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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 000-21751
MESSAGEMEDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0612860
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
6685 GUNPARK DRIVE EAST #240
BOULDER, CO 80301
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
(303) 440-7550
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
4104 SORRENTO VALLEY BLVD. #200
SAN DIEGO, CA 92121
(FORMER NAME, FORMER ADDRESS & FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K: [X]
As of March 15, 1999, there were outstanding 40,600,468 shares of the
Registrant's common stock, $.001 par value. As of that date, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
approximately $81,674,176 when the closing price of such stock, as reported on
the Nasdaq National Market, was $5.56. * Shares of common stock held by each
officer and director and each person who owns 5% or more of the outstanding
common stock have been excluded in that such persons may be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information called for by Part III is incorporated by reference
from the Proxy Statement relating to the Annual Meeting of Stockholders of the
Registrant to be held on May 28, 1999.
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* Excludes 25,910,868 shares of common stock held by directors and executive
officers and stockholders whose ownership exceeds five percent of the shares
outstanding at March 15, 1999. Exclusion of shares held by any person should
not be construed to indicate that such person possess the power, direct or
indirect, to direct or cause the direction of the management of policies of
the Registrant, or that such person is controlled by or under common control
with the Registrant.
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PART I
This Report on Form 10-K contains, in addition to historical information,
forward-looking statements within the meaning of Section 27 A of the Securities
Act and Section 21 E of the Exchange Act. Actual results could differ materially
from those projected in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in the
subsection entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 5. Readers are cautioned not to place undo reliance on
these forward-looking statements, which speak only as of the date hereof.
ITEM 1. BUSINESS
MessageMedia provides a seamless outsource solution for relationship-based,
transactive communications using Internet e-mail. Termed "e-messaging", this
personalized sales, marketing and service channel creates new revenue and
servicing opportunities, while cutting the cost of interacting with a large
number of customers. The suite of messaging services allows clients to easily
control each step in the messaging process and provides a flexible range of
messaging options to suit every communications need. E-messages can be
personalized and carefully targeted to segments of selected recipients based on
multiple criteria. The result is a richer relationship between company and
consumer. In addition, the enhanced customer loyalty leads to retention and
repetition of contact with the customer leading to lower operating costs,
improved service levels and higher revenue generation per client.
MessageMedia, Inc. ("MessageMedia" or the "Company") consists of three
e-mail related companies, First Virtual Holdings Inc. ("FVHI"), Email Publishing
Inc. ("EPub") and Distributed Bits, L.L.C. ("DBits"), consolidated into a
single, combined company that offers a comprehensive suite of outsource e-
messaging services and capabilities. The combined company is a member of the
family of companies, funded and supported by SOFTBANK Holdings Inc. and its
affiliates. The Company's singular focus is on e-messaging and it employs
advanced technology, tools and applications to help corporations fully utilize
this new channel for building and enhancing customer relationships online.
INDUSTRY BACKGROUND
The Internet is a rapidly growing network of computers and computer
networks that permits communication among users throughout the world. Presently,
approximately 85% of home computer users and 75% of workplace computer users
report using Internet e-mail, according to a recent Ziff-Davis study. As access
to computers and Internet e-mail becomes widespread, opportunity and competitive
necessity will drive businesses to increasingly utilize e-mail to communicate
with their customers. Newsletters, monthly statements and transaction
notifications, direct marketing, customer service, technical support, and travel
reservations and confirmation will be common applications of e-mail. At a lower
cost, e-mail can substitute for the telephone and U.S. mail. Other advantages of
e-mail include near-real time distribution, interactivity, easier more targeted
customization and the ability to complement web sites more readily. However,
before firms can successfully use this new medium, they must overcome several
significant challenges:
- The technical issues surrounding the sending of large quantities of
e-mail messages are complex. Challenges such as "bounced" messages,
spam-blocking software, network bandwidth utilization, content selection
and merge and massive databases require firms to make a large investments
in technology, staff, expertise and dedicated computing/network
facilities. Making these investments is not a guarantee of success. Some
firms have turned to an experienced service provider after repeated
attempts have failed to handle the challenges in-house.
- Businesses with a presence on the Internet also receive a large quantity
of unsolicited inbound e-mail. Standard e-mail client software is wholly
inadequate for routing these messages within the organization and for
assisting customer service representatives with the response.
- Unsolicited commercial e-mail (UCE), popularly known as "spam," is a
major concern among users and Internet service providers (ISPs). A high
degree of expertise and attentive care is essential on the part of a
company sending e-mail to a large number of customers or prospects.
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- Techniques for adding subscribers/recipients and improving response rates
are substantially different than in physical direct mail. The experience
and technology for implementing an effective e-mail direct marketing
program are not easily accomplished.
By outsourcing their e-mail delivery and response handling to MessageMedia,
clients can take advantage of this exciting new communication medium at a
reasonable cost and without delay. According to Forrester Research, the
outsourced e-mail services category is projected to grow from $8.5 million to
nearly $1 billion in the next four years.
MARKETING STRATEGY
MessageMedia's strategy is to provide a strongly differentiated
business-to-business brand by being the first to offer a variety of
complementary electronic mail services in all segments of targeted markets.
Initially, the Company will use a domestic direct sales force to target the
financial services, publishing, e-commerce and direct marketing industries and
later, MessageMedia intends to branch out into other domestic and international
markets.
The Company plans to build critical mass through internal development as
well as acquisitions and strategic alliances. Acquisitions will be pursued when
core capabilities must be augmented rapidly to meet market needs or when market
share can be purchased at a favorable price. In addition, MessageMedia will
pursue acquisitions, alliances, and customer opportunities among the SOFTBANK
family of companies.
SERVICES
MessageMedia's portfolio of services is designed to take full advantage of
e-mail as a one-to-one, interactive communications channel. Using MessageMedia's
outsource service solutions, businesses can accomplish cost-effective service
delivery, targeted marketing offers, and personalized customer care using
Internet e-mail. The Company's messaging services gives clients the ability to:
Create. Through a web-based Graphical User Interface (GUI), even
non-technical users can create and execute e-mail campaigns easily and quickly.
Users can create graphically rich e-mail messages, define the automated handling
of customer responses to outbound messages and view comprehensive activity
reports. E-messages with personalized content can be carefully targeted to
segments of selected recipients. Additionally, the presentation of the message
can be optimized for maximum visual appeal by automatically determining the most
graphically and functionally "rich" format that each e-mail reader is equipped
to receive.
Deliver. MessageMedia manages all logistics of e-messaging delivery, from
scheduled outbound message distribution to highly interactive and event-driven
communications. The Company provides reliable, large-scale delivery of
personalized and customized messages to every customer in a messaging campaign,
as well as sophisticated error-handling, "bounce" processing, and re-try
mechanisms which ensure a clean and current customer database. MessageMedia's
relationship with hundreds of local and national Internet service providers
minimizes the risk that messages will be blocked and helps to ensure that
communications reach their intended audience.
Respond. MessageMedia manages all logistics of response processing from
customers of clients, including response validation, response tracking,
performance of client defined actions and automated database updates.
MessageMedia's 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 and responses creates confidence
because specific requests have been heard, acknowledged and processed.
Manage. MessageMedia tracks and reviews the success of current and past
e-messaging campaigns and delivers multiple offers to separately defined
customer groups. This management identifies what worked and what did not. All
messaging activity is automatically tracked and logged into the Company's
database, creating a clear history of all customer actions to aid in resolution
of individual requests as well as total campaign analysis. This detailed
customer record provides a wealth of information and enables companies to
fine-tune their direct marketing efforts and increase the return on investment
in its next campaign.
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RESEARCH, DEVELOPMENT AND ENGINEERING
The Company's research, development and engineering activities are focused
primarily on the design, development and enhancement of e-messaging services, as
well as on increasing the capacity and reliability of existing products and
services. The Company has devoted a significant portion of its resources to
research, development and engineering programs. The Company's research,
development and engineering expenses were $4.8 million, $6.7 million and $4.7
million, for the years ended December 31, 1998, 1997 and 1996, respectively. The
Company believes that significant research, development and engineering
expenditures will be required in order for the Company to remain competitive.
Accordingly, the Company expects that research, development and engineering
expenses will continue to constitute a significant portion of the Company's
overall expenses in the future.
The Company's ability to design, develop, test and support new software
products and enhancements on a timely basis is critical to the Company's future
success. There can be no assurance that the Company will be successful in
developing and marketing new software products and enhancements that meet
changing customer needs and respond to such technological changes or evolving
industry standards. The Company's current services are designed around certain
widely used and accepted standards, including the MIME and SMTP e-mail standards
and upon process-based security via an e-mail confirmation. Current and future
use of the Company's services will depend, in part, on industry acceptance of
such standards and practices as they apply to the Internet and Internet
commerce.
COMPETITION
The market for MessageMedia's products and services is intensely
competitive. There are no substantial barriers to entry into MessageMedia's
business, and the Company expects that established and new entities will enter
the market for interactive messaging services and interactive Internet
communications in the near future.
The Company's principal competitors in the interactive messaging services
arena include providers of e-mail based services such as Axciom, Cyber Data
Systems, Digital Impact, MarketHome, eGain, Email Channel, Exactis.com, Inc.
(formerly Infobeat), Matchlogic, Mustang, Postmaster Direct, PostX, ReplyNet and
RevNet. The Company also competes with BroadVision, Mypoints.com and E-Care
Group for one-to-one marketing. Additionally, MessageMedia competes with
traditional advertising, merchandising and direct marketing companies that use
more conventional means of delivering information and marketing messages to
consumers.
The Company may experience additional competition from Internet service
providers, advertising and direct marketing agencies and other large established
businesses that enter the market for interactive messaging services. Companies
such as America Online, Microsoft, IBM, Integrion, AT&T, Hewlett-Packard,
Netscape Communications, Harte-Hanks Data Technology, ADVO, The Interpublic
Group of Companies and Foote, Cone and Belding, which possess large, existing
customer bases, substantial financial resources and established distribution
channels, could develop, market or resell a number of messaging services. Such
potential competitors may also choose to enter the market for messaging services
by acquiring one of MessageMedia's existing competitors or by forming strategic
alliances with such competitors. Either of these occurrences could harm the
Company's ability to compete effectively.
Many of MessageMedia's 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 the Company does. Such 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 MessageMedia's
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 such competitors bundle competing products or services for their
customers, the demand for the Company's products and services could
substantially decline. As a result of the above factors, MessageMedia cannot
assure you that the Company will compete effectively with current or future
competitors or that competitive pressures will not have a material adverse
effect on the Company's business, financial condition and results of operations.
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LIMITED INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret, copyright and
trademark laws, nondisclosure agreements, and other contractual provisions and
technical measures to protect its proprietary rights. The Company believes that,
due to the rapid pace of technological innovation for Internet products, the
Company's ability to establish and maintain a position of technology leadership
in the industry depends more on the skills of its development personnel than
upon the legal protections afforded its existing technology. There can be no
assurance that trade secret, copyright and trademark protections will be
adequate to safeguard the proprietary software underlying the Company's products
and services, or that its agreements with employees, consultants and others who
participate in the development of its software will not be breached, that the
Company will have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known. Moreover, notwithstanding the Company's
efforts to protect its intellectual property, there is no assurance that
competitors will not be able to develop functionally equivalent interactive
messaging technologies without infringing any of the Company's intellectual
property rights. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use
products or technology that the Company considers 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 the Company's
means of protecting its proprietary rights will be adequate or that the
Company's 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, the Company
believes 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 in the future. In particular, 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 the Company's products and services or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable or favorable to the Company,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company may initiate
claims or litigation against third parties for infringement of the Company's
proprietary rights or to establish the validity of the Company's proprietary
rights. In particular, on October 29, 1998, the Company 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 MessageMedia and
seeks injunctive relief and unspecified damages. Litigation to determine the
validity of any claims could result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel from
productive tasks, whether or not such litigation is determined in favor of the
Company. 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 the Company. In the event of an
adverse ruling in any such litigation, the Company 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 of the Company to develop or license a
substitute technology could have a material adverse effect on the Company's
business, financial condition and results of operations.
GOVERNMENT REGULATION
There are currently few laws or regulations that directly apply to
activities on the Internet. The Company believes that it is 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 ("spam"). 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,
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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 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 December 31, 1998, the Company had a total of 76 full time employees
and 6 part time employees. Of these 82 employees, 44 were in research,
development and engineering, 21 were in marketing and sales and 17 were in
general and administration. In addition, the Company had under contract 10
consultants and/or contractors.
The Company's future success depends to a significant extent upon the
continued service of its key technical and senior management personnel and upon
its 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 the Company will be successful in
attracting and retaining such personnel, and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. None of the Company's employees are represented by a
labor union. The Company has never experienced a work stoppage and believes that
its relationships with its employees are good.
Executive Officers of the Company
The following table sets forth the names, ages and positions of the
executive officers of the Company as of March 15, 1999:
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NAME AGE POSITION
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Dennis J. Cagan...................... 53 Chief Executive Officer
A. Laurence Jones.................... 46 President
Bert C. Klein........................ 38 Vice President of Finance and Administration
and Chief Financial Officer
David B. Ehrenthal................... 38 Vice President of Sales
Andrew C. Currie..................... 39 Vice President of Client Services
Brian P. Makare...................... 36 Vice President of Development and
Engineering
Marshall T. Rose..................... 38 Chief Technical Officer
Lewis T. Silverberg.................. 64 Corporate Secretary
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FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
MessageMedia operates in a rapidly changing environment that involves a
number of uncertainties, some of which are beyond the Company's control. In
addition to the uncertainties described elsewhere in this report, these
uncertainties include:
OUR HISTORY OF OPERATING LOSSES AND ANTICIPATED FUTURE LOSSES
We have incurred net operating losses in each quarter since our inception
in March 1994. To date, we have not generated significant revenues and we cannot
guarantee that our revenues will increase in the future. In addition, we are
currently making and plan to continue to make significant investments in our
systems, sales, marketing, research, development and engineering and
administrative infrastructure in the near future. As a result of these
expenditures, we expect to continue to incur significant operating losses for
the foreseeable future. For these and other reasons, we cannot assure you that
we will ever operate profitably.
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OUR LIMITED OPERATING HISTORY
We began operations in March 1994. To date, we have generated substantially
all of our revenues from the following:
- Messaging fees and related messaging consulting fees;
- The receipt of registration fees from consumers and merchants;
- Transaction processing fees;
- Merchandising fees;
- Sales of our VirtualTAGs, an interactive banner; and
- Internet related consulting fees.
Since discontinuing the Internet Payment System operations in August 1998,
we have dedicated all of our resources to developing and implementing our
messaging platform and related services and technologies.
Our future financial performance will depend significantly on the
successful introduction and customer acceptance of our messaging platform and
other new and enhanced products and services. It is very difficult to predict
what the demand will be for our messaging platform because it is a relatively
new type of product. Furthermore, we believe that our prior experience in
developing and operating the Internet Payment System does not offer a meaningful
basis to assess the future prospects of our messaging platform and related
products and services. Accordingly, we cannot assure you that a significant
market for our messaging platform or for any of our other technologies or
services will develop.
UNCERTAINTY RELATING TO INTEGRATING EMAIL PUBLISHING INC. AND DISTRIBUTED BITS,
L.L.C.
On December 9, 1998, we acquired EPub through a merger in which EPub merged
with and into our wholly-owned subsidiary. On December 11, 1998, we acquired
DBits in a similar transaction. As a result, companies that had previously
operated independently must now work together. The integration will require
significant effort from our personnel and the personnel of EPub and DBits who
are now MessageMedia employees. In addition to the integration risks that we
describe below, we cannot assure you that we will be able to profitably
consolidate such businesses.
INTEGRATION OF POTENTIAL ACQUISITIONS
As part of our business strategy, we may focus on acquiring, or making
significant investments in, complementary companies, products and technologies.
The following risks are common to the integration of two companies, and may be
associated with recent or future acquisitions:
- The difficulty of incorporating new operations, technology and personnel
into one company;
- The potential disruption of our ongoing business;
- The additional expense associated with amortization of acquired
intangible assets;
- The maintenance of uniform standards, controls, procedures and policies;
and
- The impairment of relationships with employees and customers.
We cannot assure you that we will successfully overcome these risks or any
other problems that we encounter in connection with any future acquisitions.
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OUR NEED FOR ADDITIONAL CAPITAL
We will need to raise additional funds through the public or private sale
of our equity or debt securities or from other sources for the following
purposes:
- To fund our operations;
- To develop new or enhanced services;
- To respond to competitive pressures;
- To acquire complementary businesses or technologies; and
- To remain in compliance with requirements of the Nasdaq National Market
for continued listing.
We will need to raise additional funds through the public or private sale
of our equity or debt securities or from other securities, before the end of the
first quarter 2000. We cannot assure you that additional funds will be available
when we need them, or that if funds are available, they will include terms
favorable to MessageMedia or our stockholders. If we are not able to obtain
sufficient funds or if adequate funds are not available on terms acceptable to
us, we may not be able to develop or enhance our products and services. A lack
of sufficient funds could also prevent us from taking advantage of important
opportunities or being able to respond to competitive pressures. Any of these
results could have a material adverse effect on our business, financial
condition and results of operations.
Our need to raise additional funds could also directly and adversely affect
your investment in MessageMedia in another way. When a company raises funds by
issuing shares of stock, the percentage ownership of the existing stockholders
of that company is reduced or diluted. If we raise funds in the future by
issuing additional shares of stock, you may experience significant dilution.
