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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 1999
REGISTRATION NO. 333-75687
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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USA.NET, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 4822 84-1163852
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1155 KELLY JOHNSON BOULEVARD, SUITE 400
COLORADO SPRINGS, CO 80920
(719) 265-2930
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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JOHN W. STREET
CHAIRMAN OF THE BOARD
USA.NET, INC.
1155 KELLY JOHNSON BOULEVARD, SUITE 400
COLORADO SPRINGS, CO 80920
(719) 265-2930
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies To:
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JAMES C. T. LINFIELD, ESQ. ROBERT M. MATTSON, JR., ESQ.
MARK G. SENEKER, ESQ. TAMARA POWELL TATE, ESQ.
COOLEY GODWARD LLP BRIAN LEWANDOWSKI, ESQ.
2595 CANYON BOULEVARD, SUITE 250 MORRISON & FOERSTER LLP
BOULDER, CO 80302-6737 19900 MACARTHUR BLVD., SUITE 1200
(303) 546-4000 IRVINE, CA 92612-2445
(949) 251-7500
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Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR
TO THE TIME THIS PROSPECTUS IS DELIVERED IN FINAL FORM. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 29, 1999
PROSPECTUS
6,000,000 SHARES
USA.NET LOGO
COMMON STOCK
-------------------------
This is an initial public offering of our common stock. We are selling all of
the 6,000,000 shares offered under this prospectus. We anticipate that the
initial public offering price will be between $10.00 and $12.00 per share.
Our common stock has been approved for quotation on the Nasdaq National Market
under the symbol "MBOX."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
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PER
SHARE TOTAL
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Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to us............................ $ $
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The underwriters may purchase up to an additional 900,000 shares from us at the
initial public offering price less the underwriting discount to cover
over-allotments.
-------------------------
BEAR, STEARNS & CO. INC.
VOLPE BROWN WHELAN & COMPANY
CIBC WORLD MARKETS
THE DATE OF THIS PROSPECTUS IS , 1999.
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INSIDE FRONT COVER PAGE
[BLANK]
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[INSIDE BACK COVER]
[BLANK]
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[OUTSIDE BACK COVER]
1. Top Center: USA.NET logo
2. Lower Left: www.usa.net
<PAGE> 6
PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. NEITHER USA.NET, INC. NOR ANY UNDERWRITER HAS AUTHORIZED ANYONE TO
PROVIDE PROSPECTIVE INVESTORS WITH DIFFERENT OR ADDITIONAL INFORMATION. THIS
PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR ANY
SALE OF THESE SECURITIES.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary..................... 1
Risk Factors........................... 5
Forward-Looking Statements; Market
Data................................. 17
Use of Proceeds........................ 18
Dividend Policy........................ 18
Capitalization......................... 19
Dilution............................... 20
Selected Financial Data................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
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PAGE
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Business............................... 33
Management............................. 54
Principal Stockholders................. 67
Certain Transactions................... 69
Description of Securities.............. 72
Shares Eligible for Future Sale........ 76
Underwriting........................... 77
Legal Matters.......................... 79
Experts................................ 79
Where You Can Find Additional
Information.......................... 79
Index to Financial Statements.......... F-1
</TABLE>
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UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 7
PROSPECTUS SUMMARY
This summary highlights information in this prospectus. You should read the
entire prospectus carefully, especially the risks of investing in our common
stock discussed under "Risk Factors," before investing in our common stock.
BUSINESS OVERVIEW
We provide email and advanced messaging solutions on the Internet for
consumers, Web portals and businesses. Our advanced messaging solutions allow
users to access and manage messages from a variety of communications devices. As
of April 30, 1999, we managed over 10.2 million mailboxes across all of our
service offerings and processed over 172 million messages during the month of
April 1999. We base our messaging solutions on highly reliable and scalable
technology that can support our customer growth and their expanding messaging
needs.
Our advanced messaging solutions are designed to meet the following needs
of consumers, Web portals and businesses:
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CONSUMERS WEB PORTALS AND BUSINESSES
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<S> <C>
- - Permanent email address - Rapid deployment and reduced operating
- - Anytime, anywhere easy access to email costs
- - Robust set of basic features - Scalability to accommodate growth
- - Optional advanced functionality - Reliability and security
- - Account privacy and security - Anytime, anywhere easy access to email
- Customized "look and feel"
- Compatibility with existing email systems
- Specialized applications
- Sophisticated customer service and support
</TABLE>
Consumers. Our consumer email service, NET@DDRESS (www.netaddress.com), was
launched in April 1996, and is now the largest independent Web-based email
service on the Internet with approximately 7 million mailboxes. NET@DDRESS is
offered free of charge to consumers. We generate revenue from NET@DDRESS by
selling advertising space and by offering fee-based premium services such as
virus scanning, email forwarding and message notification.
