the customer.
This format allows any customer in the database to receive html if their e-mail
software is html compatible. The response rates of certain customer segments
which previously had received only text tripled, and Intuit has successfully
converted more than 33% of the Quicken.com customer list to html. Intuit now
mails both a text and html version of the newsletter on a monthly basis, and
continues to see strong response rates and results from the html version.
SALES AND MARKETING
SALES STRATEGY
Our sales efforts target all market segments through direct and indirect
channels. Our sales team typically markets our solutions to a combination of
dedicated information technology personnel and members of the senior management
team. We believe that as the e-messaging market evolves, our solutions will
increasingly impact our clients overall strategy and, as a result, we will focus
on targeting a client's senior management. We believe that we have developed a
set of "blue chip" clients who facilitate our sales efforts by acting as well
known references.
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We have a dedicated group within our client services organization
responsible for retaining and increasing usage of our services by existing
customers. Our client services professionals are highly effective at helping to
manage relationships and selling additional services to existing clients when
the need arises.
We maintain our own direct sales force to introduce and educate prospective
customers and partners about our services. The national accounts team focuses on
our top 100 sales targets. A regional field team focuses on the next 1000
prospects. The general market is served by our packaged solution offering and
indirect sales channels. As of August 17, 1999, we had 18 account executives in
the direct sales group, and we plan to significantly expand this group in the
next 12 months. We currently have sales offices in San Francisco, California,
New York, New York, Boston, Massachusetts, Atlanta, Georgia, Chicago, Illinois,
Los Angeles, California, Mountain View, California, Boulder, Colorado and
Huntsville, Alabama.
We plan to expand internationally and into smaller markets. To establish a
presence and penetrate overseas and smaller markets, we plan to develop indirect
sales and distribution capabilities and strategic relationships. Initially, our
international activities will focus on the European market.
MARKETING STRATEGY
We plan to execute a comprehensive strategic marketing plan to achieve
strong brand identity and strategic product positioning, as well as delivery of
marketing materials and selling tools designed to advance the sales prospect
quickly through the sales cycle. We intend to gain market visibility of our
comprehensive e-messaging solutions through targeted advertising campaigns,
tradeshows and corporate event participation, direct marketing initiatives,
marketing through a world-class website and to leverage market visibility
through the joint marketing efforts of strategic alliances and partnerships.
ENGINEERING, TECHNOLOGY AND OPERATIONS
E-MAIL DISTRIBUTION AND PROCESSING
Our advanced, proprietary technologies enable us to deliver large volumes of
personalized e-mail for our clients. The design and application of our
technology allows us to create customized e-messages from user-defined
templates, allowing either the client or our own staff to define the level of
customization. In addition, our technology enables high volumes of outbound
e-mail on the Internet, volumes that are today very difficult to achieve when
relying on third party or industry standard solutions. We have designed very
stable and highly scalable architecture that can be distributed over the
network, providing for a high degree of availability and reliability.
Our service and product offerings provide our clients with the ability to
send e-messages based on either plain text, or the Web's standard HyperText
Markup Language, allowing for the inclusion of color, graphics and other
advertising tools and materials. Our technologies enable a highly automated
e-messaging process, with complete management of outbound messages, inbound
responses and bounced messages. We also offer a variety of reporting and
management tools.
CUSTOM E-MAIL RESPONSE PROCESSING
The application of our technologies enable the ability to automatically and
efficiently handle high volumes of inbound responses to e-mail campaigns,
customer support questions or subscribe/unsubscribe requests. Our ResponseNow
product is a highly scalable technology that automatically can process incoming
messages, route them to the appropriate location, process database update
transactions and formulate pre-defined answers and reply back to the sender.
A-35
<PAGE> 40
SURVEY PROCESSING
We offer our clients the ability to gather information from their customers
in the form of e-mail or web-based surveys. Our technologies and products allow
us to provide the client with a secure and customized web site that can capture
survey information. This data is then stored in a proprietary database for
analysis and reporting. We offer the client a variety of reports via the web, as
well as many customized analytical reports and a variety of research and
technology intensive data analysis processes.
DATA AND NETWORK CENTERS
We have multiple data centers and Internet connection points to ensure that
we can continuously and reliably send and receive e-mail and process web surveys
for our clients. Internal data centers are located in our Boulder, Colorado,
Huntsville, Alabama and Mountain View, California offices, and we have two
co-location facilities, one in Denver, Colorado and the other in Santa Clara,
California. These co-location sites provide highly reliable and secure points of
operation and network connection. They each provide full security, air and power
conditioning and backup generators. Our own sites are connected to the
co-location sites with high-speed telecommunication circuits, and we maintain
services from three different ISP's for redundancy. Capacity easily can be added
at either of the co-location facilities, in the form of additional servers as
well as Internet connections and network bandwidth. Because of our diverse
geographical locations, we are able to offer highly reliable network services,
not impacted by a single or geographically focused natural disaster.
RESEARCH, DEVELOPMENT, AND ENGINEERING
Our research, development and engineering activities are focused primarily
on the design, development and enhancement of our e-messaging services, as well
as on increasing the capacity, reliability and security of existing products and
services. We believe that significant research, development, and engineering
expenditures in the future will be required in order for us to remain
competitive.
COMPETITION
We know of no competitor that offers the full range of solutions provided by
us. However, the market for our products and services is intensely competitive.
There are no substantial barriers to entry into our business, and we expect that
established and new entities will enter the market for e-messaging services and
interactive Internet communications in the near future.
Our principal competitors in the e-messaging services arena include
providers of e-mail based services such as 24x7, Inc., Axciom, Inc., Cyber Data
Systems, Inc., DoubleClick, Inc., eGain Communications Corporation,
EmailChannel, Inc., Exactis.com, Inc., Experian, Inc., Kana Communications,
Inc., MarketHome, Inc., MatchLogic, Inc., Mustang Software, Inc., NetCreations,
Inc., PostX Corporation and ReplyNet, Inc. We also compete with BroadVision,
Inc., Digital Impact, E-Care Group and Mypoints.com, Inc. for one-to-one
marketing.
We may experience additional competition from ISPs and other large
established businesses that enter the market for e-messaging services. Companies
such as ADVO Inc., America Online, Inc., AT&T, IBM Corporation, Harte-Hanks,
Inc., Hewlett-Packard Company, Integrion Financial Network LLC, The Interpublic
Group of Companies, Inc., Microsoft Corporation, Netscape Communications and
Foote Cone & Belding, some of whom are current clients of ours, which possess
large, existing customer bases, substantial financial resources and established
distribution channels could develop, market or resell a number of messaging
services.
We believe that our service solution competes favorably with that of other
providers with respect to the following factors:
o ability to handle large volumes of e-mail and ability to scale;
o comprehensive service offerings and fully-featured technology;
o strong focus on permission-based e-messaging; and
o strength of inbound/outbound messaging capabilities and database
expertise.
A-36
<PAGE> 41
However, despite our competitive positioning, we may not be able to compete
successfully against current and future competitors, and competitive pressures
we face could have a material adverse effect on our business, operating results
and financial condition.
Many of our current and potential competitors have longer operating
histories, greater name recognition, larger customer bases, more diversified
lines of products and services and significantly greater resources than we do.
These competitors may be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and make more attractive offers to
potential customers. In addition, many of our current or potential competitors
have broad distribution channels that may be used to bundle competing products
or services directly to end-users or purchasers. If these competitors bundle
competing products or services for their customers, the demand for our products
and services could substantially decline. As a result of the above factors, we
cannot assure you that we will compete effectively with current or future
competitors or that competitive pressures will not have a material adverse
effect on our business, financial condition and results of operations.
INTELLECTUAL PROPERTY
MessageMedia, DecisionSource, ResponseNow and Revnet are among the
trademarks or service marks owned by us, and First Virtual is one of the
registered marks owned by us. This Current Report on Form 8-K/A also makes
references to trademarks of other companies which are the properties of their
respective owners.
We rely on a combination of trade secret, copyright and trademark laws,
nondisclosure agreements and other contractual provisions and technical measures
to protect our proprietary rights. We believe that, due to the rapid pace of
technological innovation for Internet products, our ability to establish and
maintain a position of technology leadership in the industry depends more on the
skills of our development personnel than upon the legal protections afforded our
existing technology. There can be no assurance that trade secret, copyright and
trademark protections will be adequate to safeguard the proprietary software
underlying our products and services, or that our agreements with employees,
consultants and others who participate in the development of our software will
not be breached, that we will have adequate remedies for any breach or that our
trade secrets will not otherwise become known. Moreover, notwithstanding our
efforts to protect our intellectual property, competitors may be able to develop
functionally equivalent e-messaging technologies without infringing any of our
intellectual property rights. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use
products or technology that we consider proprietary, and third parties may
attempt to develop similar technology independently. In addition, effective
protection of intellectual property rights may be unavailable or limited in
certain countries. Accordingly, there can be no assurance that our means of
protecting our proprietary rights will be adequate or that our competitors will
not independently develop similar technology.
As the volume of Internet commerce increases, and the number of products and
service providers that support Internet commerce increases, we believe that
Internet commerce technology providers may become increasingly subject to
infringement claims. There can be no assurance that infringement claims will not
be filed by plaintiffs against us in the future. For example, on October 19,
1998 Exactis.com, Inc. filed a complaint against our subsidiary Epub in the
Federal District Court of Colorado. The complaint alleges infringement of a
patent held by Exactis.com, Inc. and seeks injunctive relief and unspecified
damages. Any such claims, with or without merit, could be time consuming, result
in costly litigation, disrupt or delay the enhancement or shipment of our
products and services or require us to enter into royalty or licensing
agreements. These royalty or licensing agreements, if required, may not be
available on terms acceptable or favorable to us, which could have a material
adverse effect on our business, financial condition and results of operations.
In addition, we may initiate claims or litigation against third parties for
infringement of our proprietary rights or to establish the validity of our
proprietary rights. For example, on October 29, 1998 we filed a complaint in the
U.S. District Court for the Southern District of California against Exactis.com,
Inc. The complaint alleges infringement of a patent held by us and seeks
injunctive relief and unspecified damages. Litigation to determine the validity
of any claims could result in significant expense to us and divert the efforts
of our technical and management personnel from productive tasks, whether or not
such litigation is determined in our favor. In addition, patent litigation such
as the Exactis.com, Inc. lawsuit often gives rise to counterclaims by the
defendants, which could include challenges to the validity of patents held by
us. In the event of an adverse ruling in any such litigation, we may be required
to pay substantial damages, discontinue the use and sale of infringing products,
expend significant resources to develop non-infringing technology or obtain
licenses to infringing technology. The failure by us to develop or license a
substitute technology could have a material adverse effect on our business,
financial condition and results of operations.
A-37
<PAGE> 42
GOVERNMENT REGULATION
A number of states have adopted laws restricting the distribution of SPAM.
We actively monitor such legislation and regulatory developments to minimize the
risk of our participation in activities that violate anti-SPAM legislation.
Additionally, a number of legislative and regulatory proposals are under
consideration by federal and state lawmakers and regulatory bodies and may be
adopted with respect to the Internet. Some of the issues that such laws or
regulations may cover include user privacy, obscenity, fraud, pricing and
characteristics and quality of products and services. The adoption of any such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the projected demand for our products and services or increase our cost
of doing business. Moreover, the applicability to the Internet of existing
United States and international laws governing issues such as property
ownership, copyright, trade secret, libel, taxation and personal privacy is
uncertain and developing. Any new legislation or regulation, or application or
interpretation of existing laws, could have a material adverse effect on our
business, results of operations, financial condition and prospects.