Additionally, certain types of equity securities that we may issue in the future
could have rights, preferences or privileges senior to your rights as a holder
of our common stock.
OUR ABILITY TO ATTRACT AND RETAIN PERSONNEL
Our success greatly depends on the continued service of our key senior
management personnel. None of the persons currently in such positions are bound
by an employment agreement. The loss of any member of our senior management team
could have a material adverse effect on our future operating results. In January
1999, Keith S. Kendrick, President of MessageMedia left MessageMedia to pursue
another opportunity. His position was replaced with an interim-CEO, Dennis
Cagan. In addition, on March 1, 1999, the Company appointed A. Laurence Jones as
its President. Our future success will depend in large part upon our ability to
attract, retain and motivate highly skilled employees, in particular in the role
of President or Chief Executive Officer as well as other senior management
positions. We face significant competition for individuals with the skills and
experience required to perform in such roles. We cannot assure you that we will
be able to attract or retain such individuals, or that the departure of such
individuals from MessageMedia will not cause a disruption in our operations.
RISKS ASSOCIATED WITH NEW MANAGEMENT TEAM
Virtually all of our executive officers, including our Chief Executive
Officer, President, Chief Financial Officer, Vice President of Product
Management, and Vice President of Engineering, have joined our company within
the past several months. Our future success will depend in large part upon the
ability of our executive officers and other members of our management to operate
effectively, both individually and as a group. Due to the fact that many of our
executive officers are new to our company and have never worked together, and
that we do not yet have a full management team in place, we cannot assure you
that our management will be able to function effectively, individually or as a
team. Failure to do so could have a material adverse effect on our business,
financial condition and results of operations.
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RISKS ASSOCIATED WITH OUR RELOCATION
On January 11, 1999, we announced our plan to relocate and consolidate our
offices in our Boulder, Colorado location. The consolidation includes the
relocation of 22 of our employees currently residing in San Diego, California
and is subject to risks commonly encountered in making such a relocation,
including, among others, loss of personnel who choose not to relocate, the
difficulty associated with assimilating the personnel and operations from two
locations, the potential disruption of our business and the impairment of our
reputation and relationships with employees and clients. We cannot assure you
that we will overcome these risks and continue to operate our business
effectively.
Our relocation in Colorado also presents risks with respect to the services
we provide to our customers. Currently we maintain technical platforms in each
of San Diego and Boulder. The platforms contain software which we use to provide
e-mail delivery services for our customers. When we consolidate our offices in
Colorado, the technical platform in San Diego will be discontinued and the
software and services provided under the San Diego platform will be integrated
into the Colorado platform, which utilizes software acquired in the EPub
acquisition. We will also integrate software obtained in our acquisition of
DBits. We cannot assure you that we will be successful in our integration of the
software acquired from EPub with the San Diego platform, in our attempt to
retrain our employees to manage the integrated platform, in the transition of
our customers to the new platform, or in our integration of the DBits software.
UNCERTAINTY OF OUR NASDAQ NATIONAL MARKET LISTING
Our common stock is currently listed on the Nasdaq National Market. Nasdaq
has certain requirements that a company must meet to remain listed on the Nasdaq
National Market. If we continue to experience losses from our operations or if
we are unable to raise additional funds, we may not be able to maintain the
standards for continued quotation on the Nasdaq National Market. If our common
stock is removed from the Nasdaq National Market, any trading in our common
stock might then be conducted on the Nasdaq SmallCap Market, which is a
significantly less active market than the Nasdaq National Market. As a result,
you could find it more difficult to dispose of your MessageMedia common stock.
Furthermore, Nasdaq recently adopted new rules which make continued listing
of companies on either of the Nasdaq National Market or the Nasdaq SmallCap
Market more difficult. If MessageMedia common stock were removed from the Nasdaq
National Market and did not qualify for listing on the Nasdaq SmallCap Market or
was subsequently delisted from the Nasdaq SmallCap Market, MessageMedia common
stock could be subject to what are known as the "penny stock" rules. The "penny
stock" rules place additional requirements on broker-dealers who sell or make a
market in such securities. Consequently, if we fail to qualify for listing on,
or if we were removed from, the Nasdaq SmallCap Market, the ability or
willingness of broker-dealers to sell or make a market in MessageMedia common
stock could decline. As a result, your ability to resell your MessageMedia
shares could be adversely affected. In addition, if the market price of
MessageMedia common stock falls below $5.00 per share, as it has in the past, we
could become subject to some of the "penny stock" rules even if our common stock
were still quoted on the Nasdaq SmallCap Market. Furthermore, if we were deemed
to be an issuer of "penny stock," we could lose the protection given to
"forward-looking statements" by Section 27A of the Securities Act and Section
21E of the Exchange Act.
ANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS
We expect that our future operating results may fluctuate significantly.
These fluctuations will 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:
- Market response to our messaging platform;
- Difficulties in the development or deployment of new messaging products
or services;
- Market acceptance of Internet commerce, products and services in general;
- Fluctuating market demand for our products and services;
8
<PAGE> 10
- The degree of acceptance of the Internet as an advertising and
merchandising medium;
- The timing and effectiveness of collaborative marketing efforts initiated
by our strategic partners;
- The timing of the introduction of new products and services offered by
us;
- The timing of the release of enhancements to our products and services;
- Product introductions and service offerings by our competitors;
- The mix of the products and services provided by us;
- The timing and rate at which we increase our expenses to support
projected growth;
- The cost of compliance with applicable government regulations;
- Competitive conditions in our marketplace; and
- General economic conditions.
The fees that we charge for messaging and consulting services may change as
we assess our marketing strategy and competitive position. 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 be materially and adversely affected.
UNCERTAIN ACCEPTANCE OF OUR MESSAGING SERVICES
Market demand for new product and service types such as interactive
messaging is inherently uncertain. The messaging platform is very different from
the traditional methods of marketing and information exchange used by our target
customers, who have typically relied on advertising and direct mail to attract
new customers and maintain customer relationships. We believe that the messaging
platform will prove to be an efficient and cost-effective marketing and
relationship-management tool for a broad variety of customers. However, we
cannot assure you that prospective customers will be able to implement the
messaging platform without substantial additional cost or that it will be cost
efficient when compared to traditional methods of marketing and information
exchange. If the messaging platform fails to meet customers' demands, the use of
our interactive messaging services may decline over time. If this were to
happen, our business, financial condition and results of operations would be
materially and adversely affected.
OUR DEPENDENCE ON THIRD-PARTY PROVIDERS
We depend heavily on several third-party providers of Internet and related
telecommunication services in operating our messaging platform. We cannot assure
you that these companies will 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.
We would have to reengineer our computer systems and telecommunications
infrastructure to accommodate a new service provider. This process would be both
expensive and time-consuming. Any interruption by our service providers would
also be likely to disrupt the operation of the messaging platform, causing a
loss of revenues and potential loss of customers. Such losses could have a
material adverse effect on our business, financial condition and results of
operations.
OUR RELIANCE ON SIGNIFICANT CUSTOMERS
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 for this portion of our business. 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.
9
<PAGE> 11
Consequently, if we fail to develop relationships with significant new
customers, our business, financial condition and results of operations will be
materially and adversely affected.
UNDEVELOPED AND RAPIDLY CHANGING MARKETS FOR OUR PRODUCTS
The markets for our products and services are at a very early stage of
development and are rapidly changing. An increasing number of entities and
individuals continue to enter the market in which we compete. These 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. Demand for and
market acceptance of recently introduced products and services is both uncertain
and risky. The degree to which the 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 interactive messaging will also 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 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. Accordingly, we cannot
assure you that sufficient demand for our products and services will develop to
sustain our business.
RISKS OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS
Our products and services are designed around current technical standards
and our revenues depend 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. We cannot assure you that the standards on which our products
and services are or will be based will be accepted by the industry. Nor can we
assure you that products, services or technologies developed by others will not
render our products and services noncompetitive or obsolete. If we are unable to
respond to changing market conditions, technological developments, emerging
industry standards or changing customer requirements, our business, financial
condition and results of operations could be materially and adversely affected.
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. We cannot assure you that, despite testing that
our clients and we conduct, we will locate errors if they occur. Nor can we
assure you that we will not experience development delays. Either of these
occurrences could have a material adverse effect on our business, financial
condition and results of operations.
OUR RISK OF CAPACITY CONSTRAINTS
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. We cannot assure you, however,
that our products and services will be able to meet the growing demand as the
number of 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, financial
condition and results of operations could be materially and adversely affected.
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<PAGE> 12
OUR DEPENDENCE ON INCREASED USAGE AND STABILITY OF THE INTERNET
The future of the Internet as a center for commerce will depend in
significant part on the following factors:
- Continued rapid growth in the number of households and commercial,
educational and government institutions with access to the Internet;
- The level of usage by individuals;
- The number and quality of products and services designed for use on the
Internet; and
- 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
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 is also 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 viability of Internet
commerce and the market for our products 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. It also needs to be expanded to provide a
substantial amount of public education to increase confidence in the integrity
and security of Internet commerce. If the Internet infrastructure is not
adequately expanded or managed, or if our products and services do not achieve
sufficient market acceptance, then our business, financial condition and results
of operations will be materially and adversely affected.
OUR RISK OF SYSTEMS FAILURES, SECURITY RISKS, AND LACK OF SUFFICIENT INSURANCE
Risk of System Failures
The success of our services also depends on our ability to protect our
computer equipment and the information stored in our data centers against loss
or damage. We must protect against system overloads, fire, power loss,
telecommunications failures, unauthorized intrusion, infection by computer
viruses and similar events. We cannot assure you that a system failure would not
materially and adversely affect our ability to provide our products and
services.
Security Risks
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 is also 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, we cannot
guarantee that such provisions will be enforceable or will be effective in
limiting our exposure to damage claims.
11
<PAGE> 13
Lack of Sufficient Insurance
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 revenues,
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.
ITEM 2. PROPERTIES
The Company's corporate facility consists of approximately 10,000 square
feet of leased space in San Diego, California. This primary facility lease
expires in May 1999. In addition, the Company leases approximately 500 square
feet of space in San Diego, California for its computer processing center. In
December 1998, the Company acquired EPub. In doing so, the Company acquired a
facility lease consisting of approximately 6,500 square feet of leased space in
Boulder, Colorado. This facility lease expires in June 2002. On January 11,
1999, the Company decided to close its San Diego operations and not renew its
facility lease when its expires. In addition, the Company will move out of San
Diego processing facility once a new processing center is established in
Colorado. As of the time of this filing, the move of the corporate facility is
expected to take place mid-year 1999. The Company is also looking for a larger
corporate facility in Colorado to lease.
The Company's operations are dependent in part upon its ability to protect
its operating systems against physical damage from fire, floods, earthquakes,
power loss, telecommunications failures, break-ins and similar events. The
Company does not presently have redundant, multiple site capacity in the event
of any such occurrence. Despite the implementation of network security measures
by the Company, its servers are also potentially vulnerable to computer viruses,
break-ins and similar disruptions from unauthorized tampering with the Company's
computer system. The occurrence of any of these events could result in
interruptions, delays or cessations in service to users of the Company's
products and services, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 3. LEGAL PROCEEDINGS
On October 19, 1998, Exactis.com, Inc., a Delaware Corporation, filed a
complaint against EPub, which is now a subsidiary of MessageMedia, 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, the Company 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 the
Company. The complaint seeks injunctive relief and unspecified damages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on December 9, 1998.
Proxies were solicited for the meeting. The matters described below were voted
on at the meeting. Of the 31,418,327 shares of common stock outstanding and
eligible to vote at the meeting, 30,389,587 shares of common stock were actually
voted and the results of the votes taken at such meeting were as follows:
1. The proposal to (i) approve and adopt the Agreement and Plan of Merger
and Reorganization dated August 20, 1998, among the Company, EPub Holdings,
Inc., a Delaware corporation and wholly-owned
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<PAGE> 14
subsidiary of the Company ("Sub"), EPub, certain stockholders of EPub, and Chase
Manhattan Bank & Trust Company, N.A., as escrow agent, and (ii) approve the
merger of Sub with and into EPub pursuant to which EPub would become a
wholly-owned subsidiary of the Company and all outstanding shares of EPub
capital stock would be converted into shares of the Company's common stock was
approved by the stockholders. For the purposes of this proposal, the 20,043,263
shares of the Company's common stock held by SOFTBANK Holdings, Inc. and its
affiliates were excluded from the calculation due to their relationship with
EPub. Of the 11,375,064 shares eligible to vote, 7,792,650 shares were voted in
favor of the proposal, 21,000 in opposition to the proposal and there were 5,583
abstentions.
2. The proposal to approve the amendment to the Company's Certificate of
Incorporation to change the Company's name from First Virtual Holdings
Incorporated to "MessageMedia, Inc." was approved by the stockholders. Of the
31,418,327 shares voted, 30,140,349 were voted in favor of the proposal, 37,844
in opposition to the proposal and there were 3,249 abstentions.
3. The proposal to amend the Company's Certificate of Incorporation to
increase the number of authorized shares of the Company's common stock from
40,000,000 to 100,000,000 was approved by the stockholders. Of 31,418,327 shares
voted, 26,693,099 were voted in favor of the proposal, 186,343 in opposition to
the proposal and there were 8,656 abstentions.
4. The proposal to amend the Company's 1995 Stock Plan to increase the
number of shares of the Company's common stock available for issuance thereunder
by 2,000,000 shares to an aggregate of 6,000,000 shares was approved by the
stockholders. Of the 31,418,327 shares voted, 26,856,531 shares were voted in
favor of the proposal, 179,915 in opposition of the proposal and there were
29,583 abstentions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MessageMedia's common stock commenced trading in the over-the-counter
market on December 13, 1996 and was quoted on the Nasdaq National Market under
the symbol "FVHI" (First Virtual Holdings Incorporated). On December 15, 1998,
the Company changed its Nasdaq symbol to "MAIL" and on March 30, 1999, the
Company changed its Nasdaq symbol to "MESG". The following table represents the
high and low sales prices for the Company's common stock on the Nasdaq National
Market.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter.................................... 3 1/8 11/1 9 1/2 6 3/4
Second Quarter................................... 3 1/16 21/3 7 1/4 3 1/2
Third Quarter.................................... 7 3/8 1 7/16 7 2 7/8
Fourth Quarter................................... 6 5/16 1 25/32 5 7/8 2 1/16
</TABLE>
The Company has not paid any dividends on its common stock and does not
anticipate that it will do so in the foreseeable future. As of March 15, 1999,
there were approximately 277 holders of record and an estimated 3,400 beneficial
holders of the Company's common stock.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes thereto
appearing elsewhere in this Report on Form 10-K.
STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
MARCH 11, 1994
YEAR ENDED DECEMBER 31, (DATE OF INCEPTION)
-------------------------------------------------------- THROUGH DECEMBER 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ----------- --------------------
<S> <C> <C> <C> <C> <C>
Revenue................ $ 1,287,790 $ 1,450,598 $ 695,866 $ 197,902 $ 3,580
Cost of revenues....... 97,553 270,416 265,900 123,375 --
------------ ------------ ------------ ----------- ---------
Gross profit........... 1,190,237 1,180,182 429,966 74,527 3,580
Operating expenses:
Marketing and sales.... 1,934,486 5,424,110 1,836,545 346,400 143,678
Research, development
and engineering...... 4,828,277 6,687,177 4,652,582 530,809 307,315
General and
administrative....... 3,810,073 4,377,688 4,237,638 1,292,781 358,790
Restructure charge..... 812,166 -- -- -- --
Write-off of in-process
technology........... 1,300,000 -- -- -- --
------------ ------------ ------------ ----------- ---------
Total operating
expenses............. 12,685,002 16,488,975 10,726,765 2,169,990 809,783
Depreciation and
amortization......... 2,470,917 1,097,716 524,124 106,628 16,327
------------ ------------ ------------ ----------- ---------
Loss from operations... (13,965,682) (16,406,509) (10,820,923) (2,202,091) (822,530)
Interest income
(expense)............ 133,659 459,227 130,983 (67,890) (13,149)
------------ ------------ ------------ ----------- ---------
Net loss............... (13,832,023) (15,947,282) (10,689,940) (2,269,981) (835,679)
Dividends imputed on
preferred stock...... (153,126) (1,250,000) -- -- --
------------ ------------ ------------ ----------- ---------
Net loss applicable to
common shares........ $(13,985,149) $(17,197,282) $(10,689,940) $(2,269,981) $(835,679)
============ ============ ============ =========== =========
Net loss per share,
basic and diluted.... $ (0.63) $ (1.94) $ (2.33) $ (0.54) $ (0.26)
Shares used in per
share computation,
basic and diluted.... 22,304,902 8,842,367 4,588,262 4,170,231 3,185,606
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments........... $ 4,659,375 $6,331,059 $17,327,971 $2,091,651 $ 14,847
Furniture, equipment, software and
information technology, net...... 1,475,720 1,878,893 2,023,861 417,653 261,638
Intangibles........................ 23,894,715 -- -- -- --
Total assets....................... 31,220,981 9,048,089 19,692,557 2,574,826 320,421
Current liabilities................ 2,670,602 4,769,958 3,236,037 622,403 148,672
Notes and amounts payable,
non-current...................... 53,786 162,500 1,912,500 1,200,000 713,400
Stockholders' equity (net capital
deficiency)...................... 28,483,510 (571,869) 14,944,020 752,423 (541,651)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-K contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the subsection entitled "Factors
Affecting Operating Results and Market Price of Stock" commencing on page 5.