Web Portals. Our primary Web portal clients are Netscape and register.com,
a business-oriented portal site. We currently manage over 3 million mailboxes
for Netscape's Netcenter Web portal. We generate revenue from Netscape WebMail
by selling advertising space and fee-based premium services. We share this
revenue with Netscape. In addition, we plan to generate revenue by charging a
monthly fee for each mailbox established through our register.com relationship.
Businesses. We provide specialized business messaging applications for
companies such as American Express Travel Related Services Company, as well as
comprehensive message outsourcing services for a wide range of businesses.
AmExMail is available to all consumers free of charge but has special features
available exclusively to American Express Cardmembers. We generate revenue from
our specialized business applications and outsourcing services primarily by
charging a monthly fee for each mailbox. We also offer fee-based premium
services and sell advertising in select situations.
MARKET OPPORTUNITY
We believe that email and advanced messaging services will continue to be
key drivers of Internet usage and growth because they are among the most popular
Internet applications today. According to Forrester Research, the number of
email users in the U.S. is expected to increase from 75 million in 1998 to 135
million in 2001. International Data Corporation estimates that the total number
of email messages sent per day in the United States will increase from 2.1
billion in 1998 to 7.9 billion in 2002.
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We believe that a growing number of businesses, including many that have
already implemented their own in-house email systems, will outsource their
messaging services to an outside vendor such as USA.NET to secure a more
reliable, cost effective and less resource-intensive solution. The Gartner Group
projects that the percentage of large businesses that will outsource at least
some of their email systems will grow from 10% in 1998 to 25% in 2000.
STRATEGY
Our objective is to be the leading provider of email and advanced messaging
solutions for consumers, Web portals and businesses. We intend to pursue this
objective by:
- Developing specialized applications to solve unique business needs;
- Expanding our message outsourcing services;
- Continuing our leadership in consumer messaging;
- Developing and strengthening our relationships with Web portals;
- Maintaining our technology leadership position; and
- Providing superior customer service.
We believe that our proven experience in meeting the rapidly evolving
messaging needs of consumers, Web portals and businesses positions us to
capitalize on the continuing rapid growth of Internet-based messaging.
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Our principal executive office is located at 1155 Kelly Johnson Boulevard,
Suite 400, Colorado Springs, CO 80920, and our telephone number is (719)
265-2930. Our Web site address is www.usa.net. The information contained on our
Web site does not constitute a part of this prospectus.
2
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THE OFFERING
Common Stock Offered in this
Offering.............................. 6,000,000 shares
Common Stock Outstanding After this
Offering.............................. 35,345,525 shares
Use of Proceeds....................... We intend to use the net proceeds
from the offering to fund our capital
expenditures, expand our product
development and sales and marketing
activities, repay certain
indebtedness, and for working capital
and other general corporate purposes,
including potential acquisitions and
investments.
Proposed Nasdaq National Market
Symbol................................ MBOX
ADDITIONAL SHARES MAY BE ISSUED AFTER THIS OFFERING UPON THE EXERCISE OF OPTIONS
AND WARRANTS
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of April 30, 1999. We are
permitted, and in some cases obligated, to issue shares of common stock in
addition to the common stock to be outstanding after this offering. The
following is a summary of these additional shares of common stock:
- 6,559,080 shares that could be issued upon the exercise of options
outstanding as of April 30, 1999 under our stock option plans, at a
weighted average exercise price of $3.14 per share;
- 10,442,600 additional shares that could be issued under our stock option
plans;
- 220,771 shares that could be issued upon exercise of an outstanding
warrant at an exercise price of $3.08; and
- 1,250,000 shares that can be issued to our employees who elect to buy
stock in the future under our employee stock purchase plan.
---------------------
Unless we indicate otherwise, all information in this prospectus:
- Reflects a 4.8-for-1 forward stock split that we will effect before we
close this offering;
- Reflects the automatic conversion of all outstanding shares of preferred
stock into 26,576,963 shares of common stock when we close this offering;
and
- Assumes that the underwriters do not exercise their option to purchase
additional shares of common stock after the closing of this offering and
that no other person exercises any other outstanding option or warrant
after April 30, 1999.