EMPLOYEES
As of August 17, 1999, we had a total of 208 full-time employees and
part-time employees. Of these employees, 63 were in research, development and
engineering, 71 were in client services, 38 were in marketing and sales and 36
performed general and administrative functions.
Our future success depends to a significant extent upon the continued
service of our key technical and senior management personnel and upon our
ability to attract and retain additional highly skilled, creative, technical,
financial and strategic marketing personnel. Competition for such personnel is
intense. There can be no assurance that we will be successful in attracting and
retaining such personnel, and the failure to do so could have a material adverse
effect on our business. None of our employees are represented by a labor union.
We never have experienced a work stoppage and believe that our relationships
with our employees are good.
FACILITIES
Our corporate facility consists of approximately 27,200 square feet of
leased space in Boulder, Colorado. This primary facility lease expires on
November 30, 2000. We lease additional space in San Diego, California and
Denver, Colorado for our computer processing center. The San Diego computer
processing center lease expires in October 1999 and the Denver computer
processing center lease expires in February 2002. Our intention is to move out
of our San Diego processing facility once a new processing center is established
in Colorado. In addition, we lease facilities in San Francisco, California, New
York, New York, Boston, Massachusetts, Atlanta, Georgia, Chicago, Illinois, Los
Angeles, California, Mountain View, California and Huntsville, Alabama.
LEGAL PROCEEDINGS
On October 19, 1998, Exactis.com, Inc., a Delaware Corporation, filed a
complaint against Epub, which is now our subsidiary, in the U.S. District Court
for the District of Colorado. The complaint alleges infringement of a patent
held by Exactis.com, Inc. The complaint seeks injunctive relief and unspecified
damages.
On October 29, 1998, we filed a complaint in the U.S. District Court for the
District of Southern California against Exactis.com, Inc. The complaint alleges
infringement of U.S. Patent No. 5,826,241 which is held by us. The complaint
seeks injunctive relief and unspecified damages.
A-38
<PAGE> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1* Agreement and Plan of Merger and Reorganization dated July 22,
1999 among the Registrant, Revnet Systems, Inc. and MM1
Acquisition Corporation.
2.2* Agreement and Plan of Merger and Reorganization dated July 27,
1999 among the Registrant, Decisive Technology Corporation. and
MM2 Acquisition Corporation.
4.1* Registration Rights Agreement among the Registrant, the
Securityholders' Agent and James Clayton
4.2* Registration Rights Agreement among the Registrant, the
Securityholders' Agent and William Blair & Company, LLC
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of PricewaterhouseCoopers LLP
99.1* Press Release dated August 10, 1999
99.2* Press Release dated August 17, 1999
99.3 Revnet Systems, Inc. Financial Statements
99.4 Decisive Technology Corporation Financial Statements
99.5 MessageMedia, Inc., Revnet Systems, Inc. and Decisive Technology
Corporation Pro Forma Combined Financial Information
</TABLE>
* Previously filed as exhibit to the Registrant's Current Report
on Form 8-K, filed with the SEC on August 24, 1999.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-86731 and No. 333-81081) and on Form S-8 (No.
333-86735 and No. 333-81089) of MessageMedia, Inc. of our report dated June 15,
1999, except for note 12 as to which the date is August 9, 1999 relating to the
financial statements of Revnet Systems, Inc., which appears in the Current
Report on Form 8-K/A of MessageMedia, Inc. dated September 22, 1999.
PricewaterhouseCoopers LLP
Birmingham, Alabama
September 22, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-86731 and No. 333-81081) and on Form S-8 (No.
333-86735 and No. 333-81089) of MessageMedia, Inc. of our report dated August
16, 1999 relating to the financial statements of Decisive Technology
Corporation, which appears in the Current Report on Form 8-K/A of MessageMedia,
Inc. dated September 22, 1999.
PricewaterhouseCoopers LLP
San Jose, California
September 22, 1999
<PAGE> 1
EXHIBIT 99.3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Revnet Systems, Inc.
In our opinion, the accompanying balance sheets and related statements of
operations, changes in shareholders' deficit, and cash flows present fairly, in
all material respects, the financial position of Revnet Systems, Inc. (the
Company) 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. 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 which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 12, the Company was sold to MessageMedia, Inc. on August 9,
1999.
PricewaterhouseCoopers LLP
Birmingham, Alabama
June 15, 1999, except for Note 12,
as to which the date is August 9, 1999.
<PAGE> 2
REVNET SYSTEMS, INC.
BALANCE SHEETS
December 31, 1997, 1998, and June 30, 1999
<TABLE>
<CAPTION>
JUNE 30,
1999
1997 1998 (UNAUDITED)
----------- ----------- -----------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 60,231 $ 41,981 $ 289,195
Accounts receivable, trade - less allowance
for doubtful accounts of $5,000, $70,000, and
$73,779 in 1997, 1998, and June 30, 1999, respectively 43,778 405,002 651,966
Other current assets 2,859 892 4,465
----------- ----------- -----------
Total current assets 106,868 447,875 945,626
----------- ----------- -----------
Property and equipment, net 37,473 88,030 154,011
----------- ----------- -----------
Total assets $ 144,341 $ 535,905 $ 1,099,637
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Credit facility $ 496,788 $ 583,000 $ 766,000
Trade accounts payable 87,360 70,027 252,458
Cash overdrafts 4,190 -- --
Accrued liabilities:
Sales tax -- 130,000 258,000
Commissions, salaries, and benefits 29,139 99,338 165,019
Vacation 5,731 19,772 34,987
Interest 16,756 18,474 27,591
Deferred revenue 22,744 130,113 283,720
Liability for sales returns 14,000 50,000 70,000
----------- ----------- -----------
Total current liabilities 676,708 1,100,724 1,857,775
----------- ----------- -----------
Accrued salary 222,000 222,000 222,000
Note payable 50,000
Note payable - shareholder 195,000 214,988 214,988
----------- ----------- -----------
Total liabilities 1,143,708 1,537,712 2,294,763
----------- ----------- -----------
Shareholders' deficit:
Nonvoting common stock, $.001 par value, 1,000,000
shares authorized, 0 shares issued
Common stock, $.001 par value, 10,000,000 shares
authorized, 4,318,104, 5,249,629, and 5,437,000
shares issued in 1997, 1998, and June 30, 1999, respectively 4,318 5,250 5,437
Paid-in capital 1,435,524 2,849,986 4,517,177
Deferred financing cost (38,758) (22,752) --
Deferred compensation -- -- (1,122,459)
Accumulated deficit (2,400,451) (3,834,291) (4,595,281)
----------- ----------- -----------
Total shareholders' deficit (999,367) (1,001,807) (1,195,126)
----------- ----------- -----------
Total liabilities and shareholders' deficit $ 144,341 $ 535,905 $ 1,099,637
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 3
REVNET SYSTEMS, INC.
STATEMENTS OF OPERATIONS
for the years ended December 31, 1996, 1997, and 1998
and for the six months ended June 30, 1998 and 1999
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1999
1996 1997 1998 (UNAUDITED) (UNAUDITED)
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues $ -- $ 76,318 $ 1,113,035 $ 415,454 $ 1,418,622
----------- ----------- ----------- ----------- -----------
Cost of revenues -- 39,436 142,861 39,148 116,541
Marketing and sales 245,535 425,932 990,303 303,236 809,792
Research and development 223,919 271,308 295,037 96,323 206,130
General and administrative expense 298,391 397,298 986,968 470,614 969,749
Depreciation and amortization 9,479 16,995 31,679 13,800 22,667
----------- ----------- ----------- ----------- -----------
Operating loss (777,324) (1,074,651) (1,333,813) (507,667) (706,257)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest income 2,756 2,080 7,172 6,355 1,062
Interest expense (303) (77,561) (106,790) (60,043) (55,795)
Miscellaneous expense, net 2,072 (13,585) (409) (159) --
----------- ----------- ----------- ----------- -----------
Total other income (expense) 4,525 (89,066) (100,027) (53,847) (54,733)
----------- ----------- ----------- ----------- -----------
Net loss $ (772,799) $(1,163,717) $(1,433,840) $ (561,514) $ (760,990)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
REVNET SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
for the years ended December 31, 1996, 1997, and 1998, and
for the six months ended June 30, 1999
<TABLE>
<CAPTION>
DEFERRED ADDITIONAL
COMMON COMMON FINANCING DEFERRED PAID-IN ACCUMULATED
SHARES STOCK COST COMPENSATION CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 3,308,000 $ 3,308 $ -- $ -- $ 320,393 $ (463,935) $ (140,234)
Issuance of common stock 790,000 790 -- -- 799,311 800,101
Net loss for year -- -- -- -- -- (772,799) (772,799)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 4,098,000 4,098 -- -- 1,119,704 (1,236,734) (112,932)
Issuance of common stock 135,104 135 -- -- 184,865 -- 185,000
Stock based compensation 80,000 80 -- -- 51,953 -- 52,033
Exercise of stock options 5,000 5 -- -- 1,486 -- 1,491
Stock options issued for debt
guarantees (see Note 7) -- -- (77,516) -- 77,516 -- --
Deferred financing cost
amortization -- -- 38,758 -- -- -- 38,758
Net loss for year -- -- -- -- -- (1,163,717) (1,163,717)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 4,318,104 4,318 (38,758) -- 1,435,524 (2,400,451) (999,367)
Issuance of common stock 834,525 835 -- -- 1,250,955 -- 1,251,790
Stock based compensation 45,000 45 -- -- 67,455 -- 67,500
Note payable retired through
issuance of common
stock 50,000 50 -- -- 49,950 -- 50,000
Exercise of stock options 2,000 2 -- -- 598 -- 600
Stock options issued for debt
guarantees (see Note 7) -- -- (45,504) -- 45,504 -- --
Deferred financing cost
amortization -- -- 61,510 -- -- -- 61,510
Net loss for year -- -- -- -- -- (1,433,840) (1,433,840)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 5,249,629 5,250 (22,752) -- 2,849,986 (3,834,291) (1,001,807)
Exercise of stock options 187,371 187 -- -- 363,691 -- 363,878
Deferred financing cost
amortization -- -- 22,752 -- -- -- 22,752
Stock options issued resulting
in deferred compensation -- -- -- (1,303,500) 1,303,500 -- --
Deferred compensation
expense -- -- -- 181,041 -- -- 181,041
Net loss -- -- -- -- -- (760,990) (760,990)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1999
(unaudited) $ 5,437,000 $ 5,437 $ -- $(1,122,459) $ 4,517,177 $(4,595,281) $(1,195,126)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
REVNET SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1997, and 1998, and
for the six months ended June 30, 1998 and 1999
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1999
1996 1997 1998 (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (772,799) $(1,163,717) $(1,433,840) $ (561,514) $ (760,990)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 9,479 16,995 31,679 13,800 22,667
Provision for losses on accounts
receivable -- 5,000 20,000 22,100 3,779
Interest accrued on shareholder loan -- -- 19,988 19,988 --
Stock based compensation -- 52,033 67,500 67,500 --
Deferred finance cost amortization 38,758 61,510 38,758 22,752
Compensation from stock options -- -- -- -- 181,041
(Increase) decrease in:
Accounts receivable -- (48,778) (381,224) (193,347) (250,743)
Other current assets (37,673) 34,994 1,919 (1,071) (3,573)
Increase (decrease) in:
Trade accounts payable 3,071 55,331 (17,333) 11,421 182,431
Accrued liabilities 17,469 61,989 251,958 52,702 302,863
Deferred revenue -- 22,744 107,369 (3,930) 88,757
----------- ----------- ----------- ----------- -----------
Net cash used in operating
activities (780,453) (924,651) (1,270,474) (533,593) (211,016)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (19,064) (24,096) (82,188) (66,926) (88,648)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities (19,064) (24,096) (82,188) (66,926) (88,648)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from credit facility -- 496,788 583,000 -- 183,000
Repayment of credit facility -- -- (496,788) (496,788) --
Cash overdraft -- 4,190 (4,190) -- --
Proceeds from issuance of common stock 800,101 185,000 1,251,790 1,249,990 --
Proceeds from exercise of stock options -- 1,491 600 -- 363,878
Proceeds from issuance of note payable 122,000 195,000 -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities 922,101 882,469 1,334,412 753,202 546,878
----------- ----------- ----------- ----------- -----------
Net change in cash and
cash equivalents 122,584 (66,278) (18,250) 152,683 247,214
Cash and cash equivalents, beginning of year 3,925 126,509 60,231 60,231 41,981
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of year $ 126,509 $ 60,231 $ 41,981 $ 212,914 $ 289,195
=========== =========== =========== =========== ===========
Supplemental disclosure:
Interest paid $ 303 $ 22,047 $ 23,576 $ 11,400 $ 24,000
=========== =========== =========== =========== ===========
Noncash financing activity:
Issuance of note payable -
Shareholder as an interest note -- -- $ 19,988 $ 19,988 --
=========== =========== =========== =========== ===========
Note payable retired through
Issuance of common stock -- -- $ 50,000 $ 50,000 --
=========== =========== =========== =========== ===========
Issuance of common stock
as stock based compensation -- $ 52,033 $ 67,500 $ 67,500 --
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
REVNET SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Revnet Systems, Inc. (the Company) was
incorporated on March 18, 1994 under the laws of the State of Alabama.