MessageMedia provides a seamless outsource solution for relationship-based,
transactive communications using Internet e-mail. Termed "e-messaging" this
personalized sales, marketing and service channel creates new revenue and
servicing opportunities while cutting the cost of interacting with a large
number of customers. The Company's comprehensive suite of e-messaging services
allows clients to easily control each step in the messaging process and provides
a flexible range of messaging options to suit every communications need.
E-messages can be personalized and carefully targeted to segments of selected
recipients based on multiple criteria. The result is a richer relationship
between company and consumer. In addition, the enhanced customer loyalty leads
to retention and repetition of contact with the customer leading to lower
operating costs, improved service levels and higher revenue generation per
client.
MessageMedia, Inc. consists of three e-mail related companies, FVHI, EPub
and DBits, consolidated into a single, combined company that offers a
comprehensive suite of outsource e-messaging services and capabilities. The
combined company is a member of the family of companies, funded and supported by
SOFTBANK Holdings Inc. and its affiliates. The Company's singular focus is on
e-messaging and it employs advanced technology, tools and applications to help
corporations fully utilize this new channel for building and enhancing customer
relationships online.
In December 1998, MessageMedia was formed when the three entities merged
together. As a result of the merger, EPub became a wholly-owned subsidiary of
the Company when MessageMedia acquired all of the common stock and all
outstanding rights of the common stock of EPub in exchange for 5,582,685 shares
of MessageMedia common stock and the assumption by MessageMedia of options and
warrants to acquire up to approximately 417,315 additional shares of
MessageMedia common stock at a weighted average exercise price of $.04 per
share. DBits also became a wholly-owned subsidiary of the Company when
MessageMedia acquired all equity interests, including options, warrants or other
purchase rights, if any, in DBits, in exchange for 1,350,000 shares of
MessageMedia common stock and warrants to purchase an additional 250,000 shares
of MessageMedia common stock at an exercise price of $6.00 per share and an
additional 250,000 shares of MessageMedia common stock at $8.00 per share.
MessageMedia has incurred net operating losses in each quarter since
inception. As of December 31, 1998, MessageMedia had an accumulated deficit of
$43.7 million. To date, the Company has not generated significant revenues.
There can be no assurance that the Company's future revenues will increase and
the Company's ability to generate significant future revenues is subject to
substantial uncertainty. In addition, as the Company introduces the new
functionality of its messaging platform and explores opportunities to merge with
or acquire complementary businesses and technologies, the Company expects to
continue to incur significant operating losses for the foreseeable future.
RESULTS OF OPERATIONS
Revenues
The Company has historically generated revenues from messaging services,
consulting, interactive advertising development, the Company's payment system
and on-line merchandising. On August 17, 1998, the company ceased the operations
of the First Virtual Internet Payment System ("FVIPS"). Also, in December
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<PAGE> 17
1997, 1 Virtual Place, the Company's on-line shopping mall, was closed and
merchandising sales ceased. Revenue was earned as detailed in the table below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Messaging services...................... $ 424,564 $ -- $ --
Consulting.............................. 320,000 288,300 150,000
Interactive advertising development..... -- 115,000 --
First Virtual Internet Payment System... 543,226 1,002,554 532,134
Merchandising........................... -- 44,744 13,732
---------- ---------- --------
Total revenues................ $1,287,790 $1,450,598 $695,866
========== ========== ========
</TABLE>
For the year ended December 31, 1998, revenues decreased to $1,287,790 as
compared to $1,450,598 for the year ended December 31, 1997. The Company
introduced its new messaging services in July 1998 and discontinued its FVIPS
operations in August 1998. The Company also ceased operations of both
Interactive advertising development and merchandising in December 1997.
Consulting services in 1998 increased slightly from the prior year as the
Company experienced demand for messaging related services from clients
interested in the new products and services available for outbound e-mail.
For the year ended December 31, 1997, revenues increased to $1,450,598 as
compared to $695,866 for the year ended December 31, 1996. Revenues from FVIPS
benefited from bulk sales of consumer and merchant registrations and increased
consumer registration fees. Revenues from merchandising and interactive
advertising development increased in 1997, as compared to the year ended
December 31, 1996, as the Company began selling on-line merchandise in December
1996 and VirtualTAGs in January 1997. Consulting revenue increased for the year
ended December 31, 1997 as the Company experienced greater demand for Internet
related consulting.
Cost of Revenues
The Company incurred cost of revenues from messaging services, consulting,
interactive advertising development, FVIPS and on-line merchandising, as
detailed in the table below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Messaging services.......................... $29,394 $ -- $ --
Consulting.................................. 30,000 -- --
Interactive advertising development......... -- 46,000 --
First Virtual Internet Payment System....... 38,159 182,563 256,508
Merchandising............................... -- 41,853 9,392
------- -------- --------
Total cost of revenues............ $97,553 $270,416 $265,900
======= ======== ========
</TABLE>
For the year ended December 31, 1998, the cost of revenues for messaging
services was approximately 6.9% of related messaging revenues. Since the Company
is still in the early stages of offering its messaging products, cost of
revenues for messaging services is likely to increase as additional
functionality is added to the messaging platform. Cost of revenues related to
consulting were incurred as the Company hired a specialist to handle its
consulting needs related to messaging services. Consulting cost of revenues were
9.4% of related consulting revenues.
For the year ended December 31, 1997, the cost of revenues related to FVIPS
decreased to 18% of FVIPS related revenues compared to 48% of related revenues
in 1996. By enhancing FVIPS with new capabilities and thus replacing services
provided by third parties, the Company was able to reduce FVIPS cost of
revenues. The Company was also able to negotiate more favorable processing
agreements with outside service providers as the volume of FVIPS transactions
increased. For the year ended December 31, 1997, merchandising cost of revenues
increased to 94% of related revenues, as compared to 68% for the year ended
December 31, 1996. This increase was primarily due to a reduction in the
Company's margins in order to stay
16
<PAGE> 18
competitive in the retail pricing of its goods. In December 1997, the Company
decided to close it merchandising segment and focus its efforts on their
messaging services. For the year ended December 31, 1997, the Company's
interactive advertising development cost of revenues were for the creation of
VirtualTAGs.
Operating Expenses
Operating expenses consist of marketing and sales, research, development
and engineering, and general and administrative expenses. In addition, in 1998,
the Company incurred restructuring expenses in the second quarter and a
write-off of in-process technology in the fourth quarter in connection with the
acquisition of EPub. The Company expects operating expenses to continue to be
substantial as development and enhancement of technological capabilities
associated with its messaging services continues. The Company also anticipates
that expenses necessary for the introduction and promotion of such products will
be substantial.
Marketing and sales expenses. Marketing and sales expenses, which include
salaries and wages, consulting fees, advertising, trade show expenses, travel
and other marketing expenses, decreased to $1.9 million for the year ended
December 31, 1998, as compared to $5.4 million for the year ended December 31,
1997. This decrease is primarily due to the reduction in headcount in marketing
staff, resulting in a decrease in salaries, wages and payroll taxes of
approximately $1.6 million, a decrease in consulting fees of approximately
$730,000 due to reductions in marketing research, a decrease in promotional
expenses of approximately $640,000 from elimination of sales efforts related to
the payment system, a decrease in recruiting and relocation expenses of
approximately $180,000 as hiring new employees slowed, a decrease in travel
related expenses of approximately $115,000 and a general decrease in spending of
approximately $235,000 from lower headcount.
For the year ended December 31, 1997, marketing and sales expenses
increased to $5.4 million as compared to $1.8 million for the year ended
December 31,1996. This increase resulted primarily from the hiring of new
marketing personnel to promote Company products which increased salaries, wages
and payroll taxes by approximately $1.7 million, an increase in advertising and
promotional expenses of $785,000 for promotion of Company products, a consulting
expense increase of approximately $580,000 for market research analysis, a
recruiting and relocation expense increase of approximately $110,000 relating to
the hiring of new employees, a travel expense increase of approximately $70,000
for increased sales calls, and a general increase in spending of approximately
$355,000 to support the Company's expanding marketing and sales activities.
Research, development and engineering expenses. Research, development and
engineering expenses, which include salaries and wages and consulting fees to
support the development, enhancement and maintenance of the Company's products
and services, decreased to $4.8 million for the year ended December 31, 1998, as
compared to $6.7 million for the year ended December 31, 1997. This decrease is
primarily due to the reduction in headcount in the research, development and
engineering staff, resulting in a decrease in salaries, wages and payroll taxes
of approximately $950,000, a decrease in consulting fees of approximately
$130,000 due to the elimination of development consultants associated with the
payment system, a decrease in travel related expenses of approximately $170,000,
a decrease in communications expenses of approximately $125,000 related to the
shut down of the payment system and a general decrease in spending of
approximately $525,000 from lower department headcount and reduced overhead
associated with both a general reduction in staff and with the closure of the
Ann Arbor office in December 1997.
For the year ended December 31, 1997, research, development and engineering
expenses increased to $6.7 million as compared to $4.7 million for the year
ended December 31, 1996. This increase resulted primarily from increases in
salaries, wages and payroll taxes of approximately $1.7 million due to
additional staffing needs, and a general increase in spending of approximately
$720,000 to support the expansion of the Company's research, development and
engineering activities in San Diego, California, which included the
establishment of a second data processing center, offset by a decrease in
consulting expenses of approximately $420,000 as the Company replaced
consultants with employees.
General and administrative expenses. General and administrative expenses
consist primarily of salaries and wages, professional and consulting fees and
other expenses associated with the general management and
17
<PAGE> 19
administration of the Company. General and administrative expenses decreased to
$3.8 million for the year ended December 31, 1998, as compared to $4.4 million
for the year ended December 31, 1997. This decrease is primarily due to the
reduction in headcount in general and administrative staff resulting in a
decrease in salaries, wages and payroll taxes of approximately $840,000, a
decrease in promotional expenses of approximately $355,000 from less public
relations and investor relations activities, offset in part, by an increase in
legal expenses of approximately $315,000 for patent litigation and Nasdaq
listing issues, an increase in consulting expenses of approximately $180,000 for
merger and acquisition related research and analysis and a general increase in
spending of approximately $100,000 to support the Company's operations
For the year ended December 31, 1997, general and administrative expenses
increased to $4.4 million as compared to $4.2 million for the year ended
December 31, 1996. This increase resulted primarily from increases in salaries,
wages and payroll taxes of approximately $730,000 for additional staffing and an
increase of approximately $520,000 in public relations and investor relations,
offset by a $1.0 million, one-time charge that the Company 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 and
a general reduction in spending of approximately $50,000.
Restructuring expenses. In the second quarter of 1998, the Company recorded
a restructuring charge of approximately $812,000 as a result of the Company's
decision to focus its efforts on its messaging platform, initiate efforts to
cease operations of its Internet payment system and better align its cost
structure with expected revenue projections. The restructuring activity included
the elimination of job responsibilities company wide, resulting in approximately
$545,000 incurred to sever employees, the cancellation of consumer and merchant
memberships paid to the Company for the right to use the Internet payment system
resulting in potential refunds of approximately $110,000, the cancellation of
certain contracts relating to the operations of the payment system resulting in
one-time termination fees of approximately $62,000, and the downsizing of the
Company's corporate office space which included relocating the Company to new,
less expensive office space resulting in moving expenses of approximately
$95,000.
At December 31, 1998, the Company has not paid all expenses related to the
shut down of the internet payment system. Included in other accrued liabilities
at December 31, 1998, is $198,410 related to such expenses. The Company expects
that these expenses will be paid before mid-1999 as the Company relocates to
Boulder, Colorado and closes down its San Diego facilities and operations.
Write-off of in-process technology. In connection with the EPub
acquisition, the Company wrote-off $1.3 million of in-process technology. This
amount was expensed as a non-recurring charge on December 9, 1998, the
acquisition date. This write-off was necessary because the acquired technology
had not yet reached technological feasibility and had no future alternative
uses. MessageMedia is using the acquired in-process technology to build future
functionality into its e-messaging platform and enhance its suite of services.
The Company anticipates that certain functionality using the acquired in-process
technology will be generally released before the end of 1999, with additional
product releases in subsequent periods through 2001. MessageMedia expects that
the acquired technology will be successfully developed, but there can be no
assurance that commercial viability of these products will be achieved.
The nature of the efforts required to develop the purchased in-process
technology into a commercially viable product principally relate to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specifications, including functions, features and technical performance
requirements.
The value of the purchased in-process technology was determined with the
assistance of an independent valuation, by estimating the projected net cash
flows related to such products, including costs to complete the development of
the technology and the future revenues to be earned upon commercialization of
the products. These cash flows were discounted back to their net present value.
The resulting projected net cash flows from such projects were based on
management's estimates of revenues and operating profits related to such
projects.
18
<PAGE> 20
If these projects to develop commercial products based on the acquired
in-process technology are not successfully completed, the revenues and financial
conditions of MessageMedia may be adversely affected in future periods.
Fluctuations in operating results. The Company expects to experience
significant fluctuations in its future quarterly operating results. These
fluctuations will be due to several factors, many of which are beyond the
control of the Company, including, among others, market response to the
Company's messaging services; difficulties encountered in the development or
deployment of products or services, including interactive messaging;
difficulties encountered in acquiring and/or merging with other companies or
technologies, including in particular any difficulties in integrating the
technology and operations of EPub and/or DBits; market acceptance of Internet
commerce in general and the Company's messaging services concept in particular;
fluctuating market demand for the Company's products and services; the degree of
acceptance of the Internet as an advertising and merchandising medium; the
timing and effectiveness of collaborative marketing efforts initiated by the
Company's strategic partners; the timing of the introduction of new products and
services offered by the Company; the timing of the release of enhancements to
the Company's products and services; product introductions and service offerings
by the Company's competitors; the mix of the products and services provided by
the Company; the timing and rate at which the Company increases its expenses to
support projected growth; the cost of compliance with applicable government
regulations; competitive conditions in the Company's marketplace; and general
economic conditions. In addition, the fees charged by the Company for
advertising, messaging, and consulting services, are subject to change as the
Company introduces its messaging services and assesses its marketing strategy
and competitive position.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had $4.7 million in cash and cash
equivalents. On March 26, 1999, the Company issued 2,352,942 shares of its
common stock in a private placement for net proceeds of approximately $10
million. MessageMedia believes that existing cash resources will be sufficient
to support MessageMedia's currently anticipated working capital and capital
expenditure requirements through the end of 1999. MessageMedia will need to
raise additional funds through the public or private sale of its equity or debt
securities or from other sources before the end of the first quarter 2000. The
timing and amount of MessageMedia's capital requirements will depend on a number
of factors, including demand for MessageMedia's products and services, the need
to develop new or enhanced products and services, competitive pressures and the
availability of complementary businesses or technologies that MessageMedia may
wish to acquire. If additional funds are raised through the issuance of equity
securities, the percentage ownership of MessageMedia's stockholders will be
diluted and such equities may have rights, preferences or privileges senior to
those of the holders of MessageMedia's common stock. There can be no assurance
that additional financing will be available when needed or that, if available,
will include terms favorable to MessageMedia or its stockholders. If adequate
funds are not available on acceptable terms, MessageMedia may be unable to
develop or enhance its products or services, take advantage of opportunities or
respond to competition and the Nasdaq National Market may choose to discontinue
the listing of MessageMedia's common stock.
During the year ended December 31, 1998, MessageMedia significantly reduced
its operating expenditures. Management continues to pursue opportunities to
increase its revenues and believes that the market for interactive messaging has
recently shown signs of significant expansion. Management believes that these
efforts and its continuing efforts to raise additional capital through equity
placements with existing stockholders, their affiliates or strategic partners
should allow MessageMedia to continue operations for the next twelve to eighteen
months. If near term revenues do not increase or if MessageMedia is unable to
raise additional equity, management would be required to further reduce its
expenditures on research and development and general and administrative
activities. These reductions could significantly hamper MessageMedia's ability
to develop its messaging services.
Capital expenditures have been primarily for facilities, furniture and
capital equipment to support the expansion of the Company's operations and
information systems. Capital expenditures were $436,474 and $929,641 for the
years ended December 31, 1998 and 1997, respectively.
19
<PAGE> 21
YEAR 2000 COMPLIANCE
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 the Company just recently developed the
software for its messaging platform and is adding new enhancements and
functionality regularly, the Company believes that its 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. The Company currently has not yet undertaken a
systematic effort to identify Year 2000 compliance problems in all of the
components of its messaging platform. The Company believes that compliance
testing will require approximately 200-300 man-hours and intends to complete
compliance testing and remediation efforts on or before December 31, 1999. To
date, the Company has incurred minimal expenses related to Year 2000 compliance.
However, the Company expects to incur $150,000 to $250,000 of expenses in 1999
related to Year 2000 compliance. The Company currently has no contingency plans
in place in the event it does not complete all its testing and remediation
efforts. The Company plans to evaluate the status of completion in July 1999 and
determine whether such a plan is necessary.
MessageMedia relies on a number of software and communications systems
provided by third parties to operate its 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 the Company, as well as desktop PC applications software. In
each case, MessageMedia employs 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 suppliers fail to provide Year 2000 compliant versions of the
software, operations, including our messaging platform, could be disrupted.
Year 2000 compliance problems could also undermine the general
infrastructure necessary to support the Company's operations. For instance, the
Company depends on third-party Internet service providers (known as "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
the Company's interactive messaging and other services. MessageMedia has
attempted to address this risk by obtaining the same service capacity from
multiple ISPs. In addition, the Company relies on a third-party data center to
house some servers and communications systems. Any interruption in the security,
access, monitoring or power systems at the third-party data center 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, the demand for the Company's services could decline, resulting in an
adverse impact to MessageMedia's business, financial condition and results of
operations.