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"USA.NET" and "NET@DDRESS" are registered United States service marks of
ours. "Netscape" and the N design are registered trademarks of Netscape
Communications Corporation. Each other trademark, tradename or service mark
appearing in this prospectus belongs to its holder.
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SUMMARY FINANCIAL AND OPERATING DATA
The following tables set forth our summary financial and operating data.
These tables do not present all of our financial information. You should read
this information together with our financial statements and the notes to those
statements beginning on page F-1 of this prospectus and the information under
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
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1996 1997 1998 1998 1999
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(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND MAILBOX DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................................... $ 34 $ 782 $ 4,703 $ 520 $ 1,945
Cost of revenue........................................... 299 1,614 5,329 709 2,180
---------- ---------- ---------- ---------- ----------
Gross margin............................................ (265) (832) (626) (189) (235)
Operating expenses:
Selling and marketing................................... 876 2,269 6,904 914 2,401
Product development..................................... 260 1,208 3,042 481 1,362
General and administrative.............................. 674 1,490 2,447 346 892
Amortization of channel acquisition costs............... -- -- 1,250 -- 625
Amortization of deferred compensation................... -- 362 917 184 321
---------- ---------- ---------- ---------- ----------
Total operating expenses.......................... 1,810 5,329 14,560 1,925 5,601
---------- ---------- ---------- ---------- ----------
Net loss from operations.................................. (2,075) (6,161) (15,186) (2,114) (5,836)
Other income (expense), net............................... -- 125 291 12 (145)
---------- ---------- ---------- ---------- ----------
Net loss from continuing operations....................... $ (2,075) $ (6,036) $ (14,895) $ (2,102) $ (5,981)
========== ========== ========== ========== ==========
Basic and diluted net loss from continuing operations per
share................................................... $ (1.44) $ (2.37) $ (5.77) $ (0.82) $ (2.28)
========== ========== ========== ========== ==========
Weighted average common shares outstanding -- basic and
diluted................................................. 1,443,014 2,549,328 2,581,978 2,563,622 2,624,317
========== ========== ========== ========== ==========
Pro forma basic and diluted net loss from continuing
operations per share (unaudited)........................ $ (0.65) $ (0.15) $ (0.20)
========== ========== ==========
Pro forma weighted average common shares outstanding --pro
forma basic and diluted (unaudited)..................... 22,825,109 14,487,408 29,201,294
========== ========== ==========
NUMBER OF MAILBOXES AT PERIOD END:
Consumers................................................. 135,000 2,496,000 5,676,000 3,385,000 6,700,000
Web portals............................................... -- -- 1,715,000 -- 2,700,000
Businesses................................................ -- 44,000 217,000 83,000 258,000
---------- ---------- ---------- ---------- ----------
Total............................................. 135,000 2,540,000 7,608,000 3,468,000 9,658,000
========== ========== ========== ========== ==========
</TABLE>
Pro forma net loss per share (unaudited) in the foregoing table is computed
using the weighted average number of common shares outstanding, including the
pro forma effects of the automatic conversion of our preferred stock into common
stock as if such conversion occurred on January 1, 1998, or at the date of
original issuance, if later. The resulting pro forma adjustment includes an
increase in the weighted average shares used to compute pro forma basic and
diluted net loss per share of approximately 20,243,000 shares for the year ended
December 31, 1998 and 26,577,000 and 11,923,000 for the three months ended March
31, 1999 and 1998, respectively.
The following table is a summary of our balance sheet data. The as adjusted
column reflects our receipt of the estimated net proceeds from the 6,000,000
shares of common stock we are selling in this offering at an assumed initial
public offering price of $11.00 per share, after deducting estimated
underwriting discounts and expenses and including the repayment of short-term
debt of $1,709,000.
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MARCH 31, 1999
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ACTUAL AS ADJUSTED
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,437 $62,037
Restricted cash............................................. 1,419 1,419
Short-term investments...................................... 2,482 2,482
Working capital............................................. 10 60,320
Total assets................................................ 29,848 88,448
Short-term debt, including current portion of long-term debt
and capital lease obligations............................. 3,210 1,501
Long-term capital lease obligations......................... 4,925 4,925
Other long-term liabilities................................. 250 250
Total liabilities........................................... 13,718 12,008
Total stockholders' equity.................................. 16,130 76,440
</TABLE>
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest in shares of our common stock. The
risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business.