The Company primarily develops and markets software and services for
the management of internet communications. The Company's products and
services are designed to manage e-mail lists for firms involved in
electronic commerce on the internet, as well as for associations,
universities, and governments. The Company also provides software and
services that enable interactive e-mail discussion groups. The Company
is headquartered in Huntsville, Alabama.
INTERIM RESULTS (UNAUDITED) - The interim financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and, therefore, do not
include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, these statements have been prepared on the
same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring accruals, that are
necessary for the fair statement of results for the unaudited interim
periods. The operating results for the interim period are not
necessarily indicative of the results to be expected for a full fiscal
year or for any future periods.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost, less
accumulated depreciation. Depreciation is computed using primarily the
double declining balance method over the estimated useful lives of the
assets which generally range from 3 to 7 years. Maintenance and repairs
are charged to expense as incurred. Upon sale, retirement, or other
disposition of these assets, the cost and related accumulated
depreciation are removed from the respective accounts, and any gain or
loss is included in net income.
SOFTWARE DEVELOPMENT COSTS - The Company capitalizes certain internal
software development costs when incurred upon the establishment of
technological feasibility. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized
software development costs require considerable judgment by management
with respect to certain external factors including, but not limited to,
technological feasibility, anticipated future gross revenues, estimated
economic life and changes in software and hardware technologies. At
December 31, 1998, no internal software development costs have been
capitalized because anticipated future gross revenues may not support
recoverability.
DEFERRED REVENUE AND REVENUE RECOGNITION - Deferred revenue arises as a
normal part of business from advance payments for service contracts.
Revenue attributable to product service agreements and maintenance
contracts is recognized on a straight-line basis over the term of the
respective agreement. The Company records revenue attributable to
software product sales upon shipment of the related products, net of
any discounts. No significant post-shipment obligations exist for the
Company's software sales.
LIABILITY FOR SALES RETURNS - The Company's sales generally include a
90-day limited warranty. The liability for sales returns is
management's estimate of the Company's liability for such sales returns
on sales made by the Company.
<PAGE> 7
REVNET SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
expensed as incurred.
ADVERTISING EXPENSE - Advertising costs are expensed as incurred.
Advertising expense totaled approximately $118,000, $148,000, and
$173,000 for the years ended December 31, 1996, 1997, and 1998,
respectively.
ACCOUNTING FOR INCOME TAXES - On January 1, 1998, the Company elected
to terminate its subchapter S Corporation tax status. Deferred income
taxes are recognized for tax consequences in future years of temporary
differences between the tax bases of assets and liabilities and their
financial reporting amounts at year end. The amounts recognized are
based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of revenues
and expenses. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997
and 1998, and June 30, 1999:
<TABLE>
<CAPTION>
JUNE 30,
1999
1997 1998 (UNAUDITED)
-------- -------- -----------
<S> <C> <C> <C>
Equipment $ 74,082 $156,269 $244,917
Furniture 7,309 7,309 7,309
-------- -------- --------
81,391 163,578 252,226
Less accumulated depreciation 43,918 75,548 98,215
-------- -------- --------
$ 37,473 $ 88,030 $154,011
======== ======== ========
</TABLE>
3. CREDIT FACILITY AND NOTE PAYABLE
The Company has a revolving bank line of credit that provides for
borrowings up to $660,000, and was repaid on August 9, 1999. Pursuant
to the agreement, the Company was required to provide the bank with
personal guarantees acceptable to the bank in an aggregate amount equal
to or exceeding the outstanding amount under the loan at all times. At
December 31, 1998 and June 30, 1999, guarantees in the amount of
$645,000 had been provided under this credit facility. Interest accrues
at 9.00% payable monthly. The Company's assets are provided as
collateral for these borrowings. The unpaid principal balance at
December 31, 1997 and 1998, and June 30, 1999 was $496,788, $583,000,
and $603,000 (unaudited), respectively.
During the year ended December 31, 1996, the Company entered into a
$50,000 non-interest bearing note payable. During 1998, the note
payable was retired through the issuance of common stock.
<PAGE> 8
REVNET SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
4. OPERATING LEASES
The Company leases office space and certain equipment under various
noncancelable operating leases with terms between one and five years,
expiring between 1999 and 2003. Rental expense was $32,953, $47,120,
and $47,710 for the years ended December 31, 1996, 1997, and 1998,
respectively. Future minimum payments under these operating leases are
as follows:
<TABLE>
Years ending December 31:
<S> <C>
1999 $ 78,028
2000 59,235
2001 5,339
---------
$ 142,602
=========
</TABLE>
Included in the future minimum payments above is a building lease with
a monthly rental payment of $5,660 expiring on September 30, 2000. The
Company can terminate the lease by providing sixty days written notice.
5. CONTINGENCIES
The Company has a contingent liability arising from pending litigation
in which a third party contends that the Company has infringed a patent
belonging to the third party. After extensive review of the claims at
issue, management does not believe that any of its products are covered
by any valid claim of the third party's patent. As a result, it is
management's opinion that the probable resolution of such contingencies
will not materially affect the financial position, results of
operations, or cash flows of the Company. The Company is not aware of
any other pending or threatened litigation matter that could have a
material adverse affect on the Company's business, operations,
financial condition, or cash flows.
<PAGE> 9
REVNET SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
6. EMPLOYEE BENEFIT PLAN
Substantially all of the Company's eligible full-time employees
participate in a Company sponsored defined contribution 401(k) profit
sharing plan. Under the plan, employees may elect to defer up to
fifteen percent (15%) of their salary, subject to Internal Revenue
Service limits. The Plan also allows for the Company to make a
discretionary profit sharing contribution or a discretionary matching
contribution. The matching contribution is based on a percentage of the
employees pretax contribution. The profit sharing contribution is
allocated to employees based on their eligible salary as defined by the
plan. The Company made no contributions to the plan during the years
ended December 31, 1996, 1997, and 1998.
7. STOCKHOLDERS' EQUITY
STOCK OPTIONS FOR LOAN GUARANTEES - In consideration of personal
guarantees of a line of credit agreement entered into by the Company on
May 23, 1997, a Stock Option Agreement (1997 Agreement) was entered
into with the guarantors whereby each guarantor was granted an option
to purchase one share of common stock at an exercise price of $1.50 per
share for each $1.50 guaranteed by the respective guarantor. The number
of shares authorized under the 1997 Agreement is limited by the maximum
line of credit extended. A total of 317,983 options were granted under
the 1997 Agreement, become exercisable immediately, and expire three
years from the date of grant. Based upon the fair value of the options
at the date of grant using an option pricing model, the Company
recorded deferred financing cost at the date of grant of $77,516 which
is amortized over the one year term of the line of credit on a
straight-line basis. The unamortized deferred financing cost is
included in shareholders' deficit in the accompanying balance sheet.
In consideration of a personal guarantee of a line of credit agreement
entered into by the Company on July 2, 1998, a Stock Option Agreement
(1998 Agreement) was entered into with the guarantors whereby each
guarantor was granted an option to purchase one share of common stock
at an exercise price of $1.50 per share for each $1.50 guaranteed by
the respective guarantor. The number of shares authorized under the
1998 Agreement is limited by the maximum line of credit extended. A
total of 186,666 options were granted under the 1998 Agreement, become
exercisable immediately, and expire three years from the date of grant.
Based upon the fair value of the options at the date of grant using an
option pricing model, the Company recorded deferred financing cost at
the date of grant of $45,504 which is amortized over the one year term
of the line of credit on a straight-line basis. The unamortized
deferred financing cost is included in shareholders' deficit in the
accompanying balance sheet.
STOCK OPTION PLANS - In October 1994, the Company adopted an Employee
Incentive Stock Option Plan (1994 Plan) designed to attract, motivate,
and retain key employees. The 1994 Plan authorizes the issuance of up
to 480,000 shares of common stock. In May 1997, the Company increased
the number of authorized shares under the 1994 Plan from 480,000 common
shares to 1,080,000 common shares. Options granted under the 1994 Plan
become exercisable two years after the date of grant and expire five
years after the date of grant.
Effective April 1, 1997, the Company adopted an Employee Incentive
Stock Option Plan (1997 Plan) for certain key employees, under which
400,000 shares of common stock were reserved for issuance. Options
granted under the 1997 Plan vest based on cumulative gross revenue
during the vesting period as defined by the Plan and terminate after
five years from the date of grant.
The Company adopted a Director's Stock Option Plan (Director's Plan)
effective September 1996, under which 30,000 shares of common stock
were authorized. Options granted under
<PAGE> 10
REVNET SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
the Director's Plan become exercisable immediately and expire three
years from the date of grant.
In connection with the Private Offering Memorandum (Offering) dated
October 31, 1997, the Company entered into a Stock Option Agreement
(Private Offering Agreement) whereby each investor was granted an
option to purchase one share of common stock at an exercise price of
$2.50 for each share of common stock purchased under the Offering.
Options granted under the Private Offering Agreement total 939,993,
become exercisable immediately and expire three years from the date of
grant.
On February 1, 1999, the Company granted 1,185,000 nonqualified stock
options to certain members of management at an exercise price of $0.40
per share. The fair value of the options on the date of grant as
determined by management was $1.50 per share. The options vest over a
two and one-half year period, with 50% of options vesting over the
first eighteen months and 50% vesting over the following twelve months.
On February 1, 1999, the Company recorded deferred compensation expense
for the difference between the fair value of the options and the
exercise price at the date of grant. The deferred compensation expense,
which is included in shareholders' deficit, will be amortized over the
stock option vesting period.