The Company's operations could also be adversely affected if its customers
fail to ensure that their software systems are Year 2000 compliant. 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. MessageMedia cannot assess or control the degree of Year
2000 compliance in its customers' information systems. Disruptions in the
information systems of significant customers could temporarily prevent such
customers from accessing or using the messaging platform, which could materially
affect the Company's operating results. To address the risk of disruptions in
customer information systems, MessageMedia designed its 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 interactive
messaging services until their internal information technology problems have
been alleviated, which would adversely affect the Company's 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
20
<PAGE> 22
expenditures, The Company's customers may have less money available to pay for
services, which could have a material adverse affect on the Company's business,
financial condition and results of operations.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated by reference herein from
Part IV, Item 14(a)(1)
and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
The information required by this item concerning the directors of the
Company is incorporated by reference from the section entitled "Election of
Directors" in the Company's Proxy Statement to be filed with the Securities and
Exchange Commission with respect to the Company's 1999 Annual Meeting of
Stockholders to be held on May 28, 1999 (the "Proxy Statement").
IDENTIFICATION OF EXECUTIVE OFFICERS
The information required by this item is incorporated by reference from the
information set forth in the section entitled "Executive Officers of the
Company" in Part I, Item 1 of this Report on Form 10-K.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The information required by this item concerning the directors of the
Company is incorporated by reference from the section entitled "Compliance with
the Reporting Requirements of Section 16 (a) of the Securities Exchange Act of
1934" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The section labeled "Executive Compensation" appearing in the Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section labeled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Relationships" appearing in the Proxy
Statement is incorporated herein by reference.
21
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 26
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 27
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... 28
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency) for the years ended December 31, 1998, 1997
and 1996.................................................. 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... 30
Notes to Financial Statements............................... 31
(a)(2) CONSOLIDATED INDEX TO THE FINANCIAL STATEMENT
SCHEDULES
Schedule II -- Valuation and Qualifying Accounts............ 44
</TABLE>
(a)(3) INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------ -------------
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of the
Company.
3.2* Bylaws of the Company.
10.1* Form of Indemnification Agreement entered into between
Company and its officers and directors.
10.2* The Company's 1994 Incentive and Non-Statutory Stock Option
Plan.
10.3* The Company's 1995 Stock Plan.
10.4* The Company's Employee Stock Purchase Plan.
10.7* Marshall T. Rose Employment Agreement.
10.9* Series A Preferred Stock Purchase Agreement dated as of May
22, 1995 between the Company and the purchasers named
therein.
10.10* Series B Preferred Stock Purchase Agreement dated as of
December 22, 1995 between the Company and First USA Merchant
Services, Inc.
10.11* Securities Purchase Agreement between the Company and
General Electric Capital Corporation, dated July 3, 1996.
10.12* Warrant to Purchase 47,619 shares of Common Stock, issued to
General Electric Capital Corporation as of July 3, 1996.
10.13* Series D Preferred Stock Purchase Agreement between the
Company and First Data Corporation, dated August 26, 1996.
10.14* Amended and Restated Shareholder Rights Agreement dated
August 26, 1996 between the Company and First Data
Corporation.
10.16* Warrant to purchase 475,734 shares of Series B Preferred
Stock, issued to First USA Paymentech.
10.25* Master Lease Agreement dated as of October 24, 1996 between
the Company and ComDisco, Inc.
10.32** David Ehrenthal employment agreement.
10.33** Purchase Agreement dated April 30, 1998 among the Company,
SOFTBANK Holdings and SOFTBANK Technology Ventures IV, LP.
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------ -------------
<C> <S>
10.34** Loan Agreement dated April 30, 1998 among the Company and
SOFTBANK Holdings, Inc.
10.35** Form of Convertible Promissory Note issued to SOFTBANK
Holdings, Inc.
10.36*** Bert C. Klein employment agreement.
10.37 Philip Bane Severance Agreement.
10.38 Nathaniel Borenstein Severance Agreement.
10.39 John Stachowiak Severance Agreement.
10.40 Carolyn Turbyfill Severance Agreement.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young, LLP, Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed as exhibits to the Company's Registration Statement on Form
S-1 (SEC File #333-14573).
** Previously filed as exhibit to the Company's Form 10 Q, March 31, 1998 (SEC
File #000-21751).
*** Previously filed as exhibit to the Company's Form 10 Q, September 30, 1998
(SEC File #000-21751).
(b) REPORTS ON FORM 8-K
A Form 8-K/A, dated November 3, 1998, reporting information under Item 5
with respect to a press release announcing the closing of the previously
announced investment in the Company by SOFTBANK Holdings, Inc. and certain of
its affiliates. After giving effect to the closing of the SOFTBANK investment
and related transactions on a pro forma basis, as of May 31, 1998, the Company
had complied with the capital requirements for continued listing of its common
stock on the Nasdaq National Market. The following exhibits were filed as part
of the Form 8-K/A:
Exhibit 99.1 -- Press release dated June 25, 1998.
A Form 8-K, dated November 30, 1998, reporting information under Item 5
with respect to the Company entering into an Agreement and Plan of
Reorganization with providing for the merger of Distributed Bits LLC with and
into a subsidiary of the Company. The following exhibits were filed as part of
the Form 8-K:
Exhibit 2.1 -- Agreement and Plan of Reorganization dated November 18,
1998 among The Company, DB Acquisition Corp, Distributed
Bits LLC, Derek Scruggs, DBI LLC and Richard Angell as
Member Representative and Chase Manhattan Bank & Trust
Company, N. A. as escrow agent.
Exhibit 2.2 -- Form of Registration Rights Agreement among the Company
and the former members of Distributed Bits LLC.
Exhibit 99.1 -- Press release dated November 19, 1998.
A Form 8-K, dated December 23, 1998, reporting information under Item 5
with respect to the Company completing the merger of a subsidiary of the Company
with and into Email Publishing, Inc. and completing the merger of Distributed
Bits LLC with and into a subsidiary of the Company. The following exhibits were
filed as part of the Form 8-K:
Exhibit 2.1 -- Agreement and Plan of Reorganization dated August 20,
1998 among the Company, EPub Holdings, Inc., Email
Publishing, Inc., certain stockholders Email Publishing,
Inc. and Chase Manhattan Bank & Trust Company, N. A. as
escrow agent.
Exhibit 2.2 -- Agreement and Plan of Reorganization dated November 18,
1998 among the Company, DB Acquisition Corp, Distributed
Bits LLC, Derek Scruggs, DBI LLC
23
<PAGE> 25
and Richard Angell as Member Representative and Chase
Manhattan Bank & Trust Company, N. A. as escrow agent.
Exhibit 3.1 -- Certificate of Amendment to the Company's Amended and
Restated Certificate of Incorporation.
Exhibit 99.1 -- Press release dated December 16, 1998.
(c) EXHIBITS
See (a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See (a)(2) above
24
<PAGE> 26
SIGNATURE
Pursuant to the requirements of section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 1999 MESSAGEMEDIA, INC.
BY: /s/ DENNIS J. CAGAN
------------------------------------
Dennis J. Cagan
Chief Executive Officer
POWER OF ATTORNEY
By signing this Form 10-K, I hereby appoint each of Dennis J. Cagan and
Bert C. Klein as my attorneys-in-fact to sign all amendments to this Form 10-K
on my behalf, and file this Form 10-K (including all exhibits and other
documents related to the Form 10-K) with the Securities and Exchange Commission.
I authorize each of my attorneys-in-fact to (1) appoint a substitute
attorney-in-fact for himself and (2) perform any actions that he believes are
necessary or appropriate to carry out the intention and purpose of this Power of
Attorney. I ratify and confirm all lawful actions taken directly or indirectly
by my attorneys-in-fact and by any properly appointed substitute
attorneys-in-fact.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant in
the capacities and dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DENNIS J. CAGAN Chief Executive Officer March 30, 1999
- ----------------------------------------------------- and Director
Dennis J. Cagan (Principal Executive Officer)
/s/ BERT C. KLEIN Vice President of Finance and March 30, 1999
- ----------------------------------------------------- Administration and
Bert C. Klein Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ BRADLEY A. FELD Co-Chairman of the Board March 30, 1999
- -----------------------------------------------------
Bradley A. Feld
/s/ RONALD D. FISHER Co-Chairman of the Board March 30, 1999
- -----------------------------------------------------
Ronald D. Fisher
/s/ GARY E. RIESCHEL Director March 30, 1999
- -----------------------------------------------------
Gary E. Rieschel
/s/ PAMELA H. PATSLEY Director March 30, 1999
- -----------------------------------------------------
Pamela H. Patsley
/s/ LEE H. STEIN Director March 30, 1999
- -----------------------------------------------------
Lee H. Stein
/s/ R. TERRY DURYEA Director March 30, 1999
- -----------------------------------------------------
R. Terry Duryea
/s/ GERALD A. POCH Director March 30, 1999
- -----------------------------------------------------
Gerald A. Poch
</TABLE>
25
<PAGE> 27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
MessageMedia, Inc.
We have audited the accompanying consolidated balance sheets of
MessageMedia, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1998. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MessageMedia,
Inc. at December 31, 1998 and 1997, and the consolidated 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.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Diego, California
February 2, 1999
except for Note 12, for which the
date is March 26, 1999
26
<PAGE> 28
MESSAGEMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 4,659,375 $ 6,331,059
Accounts receivable....................................... 680,927 207,985
Prepaid expenses and other................................ 429,963 418,615
------------ ------------
Total current assets.............................. 5,770,265 6,957,659
Furniture, equipment and software, net...................... 1,475,720 1,859,048
Information technology, net................................. -- 19,845
Organization and other costs, net........................... 50,835 77,630
Intangible assets, net...................................... 23,894,715 --
Deposits and other.......................................... 29,446 133,907
------------ ------------
Total assets...................................... $ 31,220,981 $ 9,048,089
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,383,197 $ 1,440,224
Accrued compensation and related liabilities.............. 148,419 370,741
Accrued interest.......................................... 15,226 289,903
Deferred revenue.......................................... 36,000 537,790
Amount due to stockholders, current portion............... 395,000 1,530,000
Note payable and capital lease obligations, current
portion................................................ 108,990 --
Other accrued liabilities................................. 583,770 601,300
------------ ------------
Total current liabilities......................... 2,670,602 4,769,958
Amount due to stockholders.................................. -- 162,500
Note payable and capital lease obligations.................. 53,786 --
Deferred rent............................................... 13,083 --
------------ ------------
Total long term liabilities....................... 66,869 162,500
Series A redeemable convertible preferred stock, $0.001 par
value; 1,000 shares authorized, none outstanding at
December 31, 1998 and 750 outstanding at December 31,
1997; liquidation preference of $3,750,000 at December 31,
1997...................................................... -- 4,687,500
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.001 par value;
1,000 shares authorized, none outstanding at December
31, 1998 and 250 outstanding at December 31, 1997;
liquidation preference of $1,250,000 at December 31,
1997................................................... -- 1
Preferred stock, 5,000,000 shares authorized, none
outstanding at December 31, 1998 and 1997................. -- --
Common stock, $0.001 par value; 100,000,000 shares
authorized, 40,121,048 and 8,903,855 shares issued and
outstanding at December 31, 1998 and 1997, respectively... 40,121 8,904
Additional paid-in-capital................................ 71,398,314 26,300,228
Warrants.................................................. 1,430,828 3,017,115
Deferred compensation..................................... (657,720) (155,235)
Accumulated deficit....................................... (43,728,033) (29,742,882)
------------ ------------
Total stockholders' equity (deficit).............. 28,483,510 (571,869)
------------ ------------
Total liabilities and stockholders' equity
(deficit)...................................... $ 31,220,981 $ 9,048,089
============ ============
</TABLE>
See accompanying notes.
27
<PAGE> 29
MESSAGEMEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues............................................. $ 1,287,790 $ 1,450,598 $ 695,866
Cost of revenues..................................... 97,553 270,416 265,900
------------ ------------ ------------
Gross profit......................................... 1,190,237 1,180,182 429,966
Operating expenses:
Marketing and sales................................ 1,934,486 5,424,110 1,836,545
Research, development and engineering.............. 4,828,277 6,687,177 4,652,582
General and administrative......................... 3,810,073 4,377,688 4,237,638
Restructuring expenses............................. 812,166 -- --
Write-off of in-process technology................. 1,300,000 -- --
------------ ------------ ------------
Total operating expenses................... 12,685,002 16,488,975 10,726,765
Depreciation and amortization........................ 2,470,917 1,097,716 524,124
------------ ------------ ------------
Loss from operations................................. (13,965,682) (16,406,509) (10,820,923)
Interest income...................................... 217,551 554,587 235,560
Interest expense..................................... (83,892) (95,360) (104,577)
------------ ------------ ------------
Net loss............................................. (13,832,023) (15,947,282) (10,689,940)
Dividends imputed on preferred stock................. (153,126) (1,250,000) --
------------ ------------ ------------
Net loss applicable to common shares................. $(13,985,149) $(17,197,282) $(10,689,940)
============ ============ ============
Net loss per share, basic and diluted................ $ (0.63) $ (1.94) $ (2.33)
Shares used in per share computation, basic and
diluted............................................ 22,304,902 8,842,367 4,588,262
</TABLE>
See accompanying notes.
28
<PAGE> 30
MESSAGEMEDIA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- -------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
---------- ------ ---------- ------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... 1,477,489 $1,478 4,273,250 $ 4,273 $ 3,852,332 $ -- $ --
Issuance of common stock for cash
and services...................... -- -- 61,126 61 51,776 -- --
Issuance of Series B convertible
preferred stock at $3.189 per
share, net of issuance costs of
$117,110.......................... 465,000 465 -- -- 1,365,310 -- --
Issuance of warrants............... -- -- -- -- -- 3,017,115 --
Issuance of Series C convertible
preferred stock at $15 per share
and shares of common stock at $5
per share, net of issuance costs
of $45,934........................ 130,952 131 107,144 107 2,453,828 -- --
Issuance of Series D convertible
preferred stock at $15 per share,
net of issuance costs $9,163...... 200,000 200 -- -- 2,990,637 -- --
Deferred compensation and related
amortization...................... -- -- -- -- 50,567 -- (44,305)
Issuance of common stock for IPO
net of issuance costs............. -- -- 2,000,000 2,000 14,991,067 -- --
Issuance of common stock for
converted preferred stock upon
IPO............................... (2,273,441) (2,274) 2,273,441 2,274 -- -- --
Issuance of common stock for anti-
dilutive shares in preferred stock
conversion........................ -- -- 59,876 60 (60) -- --
Issuance of common stock for
exercise of stock options......... -- -- 19,975 20 2,558 -- --
Net loss........................... -- -- -- -- -- -- --
---------- ------ ---------- ------- ----------- ----------- ---------
Balance at December 31, 1996....... -- -- 8,794,812 8,795 25,758,015 3,017,115 (44,305)
Deferred compensation and related
amortization...................... -- -- -- -- 128,888 -- (110,930)
Stock options accelerated for
vesting........................... -- -- -- -- 52,137 -- --
Extension of warrants.............. -- -- -- -- 50,000 -- --
Issuance of Series A preferred
stock, net of issuance cost....... 250 1 -- -- 1,137,999 -- --
Employee stock purchase plan....... -- -- 22,160 22 74,958 -- --
Issuance of common stock for
services rendered................. -- -- 1,193 1 8,052 -- --
Issuance of common stock for
exercise of stock option.......... -- -- 85,690 86 27,679 -- --
Dividend imputed on Series A
convertible preferred stock,
classified outside if
stockholders' equity (net capital
deficiency)....................... -- -- -- -- (937,500) -- --
Net loss........................... -- -- -- -- -- -- --
---------- ------ ---------- ------- ----------- ----------- ---------
Balance at December 31, 1997....... 250 1 8,903,855 8,904 26,300,228 3,017,115 (155,235)
Issuance of stock dividends to
Series A preferred stockholders... -- -- 108,125 108 153,020 -- --
Issuance of common stock for the
exercise of warrants.............. -- -- 947,495 947 2,039,085 (1,936,287) --
Issuance of common stock for
exercise of stock options......... -- -- 659,637 660 270,648 -- --
Conversion of Series A preferred
Stock............................. (250) (1) 1,752,141 1,752 473,249 -- --
Issuance of common stock for
services rendered................. -- -- 59,009 59 87,049 -- --
Charge associated with extending
option terms...................... -- -- -- -- 405,718 -- --
Deferred compensation and related
amortization...................... -- -- -- -- 165,779 -- 119,221
Common stock issued to SOFTBANK and
affiliates........................ -- -- 20,784,883 20,785 15,338,039 -- --
Dividend imputed on Series A
convertible preferred stock,
cancelled upon buyout of Series A
convertible preferred by
SOFTBANK.......................... -- -- -- -- 937,500 -- --
Employee stock purchase plan....... -- -- 17,907 18 43,949 -- --
Common stock issued to Email
Publishing, Inc................... -- -- 5,582,676 5,583 20,257,720 -- (583,101)
Common stock and warrants issued to
Distributed Bits.................. -- -- 1,305,320 1,305 4,926,330 350,000 (38,605)
Net loss........................... -- -- -- -- -- -- --
---------- ------ ---------- ------- ----------- ----------- ---------
Balance at December 31, 1998....... -- $ -- 40,121,048 $40,121 $71,398,314 $ 1,430,828 $(657,720)
========== ====== ========== ======= =========== =========== =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (NET
ACCUMULATED CAPITAL
DEFICIT DEFICIENCY)
------------ -------------
<S> <C> <C>
Balance at December 31, 1995....... $ (3,105,660) $ 752,423
Issuance of common stock for cash
and services...................... -- 51,837
Issuance of Series B convertible
preferred stock at $3.189 per
share, net of issuance costs of
$117,110.......................... -- 1,365,775
Issuance of warrants............... -- 3,017,115
Issuance of Series C convertible
preferred stock at $15 per share
and shares of common stock at $5
per share, net of issuance costs
of $45,934........................ -- 2,454,066
Issuance of Series D convertible
preferred stock at $15 per share,
net of issuance costs $9,163...... -- 2,990,837
Deferred compensation and related
amortization...................... -- 6,262
Issuance of common stock for IPO
net of issuance costs............. -- 14,993,067
Issuance of common stock for
converted preferred stock upon
IPO............................... -- --
Issuance of common stock for anti-
dilutive shares in preferred stock
conversion........................ -- --
Issuance of common stock for
exercise of stock options......... -- 2,578
Net loss........................... (10,689,940) (10,689,940)
------------ ------------
Balance at December 31, 1996....... (13,795,600) 14,944,020
Deferred compensation and related
amortization...................... -- 17,958
Stock options accelerated for
vesting........................... -- 52,137
Extension of warrants.............. -- 50,000
Issuance of Series A preferred
stock, net of issuance cost....... -- 1,138,000
Employee stock purchase plan....... -- 74,980
Issuance of common stock for
services rendered................. -- 8,053
Issuance of common stock for
exercise of stock option.......... -- 27,765
Dividend imputed on Series A
convertible preferred stock,
classified outside if
stockholders' equity (net capital
deficiency)....................... -- (937,500)
Net loss........................... (15,947,282) (15,947,282)
------------ ------------
Balance at December 31, 1997....... (29,742,882) (571,869)
Issuance of stock dividends to
Series A preferred stockholders... (153,128) --
Issuance of common stock for the
exercise of warrants.............. -- 103,745
Issuance of common stock for
exercise of stock options......... -- 271,308
Conversion of Series A preferred
Stock............................. -- 475,000
Issuance of common stock for
services rendered................. -- 87,108
Charge associated with extending
option terms...................... -- 405,718
Deferred compensation and related
amortization...................... -- 285,000
Common stock issued to SOFTBANK and
affiliates........................ -- 15,358,824
Dividend imputed on Series A
convertible preferred stock,
cancelled upon buyout of Series A
convertible preferred by
SOFTBANK.......................... -- 937,500
Employee stock purchase plan....... -- 43,967
Common stock issued to Email
Publishing, Inc................... -- 19,680,202
Common stock and warrants issued to
Distributed Bits.................. -- 5,239,030
Net loss........................... (13,832,023) (13,832,023)
------------ ------------
Balance at December 31, 1998....... $(43,728,033) $ 28,483,510
============ ============
</TABLE>
See accompanying notes.