If any of the following risks actually occur, our business, operating
results or financial condition could be materially adversely affected. This
could cause the trading price of our common stock to decline, and you may lose
part or all of your investment.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF THE MARKET FOR EMAIL AND ADVANCED
MESSAGING SERVICES FAILS TO GROW
The market for Web-based email and advanced Internet messaging services is
new and rapidly evolving. We are uncertain whether the market for our services
will continue to grow and develop. Our future success depends on businesses'
widespread acceptance and use of outsourcing to solve their email and advanced
Internet messaging needs. We only recently launched our commercial messaging
services. We may not be able to sustain our recent growth in revenue and users
and our recent growth rates may not indicate actual growth rates that we may
experience.
If the market for our services fails to develop, develops more slowly than
we expect, or if we fail to accurately design our service enhancements to
satisfy our users on a timely basis, or at all, our business, operating results
and financial condition would be materially adversely affected.
IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS BECAUSE WE HAVE A LIMITED
OPERATING HISTORY
We have only a limited operating history upon which you can evaluate our
business and prospects. We did not begin to offer Web-based email services until
April 1996 and commercial messaging services until June 1998. As a young
company, we face risks and uncertainties relating to our ability to successfully
implement our business plan. You should consider the risks, expenses and
difficulties encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets. If we do not
successfully address these risks and uncertainties, our business, operating
results and financial condition will be materially adversely affected.
WE HAVE A HISTORY OF LOSSES, WE EXPECT TO LOSE MONEY IN THE FUTURE AND WE MAY
NOT ACHIEVE OR SUSTAIN PROFITABILITY
We have not achieved profitability and we expect to continue to lose money
at least through the end of 2001. If our revenue does not increase
substantially, we may never become profitable. Even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis in the future.
We have not generated enough revenue to cover the substantial amounts we
have spent to create, launch and enhance our services. Our operating costs have
exceeded our revenue for all quarters. We have historically funded our
operations by selling stock and obtaining loans from banks and not by generating
income from our business. We incurred net losses from continuing operations of
approximately $6.0 million (unaudited) for the three months ended March 31,
1999, $14.9 million in 1998, $6.0 million in 1997 and $2.1 million in 1996. As
of March 31, 1999, our accumulated deficit was $30.6 million.
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WE MUST DEVOTE SIGNIFICANT MANAGERIAL, TECHNICAL AND FINANCIAL RESOURCES TO OUR
STRATEGIC RELATIONSHIPS AND THESE RELATIONSHIPS MAY NOT PROVE TO BE PROFITABLE
Our strategic relationships, including those with American Express,
Netscape and register.com, expose us to a number of significant risks and
uncertainties, such as:
- We may fail to generate sufficient advertising and other revenue to
offset the expenses and resources we devote to developing, maintaining
and enhancing such services;
- The resources we need to devote to these relationships and our services
may be greater than we anticipate; and
- These relationships may divert our resources and our management's time
and attention from our other services, including NET@DDRESS and our
commercial messaging services.
These risks and uncertainties could result in material adverse effects upon
our business, operating results and financial condition.
Our strategic relationships require that we devote significant managerial,
technical and financial resources to those relationships. Our agreements with
American Express and Netscape require us to maintain and manage all of the user
mailboxes and hardware on our systems and to provide specified service and
support levels. We are also responsible for marketing the services and selling
the advertising inventory on these services. We share with American Express and
Netscape the revenue generated from these services. Please see our discussion in
"Business -- Strategic Relationships" for additional information regarding our
strategic relationships.
WE DEPEND ON KEY STRATEGIC RELATIONSHIPS TO GENERATE REVENUE AND OUR BUSINESS
COULD SUFFER IF ANY OF THESE RELATIONSHIPS ARE TERMINATED
Our agreements with our strategic partners are short-term, typically
ranging from one to two years. These agreements, as well as others with future
strategic partners, may be terminated early in certain circumstances, including
our failure to provide certain service and support levels, and our partners may
not renew them at the end of their respective terms. If these relationships are
terminated early, we will be unable to recover the costs and expenses associated
with building our operations to provide the services and satisfy our contractual
obligations. We may also be unable to effectively reallocate personnel,
equipment and other resources that were allocated to those relationships.