<PAGE> 11
REVNET SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Option activity under all stock option plans combined is presented in
the table below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF RANGE OF EXERCISE
OPTIONS EXERCISE PRICES PRICE
------------- -------------------- -----------------
<S> <C> <C> <C>
Options outstanding, December 31, 1995 165,000 $ .25 $ .25
Options granted 80,000 $ .30 - $1.00 $ .53
---------
Options outstanding, December 31, 1996 245,000 $ .25 - $1.00 $ .29
Options granted 510,000 $1.00 - $1.50 $ 1.50
Options exercised (5,000) $ .30
---------
Options outstanding, December 31, 1997 750,000 $ .25 - $1.50 $ .80
Options granted 1,720,642 $1.00 - $2.50 $ 2.05
Options exercised (2,000) $ .30
---------
Options outstanding, December 31, 1998 2,468,642 $ .25 - $2.50 $ 1.67
Options granted (unaudited) 1,297,500 $1.50 - $2.25 $ 1.56
Options exercised (unaudited) (187,371) $ 1.94
---------
Options outstanding, June 30, 1999 (unaudited) 3,578,771
=========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES 12/31/98 LIFE PRICE 12/31/98 PRICE
----------------- ---------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
$ .25 - $.60 220,000 1.77 $ .29 220,000 $ .29
$1.00 524,000 3.30 $1.00 314,000 $1.00
$1.50 784,649 2.84 $1.50 535,649 $1.50
$2.50 939,993 2.17 $2.50 939,993 $2.50
--------- ---------
2,468,642 2,009,642
========= =========
</TABLE>
The options above were issued at exercise prices at or above the fair
market value at the date of grant. At December 31, 1998, 486,000
options were available for grant under the plans.
The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its employee and director
stock option plans. Accordingly, no compensation expense has been
recognized for these stock option plans. Had compensation cost for the
Company's employee and director stock-based plans been determined based
on the fair value at the grant dates for awards under those plans
consistent with the method prescribed in SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net loss and loss per share
would have been reduced to the pro forma amounts indicated as follows:
<PAGE> 12
REVNET SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $ (772,799) $(1,163,717) $(1,433,840)
Net loss - pro forma $ (781,608) $(1,172,544) $(1,467,844)
</TABLE>
The pro forma amounts reflected above are not representative of the
effects on reported net income in future years because, in general, the
options granted typically do not vest for several years and additional
awards are made each year. The fair value of each employee and director
option grant is estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Dividend yield 0 0 0
Expected life (years) 2 - 5 2 - 5 2 - 5
Expected volatility 0% 0% 0%
Risk-free interest rate (range) 5.02% - 6.41% 5.69% - 6.70% 4.74% - 5.58%
</TABLE>
OTHER - The Company has granted to certain employees and vendors stock
as compensation. During 1998, 45,000 and 1,200 shares of the Company's
common stock were issued to employees and vendors, respectively, and
$67,500 and $1,800 was charged to expense. During 1997, 80,000 and
3,437 shares of the Company's common stock were issued to employees and
vendors, respectively, and $48,000 and $4,033 was charged to expense.
8. RELATED PARTIES
On February 28, 1997, the Company issued a note payable to the majority
shareholder for $195,000, bearing interest at 10.25% per annum. In
accordance with the agreement, interest accrued at the one-year
anniversary of the note was deferred and added to the principal
balance. The principal and any accrued interest is payable on demand by
the majority shareholder, or may be paid at any time at the Company's
discretion. In the event that adequate funding is not received from
outside investors, the majority shareholder has agreed not to demand
payment of the note during the year ending December 31, 1999.
The Company has an accrued salary payable to the CEO and majority
shareholder for wages earned from 1994 through 1997 amounting to
$222,000 at December 31, 1997 and 1998. The accrued balance at June 30,
1999 was also $222,000 (unaudited). No interest was accrued on the
accrued salary during 1994 through 1998. Had interest been accrued on
the liability, interest expense for the liability at a rate of 8.25%
per annum would have been approximately $23,000 for 1998 and $69,000
for the period 1994 (inception) through 1998.
9. CONCENTRATION OF CREDIT RISK
The Company endeavors to keep pace with the evolving computer industry
and has adopted credit policies and standards intended to accommodate
industry growth and inherent risk. Management believes that credit
risks are moderated by the diversity of its end customers and
geographic sales areas. The Company performs ongoing credit evaluations
of its customers' financial condition.
<PAGE> 13
REVNET SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
10. INCOME TAXES
The benefit for income taxes is comprised of the following for the year
ended December 31, 1998:
<TABLE>
<S> <C>
Deferred income tax benefit $(534,000)
Change in valuation allowance 534,000
---------
$ 0
=========
</TABLE>
The provision for income taxes is different from the amount computed by
applying the federal income statutory rate of 34% to income before
income taxes primarily due to state taxes and the effects of changes in
the deferred tax asset valuation allowance.
The components of deferred income taxes recognized as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
NET CURRENT NET LONG-
DEFERRED TERM DEFERRED
TAX ASSET TAX ASSET
---------------- ----------------
<S> <C> <C>
Deferred tax assets $ 16,000 $ 518,000
Less: valuation allowance (16,000) (518,000)
-------------- ---------------
Total $ 0 $ 0
============== ===============
</TABLE>
Deferred tax assets and liabilities relate to net operating loss
carryforwards and differences between the tax bases and financial
reporting amounts of the allowance for doubtful accounts and accrued
liabilities. The Company has a net operating loss carryforward of
approximately $1,434,000 at December 31, 1998 which results in a
deferred tax asset of approximately $518,000 at December 31, 1998. The
carryforward expires in the year 2013.
The Company has recorded a full valuation allowance against the
deferred tax asset at December 31, 1998. The valuation allowance will
be reduced and the tax benefit recognized when the Company is in a
profitable operating position and circumstances indicate it is more
likely than not that the deferred tax assets will be realized.
Prior to January 1, 1998, the Company operated as a Subchapter S
Corporation with income and/or losses allocated to the Company's
shareholders for income tax purposes.
11. SUBSEQUENT LINE OF CREDIT AND STOCK OPTION AGREEMENT
In February 1999, the Company obtained an additional revolving bank
line of credit that provides for borrowings up to $300,000. The line of
credit was repaid on August 9, 1999. Pursuant to the agreement, the
Company was required to provide the bank with personal guarantees
acceptable to the bank in an aggregate amount equal to or exceeding the
outstanding amount under the loan at all times. At June 30, 1999,
guarantees in the amount of $250,000 had been provided. Interest
accrues at 8.25% payable monthly. The unpaid balance at June 30, 1999
was $163,000 (unaudited).
<PAGE> 14
REVNET SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
In consideration of a personal guarantee of the February 1999 line of
credit, a stock option agreement was entered into whereby the guarantor
was granted an option to purchase 12,500 shares of common stock at an
exercise price of $2.00 per share for each $2.00 guaranteed, and
100,000 shares of common stock at an exercise price of $2.25 per share
for each $2.25 guaranteed. The options become exercisable immediately
and expire three years from the date of grant. Based upon the terms of
the option at the date of grant, the fair value of the options was
determined by management to be immaterial.
12. SUBSEQUENT MAJORITY SHAREHOLDER TRANSACTIONS AND SALE OF THE COMPANY
On July 8, 1999, the majority shareholder exercised 200,000
nonqualified stock options for the Company's nonvoting common stock at
an exercise price of $1.50 per share. The proceeds of this exercise
were used to repay $300,000 of the note payable to shareholder, accrued
salary to shareholder and previously unpaid interest on the shareholder
note in the aggregate amount of $446,104.
On August 9, 1999, MessageMedia, Inc. acquired all outstanding shares
of the Company, and the remaining balance due to the majority
shareholder was converted to MessageMedia, Inc. stock. Subsequent to
August 9, 1999, the Company will operate as a wholly-owned subsidiary
of MessageMedia, Inc.
<PAGE> 1
EXHIBIT 99.4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Decisive Technology Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Decisive Technology
Corporation at 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
then ended in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
August 16, 1999
<PAGE> 2
DECISIVE TECHNOLOGY CORPORATION
BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998 1999
------------ ------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 748,000 $ 2,039,000 $ 551,000
Accounts receivable, net 357,000 352,000 392,000
Prepaid expenses 13,000 -- 67,000
------------ ------------ ------------
Total current assets 1,118,000 2,391,000 1,010,000
Property and equipment, net 484,000 422,000 547,000
Other assets 76,000 37,000 71,000
------------ ------------ ------------
$ 1,678,000 $ 2,850,000 $ 1,628,000
============ ============ ============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Borrowings under line of credit $ 200,000 $ 200,000 $ 250,000
Accounts payable 413,000 106,000 413,000
Accrued liabilities 686,000 406,000 385,000
Notes payable, current 903,000 -- --
Capital lease obligations, current 38,000 49,000 41,000
Deferred revenue 223,000 114,000 87,000
------------ ------------ ------------
Total current liabilities 2,463,000 875,000 1,176,000
Notes payable, non-current 39,000 39,000 39,000
Capital lease obligations 31,000 14,000 42,000
------------ ------------ ------------
2,533,000 928,000 1,257,000
------------ ------------ ------------
Commitments (Note 5)
Shareholders' equity (deficit):
Convertible Preferred Stock:
Series A: $0.01 par value; 1,000,000 shares
issued and outstanding 10,000 10,000 10,000
Series B: $0.01 par value; 2,002,750 shares
issued and outstanding 20,000 20,000 20,000
Series C: $0.01 par value; 7,558,305 and 18,650,455 shares
issued and outstanding 76,000 187,000 187,000
Common stock: $0.01 par value; 1,258,052, 1,299,527 and
1,782,802 shares issued and outstanding 13,000 13,000 18,000
Additional paid-in capital 10,105,000 17,736,000 17,834,000
Accumulated deficit (11,079,000) (16,044,000) (17,698,000)
------------ ------------ ------------
Total shareholders' equity (deficit) (855,000) 1,922,000 371,000
------------ ------------ ------------
$ 1,678,000 $ 2,850,000 $ 1,628,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
DECISIVE TECHNOLOGY CORPORATION
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue 646,000 1,503,000 3,127,000 1,620,000 1,627,000
Cost of net revenue 100,000 451,000 1,601,000 708,000 1,074,000
----------- ----------- ----------- ----------- -----------
Gross margin 546,000 1,052,000 1,526,000 912,000 553,000
----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development 1,027,000 2,249,000 1,632,000 1,144,000 484,000
Sales and marketing 2,814,000 3,243,000 2,731,000 1,701,000 939,000
General and administrative 829,000 1,061,000 1,150,000 584,000 722,000
Depreciation 77,000 181,000 207,000 112,000 75,000
Restructuring cost (Note 10) -- -- 751,000 -- --
----------- ----------- ----------- ----------- -----------
Total operating expenses 4,747,000 6,734,000 6,471,000 3,541,000 2,220,000
----------- ----------- ----------- ----------- -----------
Loss from operations (4,201,000) (5,682,000) (4,945,000) (2,629,000) (1,667,000)
Interest income 60,000 74,000 122,000 48,000 31,000
Interest expense and other, net (80,000) (24,000) (142,000) (127,000) (18,000)
----------- ----------- ----------- ----------- -----------
Net loss $(4,221,000) $(5,632,000) $(4,965,000) $(2,708,000) $(1,654,000)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
DECISIVE TECHNOLOGY CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 1,000,000 $ 10,000 1,216,666 $ 12,000
Issuance of Series B Preferred Stock for cash 1,637,038 16,000 -- --
Issuance of Series B Preferred Stock for services 30,930 1,000 -- --
Issuance of Series B Preferred Stock upon conversion
of notes payable and accrued interest 334,782 3,000 -- --
Issuance of Common Stock pursuant to the exercise of
stock options -- -- 49,017 1,000
Issuance of Common Stock for cash and services -- -- 15,728 --
Net Loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1996 3,002,750 30,000 1,281,411 13,000
Issuance of Series C Preferred Stock for cash, net of
issuance costs 7,558,305 76,000 -- --
Issuance of Common Stock pursuant to the exercise of
stock options -- -- 38,924 1,000
Repurchase of Common Stock -- -- (62,283) (1,000)
Issuance of warrants to purchase Series C Preferred Stock -- -- -- --
Net Loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1997 10,561,055 106,000 1,258,052 13,000
Issuance of Series C Preferred Stock for cash, net of
issuance costs 9,332,338 93,000 -- --
Conversion of Convertible Notes Payable into shares of