29
<PAGE> 31
MESSAGEMEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... $(13,832,025) $(15,947,282) $(10,689,940)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 2,470,917 1,097,716 524,124
In-process technology charge............................. 1,300,000 -- --
Loss on disposal of assets............................... 33,943 11,249 --
Common stock issued for services......................... 87,108 8,053 20,000
Compensation expense for extending option terms.......... 405,718 52,137 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (132,553) (119,707) (88,278)
Prepaid expenses and other............................. 23,145 (334,775) (72,887)
Deposits and other..................................... 115,983 (71,098) (58,809)
Accounts payable....................................... (371,721) (185,974) 1,134,542
Accrued compensation and related liabilities........... (262,261) (1,998) 364,569
Deferred revenue....................................... (537,790) 473,107 64,683
Accrued interest....................................... (274,677) 93,564 96,000
Due to stockholders.................................... (97,500) (220,000) 712,500
Other accrued liabilities.............................. (33,077) 25,223 576,077
------------ ------------ ------------
Net cash flows used in operating activities................ (11,104,790) (15,119,785) (7,417,419)
INVESTING ACTIVITIES
Additions to furniture and equipment....................... (436,474) (929,641) (2,104,301)
Proceeds from sales of fixed assets........................ 14,733 11,769 --
Cost associated with EPub Acquisition...................... (500,000) -- --
Cost associated with DBits Acquisition..................... (300,000) -- --
Maturity/(purchase) of short term investment............... -- 200,000 (200,000)
Organization and other costs............................... -- -- (74,998)
------------ ------------ ------------
Net cash flows used in investing activities................ (1,221,741) (717,872) (2,379,299)
FINANCING ACTIVITIES
Proceeds from issuance of redeemable preferred stock, net
of issuance costs........................................ -- 4,888,000 6,284,801
Proceeds from issuance of common stock, net of issuance
costs.................................................... 9,179,752 102,745 15,531,122
Proceeds from issuance/extension of warrants............... 103,745 50,000 3,017,115
Proceeds from borrowings from stockholders and bank........ 1,411,578 -- 486,111
Repayment of loan from bank................................ -- -- (486,111)
Repayment of capital lease obligations..................... (40,228) -- --
------------ ------------ ------------
Net cash flows provided by financing activities............ 10,654,847 5,040,745 24,833,038
------------ ------------ ------------
Net increase/(decrease) in cash and cash equivalents....... (1,671,684) (10,796,912) 15,036,320
Cash and cash equivalents at the beginning of year......... 6,331,059 17,127,971 2,091,651
------------ ------------ ------------
Cash and cash equivalents at the end of year............... $ 4,659,375 $ 6,331,059 $ 17,127,971
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 83,892 $ 95,360 $ 104,577
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of common stock for forgiveness of stockholder
debt..................................................... $ 1,533,764 $ -- $ --
============ ============ ============
Conversion of Series A redeemable convertible preferred
stock.................................................... $ 3,233,730 $ -- $ --
============ ============ ============
Issuance of common stock for forgiveness of SOFTBANK
loan..................................................... $ 1,411,578 $ -- $ --
============ ============ ============
</TABLE>
See accompanying notes.
30
<PAGE> 32
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and business activity
MessageMedia is a leading provider of e-mail services to businesses
worldwide providing a seamless outsource solution for relationship-based,
transactive communications using Internet e-mail. The Company has a singular
focus on e-messaging and employs advanced technology, tools and applications to
help corporations fully utilize this new channel for building and enhancing
customer relationships online.
On December 13, 1996, the Company completed an initial public offering (the
"Offering") of 2,000,000 shares of its common stock under the name First Virtual
Holdings Incorporated, with an offering price of $9.00 per share, resulting in
gross proceeds of $18.0 million and net proceeds (less the underwriters'
discount and offering expenses) of approximately $15.0 million. Upon completion
of the offering, all of the then outstanding preferred stocks were converted to
common stock.
On June 23, 1998, at the Company's Annual Meeting of Stockholders, the
Company's stockholders approved an investment in the Company by SOFTBANK
Holdings Inc., SOFTBANK Technology Ventures IV, L.P. (together "SOFTBANK") and
E*Trade Group Inc. SOFTBANK and affiliates purchased approximately 19.2 million
shares of the Company's common stock and became a majority stockholder of the
Company. On September 10, 1998, SOFTBANK purchased approximately 1.6 million
additional shares of the Company's common stock.
On December 9, 1998, the Company changed its name to MessageMedia and its
Nasdaq National Market symbol to "MAIL" and amended the Company's Certificate of
Incorporation increasing the number of authorized shares of the Company's common
stock from 40,000,000 to 100,000,000 shares.
On December 9, 1998, MessageMedia acquired all of the common stock and all
outstanding rights of the common stock of EPub in exchange for 5,582,676 shares
of MessageMedia common stock and the assumption by MessageMedia of options and
warrants to acquire up to approximately 417,324 additional shares of
MessageMedia common stock at a weighted average exercise price of $.04 per
share. (See Note 3 for details of this acquisition.)
On December 11, 1998, MessageMedia acquired all equity interests, including
options, warrants or other purchase rights, if any, in DBits, in exchange for
1,350,000 shares of MessageMedia common stock and warrants to purchase an
additional 250,000 shares of MessageMedia common stock at an exercise price of
$6.00 per share and an additional 250,000 shares of MessageMedia common stock at
$8.00 per share. (See Note 3 for details of this acquisition.)
Principles of Consolidation
The consolidated financial statements include the accounts of FVHI, EPub
and DBits. All significant intercompany transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of less than three months to be cash equivalents.
31
<PAGE> 33
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Furniture, Equipment and Software
Furniture and equipment are stated at cost and depreciated over the
estimated useful lives of the assets (three to five years) using the
straight-line method. Software is stated at cost and depreciated over three
years using the straight-line method.
Intangible Assets
Intangible assets arose primarily from the acquisition of two entities in
December 1999 (See Note 3). The excess of cost over the fair value of the net
assets acquired has been allocated to goodwill and developed technology. These
intangible assets are being amortized over their useful lives of two years.
Organization and Other Costs
Organization and other costs are being amortized over five years.
Accumulated amortization at December 31, 1998 and 1997 amounted to $86,569 and
$59,431, respectively.
Asset Impairment
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), the Company recognizes impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. To date,
the Company has not recorded any impairment losses.
Stock-Based Compensation
The Company accounts for stock option grants to employees in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations because the Company believes the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation",
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Deferred compensation is recorded only when the
fair value of the stock on the date of the option grant exceeds the exercise
price of the option. The deferred compensation is amortized over the vesting
period of the option.
Revenue Recognition
MessageMedia had three main sources of revenue in 1998: messaging revenue,
consulting revenue and Internet payment system (IPS) revenue.
Messaging revenue is recognized as earned in accordance with individual
customer contracts.
Consulting revenue is recognized as earned in accordance with individual
customer contracts.
Internet payment system revenue consists of consumer and merchant
registrations, transaction revenue, Infohaus revenue and marketing revenue.
Consumer registration fees and merchant registration fees were recognized over a
twelve month period. Also, the related direct costs of processing such
registrations and renewals were deferred and amortized over a 12-month period.
Transaction revenue and marketing revenue were recognized when earned. The
operation of the Internet payment system was discontinued in August 1998.
32
<PAGE> 34
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Research and Development
Research and development costs are expensed in the period incurred.
Software Developments Costs
Financial accounting standards provide for the capitalization of certain
software development costs after technological feasibility of the software is
attained. No such costs have been capitalized to date.
Net Loss Per Share
Basic and diluted earnings per share is calculated in accordance with FASB
Statement No. 128, "Earnings Per Share". All earnings per share amounts for all
periods, have been represented, and where appropriate, restated to conform to
the SFAS 128 requirements.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statements No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Company expects to adopt the
new Statement effective January 1, 2000. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value. The Company
does not anticipate that the adoption of this Statement will have a significant
effect on its results of operations or financial position.
2. BALANCE SHEET DETAILS
Furniture, equipment and software at December 31, 1998 and 1997 consists of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Furniture, equipment and software................. $ 4,017,987 $ 3,378,530
Less accumulated depreciation..................... (2,542,267) (1,519,482)
----------- -----------
$ 1,475,720 $ 1,859,048
=========== ===========
</TABLE>
Intangible assets at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Developed technology-EPub......................... $ 900,000 $ --
Goodwill-EPub..................................... 18,200,259 --
Goodwill-Dbits.................................... 5,833,357 --
Less accumulated amortization..................... (1,038,901) --
----------- -----------
$23,894,715 $ --
=========== ===========
</TABLE>
Long-term debt and capital lease obligations at December 31, 1998 and 1997
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current portion of debt and capital lease
obligations:
Note payable to bank............................ $ 65,818 $ --
Obligation under capital leases................. 43,172 --
----------- -----------
$ 108,990 $ --
=========== ===========
</TABLE>
33
<PAGE> 35
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Long-term portion of debt and capital lease obligations:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Note payable to bank..................................... $ 25,691 --
Obligation under capital leases.......................... 28,095 --
-------- --------
$ 53,786 $ --
======== ========
</TABLE>
Other accrued liabilities at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Directors and officers insurance payable................. $147,187 $275,415
Reserve for payment system shutdown...................... 198,410 --
Other accrued liabilities................................ 238,173 325,885
-------- --------
$583,770 $601,300
======== ========
</TABLE>
3. ACQUISITIONS
Email Publishing Inc.
On December 9, 1998, MessageMedia acquired all of the common stock and all
outstanding rights of the common stock of EPub in exchange for 5,582,676 shares
of MessageMedia common stock and the assumption by MessageMedia of options and
warrants to acquire up to approximately 417,324 additional shares of
MessageMedia common stock at a weighted average exercise price of $.04 per
share. The purchase price was calculated to be $20,763,300 based on the fair
market value of $3.38 per share of MessageMedia common stock. The purchase price
also includes estimated merger costs of $500,000. The purchase price was
allocated as follows based upon a valuation of the tangible and intangible
assets, including acquired technology and in-process technology, by an
independent appraiser, as well as management's best estimates:
<TABLE>
<S> <C>
Current assets acquired................................. $ 329,241
Furniture, equipment and software....................... 224,223
Other assets............................................ 10,389
In-process technology................................... 1,300,000
Developed technology.................................... 900,000
Goodwill................................................ 18,200,259
Liabilities assumed..................................... (798,336)
Deferred compensation................................... 597,524
-----------
$20,763,300
===========
</TABLE>
In connection with the EPub acquisition, the Company wrote-off $1.3 million
of in-process technology. This amount was expensed as a non-recurring charge on
December 9, 1999, the acquisition date. This write-off was necessary because the
acquired technology had not yet reached technological feasibility and had no
future alternative uses. MessageMedia is using the acquired in-process
technology to build future functionality into its e-messaging platform and
enhance its suite of services. The Company anticipates that certain
functionality using the acquired in-process technology will be generally
released before the end of 1999, with additional product releases in subsequent
periods through 2001. MessageMedia expects that the acquired technology will be
successfully developed, but there can be no assurance that commercial
feasibility of these products will be achieved.
34
<PAGE> 36
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
The nature of the efforts required to develop the purchased in-process
technology into a commercially viable product principally relate to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specifications, including functions, features and technical performance
requirements.
The value of the purchased in-process technology was determined with the
assistance of an independent valuation, by estimating the projected net cash
flows related to such products, including costs to complete the development of
the technology and the future revenues to be earned upon commercialization of
the products. These cash flows were discounted back to their net present value.
The resulting projected net cash flows from such projects were based on
management's estimates of revenues and operating profits related to such
projects.
Distributed Bits LLC
On December 11, 1998, MessageMedia acquired all equity interests, including
options, warrants or other purchase rights, if any, in DBits, in exchange for
1,350,000 shares of MessageMedia common stock and warrants to purchase an
additional 250,000 shares of MessageMedia common stock at an exercise price of
$6.00 per share and an additional 250,000 shares of MessageMedia common stock at
$8.00 per share. The purchase price was calculated to be $5,577,635 based on the
fair market value of $3.65 per share of MessageMedia common stock. The purchase
price also includes estimated merger costs of $300,000 and the value of warrants
of $350,000. This purchase price was allocated as follows, based upon
management's best estimates:
<TABLE>
<S> <C>
Current assets acquired.................................. $ 41,739
Furniture, equipment and software........................ 93,593
Other assets............................................. 1,500
Goodwill................................................. 5,833,357
Liabilities assumed...................................... (432,993)
Deferred compensation.................................... 40,439
----------
$5,577,635
==========
</TABLE>
The accompanying statements of operations reflect the operating results of
EPub and DBits since the date of the acquisition. The pro forma unaudited
results of operations for the years ended December 31, 1998 and 1997, assuming
the purchase of EPub and DBits had occurred on January 1, of the respective
years, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net revenues.................................... $ 2,506,640 $ 1,786,229
============ ============
Net loss attributable to common stockholders.... $(27,284,012) $(31,827,527)
============ ============
Net loss per share attributable to common
stockholders, basic and diluted............... $ (1.22) $ (2.02)
============ ============
</TABLE>
4. RELATED PARTY TRANSACTIONS
In conjunction with the sale of 1,250,000 shares of common stock to a
stockholder on September 16, 1994 for $200,000, the Company obtained an
unsecured line of credit from the stockholder for borrowings up to $800,000. The
Company also had an unsecured line of credit from a stockholder which allowed
for maximum borrowings of $400,000. The borrowings plus interest at 8% were due
upon the earlier of (i) January 31, 1998 or (ii) the closing of an underwritten
public offering (other than the IPO) of the Company's common stock. At December
31, 1997, $1,200,000 had been drawn against these lines of credit. On February
5, 1998, these two stockholders filed civil actions against the Company seeking
to recover the principal and interest due. The
35
<PAGE> 37
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
total amount of principal and interest was approximately $1.5 million which was
reflected as current liabilities in the 1997 financial statements. On June 23,
1998, the two stockholders signed a release for this lawsuit and the debt was
settled. (See Note 7)
On August 20, 1996, the Company entered into an agreement with the Series B
stockholder for the waiver of a previous agreement to use the Series B
stockholder as an exclusive services provider. In return for the waiver, the
Company agreed to pay the Series B stockholder facility fees totaling $500,000
and transaction surcharges of no less than $500,000 during the 40-month period
beginning September 1, 1996, dependent upon the number of transactions processed
through service providers other than the Series B stockholder. The Company
charged the $1,000,000 associated with this agreement to general and
administrative expenses during 1996. At December 31, 1998, the Company had an
outstanding balance of $395,000 due to this stockholder. There is a no interest
being charged on the outstanding balance.