For example, our agreement with American Express terminates December 31,
1999. Our agreement with Netscape with respect to its domestic Netcenter site
terminates in June 2000. Our agreement with Netscape with respect to certain
international Netcenter sites terminates two years from the initial service
launch, which has not yet occurred. These agreements do not contain any
automatic renewal or extension period and they may be terminated early in
certain circumstances, including our failure to meet specified service and
support levels. In addition, advertising revenue on Netscape WebMail Powered by
USA.NET accounted for approximately 30% of our gross revenue in 1998. If
Netscape does not renew this relationship and if we do not replace it with an
another significant Web portal strategic relationship, then our business,
operating results and financial condition would be materially adversely
affected.
WE MAY NOT BE ABLE TO ENTER INTO NEW STRATEGIC RELATIONSHIPS BECAUSE WE MAY
COMPETE WITH EXISTING OR FUTURE PARTNERS
Our relationships with our existing and future strategic partners may limit
our ability to enter into other strategic relationships or sell our services to
similar businesses. For example, our agreements with American Express, Netscape
and register.com prevent us from entering into relationships with or providing
our services to competitors of those partners. We may also enter into similar
non-compete arrangements with future strategic partners.
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<PAGE> 13
Our existing strategic partners and many companies that we may pursue for
strategic relationships in the future also offer competing products and
services. For example, we plan to seek strategic partnerships with selected
telecommunications, Internet and other service providers. However, many of these
companies already provide competing products and services and we expect them to
further develop, acquire or license competing products and services.
Accordingly, these companies may be reluctant to enter into strategic
relationships with us.
In particular, we do not know what impact America Online's merger with
Netscape will have on our relationship with Netscape. America Online provides
its subscribers with email services. It may also use technology provided by
certain of our competitors or invest in or have relationships with our
competitors or other Internet companies. These relationships may result in
Netscape deciding to terminate or narrow its relationship with us.
OUR BUSINESS MAY SUFFER IF THE NUMBER OF PEOPLE USING OUR ADVERTISING-BASED
SERVICES DECREASES
Our advertising-based services, such as NET@DDRESS, depend on a large
number of users to generate advertising revenue. If we cannot maintain and
increase our number of users, our business, operating results and financial
condition may be adversely affected. Each month, a number of our users ceases
using our services. This number may increase as certain services that were
previously provided free of charge are changed to premium services for which we
charge a fee. If we are unable to replace these users, our advertising revenue
will suffer.
INTENSE COMPETITION EXISTS IN THE EMAIL AND INTERNET MESSAGING SERVICES MARKETS
AND WE EXPECT COMPETITION TO CONTINUE TO INTENSIFY
Competition in the Web-based email and advanced Internet messaging services
markets is intense. Competition for Internet-based advertising is also intense.
We may not be able to compete successfully against our current or future
competitors. Many of our competitors have greater brand recognition, longer
operating histories, larger customer bases and greater financial, marketing and
other resources than we have. In particular, Electronic Mail & Messaging Systems
estimates that as of December 31, 1998, Lotus Notes, Microsoft Exchange Server
and Novell Groupwise had 36%, 26% and 17% of client/server mailboxes worldwide
and America Online had 35% of online and Internet service subscriptions
worldwide. Our other significant competitors include Yahoo!Mail and Hotmail who,
according to Electronic Mail and Messaging Systems, accounted for approximately
73.7% of the worldwide freemail and Web-based mail accounts as of March 31,
1999. These factors may place us at a disadvantage when we respond to our
competitors' pricing strategies, technological advances and other initiatives.
Our inability to successfully respond to competitive pressures would have a
material adverse effect on our business, operating results and financial
condition. Additionally, our competitors may develop services that are superior
to ours or that achieve greater market acceptance.
We expect competition to persist and intensify. Barriers to entry may be
insubstantial and we may face substantial and growing competitive pressures from
companies both in the United States and abroad. If we do not respond
successfully to competitive pressures, our business, operating results and
financial condition would be materially adversely affected. Please refer to
"Business -- Competition" for further discussion of the companies that we
compete against.
OUR BUSINESS MAY SUFFER FROM UNPLANNED SYSTEM INTERRUPTIONS
Our computer and communication hardware systems must operate efficiently
and without interruption. Our business will suffer if we experience frequent or
long system interruptions.
Our customers have experienced some interruptions in our email service in
the past due to hardware or software failures, computer viruses or "spam"
attacks and other causes. We believe that these interruptions are likely to
occur from time to time in the future. Our systems are also vulnerable to damage
from fire, floods, power loss, telecommunications failures, physical break-ins
and similar events. System failures that cause interruption or slower response
times could result in less traffic to our Web site
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and those of the Web portals with whom we partner. Sustained or repeated system
failures could damage our reputation and cause us to lose advertisers and users.