Series C Preferred Stock 1,759,812 18,000 -- --
Issuance of Common Stock pursuant to the exercise of
stock options -- -- 2,545,060 25,000
Repurchase of Common Stock -- -- (2,503,585) (25,000)
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 21,653,205 217,000 1,299,527 13,000
Issuance of Common Stock pursuant to the exercise of
stock options (unaudited) -- -- 483,275 5,000
Net loss (unaudited) -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 1999 (unaudited) 21,653,205 $ 217,000 1,782,802 $ 18,000
============ ============ ============ ============
<CAPTION>
ADDITIONALS
PAID IN ACCUMULATED
CAPITAL DEFICIT TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 258,000 $ (1,226,000) $ (946,000)
Issuance of Series B Preferred Stock for cash 3,689,000 -- 3,705,000
Issuance of Series B Preferred Stock for services 70,000 -- 71,000
Issuance of Series B Preferred Stock upon conversion
of notes payable and accrued interest 767,000 -- 770,000
Issuance of Common Stock pursuant to the exercise of
stock options 6,000 -- 7,000
Issuance of Common Stock for cash and services 3,000 -- 3,000
Net Loss -- (4,221,000) (4,221,000)
------------ ------------ ------------
Balance at December 31, 1996 4,793,000 (5,447,000) (611,000)
Issuance of Series C Preferred Stock for cash, net of
issuance costs 5,214,000 -- 5,290,000
Issuance of Common Stock pursuant to the exercise of
stock options 7,000 -- 8,000
Repurchase of Common Stock (6,000) -- (7,000)
Issuance of warrants to purchase Series C Preferred Stock 97,000 -- 97,000
Net Loss -- (5,632,000) (5,632,000)
------------ ------------ ------------
Balance at December 31, 1997 10,105,000 (11,079,000) (855,000)
Issuance of Series C Preferred Stock for cash, net of
issuance costs 6,386,000 -- 6,479,000
Conversion of Convertible Notes Payable into shares of
Series C Preferred Stock 1,220,000 -- 1,238,000
Issuance of Common Stock pursuant to the exercise of
stock options 662,000 -- 687,000
Repurchase of Common Stock (637,000) -- (662,000)
Net loss -- (4,965,000) (4,965,000)
------------ ------------ ------------
Balance at December 31, 1998 17,736,000 (16,044,000) (15,814,000)
Issuance of Common Stock pursuant to the exercise of
stock options (unaudited) 98,000 -- 103,000
Net loss (unaudited) -- (1,654,000) (1,654,000)
------------ ------------ ------------
Balance at June 30, 1999 (unaudited) $ 17,834,000 $(17,698,000) $(17,463,000)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
DECISIVE TECHNOLOGY CORPORATION
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,221,000) $(5,632,000) $(4,965,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 77,000 181,000 207,000
Convertible note issued for services -- 39,000 --
Convertible Preferred Stock and Common Stock
issued for services 82,000 -- --
Interest expense on warrants -- -- 97,000
Provision for doubtful accounts receivable 57,000 43,000 (21,000)
Property and equipment write-off -- -- 111,000
Changes in assets and liabilities:
Accounts receivable (55,000) (392,000) 26,000
Inventory adjustment -- -- --
Prepaid expenses and other assets (60,000) (2,000) 52,000
Other assets -- -- --
Accounts payable 354,000 36,000 (307,000)
Accrued liabilities 239,000 353,000 (280,000)
Deferred revenue 99,000 100,000 (109,000)
----------- ----------- -----------
Net cash used in operating activities (3,428,000) (5,274,000) (5,189,000)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (322,000) (250,000) (256,000)
----------- ----------- -----------
Net cash used in investing activities (322,000) (250,000) (256,000)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations (20,000) (24,000) (6,000)
Proceeds from (repayment of) convertible notes payable 50,000 (297,000) --
Repayment of note payable (54,000) -- --
Proceeds from line of credit -- 200,000 --
Payments on bridge loan -- -- --
Proceeds from issuance of convertible notes payable-
related parties -- 1,000,000 238,000
Proceeds from issuance of convertible Preferred Stock, net 3,705,000 5,290,000 6,479,000
Proceeds from issuance of Common Stock, net of repurchases 8,000 1,000 25,000
----------- ----------- -----------
Net cash provided by financing activities 3,689,000 6,170,000 6,736,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (61,000) 646,000 1,291,000
Cash and cash equivalents at beginning of period 163,000 102,000 748,000
----------- ----------- -----------
Cash and cash equivalents at end of period $ 102,000 $ 748,000 $ 2,039,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 75,000 $ 26,000 $ 45,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired under capital leases $ 53,000 $ 41,000 $ --
=========== =========== ===========
Conversion of notes payable into Series B preferred stock $ 770,000 $ -- $ 1,238,000
=========== =========== ===========
Conversion of notes payable into Series C preferred stock $ -- $ -- $ --
=========== =========== ===========
Issuance of warrants in connection with convertible notes
payable - related parties $ -- $ 97,000 $ --
=========== =========== ===========
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,708,000) $(1,654,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 112,000 75,000
Convertible note issued for services -- --
Convertible Preferred Stock and Common Stock
issued for services -- --
Interest expense on warrants 97,000 --
Provision for doubtful accounts receivable (65,000) (96,000)
Property and equipment write-off -- --
Changes in assets and liabilities:
Accounts receivable (344,000) 56,000
Inventory adjustment (20,000) --
Prepaid expenses and other assets 13,000 (67,000)
Other assets 40,000 (34,000)
Accounts payable (128,000) 307,000
Accrued liabilities (141,000) (21,000)
Deferred revenue (41,000) (27,000)
----------- -----------
Net cash used in operating activities (3,185,000) (1,461,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (151,000) (200,000)
----------- -----------
Net cash used in investing activities (151,000) (200,000)
----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations (15,000) (29,000)
Proceeds from (repayment of) convertible notes payable -- 49,000
Repayment of note payable -- --
Proceeds from line of credit -- 50,000
Payments on bridge loan (1,000,000) --
Proceeds from issuance of convertible notes payable-
related parties (150,000) --
Proceeds from issuance of convertible Preferred Stock, net 7,717,000 --
Proceeds from issuance of Common Stock, net of repurchases 5,000 103,000
----------- -----------
Net cash provided by financing activities 6,557,000 173,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,221,000 (1,488,000)
Cash and cash equivalents at beginning of period 748,000 2,039,000
----------- -----------
Cash and cash equivalents at end of period $ 3,969,000 $ 551,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 127,000 $ (18,000)
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired under capital leases $ -- $ 49,000
=========== ===========
Conversion of notes payable into Series B preferred stock $ 1,238,000 $ --
=========== ===========
Conversion of notes payable into Series C preferred stock $ 1,000,000 $ --
=========== ===========
Issuance of warrants in connection with convertible notes
payable - related parties $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
DECISIVE TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Decisive Technology Corporation (the "Company" or "Decisive") is a
leading online provider of customer intelligence solutions for Internet
and e-commerce businesses. Decisive's solutions meet the critical need
for continuous customer retention tools to sustain and increase
profitability for Internet-based businesses. Decisive's value-added
services continuously monitor and analyze customer perceptions to
improve business performance and customer loyalty. Their Internet
software technology, expert research services and project management
offers end-to-end customer feedback supporting and monitoring the
entire e-customer experience. Decisive's completely outsourced online
solutions are scaled to companies' Internet growth, allowing for
immediate analysis through powerful reporting tools which provide
statistically valid customer feedback in days rather than months. The
Company was incorporated in California on January 10, 1994.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents, and
investments with original maturity dates greater than three months to
be short-term investments. All of the Company's available funds at
December 31, 1997 and 1998, were deposited in money market accounts
with high credit-quality financial institutions.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of accounts
receivable, which are generally not collateralized. The Company's
accounts receivable are primarily derived from revenue earned from
customers located in the U.S. The Company limits its exposure to credit
loss by performing ongoing credit evaluations of its customers'
financial condition and maintaining an allowance for doubtful accounts
based upon the expected collectibility of total accounts receivable. To
date, the Company has not experienced material losses resulting from
uncollected receivables. Two customers accounted for 13% and 12%,
respectively, of total accounts receivable at December 31, 1997. Three
other customers accounted for 12%, 16% and 16%, respectively, of total
accounts receivable at December 31, 1998.
No individual customers accounted more than 10% of the Company's net
revenue during 1996 and 1997. One customer accounted for 15% of net
revenue in 1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the
estimated useful lives of the assets, generally three years. The cost
of equipment acquired under capital leases is amortized over the
shorter of the lease term or their useful life. Repair and maintenance
costs are charged to expense as incurred.
1
<PAGE> 7
DECISIVE TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-lived
Assets to be Disposed of ("SFAS 121"). SFAS 121 requires recognition of
impairment of long-lived assets in the event the net book value of such
assets exceeds the future undiscounted cash flows attributable to such
assets. In July 1998, the Company decided to restructure its activities
(see Note 10). Consequently, the Company restated its property and
equipment resulting in a property and equipment write-off of $111,000.
REVENUE RECOGNITION
The Company's revenues are derived from service revenue associated with
survey research and other projects, license fees for the perpetual use
of its software and ongoing technical support and product maintenance.
Revenue from service agreements are recognized on a
percentage-of-completion basis. The Company generally bills its
customers as services are provided. Accordingly, revenue recognized in
advance of billing milestones is recorded as unbilled accounts
receivable, and collections resulting from billing milestones achieved
in advance of recognizing revenue is recorded as deferred revenue on
the balance sheet. Revenue from the sale of software products,
including sales to distributors, is recognized upon product shipment,
provided that no significant vendor obligations remain, fees are fixed
and determinable, and collection of the receivable is probable.
Allowances for estimated future returns and exchanges are provided at
the time revenue is recognized based on the Company's return policies
and its historical experience. Revenue related to software technical
support and product maintenance contracts is recognized ratably over
the term of the contracts and any revenue which has not been recognized
at the end of the period has also been recorded as deferred revenue.
INCOME TAXES
The Company accounts for income taxes under the liability method, which
requires, among other things, that deferred income taxes be provided
for temporary differences between the tax bases of the Company's assets
and liabilities and their financial statement reported amounts. In
addition, deferred tax assets are recorded for the future benefit of
utilizing net operating losses and research and development credit
carryforwards. A valuation allowance is provided against deferred tax
assets unless it is more likely than not that they will be realized.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method of Accounting Principles Board Opinion No. 25 ("APB 25")
as permitted by Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation". The Company
provides footnote disclosure of the pro forma net income, if materially
different than reported net income, based on the fair value method of
SFAS No. 123.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash,
trade accounts receivable, accounts payable, accrued liabilities,
convertible notes payable, notes payable and capital lease obligations,
the carrying amounts approximate fair value due to the relatively short
maturity of these instruments.
2
<PAGE> 8
DECISIVE TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and, therefore, do not include all the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, these
statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of
normal recurring accruals, that are necessary for the fair statement of
results for the unaudited interim periods. The operating results for
the interim period are not necessarily indicative of the results to be
expected for a full fiscal year or for any future periods.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use." SOP No. 98-1 requires that entities capitalize certain costs
related to internal-use software once certain criteria have been met.