The Company's credit card transaction services were provided by Paymentech,
Inc., a stockholder. Fees for these services amounted to $58,520, $151,284 and
$123,622 for the years ended December 31, 1998, 1997 and 1996, respectively.
Fees paid in 1998 are significantly less compared to prior years, due to the
Company's decision in December 1997, to focus its efforts on its messaging
platform and move away from its payment system operations. The operations of the
payment system ceased in August 1998.
5. NOTE PAYABLE
In connection with the acquisition of EPub in December 1998, MessageMedia
assumed a note owed to a bank. The note bears interest at the bank's prime plus
1%. Monthly principal payments of $6,250 are due through June 2000, when the
note matures. This note is secured by certain assets of the Company. In
connection with the note, detachable warrants were issued by EPub. (See Note 7)
6. COMMITMENTS
Leases
The Company leases its office facilities and certain equipment under
non-cancelable operating lease agreements. The facility leases require the
Company to pay standard common area maintenance fees and are subject to certain
minimum escalation provisions. Rent expense for all operating leases was
approximately $635,923, $523,214 and $210,000 for the years ended December 31,
1998, 1997 and 1996, respectively. The Company has two corporate facilities, one
in San Diego, California and one in Boulder, Colorado. The San Diego facility
lease expires in May 1999 and the Boulder facility lease expires in June 2002.
In addition, the Company leases approximately 500 square feet of space in San
Diego, California for its computer processing center. This lease expires in
October 1999.
The Company acquired certain equipment capital lease obligations when it
acquired EPub and DBits in December 1998. Cost and accumulated depreciation of
equipment under capital leases were $184,628 and $46,159, respectively at
December 31, 1998.
36
<PAGE> 38
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Annual future minimum lease payments for operating and capital leases as of
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
<S> <C> <C>
1999................................................... $330,620 $ 43,172
2000................................................... 129,566 22,617
2001................................................... 108,161 7,132
2002................................................... 43,520 1,480
-------- --------
Total minimum lease payments................................ $611,867 74,401
========
Less amount representing interest........................... (3,134)
--------
Present value of future minimum lease payments.............. 71,267
Less current portion........................................ (43,172)
--------
Long-term portion of obligations under capital leases....... $ 28,095
========
</TABLE>
7. STOCKHOLDERS' EQUITY
Preferred Stock
On December 13, 1996, all outstanding preferred stock was converted into
common stock concurrent with the closing of the Company's underwritten initial
public offering. As a result of certain anti-dilution adjustments, the 2,273,441
shares of preferred stock outstanding prior to the offering were converted to
2,333,317 shares of common stock.
On October 22, 1997, the Company completed a private placement of preferred
stock and received net proceeds of $4.9 million. Under the private placement
agreement, 1,000 shares of Series A redeemable convertible preferred stock were
issued at $5,000 per share. The Series A redeemable convertible preferred stock
was convertible into common stock at the option of the investors at a per share
conversion price equal to the lesser of $5.50 or 80% of the average closing bid
price of the common stock for the prior ten days. At December 31, 1997, the
Company recorded imputed dividends on the Series A preferred redeemable
convertible stock totaling $1,250,000 for discounted conversion terms. The
Series A redeemable convertible preferred stock was redeemable for cash under
certain circumstances and carried an annual dividend of 7% payable quarterly, in
cash or shares of common stock. The Series A preferred stockholders converted
345 shares into common stock during 1998.
In June 1998, the Company issued approximately 9.8 million shares of common
stock to SOFTBANK and 833,333 shares of common stock to E*Trade for approximate
net proceeds of $6.6 million. In addition, SOFTBANK purchased $5.8 million of
the Company's outstanding debt and preferred stock, which were subsequently
converted into approximately 8.5 million shares of the Company's common stock.
The $5.8 million amount includes a settlement to two stockholders of the Company
who, on February 5, 1998 had filed civil actions against the Company seeking to
recover the principal and interest due under unsecured lines of credit. The
total amount of principal and interest paid out as settlement was approximately
$1.5 million. Also included in the transaction was the purchase of the 655
remaining outstanding shares from the Series A redeemable convertible preferred
stock.
Warrants
In connection with the sale of Series B preferred stock in December 1995 to
a financial institution, the Company issued warrants to purchase shares of
Series A and Series B preferred stock. In April 1996, the Series B preferred
stockholder partially exercised this warrant by purchasing 465,000 shares of
Series B
37
<PAGE> 39
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
preferred stock at $3.189 per share. In addition, the Series B preferred
stockholder paid the Company $3,017,115 for warrants to purchase 852,272 shares
of Series A preferred stock and 475,734 shares of Series B preferred stock at
$0.01 per share. In March 1998, the Series B shareholder exercised their warrant
to purchase 852,272 shares of Series A preferred stock, which was immediately
converted into shares of the Company's common stock. The warrant for 475,734
shares of Series B preferred stock is currently exercisable and will expire on
March 4, 2001. The Company received net proceeds of approximately $4.4 million
in connection with the original transaction.
In connection with a consulting agreement, an incentive warrant to purchase
300,000 shares of common stock at $5.63 per share was issued on September 24,
1997 to a third party. The first 100,000 shares of common stock can be exercised
when the third party produces $10 million of net sales through the use of
technology and services provided by the Company. The second 100,000 shares of
common stock can be exercised when the third party produces $25 million of net
sales through the use of technology and services provided by the Company and the
third 100,000 shares of common stock can be exercised when the third party
produces $50 million of net sales through the use of technology and services
provided by the Company. These warrants expire on December 20, 2003. As of
December 31, 1998 no sales have been attributed to the third party's efforts.
Under a certain consulting agreement, dated September 8, 1997, a warrant to
purchase 65,000 shares of common stock at $5.63 per share was granted to a third
party as payment for consulting services rendered. Under the terms of the
warrant agreement, 20,000 shares became exercisable upon completion (as defined
in the agreement) with the remaining 45,000 shares to be exercisable when the
third party delivers to the Company, two catalog merchants who execute
agreements with the Company in regards to either licensing of VirtualPINS or
interactive messaging services. These warrants expire on December 30, 2002. On
September 29, 1997, the warrant to purchase 20,000 of the Company's common stock
became exercisable and accordingly, the Company estimated the fair value of the
warrant using the Black-Scholes option pricing model. However, no value was
allocated to the warrant as the estimated fair value was nominal. This warrant
expires on December 30, 2002. In June 1998, the warrant to purchase 45,000 of
the Company's common stock expired as the incentive terms of this portion of the
agreement were not met.
In connection with the sale of Series A redeemable convertible preferred
stock in October 1997, warrants to purchase up to 850,000 shares of common stock
at $5.75 per share were issued to the Series A preferred stockholders. These
warrants will expire on October 15, 2001. In June 1998, the original Series A
preferred stockholders were granted a reduction in the exercise price of these
warrants from $5.75 per share to $1.00 per share. Such warrants carry
restrictions as to their exercisability. In December 1998, 95,225 of these
warrants were exercised.
In connection with the Company's acquisition of EPub in December 1998, the
Company assumed a warrant issued to a financial institution which is now
convertible into 25,564 shares of the Company's common stock at an exercise
price of $0.40 per share. This warrant was exercised in February 1999.
In connection with the Company's acquisition of DBits in December 1998, the
Company issued warrants to purchase an aggregate of 500,000 shares of the
Company's common stock, of which 250,000 may be exercised for $6.00 per share
and 250,000 may be exercised for $8.00 per share. These warrants are exercisable
immediately with the $6.00 warrants expiring on May 11, 2001 and the $8.00
warrants expiring on May 11, 2002.
Stock Option Plan
The Company's 1994 Incentive and Non-Statutory Stock Option Plan (1994
Plan), under which options to purchase 482,300 shares of common stock were
granted, was replaced with the 1995 Stock Plan (1995
38
<PAGE> 40
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Plan). Under the 1995 Plan, the Company is authorized to issue up to 6,000,000
common shares to officers, employees, directors and certain other individuals
providing services to the Company. Options granted under the 1995 Plan generally
vest over four years and are exercisable for a period of up to ten years from
the date of grant. Incentive stock options are granted at prices which
approximate the fair value of the shares at the date of grant as determined by
the board of directors. The following table summarizes stock option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance at December 31, 1995.................... 468,750 $0.05
Options granted............................... 1,327,645 6.43
Options exercised............................. (19,975) 0.13
Options canceled.............................. (33,250) 4.94
----------
Balance at December 31, 1996.................... 1,743,170 4.82
Options granted............................... 1,115,600 4.54
Options exercised............................. (85,690) 0.32
Options canceled.............................. (504,987) 7.49
----------
Balance at December 31, 1997.................... 2,268,093 4.14
Options granted............................... 4,537,679 1.71
Options exercised............................. (659,637) 0.41
Options canceled.............................. (2,021,348) 4.48
----------
Balance at December 31, 1998.................... 4,124,787 $1.65
========== =====
</TABLE>
Pursuant to the terms of the December 22, 1995 Series B Preferred Stock
Purchase Agreement, on April 11, 1996, the Company's board of directors granted
options to purchase 1,000,000 shares of common stock to officers, directors and
key employees of the Company at $6.30 per share. These options are fully vested
and to date, none have been exercised. These options were granted outside of the
Company's stock option plans and therefore, are not included in the table above.
On April 29, 1998, the Company offered all employees of record the
opportunity to re-price their option grants under the 1995 Stock Option Plan to
the fair market value of the stock on that date which was $0.94 per share. The
Company cancelled 1,363,876 at a weighted average exercise price of $4.75 and
re-issued the same number of options at $0.94.
As of December 31, 1998, options to purchase 1,852,318 shares are
exercisable under the 1994 and 1995 plan and 1,592,211 options are available for
future grant under the 1995 Plan.
39
<PAGE> 41
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Exercise prices and weighted average remaining contractual life for the
options outstanding under the 1994 Plan and 1995 Plan as of December 31, 1998
are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ ----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING AVERAGE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
- -------------- ----------- ---------------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.01 - 0.32 569,139 7.67 $ 0.08 279,483 $ 0.10
$ 0.33 - 0.99 1,671,996 8.83 $ 0.92 1,024,268 $ 0.92
$ 1.00 - 5.00 1,688,840 9.03 $ 2.88 412,410 $ 1.59
$ 5.01 - 7.50 47,000 9.76 $ 6.27 2,000 $ 6.38
$7.51 - 10.50 147,812 2.18 $10.46 134,157 $10.47
--------- ---------
4,124,787 1,852,318
========= =========
</TABLE>
Some of these options were granted at a per share value below the then
current fair market value of such shares. The Company recorded deferred
compensation expense for the difference between the exercise price and the fair
value of the Company's common stock for options granted during 1998, 1997 and
1996. Deferred compensation expense amounted to $285,000, $17,958 and $6,262 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value for the 1998
options was estimated at the date of grant, using the Black-Scholes option
pricing model, with the following assumptions: risk-free interest rates of 5.0%;
dividend yields of 0%; and a weighted-average expected life of the option of
five years with a volatility factor of .75. The fair value for the 1997 options
was estimated at the date of grant, using the Black-Scholes option pricing
model, with the following assumptions: risk-free interest rates of 5.41%;
dividend yields of 0%; and a weighted-average expected life of the option of
five years with a volatility factor of .50. The fair value for the 1996 options
that were granted after the Company filed its initial filing of the registration
statement relating to the IPO, was estimated at the date of grant, using the
Black-Scholes option pricing model, with the following assumptions: risk-free
interest rates of 6.18%; dividend yields of 0%; and a weighted-average expected
life of the option of five years with a volatility factor of .75. The fair value
for the 1996 options granted before the Company filed its initial filing of the
registration statement relating to the IPO were estimated at the date of grant,
using the "minimum value" method for option pricing through the initial filing
of the registration statement relating to the IPO, with the following
weighted-average assumptions: risk-free interest rates of 6%; dividend yields of
0%; and a weighted-average expected life of the option of seven years. The
volatility factor was based upon the Company's competitive situation, marketing
dynamics and competitive technology inherent in the Internet.
The weighted average fair values of the options granted during 1998, 1997
and 1996 were $2.17, $4.66 and $2.83, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
40
<PAGE> 42
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects of
applying Statement 123 for pro forma disclosure purposes are not likely to be
representative of the effects on pro forma net income (loss) in the future years
because they do not take into consideration pro forma compensation expense
related to grants made prior to 1995. The Company's pro forma information
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss applicable to common shares....... $(16,513,358) $(17,889,405) $(11,186,398)
Pro forma net loss per common share, basic and
diluted............................................ $ (0.74) $ (2.02) $ (1.74)
</TABLE>
Employee Stock Purchase Plan
In 1996, the Company adopted an Employee Stock Purchase Plan (the "ESPP"),
whereby employees, at their option, can purchase shares of Company common stock.
This is done through a payroll deduction at the lower of 85% of the fair market
value on the first day of the ESPP offering period or the end of each six-month
period. The ESPP expires at the earlier of December 31, 2006 or the date on
which all shares available for issuance have been sold. The Company has reserved
100,000 shares of common stock for issuance under the ESPP. At December 31, 1998
employees have purchased 40,067 shares through the ESPP and 59,933 shares are
available for future purchases.
Shares Reserved for Future Issuance
As of December 31, 1998, the Company has reserved shares of common stock
for future issuance as follows:
<TABLE>
<S> <C>
Stock options............................................. 6,716,998
Warrants.................................................. 2,076,073
Employee stock purchase plan.............................. 59,933
---------
8,853,004
=========
</TABLE>
8. RESTRUCTURE CHARGE
In the second quarter 1998, the Company recorded a restructuring charge of
$812,166 as a result of the Company deciding to focus its efforts on its
messaging platform, initiate efforts to cease operations of its Internet payment
system and better align its cost structure with expected revenue projections.
The restructuring activities (shown below in tabular format) primarily relate
to: 1) the elimination of job responsibilities company wide, resulting in costs
incurred to sever a total of 21 employees from all areas of the Company,
including Marketing, Sales, Research, Development, Engineering and
Administrative areas; 2) the cancellation of consumer and merchant memberships
paid to the Company for the right to use the Internet payment system; 3) the
cancellation of certain contracts relating to the operations of the payment
system resulting in one-time termination fees; and 4) the downsizing of the
Company's corporate office space which included relocating the Company to new,
less expensive office space.
41
<PAGE> 43
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Details of the restructuring charge are as follows:
<TABLE>
<CAPTION>
DESCRIPTION RESTRUCTURE CHARGE
----------- ------------------
<S> <C>
Severance packages from the elimination of job
responsibilities.......................................... $545,400
Potential refunds due to cancellations of memberships paid
for Internet payment system (offset by deferred revenue of
$128,234)................................................. 108,971
Termination fees from the cancellation of certain contracts
related to the Internet payment system.................... 62,795
Expenses related to relocating the Company's corporate
offices................................................... 95,000
--------
Total............................................. $812,166
========
</TABLE>
At December 31, 1998, the Company has not paid all expenses related to the
shut down of the internet payment system. Included in other accrued liabilities
at December 31, 1998, is $198,410 related to such expenses. The Company expects
that these expenses will be paid before mid-1999 as the Company relocates to
Boulder, Colorado and closes down its San Diego facilities and operations.
9. INCOME TAXES
Significant components of the Company's deferred tax assets as of December
31, 1998 and 1997 are shown below. Valuation allowances of $7,620,000 and
$11,750,000 have been recognized for 1998 and 1997, respectively, to offset the
net deferred tax assets, as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- ------------
<S> <C> <C>
Deferred tax liabilities:
Acquired Intangibles..................................... $ (370,000) $ --
----------- ------------
Total deferred tax liabilities................... $ (370,000) --
Deferred tax assets:
Net operating losses carryforwards....................... 6,590,000 10,280,000
R & D credit............................................. 810,000 790,000
Other net................................................ 590,000 680,000
----------- ------------
Total deferred tax assets........................ 7,990,000 11,750,000
Valuation allowance for deferred tax assets................ (7,620,000) (11,750,000)
----------- ------------
Net deferred tax assets.................................... $ -- $ --
=========== ============
</TABLE>
At December 31, 1998 approximately $171,000 of the valuation allowance for
deferred tax assets relates to stock option deductions which, when recognized,
will be allocated directly to paid in capital.
At December 31, 1998, the Company has federal and California tax net
operating loss carryforwards of approximately $18,400,000 and $2,500,000. These
federal and state carryforwards will begin to expire in 2010 and 2000,
respectively, unless previously utilized. The Company also has federal and state
research credit carryforwards of approximately $610,000 and $308,000,
respectively, which will begin expiring in 2010, unless previously utilized.
Pursuant to Internal Revenue Code Section 382 and 383, use of the Company's
net operating loss and tax credit carryforwards will be limited because of a
cumulative change in ownership of more than 50% which occurred during 1998. Such
tax net operating losses and credit carryforwards have been reduced, including
the related deferred tax assets.
42
<PAGE> 44
MESSAGEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. 401(K) PROFIT SHARING PLAN
The Company maintains a 401 (k) profit sharing plan which allows
substantially all employees to contribute up to 15% of their salary, subject to
annual limitations and requirements set by the Company. The Board of Directors,
may at its sole discretion, approve Company contributions. To date, there have
been no Company contributions under the plan.