WE MAY LOSE USERS AND OUR REPUTATION MAY SUFFER BECAUSE OF "SPAM"
Unsolicited bulk mail, or "spam," and our attempts and others' attempts to
control spam could harm our business and our reputation. Recent publications
suggest that spam has harmed our reputation as well as reputations of other
Internet and email service providers. To the extent our spam blocking efforts
are not effective, our systems may become unavailable or may suffer from reduced
performance. Technologies and processes designed to detect and block spam are
not entirely effective. As a result, unwanted spam may be delivered while
legitimate messages are not delivered. Spam-blocking efforts by others may also
result in others blocking our users' legitimate messages. Additionally, spam may
contain false email addresses or be generated by the use of false email
addresses. Our reputation may be harmed if email addresses with our domain names
are used in this manner. Any of these events may cause users to become
dissatisfied with our service and terminate their use of our services, which
could cause our business, operating results and financial condition to be
materially adversely affected.
WE MAY NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS UNLESS WE KEEP PACE WITH
RAPIDLY CHANGING TECHNOLOGY AND MARKET CONDITIONS
Rapid technological change, changing customer needs, frequent new product
and service introductions and evolving industry standards characterize the
Internet messaging market. These market characteristics could render our
existing services, technology and systems obsolete. We must continually improve
the performance, features and reliability of our services to respond to evolving
market demands and competition. Our business, operating results and financial
condition would be materially adversely affected if we are unable to respond in
a cost-effective and timely manner to changing market conditions or customer
requirements.
WE MUST COST-EFFECTIVELY UPGRADE OUR SYSTEMS AND INFRASTRUCTURE TO ACCOMMODATE
INCREASES IN EMAIL TRAFFIC AND MINIMIZE CAPACITY CONSTRAINTS TO REMAIN
COMPETITIVE
We will need to make additional investments in our network infrastructure
to avoid capacity constraints as the number of users and the frequency and
complexity of messaging increases. The proliferation of multimedia technology
and other new methods of communicating on the Internet which require large
amounts of data may further constrain our systems and infrastructure. These
constraints could result in unanticipated system disruptions, slower response
times, impaired quality and reduced levels of customer service. Slower response
times or system failures could adversely affect our delivery of advertising
impressions and cause our advertising revenue to decline. Message infrastructure
investments may be expensive and time consuming. Additionally, we may not be
able to accurately project the rate or timing of message traffic increases or
upgrade our systems and infrastructure to accommodate future traffic levels. We
do not know if we will be able to successfully manage a substantially greater
number of users and higher message volume at high transmission speeds. We are
likely to encounter equipment or software incompatibility as we upgrade our
infrastructure.
OUR BUSINESS AND REPUTATION WILL SUFFER IF WE DO NOT PREVENT SECURITY BREACHES
We must securely transmit confidential information over public networks.
Our failure to prevent security breaches could damage our reputation, expose us
to a risk of loss or liability or otherwise have a material adverse effect on
our business, operating results and financial condition. Our servers are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. These problems could lead to operational interruptions, delays,
loss of data and unauthorized access to confidential information. We may need to
expend significant capital and other resources to protect against security
breaches or to alleviate problems caused by any breach.
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OUR ABILITY TO SUSTAIN AND GROW OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
DEVELOP AND MAINTAIN THIRD PARTY MARKETING AND SALES RELATIONSHIPS FOR
COMMERCIAL MESSAGING SOLUTIONS
We sell our commercial messaging solutions through our internal sales force
and indirect channels such as Internet, telecommunications and other service
providers, as well as distributors, resellers and Web portals. Our business,
operating results and financial condition would be materially adversely affected
to the extent that we are unable to develop additional distribution
relationships, or these third parties do not successfully distribute our
services, or the amounts we pay these third parties to market and sell our
services do not provide adequate incentives.
WE MAY EXPERIENCE UNEXPECTED EXPENSES OR DELAYS IN SERVICE ENHANCEMENTS IF WE
ARE UNABLE TO LICENSE THIRD PARTY TECHNOLOGY ON COMMERCIALLY REASONABLE TERMS
We license certain technology from third parties, such as Sun Microsystems
and Oracle. We expect to increase our reliance on third party technology in the
future to enhance our services and remain competitive. We may not be able to
license these technologies on commercially reasonable terms or at all. In
addition, we may fail to successfully integrate licensed technology into our
systems. Our inability to obtain any of these licenses could delay service
development or the timely introduction of new services and divert our resources.