The Company does not expect the adoption of SOP No. 98-1 to have a
material impact on its financial statements. The Company will be
required to implement SOP No. 98-1 for the year ending December 31,
1999.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs
of Start-Up Activities." SOP No. 98-5 requires companies to expense the
costs of start-up activities and organization costs as incurred. In
general, SOP No. 98-5 is effective for fiscal years beginning after
December 15, 1998. The Company does not expect the adoption of SOP No.
98-5 to have a material impact on its results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for
derivative and hedging activities and is effective beginning after June
15, 1999. The Company will adopt FAS No. 133 in 2001 and believes it
will not have a material impact on its results of operations.
3
<PAGE> 9
DECISIVE TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
2. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1997 1998 1999
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Accounts receivable $ 552,000 $ 609,000 $ 554,000
Unbilled revenue 27,000 94,000 93,000
Less: Allowance for doubtful accounts (102,000) (81,000) (17,000)
Allowance for sales returns (120,000) (54,000) (44,000)
Allowance for sales returns due to
restructuring (Note 10) -- (216,000) (194,000)
--------- --------- ---------
$ 357,000 $ 352,000 $ 392,000
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET:
Computers and equipment $ 583,000 $ 338,000 $ 472,000
Software -- -- 60,000
Furniture and fixtures 175,000 95,000 101,000
--------- --------- ---------
758,000 433,000 633,000
Less: Accumulated depreciation and
amortization (274,000) (11,000) (86,000)
--------- --------- ---------
$ 484,000 $ 422,000 $ 547,000
========= ========= =========
</TABLE>
The net value of property and equipment under capital leases at
December 31, 1997 and 1998 was $58,000 and $19,000, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1997 1998 1999
-------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ACCRUED LIABILITIES:
Payroll and related expenses $287,000 $156,000 $235,000
Accrued promotion expense 121,000 -- --
Accrued professional services 240,000 128,000 124,000
Other accrued expenses 38,000 122,000 26,000
-------- -------- --------
$686,000 $406,000 $385,000
======== ======== ========
</TABLE>
4
<PAGE> 10
DECISIVE TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
3. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1997 1998 1999
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Convertible note payable $ 39,000 $ 39,000 $ 39,000
Convertible notes payable to related parties 903,000 -- --
--------- --------- ---------
942,000 39,000 39,000
Less: current portion (903,000) -- --
--------- --------- ---------
$ 39,000 $ 39,000 $ 39,000
========= ========= =========
</TABLE>
In October 1997, the Company entered into an agreement with a third
party for executive search services. At December 31, 1997, the Company
recorded a note payable associated with this agreement totaling
$39,000. The terms of the agreement permit the third party to convert
the note at the close of the Company's initial public offering, which
bears interest at 6.23% per annum, into 56,000 shares of the Company's
Common Stock at the close of the Company's initial public offering.
In December 1997, the Company issued convertible notes payable totaling
$1,000,000, bearing interest at 9.5% per annum to shareholders. In
March 1998, these notes were converted into 1,422,070 shares of Series
C Preferred Stock at $0.7032 per share. In connection with the notes,
the Company issued warrants to purchase 711,035 shares of the Company's
Series C Preferred Stock at $0.7032 per share which expire upon the
earlier of December 23, 1999, closing of a merger, acquisition,
reorganization, sale of all or substantially all of the assets of the
Company or other transaction or series of related transactions in which
the shareholders will own less than 50% of the voting power of the
surviving entity, or the closing of an initial public offering. Upon
issuance of the notes, the proceeds were allocated between the debt and
the warrants based on the fair value of the financial instruments. The
Company has determined that the fair value of the warrants totaled
$97,000, which have been reflected as a discount on the related notes
and then charged to interest expense upon conversion of the notes.
In February 1998, the Company issued convertible notes payable totaling
$238,000 with interest at 9.5% per annum to shareholders. In March
1998, these notes were converted into 337,742 shares of Series C
Preferred Stock at $0.7032 per share. In connection with the notes, the
Company issued warrants to purchase 101,323 shares of the Company's
Series C Preferred Stock at $0.7032 per share which expire upon the
earlier of February 13, 2000, closing of a merger, acquisition,
reorganization, sale of all or substantially all of the assets of the
Company or other transaction or series of related transactions in which
the shareholder will own less than 50% of the voting power of the
surviving entity, or closing of an initial public offering. The Company
has determined that the fair value of the warrants is immaterial to be
reflected on the Company's accompanying financial statements.
5
<PAGE> 11
DECISIVE TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BORROWINGS
LINE OF CREDIT
At December 31, 1998, the Company had borrowed $200,000 under a
line-of-credit agreement with a financial institution which expires on
August 31, 1999. The line of credit provides for borrowings of up to
$500,000. Advances in excess of $200,000 must be supported by a
borrowing base calculated on accounts receivable. Borrowings under the
line-of-credit are secured by all assets of the Company, including
intellectual property, and bear interest at prime (8.5% at December 31,
1998) plus 1.5%. Under the line-of-credit, the Company is required to
maintain certain financial covenants. The Company was out of compliance
with its financial covenants at June 30, 1999. The Company repaid the
entire outstanding balance under the line-of-credit facility in July
1999 and the outstanding balance at July 30, 1999 was 0.
5. COMMITMENTS
LEASES AND SUBLEASE
A portion of the Company's computers and equipment have been acquired
under capital leases which expire at various dates through the year
2001. The lease agreements require the Company to pay sales taxes,
property taxes, insurance and maintenance costs.
The Company leases its facility under a noncancelable operating lease
which expires in September 2001 and requires payment of property taxes,
insurance, maintenance and utilities. Rent expense was $108,000,
$250,000 and $368,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
In October 1998, the Company entered into an agreement to sublease a
portion of its facilities to a third party at approximately $20,000 a
month. The sublease agreement expires in September 1999.
Future minimum lease payments under noncancelable leases at December
31, 1998, net of sublease income, were as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
---------- ----------
<S> <C> <C>
1999 $ 54,000 $ 406,000
2000 14,000 546,000
2001 2,000 419,000
2002 -- --
Thereafter -- --
---------- ----------
Total minimum lease payments 70,000 $1,371,000
==========
Less amount representing interest (7,000)
----------
Present value of capital lease obligations 63,000
Less: current portion (49,000)
----------
Long-term portion of capital lease obligations $ 14,000
==========
</TABLE>
6
<PAGE> 12
DECISIVE TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. CONVERTIBLE PREFERRED STOCK
The Company's Articles of Incorporation, as amended, authorize the
Company to issue 25,000,000 shares of Preferred Stock, of which
1,000,000, 3,000,000 and 21,000,000 shares are designated Series A, B
and C, respectively.
In August 1994, the Company issued 1,000,000 shares of Series A
Preferred Stock ("Series A"). In May 1996, the Company issued 2,002,750
shares of Series B Preferred Stock ("Series B"). During January and
April 1997, the Company issued a total of 7,558,305 shares of Series C
Preferred Stock ("Series C"). During March, April and June 1998, the
Company issued a total of 11,092,150 shares of Series C. The rights
with respect to the Series A, B and C Preferred Stock are as follows:
VOTING
Each share of Series A, B and C has voting rights equal to an
equivalent number of shares of Common Stock into which it is
convertible and votes together as one class with the Common Stock.
As long as the shares of Preferred Stock remain outstanding, the
Company must obtain approval from the holders of a majority of the
shares of Preferred Stock in order to alter the articles of
incorporation, change the authorized number of shares of Preferred
Stock, increase the authorized number of shares of Common Stock, create
a new class of stock or effect a merger, consolidation or sale of
assets where the existing shareholders retain less than 50% of the
voting stock of the surviving entity. As long as any shares of Series B
or Series C Preferred Stock are outstanding, the Company must obtain
approval from the holders of at least 80% of the total number of shares
of Series B and Series C Preferred Stock outstanding in order to change
the authorized number of Board members or the authorized number of
shares of Series B and Series C Preferred Stock. Additionally, the
Company must obtain approval of the holders of at least 75% of the
shares of outstanding Series B and Series C Preferred Stock in order to
issue additional shares of Series B and Series C Preferred Stock.
DIVIDENDS
Holders of Series A, B and C Preferred Stock are entitled to receive
noncumulative dividends at the per annum rate of $0.02, $0.18 and
$0.055 per share, respectively, when and if declared by the Board of
Directors. The holders of Series A, B and C Preferred Stock will also
be entitled to participate in dividends on Common Stock, when and if
declared by the Board of Directors, based on the number of shares of
Common Stock held on an as-if-converted basis. No dividends on
preferred or Common Stock were declared by the Board through December
31, 1998.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the
Company, including a merger, acquisition or sale of all or
substantially all assets where the shareholders of the Company's Common
Stock and Preferred Stock own less than 51% of the resulting voting
power of the surviving entity, the holders of Series A, B and C
Preferred Stock are entitled to receive an amount of $0.25, $2.30 and
$0.7032 per share, respectively, plus any declared but unpaid
dividends, prior to and in preference to any distribution to the
holders of Common Stock. The remaining assets, if any, shall be
distributed ratably among the holders of Common Stock. Should the
Company's legally available assets be insufficient to satisfy the
liquidation preferences, the funds will be distributed ratably in
proportion to the aggregate Series A, B and C Preferred Stock
preferences.
7
<PAGE> 13
DECISIVE TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
CONVERSION
Each share of Series A, B and C Preferred Stock is convertible, at the
option of the holder, according to a conversion ratio, subject to
adjustment for dilution, except for Series A Preferred Stock, and is
currently set at one-for-one. Each share of Series A, B and C Preferred
Stock automatically converts into the number of shares of Common Stock
into which such shares are convertible at the then effective conversion
ratio upon the closing of a bona fide firm commitment public offering
of Common Stock at a per share price of at least $5.00 per share with
gross proceeds of at least $15,000,000.
7. COMMON STOCK
The Company's Articles of Incorporation, as amended, authorize the
Company to issue 38,000,000 shares of $0.01 par value Common Stock.
During the years ended December 31, 1998 and 1997, the Company sold
2,545,060 and 38,924 shares, respectively, of Common Stock to certain
employees. A portion of the shares sold are subject to a right of
repurchase by the Company, which is released over a two year period
from the vesting commencement date until vesting is complete. At
December 31, 1998, 29,167 shares were subject to repurchase at an
average price of $0.28 per share.
As of December 31, 1998, the Company has reserved shares of Common
Stock as follows:
<TABLE>
<S> <C>
Conversion of Convertible Preferred Stock 23,200,251
Exercise of Convertible Preferred Stock Warrants 812,358
Options under Stock Option Plan 4,373,300
----------
Total shares reserved 28,385,909
==========
</TABLE>
8. STOCK OPTIONS
In February 1996, the Board of Directors and shareholders adopted the
1996 Stock Option Plan (the "Plan"). The Plan, as amended, provides for
the granting of stock options to employees and consultants of the
Company. Options granted under the Plan may be either incentive stock
options or nonqualified stock options. Incentive stock options ("ISO")
may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO")
may be granted to Company employees and consultants.
Options under the Plan may be granted for periods of up to ten years
and at prices no less than 85% of the estimated fair value of the
shares on the date of grant as determined by the Board of Directors,
provided, however, that (i) the exercise price of an ISO and NSO shall
not be less than 100% and 85% of the estimated fair value of the shares
on the date of grant, respectively, and (ii) the exercise price of an
ISO and NSO granted to a 10% shareholder shall not be less than 110% of
the estimated fair value of the shares on the date of grant,
respectively. Options exercisable immediately and exercised prior to
vesting are subject to repurchase by the Company. Options granted prior
to December 31, 1997 generally vest 10% after six months and 1/60th
each month thereafter for a term not to exceed five years. Options
granted after this date generally vest 12.5% after six months and
1/48th each month thereafter for a term not to exceed four years, for
new employees. For options granted to existing employees, options vest
at 1/48th per month.