11. LEGAL PROCEEDINGS
On October 19, 1998, Exactis.com, Inc., a Delaware Corporation, filed a
complaint against EPub, which is now a subsidiary of MessageMedia, 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. The case is currently in a discovery phase and the Company
believes it has a meritorious defense. Although the outcome of this case cannot
be predicted, the Company believes that it will not have a material adverse
effect on the financial condition of the Company.
12. SUBSEQUENT EVENTS
On January 6, 1999, management and the Board of Directors decided to
relocate the Company's corporate offices from San Diego, California to Boulder,
Colorado. The Company is currently in the process of relocating.
On March 26, 1999, the Company issued 2,352,942 shares of its common stock
in a private placement for net proceeds to the Company of approximately $10
million.
43
<PAGE> 45
SCHEDULE II
MESSAGEMEDIA, INC.
VALUATION AND QUALIFYING ACCOUNTS
RESERVE FOR PAYMENT SYSTEM SHUTDOWN
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT --------------------------------- BALANCE AT
BEGINNING OF CHARGED TO COSTS CHARGED TO END OF
DESCRIPTION PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998....... -- $812,166 $-- $613,756 $198,410
</TABLE>
44
<PAGE> 1
EXHIBIT 10.37
AGREEMENT TO CHANGE STATUS AND RELEASE OF ALL CLAIMS
This Agreement to Change Status and Release all Claims ("Agreement") is
made between First Virtual Holdings Incorporated (EMPLOYER) and Philip H. Bane
(EMPLOYEE) in the complete, final, and binding settlement of all claims and
potential claims, if any, with respect to their employment relationship as of
January 13, 1998 ("Effective Date") and reflects a change in status.
Whereas, Employer has verbally informed Employee that it desires to change his
status from one of a full time Employee as of the Effective Date to part time
Consultant; and
Whereas, Employer is willing to honor Employee's Amended Employment Agreement
as a part of this change in status such that Employer will provide Employee
with:
(i) a lump sum payment equal to four (4) months salary and will continue to
provide medical benefits for four (4) months; and,
(ii) accelerated vesting of 25% of all previously unvested options as of the
Effective Date.
In consideration of the obligations identified below assumed by each of
the parties, it is hereby agreed by and between the parties that all disputes,
controversies, and potential disputes or causes of action or claims arising out
of, or in any way connected with, Employee's employment relationship with
Employer, whether known or unknown, suspected or unsuspected, which the Employee
and Employer, including but not limited to its parent corporation(s),
subsidiaries, Directors, shareholders, officers, trustees, employees, past and
present, successors, predecessors, assigns, and agents, has or may have had
against each other are settled on the following material terms:
1. Employee hereby resigns as General Counsel and Secretary as of the
Effective Date.
2. Employee represents and warrants, that to the best of his knowledge and
belief that nothing stated in the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission relating to Employer's initial public
stock offering or the Employer's Form 10K filed for fiscal year 1996 or the
Employer's Form 10Q filed for first quarter, second quarter or third quarter
1997 ("SEC Filings") was false or inaccurate as of the date of such SEC Filings
or failed to state a fact that when considered in light of all facts and
circumstances would be considered material.
3. Employer has paid to Employee the total amount of $12,851.79 representing
salary earned and unpaid through 1/5/98, vacation pay earned and unused through
1/5/98, net applicable withholdings, and a refund of moneys paid into the
Employee Stock Purchase Plan. Employee agrees and understands that this payment
and transfer is a full satisfaction of any wages earned, but unpaid to date and
waives any right under California Labor Code Section 206.5.
4. Employer will pay Employee an additional amount of $53,333.36
representing four (4) months salary, net applicable withholdings.
5. Employer will provide Employee with health insurance coverage for the
period covering 1/2/98 through 5/2/98, representing Employer's obligation under
Employee's Amended Employment Agreement. This amount will be paid directly by
Employer. Employer hereby forgives the second
Page 1
<PAGE> 2
installment of a loan due Employer from Employee in accordance with his Amended
Employment Agreement as of the Effective Date.
6. Employer and Employee agree that as of the Effective Date, the options to
purchase Common Stock held by Employee shall be exercisable as to the number of
shares set forth in the far right hand column below, for so long as such
options remain exercisable in accordance with their terms:
<TABLE>
<CAPTION>
Option Date Type Granted Price Vested and Exercisable
<S> <C> <C> <C> <C>
4/29/96 ISO 15,000 $1 8437.50
7/18/96 ISO 20,000 $9 10,312.25
11/20/96 ISO 1666 $10.50 1666
11/20/96 NSO 23,334 $10.50 23,334
8/15/97 NSO 5000 $1 1250
8/15/97 NSO 45,000 $3.94 11,250
</TABLE>
7. Employer agrees that the CEO and Chairman, Lee H. Stein or CFO, John
Stachowiak are the only authorized persons currently employed by Employer
to provide a reference concerning Employee. Employer shall provide the
reference only after receiving written authorized consent or request
signed by Employee identifying the authorized inquirer.
8. Employee and Employer agree that the events leading to this Agreement and
Release, the fact of the Agreement and Release, and the terms and
conditions of the Agreement and Release are and shall be maintained in
privacy and confidence. Both parties agree that this confidentiality is a
material term of the Agreement and Release. Without waiving their
agreement concerning confidentiality, the parties agree that the
information regarding the monetary terms of this settlement may be
disclosed to any state or federal taxing authority as required by law.
Such disclosure shall not be deemed a breach of this Agreement. Nothing in
this paragraph is intended to restrict Employee from communicating with
prospective employers and job referral sources about Employee's job
experience at First Virtual, the nature and extent of job
responsibilities, level of performance, the dates of employment, and the
fact that Employee's status change resulted from a reorganization of
Employer and that this change in status was not performance related. Both
Employee and Employer agree that they will do nothing to disparage the
other in any communications after the date of this Agreement.
9. Employer further agrees that it will transfer by this Agreement certain
books as identified in Attachment A.
9.1 Each party acknowledges, complete satisfaction of, and does hereby forever
release, absolve, and discharge the other including but not limited to its
parent corporation(s), subsidiaries, Directors, shareholders, officers,
trustees, employees, past and present, successors, predecessors, assigns,
agents, attorneys, and representatives from any and all causes of action
judgments, liens indebtedness, damages, claims, liabilities, and demands,
and causes of action of whatever kind or nature (except for Employee's
right to unemployment insurance should Employee fail to obtain
re-employment after the termination of this agreement,) whether known or
unknown, suspected or unsuspected, which the parties now have or hold, or
at any time has or held against the other its parent corporation(s),
subsidiaries, shareholders, officer, trustees, employees, past and
present, successors, predecessors, assigns and agents. This release
expressly waives any and all claims each party may presently have against
the other regardless of the nature, source, or basis for any such claim.
Page 2
<PAGE> 3
9.2 Without expanding or modifying same, the Company acknowledges its
continuing obligations under its letter provided Employee, dated
October 9, 1996 about certain rights of indemnification.
9.3 Employee represents and warrants that he has either destroyed or delivered
to Employer all documents and information in any media either provided
Employee by Company or developed by Employee during his employment.
Employee acknowledges and reaffirms his obligations under the Employee
Confidentiality and Invention Assignment Agreement dated April 29, 1996.
10. In executing this Agreement, the Parties acknowledge that they may in the
future discover facts different from or in addition to those which are the
subject of this Agreement, and agree that this Agreement shall remain in
effect in all respects, notwithstanding the discovery or existence of
different or additional facts. It is the intent of the Parties to
completely, finally, irrevocably, and forever release, forgive, remise,
acquit, and discharge the matters as provided herein; and in furtherance
of this intention, this Agreement shall remain in effect as a complete and
final release, forgiveness, and discharge of those matters, notwithstanding
the discovery or existence of different or additional facts relevant to
those matters. Therefore, the Parties waive all rights and benefits which
they may now have or in the future may have under and by virtue of the
terms of Section 1542 of the California Civil Code, which reads as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
11. Employee and Employer each acknowledge that they have carefully read and
understand the contents of this Agreement and that this Agreement
constitutes the entire agreement and understanding of the parties. The
parties further agree that the terms of this Agreement are contractual and
that both parties, their heirs, successors, and assigns are bound by it,
and that any disputes as to its terms or its interpretation is governed by
laws of the state of California. Should any court of law find any term or
clause invalid under the prevailing law, then that term or clause only
shall be omitted from enforcement, all other terms and conditions
remaining enforceable.
12. Employee acknowledges complete satisfaction of, and does hereby forever
release, absolve, and discharge Employer, including but not limited to its
parent corporation(s), subsidiaries, shareholders, officers, trustees,
employees, past and present, successors, predecessors, assigns, agents,
attorneys, and representatives from any and all causes of action related
to the Age Discrimination in Employment Act (ADEA). Employee understands:
o That Employee has at least 45 days to review and execute this
release and to review information provided by the Company regarding all
employment terminations occurring on or around the same time as the termination
of Employee's employment; and,
o That Employee will have 7 days after executing this release to
revoke the release; and,
o That Employee is advised to consult with an attorney before
executing this release.
Page 3
<PAGE> 4
Any revocation shall be in writing and shall be delivered to the Chief
Executive Officer by the close of business on the seventh business day from the
date Employee signs this agreement.
13. Employer agrees that Employee's phone number and voice mail shall remain
unchanged through January 31, 1997. Employee shall be allowed to dictate a
message that "for First Virtual matters, please call Beth Mayfield at 350-3507
and if you want to leave a message for Philip Bane, please do so and he will
return your call." Employee's password and access to voice mail shall be valid
through January 31, 1998.
14. Parties acknowledge that they both voluntarily and knowingly entered into
this Agreement, having full knowledge and understanding of its contents, its
effect, and of the rights that they may be waiving.
/s/ PHILIP H. BANE
- ---------------------------
Philip H. Bane
Date: 1/13/98
---------------------
First Virtual Holdings Incorporated
/s/ LEE H. STEIN
- ----------------------------------------
Lee H. Stein
Its Chairman and Chief Executive Officer
Date: 1/13/98
---------------------
Page 4
<PAGE> 5
ATTACHMENT A
TITLE PUBLISHER
1. Trade Secret Protection Glasser Legal Works
2. Computer Software Agreements WG&L
3. The Publishing Law Handbook Aspen
4. Corporate Partnering Aspen
5. Communications and Technology Alliances WG&L
6. The Law of Computer Technology WG&L
7. The Law Of Electronic Commerce Little, Brown & Co.
Page 5
<PAGE> 1
EXHIBIT 10.38
FIRST VIRTUAL HOLDINGS, INCORPORATED
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is effective this
16th day of January, 1998 (the "Effective Date"), by and between Nathaniel
Borenstein ("Employee") and First Virtual Holdings Incorporated ("Company").
WHEREAS, Employee and Company are parties to that certain employment
agreement (the "Employment Agreement") dated August 8, 1996;
WHEREAS, Employee's employment with Company under the Employment Agreement
is "at will" and may be terminated at any time by Employee or Company;
WHEREAS, the present financial circumstances of Company require that
Company reduce its payroll expenditures;
WHEREAS, Company has offered Employee a choice of termination of
employment with severance benefits or continued employment with Company under
the terms of this Amendment;
WHEREAS, Company has adopted a compensation reduction program
(the"Program") pursuant to which Employee may elect to reduce Employee's rate
of compensation and Company may grant Employee options to purchase common stock
of Company under the 1995 Stock Option Plan of Company;
WHEREAS, Employee has voluntarily agreed to amend the Employment Agreement
and participate in the Program pursuant to the terms of this Amendment; and
WHEREAS, Company acknowledges and agrees that, while this Amendment is in
effect, Employee may wish to seek and obtain other employment, and Company
agrees Employee may do so to the extent that such activity does not interfere
in any way whatsoever with Employee's obligations as an employee of Company;
NOW, THEREFORE, in consideration of the foregoing recitals and the
respective covenants of the parties contained herein, Company and Employee agree
as follows:
1. Resignation as Company Officer. Employee hereby resigns as an officer
of the Company. Employee is no longer considered an insider for stock
trading purposes.
2. Compensation. Effective as of January 16, 1998, and continuing through
June 30, 1998 Employee's compensation shall be $1,150.00 per month.
3. Grant of Option. As of the Effective Date, Company shall grant
Employee an incentive stock option (the "Option") within the meaning
of and to the extent permitted by Section 422 of the Internal Revenue
Code of 1986, as amended, to purchase 41,426 shares of common stock of
Company. The terms and conditions of the Option shall be as set forth
in that certain agreement between Company and Employee describing the
Page 1
<PAGE> 2
Program, which letter is incorporated herein by the reference, and by
the terms of the Company's 1995 Stock Option Plan and standard form of
stock option agreement.
4. Other Consideration. In consideration for Employee's agreement to
accept stock options and the above described compensation. Company
grants to Employee all equipment specified in Attachment A.
5. Ratification. In all other respects, the Employment Agreement is
hereby ratified and affirmed, including but not limited to health care
coverage and option vesting provisions.
6. Termination. Your employment will terminate with no further action by
either party on June 30, 1998, provided however that either party may
terminate this agreement with ten (10) days written notice. You will
earn the options hereunder and be paid your salary and be entitled to
any benefits through the notice period.
7. Waiver of Severance. In consideration of the grant of Options
hereunder and transfer of equipment as found herein, the parties agree
to execute the attached Severance Agreement in substantially similar
form provided that neither party shall be required to execute the
Severance Agreement if either can document a claim that has arisen
between the date of this Amended Agreement and June 30, 1998 and is
not willing to waive same without additional consideration.
8. Securities Indemnification. Without expanding or modifying same, the
Company acknowledges its continuing obligations under its letter
provided Employee, dated October 9, 1996 about certain rights of
indemnification.
IN WITNESS WHEREOF, each of the parties has executed this Amendment, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
COMPANY: FIRST VIRTUAL HOLDINGS, INC.
By: /s/ LEE H. STEIN
-----------------------------------
Lee H. Stein
Chairman and CEO
EMPLOYEE: /s/ NATHANIEL BORENSTEIN
---------------------------------------
Nathaniel Borenstein
Page 2
<PAGE> 3
[HOLDINGS INCORPORATED ]
February 12, 1998
Nathaniel Borenstein
514 East Washington
Ann Arbor, MI 48104
RE: COMPENSATION REDUCTION PROGRAM
Dear Nathaniel:
The Board of Directors ("Board") of First Virtual Holdings
Incorporated (the "Company") has approved a compensation reduction program (the
"Program") whereby the Board will amend your employment agreement with the
Company to reduce your annual base compensation for the period January 16, 1998
through and including June 30, 1998 by 93.1 percent (93.1%) from $16.666.00
monthly to $1150.00 monthly. As consideration for this reduction in
compensation, the Board will grant you an incentive stock option (the "Option")
as described below. The Company will use the cash proceeds derived from the
reduction in your base compensation for general corporate purposes, and in
doing so the Company will rely on your representation, evidenced by your
signature below, that your reduced compensation will be sufficient to meet your
personal financial needs.
The Option will be for 41,426 shares of the Company's common stock
("Common Stock") at an exercise price of $2.06 per share, the fair market value
of the Common Stock on the date of grant. The Option will vest 3,766 on January
31, 1998 and in equal monthly installments of 7,532 shares at the end of each
succeeding five (5) months. The term of the Option will be ten (10) years. The
Company engaged the services of an independent compensation consulting firm to
advise the Company as to the number of shares that could be offered you for your
agreement to forego compensation. The Board of Directors have made a
determination, based on this advice and said determination is reflected in this
letter. You may review these the consultant's letter at any time prior to
agreeing to participate in the Plan.
You should be aware that the Option involves significant investment
risk. If the fair market value of the Common Stock declines below your exercise
price, your option will have no value. The Company cannot guarantee the fair
market value of the Common Stock at any time. In addition, you will incur
certain tax liabilities with respect to the exercise of the Option and the
subsequent sale of the stock. The Company cannot give you tax advice, and we
encourage you to consult a tax advisor with respect to the Option.
You should also be aware that your election to participate in the
Program will be irrevocable. At no time will you have any right to any of the
cash compensation you elect to forego, even if you agree to cancel a portion of
the Option. For this reason, you should consult your personal financial advisor
before you elect to participate in the Program.
<PAGE> 4
Nathaniel Borenstein
February 12, 1998
Page 2
To participate in the Program, promptly return a signed copy of this
letter to Lew Silverberg at the Company. Please also execute and return a copy
of the enclosed "Stock Option Agreement for Reduction in Compensation".
With your signature, in addition to indicating your willingness to
participate in the Program, you are representing to the Company that your
reduced compensation will be sufficient to cover your personal financial
obligations. In addition, you are acknowledging that your employment with the
Company remains "at will," and neither your election to participate in the
Program nor the vesting of the Option shall affect your ability or the ability
of the Company to terminate your employment at any time, with or without cause.
Very truly yours,
/s/ LEE STEIN
-------------------------------
Lee Stein
Chairman & CEO
/s/ NATHANIEL BORENSTEIN
- ----------------------------
Nathaniel Borenstein
Date 2/13/98
---------------------
<PAGE> 1
EXHIBIT 10.39
SEVERANCE AGREEMENT AND RELEASE OF ALL CLAIMS
This Agreement to Change Status and Release all Claims ("Agreement") is
made between First Virtual Holdings Incorporated (EMPLOYER) and John M.
Stachowiak (EMPLOYEE) in the complete, final, and binding settlement of all
claims and potential claims, if any, with respect to their employment
relationship. This agreement shall be effective May 15, 1998 ("Effective Date").