Any such delays could materially adversely affect our business, operating
results and financial condition.
OUR SERVICES AND REPUTATION MAY BE ADVERSELY AFFECTED BY SOFTWARE DEFECTS
Our services depend on complex software developed by us and third parties.
Software often contains defects, particularly when first introduced or when new
versions are released. These defects could cause service interruptions that
damage our reputation, increase our service costs, cause us to lose revenue,
delay market acceptance or divert our development resources, any of which could
materially adversely affect our business, operating results and financial
condition. We may not discover software defects that affect our services or
enhancements until we deploy the software.
A NUMBER OF FACTORS COULD CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY
AND OUR STOCK PRICE TO FALL
Our annual and quarterly operating results have fluctuated significantly in
the past and we expect them to fluctuate significantly in the future. It is
possible that in some future periods our results may be below expectations of
public market analysts and investors. If this were to occur, the trading price
of our common stock could significantly decline. Our operating results fluctuate
because of a variety of factors, not all of which are in our control. These
factors include:
- Our expenses and revenue from our strategic relationships;
- The timing of our or our competitors' introduction of new, enhanced or
alternative messaging services and the market acceptance of those
services;
- The amount and timing of revenue, operating costs and capital
expenditures;
- Seasonal trends and budgeting cycles in advertising sales and Internet
usage;
- Pricing, service or marketing decisions that we make in response to
competition;
- System downtime or technical difficulties that affect our operations or
the Internet in general; and
- Economic conditions relating to the Internet and general economic
conditions.
In addition, we base our operating expenses largely on our expectations of
future revenue. Accordingly, our operating results are particularly sensitive to
fluctuations in revenue because we may be unable to adjust spending quickly
enough to offset any unexpected revenue shortfall. If our revenue is below our
plan, or if we increase our spending ahead of our revenue growth, our business,
operating results
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and financial condition would be materially adversely affected. You should not
rely on annual or quarter-to-quarter comparisons of our operating results as an
indication of future performance.
WE MUST ESTABLISH, MAINTAIN AND STRENGTHEN OUR BRANDS TO REMAIN COMPETITIVE
To be successful, we believe that we must establish, maintain and
strengthen our brands. We must succeed in our marketing efforts, provide
high-quality services and increase our user base to build our brand awareness.
If consumers, Web portals, businesses or advertisers do not perceive our
services to be of high quality, or if users reject our new services, the value
of our brands would be diluted. If we are unable to establish, maintain and
strengthen our brands, our business, operating results and financial condition
would be materially adversely affected.
WE MAY NOT BE ABLE TO SUCCESSFULLY OPERATE OUR BUSINESS IF WE LOSE KEY PERSONNEL
OR IF OUR NEWLY FORMED MANAGEMENT TEAM DOES NOT WORK EFFECTIVELY TOGETHER
We believe that our success will depend on the continued services of our
senior management team and other key personnel. The loss of the services of any
of our senior management team or other key employees could materially adversely
affect our business, operating results and financial condition. We do not have
long-term employment agreements with any of our senior management or other key
personnel.
Additionally, certain key members of our senior management team, including
John Gerdelman, our Chief Executive Officer, and Kaukab Chaudhry, our Chief
Financial Officer, were elected in April 1999. Accordingly, our senior
management team has had a limited time to work together. We cannot assure you
that they will be able to work effectively together.
OUR BUSINESS WILL SUFFER IF WE DO NOT ATTRACT AND RETAIN ADDITIONAL HIGHLY
SKILLED PERSONNEL
Our future success depends on our ability to identify, attract, hire,
train, retain and motivate highly skilled technical, managerial and sales and
marketing personnel. Our failure to attract and retain the necessary technical,
managerial, sales and marketing and administrative personnel could materially
adversely affect our business, operating results and financial condition. For
example, the complexity and implementation of our Internet messaging services
requires highly trained sales and marketing personnel to educate prospective
users regarding the use and benefits of our services. Competition for skilled
personnel is intense, and we cannot guarantee that we will successfully attract,
assimilate or retain a sufficient number of qualified personnel. In particular,
we have experienced difficulties in retaining employees due to significant
competition for experienced personnel in our market.
FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD ADVERSELY AFFECT OUR BUSINESS
Our recent rapid growth has significantly strained our managerial,
operational and financial resources. Our failure to manage our growth
effectively could materially adversely affect our business, operating results
and financial condition. We expect to continue to significantly augment our
infrastructure at an accelerated pace. We must effectively manage our
operational, customer service and financial systems, procedures and controls to
manage this future growth.