8
<PAGE> 14
DECISIVE TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
A summary of the Plan's activity is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------
OPTIONS WEIGHTED
AVAILABLE AVERAGE
FOR GRANT SHARES PRICE
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1996 173,786 1,167,464 $ 0.22
Additional shares authorized 3,300,000 -- $ --
Options granted (3,821,700) 3,821,700 $ 0.27
Options exercised -- (38,924) $ 0.20
Options repurchased 36,033 -- $ 0.15
Options canceled 428,929 (428,929) $ 0.16
---------- ---------- ----------
Balance at December 31, 1997 117,048 4,521,311 $ 0.26
Additional shares authorized 2,280,000 -- $ --
Options granted (3,436,570) 3,436,570 $ 0.25
Options exercised -- (2,545,059) $ 0.27
Options canceled 2,542,342 (2,542,342) $ 0.25
---------- ---------- ----------
Balance at December 31, 1998 1,502,820 2,870,480 $ 0.25
Additional shares authorized 3,500,000 -- $ --
Options granted (5,907,427) 5,907,427 $ 0.20
Options exercised -- (114,583) $ 0.20
Options canceled 1,015,605 (1,015,605) $ 0.20
---------- ---------- ----------
Balance at June 30, 1999 110,998 7,647,719 $ 0.22
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1998 DECEMBER 31, 1998
----------------------------------------------------------- ----------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- -------------------- ------------------ ------------------ ------------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C>
$0.15 - $0.28 2,870,480 9.2 $ 0.25 1,701,445 $ 0.25
</TABLE>
At December 31, 1998, there were 2,266,442 shares purchased under the
Plan that were subject to repurchase by the Company.
9
<PAGE> 15
DECISIVE TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
PRO FORMA DISCLOSURES
The Company accounts for the Plan in accordance with the provisions of
Accounting Principles Board Opinion No. 25 and complies with the
disclosure requirements of Statement of Financial Accounting Standards
No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation" which
established a fair value based method of accounting for employee stock
option plans. Had compensation cost for the Company's option plans been
determined based on the fair value at the grant dates, as prescribed in
FAS 123, the Company's net loss would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net loss:
As reported $(5,632,000) $(4,965,000)
Pro forma adjustment (48,000) (37,000)
----------- -----------
Pro forma net loss $(5,680,000) $(5,002,000)
=========== ===========
</TABLE>
The Company calculated the fair value of each option grant on the date
of grant using the Black-Scholes pricing method with the following
assumptions: volatility at 0%; dividend yield at 0%; weighted average
expected option term of four years; risk free interest rate of 4.1% to
5.5% and 5.6% to 6.3% for the year ended December 31, 1998 and 1997,
respectively. The weighted average fair value of options granted during
1998 and 1997 was $0.05. Because additional stock options are expected
to be granted each year and the pro forma net loss only includes the
effect of options granted in 1998 and 1997, the above pro forma
disclosures are not representative of the pro forma effects on reported
financial results for future years.
9. INCOME TAXES
No provision for federal and state income taxes has been recorded as
the Company incurred net operating losses through December 31, 1998. At
December 31, 1998, the Company had approximately $15,100,000 and
$10,000,000 of federal and state, respectively, net operating loss
carryforwards available to offset future taxable income which expire in
varying amounts beginning in 2002. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating losses carried forward
may be impaired or limited in certain circumstances. Events which may
cause limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50% over a three year period.
Deferred tax assets, aggregating approximately $6,400,000 at December
31, 1998, consist primarily of net operating loss carryforwards and
reserves and accrued expenses which are not currently deductible for
tax purposes. The Company has provided a full valuation allowance
against the deferred tax assets because of the uncertainty regarding
realization based upon the weight of currently available information.
10
<PAGE> 16
DECISIVE TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. RESTRUCTURING COST
In July 1998, the Company decided to restructure its activities and
ceased the development, marketing and support of survey software
applications to become solely a service provider of online customer
intelligence solutions for Internet and e-commerce businesses (see Note
1), resulting in a headcount reduction of 27 employees, or 45% of its
then existing workforce. Consequently, the Company recorded a
restructing charge of $751,000 consisting of $424,000 in severance and
benefits, $111,000 of property and equipment write-off and $216,000 of
allowance for sales returns.
Restructuring activity for 1998 was as follows:
<TABLE>
<CAPTION>
PROPERTY AND ALLOWANCE
SEVERANCE EQUIPMENT FOR SALES
AND BENEFITS WRITE-OFF RETURNS
------------ ------------ ---------
<S> <C> <C> <C>
1998 Provision $ 424,000 $ 111,000 $ 216,000
Amount paid in 1998 (256,000) (111,000) --
--------- --------- ---------
Balance at December 31, 1998 168,000 -- 216,000
Amount paid (unaudited) (168,000) -- (22,000)
--------- --------- ---------
Balance at June 30, 1999 (unaudited) $ -- $ -- $ 194,000
========= ========= =========
</TABLE>
11. RELATED PARTY TRANSACTIONS
REVENUE
During 1997, the Company recognized revenues of approximately $58,000
on sales of software survey products purchased by a shareholder of the
Company. Additionally, the Company recognized revenues of approximately
$22,000 on sales of software survey products purchased by an employer
of one of the Company's directors. The Company recognized revenues of
approximately $2,000 on sales of software survey products purchased by
a Company owned by the Company's founder. Contracted prices on these
orders were comparable to those given to other customers of the
Company. At December 31, 1997 and 1998, the amount due the Company by
related parties aggregated $31,000 and $0, respectively.
NOTE RECEIVABLE DUE FROM SHAREHOLDER
On December 24, 1997, the Company entered into an agreement to lend up
to $150,000 to a former executive of the Company. The loan bears
interest at 9.0% per annum and is due no later than December 24, 2002.
At December 31, 1998, the Company had outstanding advances totaling
$150,000 to the former executive. The Company recorded a reserve of
$150,000 against this note receivable.
11
<PAGE> 17
DECISIVE TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
12. SUBSEQUENT EVENTS
WARRANT EXERCISE
The Company has outstanding warrants with the rights to purchase
812,358 shares of Common Stock at $0.7032 per share. In July 1999, the
holders of these warrants exercised their rights to purchase the stock
in exchange for $571,250 in cash.
NOTE PAYABLE
The Company's note payable in the amount of $39,000 plus interest
referred to in Note 3 was converted to Common Stock in July 1999.
ACQUISITION
On August 16, 1999, MessageMedia Inc. acquired all the outstanding
shares of the Company.
12
<PAGE> 1
EXHIBIT 99.5
MESSAGEMEDIA, INC.
REVNET SYSTEMS INC. AND DECISIVE TECHNOLOGY CORPORATION
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
PENDING
PURCHASE TRANSACTIONS PRO FORMA ADJUSTMENTS
---------------------------- ------------------------------
MESSAGE- REVNET DECISIVE REVNET DECISIVE COMBINED PRO
MEDIA, INC. SYSTEMS TECHNOLOGY SYSTEMS TECHNOLOGY FORMA
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents .........$ 10,112,132 $ 289,195 $ 551,000 $ -- $ -- $ 10,952,327
Accounts receivable ............... 947,303 651,966 392,000 -- -- 1,991,269
Notes receivable .................. -- -- -- -- -- --
Prepaid expenses and other......... 409,046 4,465 67,000 -- -- 480,511
------------- ------------- ------------- ------------- ------------- -------------
Total current assets ................. 11,468,481 945,626 1,010,000 -- -- 13,424,107
Furniture, equipment & software,
net ............................... 1,225,095 154,011 547,000 -- -- 1,926,106
Patent and other costs, net .......... 26,642 -- -- -- -- 26,642
Intangibles .......................... 17,661,312 -- -- 41,107,568(c) 38,789,955(h) 98,833,835
800,000(d) 475,000(i)
Other assets ......................... 27,000 -- 71,000 -- -- 98,000
------------- ------------- ------------- ------------- ------------- -------------
Total assets .........................$ 30,408,530 $ 1,099,637 $ 1,628,000 $ 41,907,568 $ 39,264,955 $ 14,308,690
============= ============= ============= ============= ============= =============
Liabilities and stockholders' equity
(deficit)
Current liabilities:
Accounts payable ..................$ 642,506 $ 252,458 $ 413,000 $ 800,000(d) $ 475,000(i) $ 2,582,964
Accrued compensation & related
liabilities .................... 217,553 200,006 -- -- -- 417,559
Deferred revenue .................. -- 283,720 87,000 -- -- 370,720
Accrued interest .................. -- 27,591 -- -- -- 27,591
Other accrued liabilities ......... 1,169,960 258,000 385,000 -- -- 1,812,960
Liability for sales returns ....... -- 70,000 -- -- -- 70,000
Borrowings under line of credit ... -- 766,000 250,000 -- -- 1,016,000
Current portion, due to
stockholder..................... -- -- -- -- -- --
Current portion, capital lease
obligations .................... 17,038 -- 41,000 -- -- 58,038
------------- ------------- ------------- ------------- ------------- -------------
Total current liabilities ............ 2,047,057 1,857,775 1,176,000 800,000 475,000 6,355,832
Long term liabilities
Amount due to stockholder ......... -- 214,988 -- -- -- 214,988
Accrued salary .................... -- 222,000 -- -- -- 222,000
Note payable ...................... -- -- 39,000 -- -- 39,000
Deferred rent ..................... -- -- -- -- -- --
Obligation under capital lease .... 6,935 -- 42,000 -- -- 48,935
------------- ------------- ------------- ------------- ------------- -------------
Total long term liabilities .......... 6,935 436,988 81,000 -- -- 524,923
Total liabilities..................... 2,053,992 2,294,763 1,257,000 800,000 475,000 6,880,755
Stockholders' equity (deficit):
Preferred stock.................... -- -- 217,000 -- (217,000)(e) --
Common stock....................... 44,277 5,437 18,000 (5,437)(a) 217,000 (e) 49,593
3,262 (c) (18,000)(f)
(217,000)(f)
2,054 (h)
Additional paid in capital......... 84,340,341 4,517,177 17,834,000 5,437 (a) 18,000 (f) 164,530,881
(4,595,281)(b) 217,000 (f)
41,104,306 (c) (17,698,000)(g)
38,787,901 (h)
Warrants........................... 1,430,828 -- -- -- -- 1,430,828
Deferred finance cost.............. -- -- -- -- -- --
Deferred compensation.............. (577,117) (1,122,459) -- -- -- (1,699,576)
Accumulated deficit................ (56,883,791) (4,595,281) (17,698,000) 4,595,281 (b) 17,698,000 (g) (56,883,791)
------------- ------------- ------------- ------------- ------------- -------------
Total stockholders' equity (deficit).. 28,354,538 (1,195,126) 371,000 41,107,568 38,789,955 107,427,935
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity (deficit)...................$ 30,408,530 $ 1,099,637 $ 1,628,000 $ 41,907,568 $ 39,264,955 $ 114,308,690
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes to pro forma combined financial statements.
<PAGE> 2
MESSAGEMEDIA, INC.