Whereas, Employer has verbally informed Employee that it desires to terminate
Employee's employment as of the Effective Date, but to ask Employee to consult
thereafter.
Whereas, Employer will provide Employee with:
(i) a payment equal to four (4) months salary;
(ii) accelerated vesting of 25% of the total of options to purchase First
Virtual Common Stock held by Employee, as of the Effective Date; and
(iii) an extension of time to exercise those vested options until May 15, 1999.
The parties have agreed as follows:
All disputes, controversies, and potential disputes or causes of action or
claims arising out of, or in any way connected with, Employee's employment
relationship with Employer, whether known or unknown, suspected or unsuspected,
which the Employee and Employer, its shareholders, officers, assigns, and
agents, has or may have had against each other are settled.
1. Employee resigns as Vice President, Finance and Administration and Chief
Financial Officer as of the Effective Date. The parties acknowledge that
Employee is no longer a SEC Section 16 officer as of the Effective Date.
2. Employee represents and warrants, that to the best of his knowledge and
belief that nothing stated in the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission relating to Employer's initial public
stock offering or the Employer's Form 10K filed for fiscal years 1996 and 1997
or the Employer's Form 10Q filed for first, second, third or fourth quarter of
1997, or the Employer's Form 10Q filed for first quarter of 1998 ("SEC
Filings") was false or inaccurate as of the date of such SEC Filings or failed
to state a fact that when considered in light of all facts and circumstances
would be considered material.
3. Employer will pay to Employee the total amount of $18,168.17 representing
salary earned and unpaid through May 15, 1998, vacation pay earned and unused
through May 15, 1998, net of applicable withholdings, and a refund of moneys
paid into the Employee Stock Purchase Plan. Employee agrees and understands
that this payment and transfer is a full satisfaction of any wages earned, but
unpaid to date and waives any right under California Labor Code Section 206.5.
Page 1
<PAGE> 2
4. Employer will also pay Employee an additional amount of $66,666.64
representing four (4) months salary, net of applicable withholdings. Employee
will be paid his current salary on the May 31, 1998 and June 15, 1998 and the
gross amount will be subtracted from the total $66,666.64. On June 30, 1998
Employer will pay Employee the remaining amount of the $66,666.64, net of
applicable withholdings.
5. As of the Effective Date, subject to approval by the Company's Board of
Directors, the options to purchase Common Stock held by Employee shall be
exercisable as to the number of shares set forth below and the exercise period
will be extended to 1 (one) year from the Effective Date of this Agreement for
all previously existing Option Grants. Employer and Employee agree that as of
the Effective Date, the Employee is vested in the following options:
<TABLE>
<CAPTION>
Vesting
Commencement Vested and
Date Option Date Type Granted Price Exercisable
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/14/96 8/15/97 NSO 10,000 $1.00 6,458
10/14/96 4/29/98 ISO 45,000 $0.9375 29,063
10/14/96 4/29/98 ISO 25,000 $0.9375 25,000
8/12/96 4/29/98 ISO 100,000 $0.9375 68,750
TOTAL EXERCISABLE: 129,271
</TABLE>
6. The President of the Company Keith S. Kendrick and Lee H. Stein, Chairman
and CEO are the only persons currently employed by Employer authorized to
provide a reference concerning Employee. Employer may at its discretion provide
the reference only after receiving an authorized consent or request signed by
Employee identifying the authorized inquirer.
7. The events leading to this Agreement and Release, the fact of the
Agreement and Release, and the terms and conditions of the Agreement and
Release are and shall be maintained in privacy and confidence. Both parties
agree that this confidentiality is a material term of the Agreement and Release.
Without waiving their agreement concerning confidentiality, the parties agree
that the information regarding the monetary terms of this settlement may be
disclosed to any state or federal taxing authority and in filing; with the
Securities and Exchange Commission as required by law. Such disclosure shall not
be deemed a breach of this Agreement. Nothing in this paragraph is intended to
restrict Employee from communicating with prospective employers and job referral
sources about Employee's job experience at First Virtual, the nature and extent
of job responsibilities, level of performance, the dates of employment, and the
fact that Employee's termination resulted from a reorganization of Employer and
that this termination was not performance related. Both Employee and Employer
agree that they will do nothing to disparage the other in any communications
after the date of this Agreement.
8. The parties further agree that:
Employee is eligible to participate in the Professional Management Program,
provided by Right Management Consultants, and that the Company will pay the
cost of such Program in an amount not to exceed $7,500.
Page 2
<PAGE> 3
8.1 Each party acknowledges complete satisfaction of, and does hereby forever
release, absolve, and discharge the other including but not limited to its
parent corporation(s), subsidiaries, shareholders, officers, trustees,
employees, past and present, successors, predecessors, assigns, agents,
attorneys, and representatives from any and all causes of action judgments,
liens indebtedness, damages, claims, liabilities, and demands, and causes of
action of whatever kind or nature (except for Employee's right to unemployment
insurance should Employee fail to obtain re-employment after the termination of
this agreement) whether known or unknown, suspected or unsuspected, which the
parties now have or hold, or at any time has or held against the other its
parent corporation(s), subsidiaries, shareholders, officer, trustee, employees,
past and present, successors, predecessors, assigns and agents including, but
not limited to, any and all claims, under federal, state or local laws
prohibiting discrimination in employment (including but not limited to the Age
Discrimination in Employment Act of 1967), wrongful termination, breach of
contract, breach of public policy, or any other claims. This release expressly
waives any and all claims each party may presently have against the other
regardless of the nature, source, or basis for any such claim. Employee agrees
and promises not to file any lawsuit or other action asserting any such claims.
8.2 Without expanding or modifying same, Employee acknowledges its continuing
obligations under its letter provided Employee, dated October 9, 1996 about
certain rights of indemnification.
8.3 Employee represents and warrants that he has either destroyed or delivered
to Employer all documents and information in any media either provided Employee
by Employer or developed by Employee during his employment. Employee
acknowledges and reaffirms his obligations under the Employee Confidentiality
and Invention Assignment Agreement dated October 14, 1996, which shall be
considered a part of this Agreement.
9. The Parties may in the future discover facts different from or in addition
to those which are the subject of this Agreement, and agree that this Agreement
shall remain in effect in all respects, notwithstanding the discovery or
existence of different or additional facts. It is the intent of the Parties to
completely, finally, irrevocably, and forever release, forgive, remise, acquit,
and discharge the matters as provided herein; and in furtherance of this
intention, this Agreement shall remain in effect as a complete and final
release, forgiveness, and discharge of those matters, notwithstanding the
discovery or existence of different or additional facts relevant to those
matters. Therefore, the Parties waive all rights and benefits which they may now
have or in the future may have under and by virtue of the terms of Section 1542
of the California Civil Code, which reads as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH
THE DEBTOR.
10. Employee and Employer each acknowledge that they have carefully read and
understand the contents of this Agreement and that this Agreement constitutes
the entire agreement and understanding of the parties. The parties further agree
that the terms of this Agreement are contractual and that both parties, their
heirs, successors, and assigns are bound by it, and that any dispute as to its
terms or its interpretation is governed by laws of the state of California
excluding its conflict of laws doctrine.
Page 3
<PAGE> 4
Should any court of law find any term or clause invalid under the prevailing
law, then that term or clause only shall be omitted from enforcement, all other
terms and conditions remaining enforceable.
11. Employee acknowledges complete satisfaction of, and does hereby forever
release, absolve, and discharge Employer, including but not limited to its
parent corporation(s), subsidiaries, shareholders, officers, trustees,
employees, past and present, successors, predecessors, assigns, agents,
attorneys, and representatives from any and all causes of action related to the
Age Discrimination in Employment Act (ADEA). Employee understands:
- That Employee has at least 45 days to review and execute this release
and to review information provided by the Company regarding all employment
terminations occurring on or around the same time as the termination of
Employee's employment; and
- That Employee will have 7 days after executing this release to revoke
the release; and,
- That Employee is advised to consult with an attorney before executing
this release; and;
- Any revocation shall be in writing and shall be delivered to the
President by the close of business on the seventh business day from the
date Employee signs this agreement
12. This is the complete integration of the agreement between the Parties and
supersedes any oral, written or other representation made prior to or
simultaneous to the execution of this Agreement. If any of the provisions of
this Agreement are found by a court or other authority of competent
jurisdiction to be unenforceable, then that provision(s) shall be stricken from
this Agreement and the remaining provisions will continue in full force and
effect.
/s/ JOHN M. STACHOWIAK
- -------------------------------------
John M. Stachowiak
Date: May 18, 1998
First Virtual Holdings Incorporated
/s/ KEITH S. KENDRICK
- -------------------------------------
Keith S. Kendrick
Its President
Date: 15 May 1998
Page 4
<PAGE> 1
EXHIBIT 10.40
SEVERANCE AGREEMENT AND RELEASE OF ALL CLAIMS
This Agreement to Change Status and Release all Claims ("Agreement") is
made between First Virtual Holdings Incorporated (EMPLOYER) and Carolyn
Turbyfill (EMPLOYEE) in the complete, final, and binding settlement of all
claims and potential claims, if any, with respect to their employment
relationship. This agreement shall be effective June 14, 1998 ("Effective
Date").
Whereas, Employer has verbally informed Employee that it desires to terminate
Employee's employment as of the Effective Date, but to ask Employee to consult
thereafter.
Whereas, Employer will provide Employee with:
(i) a payment equal to three (3) months salary;
(ii) accelerated vesting of 100% of the total of options to purchase First
Virtual Common Stock held by Employee, as of the Effective Date; and
(iii) an extension of time to exercise those vested options until June 15,
1999.
The parties have agreed as follows:
All disputes, controversies, and potential disputes or causes of action or
claims arising out of, or in any way connected with, Employee's employment
relationship with Employer, whether known or unknown, suspected or unsuspected,
which the Employee and Employer, its shareholders, officers, assigns, and
agents, has or may have had against each other are settled.
1. Employee resigns as Vice President, Engineering and Operations as of the
Effective Date. The parties acknowledge that Employee is no longer a SEC
Section 16 officer as of the Effective Date.
2. Employee represents and warrants, that to the best of her knowledge and
belief that nothing stated in the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission relating to Employer's initial public
stock offering or the Employer's Form 10K filed for fiscal years 1996 and 1997
or the Employer's Form 10Q filed for first, second, third or fourth quarter of
1997, or the Employer's Form 10Q filed for first quarter of 1998 ("SEC Filings")
was false or inaccurate as of the date of such SEC Filings or failed to state a
fact that when considered in light of all facts and circumstances would be
considered material.
3. Employer will pay to Employee the total amount of $6,470.51 representing
vacation pay earned and unused through June 15, 1998, net of applicable
withholdings, and a refund of moneys paid into the Employee Stock Purchase
Plan, payable on or before June 30, 1998. Employee agrees and understands that
this payment and transfer is a full satisfaction of any wages earned, but
unpaid to date and waives any right under California Labor Code Section 206.5.
4. Employer will also pay Employee an additional amount of $40,000
representing three (3) months salary, net of applicable withholdings, payable
on or before June 30, 1998.
Page 1
<PAGE> 2
5. As of the Effective Date, subject to approval by the Company's Board of
Directors, the options to purchase Common Stock held by Employee shall be
exercisable as to the number of shares set forth below for all previously
existing Option Grants. Employer and Employee agree that as of the Effective
Date, the Employee is vested in the following options:
<TABLE>
<CAPTION>
Vesting
Commencement
Date Type Granted Price Vested and Exercisable
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
4/29/98 ISO $0.9375 45,000
</TABLE>
6. The President of the Company Keith S. Kendrick is the only person
currently employed by Employer authorized to provide a reference concerning
Employee. Employer may at its discretion provide the reference only after
receiving an authorized consent or request signed by Employee identifying the
authorized inquirer.
7. The events leading to this Agreement and Release, the fact of the
Agreement and Release, and the terms and conditions of the Agreement and
Release are and shall be maintained in privacy and confidence. Both parties
agree that this confidentiality is a material term of the Agreement and
Release. Without waiving their agreement concerning confidentiality, the
parties agree that the information regarding the monetary terms of this
settlement may be disclosed to any state or federal taxing authority and in
filing; with the Securities and Exchange Commission as required by law. Such
disclosure shall not be deemed a breach of this Agreement. Nothing in this
paragraph is intended to restrict Employee from communicating with prospective
employers and job referral sources about Employee's job experience at First
Virtual, the nature and extent of job responsibilities, level of performance,
the dates of employment, and the fact that Employee's termination resulted from
a reorganization of Employer and that this termination was not performance
related. Both Employee and Employer agree that they will do nothing to
disparage the other in any communications after the date of this Agreement.
8. Each party acknowledges complete satisfaction of, and does hereby forever
release, absolve, and discharge the other including but not limited to its
parent corporation(s), subsidiaries, shareholders, officers, trustees,
employees, past and present, successors, predecessors, assigns, agents,
attorneys, and representatives from any and all causes of action judgments,
liens indebtedness, damages, claims, liabilities, and demands, and causes of
action of whatever kind or nature (except for Employee's right to unemployment
insurance should Employee fail to obtain re-employment after the termination of
this agreement,) whether known or unknown, suspected or unsuspected, which the
parties now have or hold, or at any time has or held against the other its
parent corporation(s), subsidiaries, shareholders, officer, trustees,
employees, past and present, successors, predecessors, assigns and agents
including, but not limited to, any and all claims, under federal, state or
local laws prohibiting discrimination in employment (including but not limited
to the Age Discrimination in Employment Act of 1967), wrongful termination,
breach of contract, breach of public policy, or any other claims. This release
expressly waives any and all claims each party may presently have against the
other regardless of the nature, source, or basis for
Page 2
<PAGE> 3
any such claim. Employee agrees and promises not to file any lawsuit or other
action asserting any such claims.
8.1 Without expanding or modifying same, Employee acknowledges its continuing
obligations under its letter provided Employee, dated October 9, 1996 about
certain rights of indemnification.
8.2 Employee represents and warrants that she has either destroyed or
delivered to Employer all documents and information in any media either
provided Employee by Employer or developed by Employee during her employment.
Employee acknowledges and reaffirms her obligations under the Employee
Confidentiality and Invention Assignment Agreement dated June 16, 1997, which
shall be considered a part of this Agreement.
9. The Parties may in the future discover facts different from or in
addition to those which are the subject of this Agreement, and agree that this
Agreement shall remain in effect in all respects, notwithstanding the
discovery or existence of different or additional facts. It is the intent of
the Parties to completely, finally, irrevocably, and forever release, forgive,
remise, acquit, and discharge the matters as provided herein; and in
furtherance of this intention, this Agreement shall remain in effect as a
complete and final release, forgiveness, and discharge of those matters,
notwithstanding the discovery or existence of different or additional facts
relevant to those matters. Therefore, the Parties waive all rights and benefits
which they may now have or in the future may have under and by virtue of the
terms of Section 1542 of the California Civil Code, which reads as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW
OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH
THE DEBTOR.
10. Employee and Employer each acknowledge that they have carefully read and
understand the contents of this Agreement and that this Agreement constitutes
the entire agreement and understanding of the parties. The parties further
agree that the terms of this Agreement are contractual and that both parties,
their heirs, successors, and assigns are bound by it, and that any dispute as
to its terms or its interpretation is governed by laws of the state of
California excluding its conflict of laws doctrine. Should any court of law
find any term or clause invalid under the prevailing law, then that term or
clause only shall be omitted from enforcement, all other terms and conditions
remaining enforceable.
11. Employee acknowledges complete satisfaction of, and does hereby forever
release, absolve, and discharge Employer, including but not limited to its
parent corporation(s), subsidiaries, shareholders, officers, trustees,
employees, past and present, successors, predecessors, assigns, agents,
attorneys, and representatives from any and all causes of action related to the
Age Discrimination in Employment Act (ADEA). Employee understands:
* That Employee has at least 45 days to review and execute this
release and to review information provided by the Company regarding all
employment terminations occurring on or around the same time as the
termination of Employee's employment; and
* That Employee will have 7 days after executing this release to
revoke the release; and,
Page 3
<PAGE> 4
* That Employee is advised to consult with an attorney before executing
this release; and;
* Any revocation shall be in writing and shall be delivered to the
President by the close of business on the seventh (7th) business day from
the date Employee signs this agreement.
12. This is the complete integration of the agreement between the Parties and
supersedes any oral, written, or other representation made prior to or
simultaneous to the execution of this Agreement. If any of the provisions of
this Agreement are found by a court or other authority of competent jurisdiction
to be unenforceable, than that provision(s) shall be stricken from this
Agreement and the remaining provisions will continue in full force and effect.
/s/ CAROLYN TURBYFILL
- -----------------------------------
Carolyn Turbyfill
Date: 6/18/98
First Virtual Holdings Incorporated
/s/ KEITH S. KENDRICK
- -----------------------------------
Keith S. Kendrick
Its President
Date: 6/18/98
Page 4
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Registrant
EPub Holdings, Inc., a Delaware corporation.
DBits Acquisition Corporation, an Illinois corporation.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No.333-24789) pertaining to the 1994 Incentive and Non-Statutory
Stock Option Plan, the 1995 Stock Plan and the Employee Stock Purchase Plan of
MassageMedia, Inc. and in the Registration Statements (Forms S-3 No. 333-42855
and No. 333-70959) of MessageMedia, Inc. and the related Prospectus of our
report dated February 2, 1999, except for Note 12, for which the date is March
26, 1999, with respect to the consolidated financial statements included in the
Annual Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
San Diego, California
March 29, 1999
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