REVNET SYSTEMS INC. AND DECISIVE TECHNOLOGY CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
PENDING
PURCHASE TRANSACTIONS PRO FORMA ADJUSTMENTS
---------------------------- ------------------------------
MESSAGE- REVNET DECISIVE REVNET DECISIVE COMBINED PRO
MEDIA, INC. SYSTEMS TECHNOLOGY SYSTEMS TECHNOLOGY FORMA
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue............................. $ 2,055,644 $ 1,418,622 $ 1,627,000 $ -- $ $ 5,101,266
Cost of revenue..................... 380,803 116,541 1,074,000 -- -- 1,571,344
------------- ------------- ------------- ------------- ------------- -------------
Gross profit........................ 1,674,841 1,302,081 553,000 -- -- 3,529,922
Operating expenses
Marketing & sales................ 2,312,422 809,792 939,000 -- -- 4,061,214
Research, development &
engineering................... 1,789,004 206,130 484,000 -- -- 2,479,134
General & administrative......... 2,985,323 969,749 722,000 -- -- 4,677,072
Depreciation and amortization.... 6,815,048 22,667 75,000 10,476,892 (a) 9,816,239 (c) 27,205,846
Restructuring charge............. 1,025,000 -- -- -- -- 1,025,000
------------- ------------- ------------- ------------- ------------- -------------
Total operating expenses............ 14,926,797 2,008,338 2,220,000 10,476,892 9,816,239 39,448,266
------------- ------------- ------------- ------------- ------------- -------------
Net loss from operations............ (13,251,956) (706,257) (1,667,000) (10,476,892) (9,816,239) (35,918,344)
Interest income.................. 167,078 1,062 31,000 -- -- 199,140
Interest expense................. (70,876) (55,795) (18,000) -- -- (144,671)
------------- ------------- ------------- ------------- ------------- -------------
Net loss applicable to common
shares........................... $ (13,155,754) $ (760,990) $ (1,654,000) $ (10,476,892) $ (9,816,239) $ (35,863,875)
============= ============= ============= ============= ============= =============
Net loss per share, basic and
diluted.......................... $ (0.31) $ (0.75)
============= =============
Shares used in per share
computation, basic and diluted... 42,286,890 3,262,120 (b) 2,054,498 (d) 47,603,508
</TABLE>
- ----------------------------
(a) Adjustment to reflect the six-month amortization of goodwill based on the
allocation of the assumed purchase price in the June 30, 1999 pro forma
balance sheet for Revnet.
(b) Adjustment to reflect the issuance of 3,262,120 shares of MessageMedia
common stock.
(c) Adjustment to reflect the six-month amortization of goodwill based on the
allocation of the assumed purchase price in the June 30, 1999 pro forma
balance sheet for Decisive.
(d) Adjustment to reflect the issuance of 2,054,498 shares of MessageMedia
common stock.
See accompanying notes to pro forma combined financial statements.
<PAGE> 3
MESSAGEMEDIA, INC.
REVNET SYSTEMS INC. AND DECISIVE TECHNOLOGY CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
PENDING PURCHASE
TRANSACTIONS
PRIOR COMBINED --------------------------
MESSAGE- ACQUISITIONS HISTORICAL REVNET DECISIVE
MEDIA, INC. 1998 PRO FORMA SYSTEMS TECHNOLOGY
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue..................... $ 1,287,790 $ 1,241,093 $ 2,528,883 $ 1,113,035 $ 3,127,000
Cost of revenue............. 97,553 -- 97,553 142,861 1,601,000
------------ ------------ ------------ ----------- -----------
Gross profit................ 1,190,237 1,241,093 2,431,330 970,174 1,526,000
Operating expenses
Marketing & sales......... 1,934,486 364,694 2,299,180 990,303 2,731,000
Research, development
& engineering.......... 4,828,277 795,503 5,623,780 295,037 1,632,000
General &
administrative......... 3,810,073 1,898,210 5,708,283 986,968 1,150,000
Depreciation and
amortization.......... 2,470,917 11,483,066 13,953,983 31,679 207,000
Restructuring charge...... 812,166 -- 812,166 -- 751,000
Write-off of in-process
technology............. 1,300,000 -- 1,300,000 -- --
------------ ------------ ------------ ----------- -----------
Total operating expenses.... 15,155,919 14,541,473 29,697,392 2,303,987 6,471,000
------------ ------------ ------------ ----------- -----------
Net loss from operations.... (13,965,682) (13,300,380) (27,266,062) (1,333,813) (4,945,000)
Interest income........... 217,551 -- 217,551 7,172 122,000
Interest expense.......... (83,892) (33,614) (117,506) (106,790) (142,000)
Other income.............. -- -- -- (409) --
------------ ------------ ------------ ----------- -----------
Net loss.................... (13,832,023) (13,333,994) (27,166,017) (1,433,840) (4,965,000)
Preferred stock
dividend.................. (153,126) -- (153,126) -- --
------------ ------------ ------------ ----------- -----------
Net loss applicable to
common shares............. $(13,985,149) $(13,333,994) $(27,319,143) $(1,433,840) $(4,965,000)
============ ============ ============ =========== ===========
Net loss per share, basic
and diluted............... $ (0.63) $ (0.95)
============ ============
Shares used in per
share computation,
basic and diluted......... 22,304,902 6,479,982(e) 28,784,884
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------
REVNET DECISIVE COMBINED
SYSTEMS TECHNOLOGY PRO FORMA
------------- ------------ -------------
<S> <C> <C> <C>
Revenue..................... $ -- $ $ 6,768,918
Cost of revenue............. -- -- 1,841,414
------------- ------------ -------------
Gross profit................ -- -- 4,927,504
Operating expenses
Marketing & sales......... -- -- 6,020,483
Research, development
& engineering.......... -- -- 7,550,817
General &
administrative......... -- -- 7,845,251
Depreciation and
amortization.......... 20,953,784(a) 19,632,478(c) 54,778,924
Restructuring charge...... -- -- 1,563,166
Write-off of in-process
technology............. -- -- 1,300,000
------------- ------------ ------------
Total operating expenses.... 20,953,784 19,632,478 79,058,641
------------- ------------ ------------
Net loss from operations.... (20,953,784) (19,632,478) (74,131,137)
Interest income........... -- -- 346,723
Interest expense.......... -- -- (366,296)
Other income.............. -- -- (409)
------------- ------------ ------------
Net loss.................... (20,953,784) (19,632,478) (74,151,119)
Preferred stock
dividend.................. -- -- (153,126)
------------- ------------ ------------
Net loss applicable to
common shares............. $ (20,953,784) $(19,632,478) $(74,304,245)
============= ============ ============
Net loss per share, basic
and diluted............... $ (2.18)
============
Shares used in per
share computation,
basic and diluted......... 3,262,120(b) 2,054,498(d) 34,101,502
</TABLE>
- ---------------------
(a) Adjustment to reflect the twelve-month amortization of goodwill based on
the allocation of the assumed purchase price in the June 30, 1999 pro forma
balance sheet for Revnet.
(b) Adjustment to reflect the issuance of 3,262,120 shares of MessageMedia
common stock.
(c) Adjustment to reflect the twelve-month amortization of goodwill based on
the allocation of the assumed purchase price in the June 30, 1999 pro forma
balance sheet for Decisive.
(d) Adjustment to reflect the issuance of 2,054,498 shares of MessageMedia
common stock.
(e) Adjustment to reflect shares issued in prior acquisitions as if outstanding
from January 1, 1998.
See accompanying notes to pro forma combined financial statements.
<PAGE> 4
MESSAGEMEDIA, INC.
REVNET SYSTEMS INC. AND DECISIVE TECHNOLOGY CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
NOTE 1.
The unaudited pro forma financial statements reflect the proposed acquisitions
of Revnet Systems, Inc. ("Revnet") and Decisive Technology Corporation
("Decisive") for an aggregate purchase price of $81,470,856.
NOTE 2.
Upon consummation of the acquisition of Revnet, MessageMedia, Inc.
("MessageMedia") acquired all of the common stock and all outstanding rights to
acquire shares of the common stock of Revnet in exchange for 3,262,120 shares of
MessageMedia common stock and the assumption of options to acquire up to
approximately 681,675 additional shares of MessageMedia common stock, at a
weighted average exercise price of $1.36. The purchase price is calculated to be
$41,834,901 based on the fair market value of $10.64 per share of MessageMedia
common stock, including estimated acquisition costs of $800,000. The purchase
price has been allocated as follows:
<TABLE>
<S> <C>
Current assets acquired................ $ 945,626
Furniture, equipment and software...... 154,011
Goodwill............................... 41,907,568
Liabilities assumed.................... (2,294,763)
Deferred compensation.................. 1,122,459
-----------
$41,834,901
</TABLE>
The pro forma combined balance sheet includes the adjustments necessary as if
the acquisition had occurred on June 30, 1999 and reflects the allocation of the
purchase price, issuance of MessageMedia common stock and elimination of
Revnet's equity accounts. These adjustments are summarized as follows:
(a) Elimination of existing Revnet common stock
(b) Elimination of Revnet's accumulated deficit
(c) Issuance of MessageMedia common stock (3,262,120 shares @ $0.001
par value) and recording of the net assets and excess purchase
price (goodwill and other intangibles)
(d) Accrue estimated acquisition costs
<PAGE> 5
MESSAGEMEDIA, INC.
REVNET SYSTEMS INC. AND DECISIVE TECHNOLOGY CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
NOTE 3.
Upon consummation of the acquisition of Decisive, MessageMedia acquired all of
the common stock and all outstanding rights to acquire shares of the common
stock of Decisive in exchange for 2,054,498 shares of MessageMedia common stock
and the assumption of options to acquire up to approximately 466,818 additional
shares of MessageMedia common stock, at a weighted average exercise price of
$2.69. The purchase price is calculated to be $39,635,955 based on the fair
market value of $16.03 per share of MessageMedia common stock, including
estimated acquisition costs of $475,000. The purchase price has been allocated
as follows:
<TABLE>
<S> <C>
Current assets acquired......................... $ 1,010,000
Furniture, equipment and software............... 547,000
Other assets.................................... 71,000
Goodwill........................................ 39,264,955
Liabilities assumed............................. (1,257,000)
-------------
$ 39,635,955
</TABLE>
The pro forma combined balance sheet includes the adjustments necessary as if
the acquisition had occurred on June 30, 1999 and reflects the allocation of the
purchase price, issuance of MessageMedia common stock and elimination of
Decisive's equity accounts. These adjustments are summarized as follows:
(e) Conversion of all outstanding preferred stock into common stock
(f) Elimination of existing Decisive common stock
(g) Elimination of Decisive's accumulated deficit
(h) Issuance of MessageMedia (2,054,498 shares @ $0.001 par value) and
recording of the net liabilities and excess purchase price
(goodwill and other intangibles)
(i) Record estimated acquisition costs
NOTE 4.
The allocation of the purchase price was applied to the historical balance sheet
or historical statements of operations of MessageMedia, Revnet and Decisive to
arrive at the pro forma combined balance sheet and statements of operations. The
goodwill is amortized over its estimated useful life of two years due to the
unusually rapid pace of technological development of the Internet. It is not
uncommon for a specific technology product or service in the industry to become
obsolete in a relatively short period of time. Furthermore, the Internet, as an
industry, is in its infancy stage with rapidly shifting trends, technologies,
consumer preferences and competitive pressures. Based on an initial review of
Revnet's and Decisive's technologies and their planned business models,
MessageMedia's management anticipates that it will be appropriate to use a two
year life for amortizing goodwill. In addition, both Revnet and Decisive are
operating in very competitive environments and competitive advantages are often
short lived. The pro forma combined statements of operations for the year ended
December 31, 1998 and the six months ended June 30, 1999 reflect amortization
expense for these two proposed acquisitions of $40,586,262 and $20,293,131,
respectively.