WE RELY ON GENERATING REVENUE FROM ADVERTISING ON THE INTERNET AND OUR BUSINESS
WILL SUFFER IF WE ARE UNABLE TO ATTRACT ADVERTISING
We have derived substantially all of our revenue to date from the sale of
advertisements. Advertising customers may not continue to purchase advertising
space and services from us. We may not be successful in attracting additional
advertisers or achieving sufficient page impressions for our advertisers.
Advertisers may not find our advertising to be effective. If we are unsuccessful
in attracting advertisers and in increasing our advertising revenue, our
business, operating results and financial condition will be materially adversely
affected. We expect that revenue from Internet advertising will continue to
account for a significant amount of our revenue for the foreseeable future.
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We depend on third parties to measure the demographics of our user base and
the delivery of advertisements. If they are unable to provide these services in
the future, we will need to perform them ourselves or obtain them from another
provider. This could cause us to incur additional costs or cause interruptions
in our business. Companies may choose not to advertise with us or may pay less
for advertising if they do not perceive our measurements or measurements
provided by third parties to be reliable.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF THE MARKET FOR INTERNET ADVERTISING
FAILS TO DEVELOP
Since the Internet advertising market is new and rapidly evolving, it is
difficult for us and advertisers to gauge its effectiveness as compared to
traditional advertising outlets.
In addition, many of our current advertising customers have limited or no
experience using the Internet as an advertising medium and traditionally have
not devoted a significant portion of their advertising expenditures to the
Internet. If the Internet advertising market develops more slowly than we
expect, our business, operating results and financial condition will be
materially adversely affected.
It is difficult to predict which pricing models Internet advertisers will
accept. This uncertainty makes it difficult to project our future advertising
rates and revenue. Our revenue could be adversely affected if advertisers reject
our pricing models. Also, "filter" software programs that limit or prevent us
from delivering advertising to a user's computer are available. Widespread
adoption of this software could adversely affect the commercial viability of
Internet advertising.
OUR ADVERTISING REVENUE DEPENDS ON ADVERTISING CONTRACTS THAT ARE GENERALLY
SHORT-TERM AND REQUIRE US TO GUARANTEE A MINIMUM NUMBER OF IMPRESSIONS
We derive a significant portion of our revenue from short-term advertising
contracts that typically last one to two months. Our revenue and operating
results for a given quarter will depend to a significant extent on contracts
entered into within that quarter. The cancellation or deferral of advertising
contracts, or the failure to obtain sufficient new advertising contracts, could
materially adversely affect our business, operating results and financial
condition.
Our advertising revenue is based in part on the amount of traffic to the
Web sites on which we sell advertising. Any significant shortfall in traffic in
these Web sites could have a material adverse effect on our business, operating
results and financial condition. In addition, substantially all of our
advertising contracts require that we guarantee a minimum number of impressions.
If we do not meet these minimum impressions, we must provide credit for
additional impressions. Our ability to sell additional advertising would be
materially adversely affected and our advertising rates may decline.
THE LOSS OF A MAJOR ADVERTISER COULD HARM OUR BUSINESS
In 1998, Egghead.com accounted for approximately 27% of our total revenue.
In 1997, Egghead.com, 24/7 Media (an Internet advertising sales representation
firm) and Webstakes accounted for approximately 18%, 15% and 11%, respectively,
of our total revenue. Generally, our advertising agreements are short-term and
can be easily terminated by the other party. Sales of our advertising space or
of our services to a limited number of advertisers could account for a high
percentage of our revenue in the future. Our future success depends on our
ability to retain our existing advertisers and attract new advertisers. The loss
of a major advertiser or our inability to attract new advertisers could have a
material adverse effect on our business, operating results and financial
condition.
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WE WILL NOT BE ABLE TO GROW OUR BUSINESS UNLESS CONSUMERS AND BUSINESSES
INCREASE THEIR USE OF THE INTERNET AND THE INTERNET IS ABLE TO SUPPORT THE
DEMANDS OF THIS GROWTH
Our success depends on consumers and businesses increasing their use of the
Internet. Consumers and businesses might not use the Internet for a number of
reasons, such as:
- High Internet access costs;
- Perceived security risks;
- Legal and regulatory issues;
- Inconsistent service quality; and
- Unavailability of cost-effective, high-speed service.
Even if consumers and businesses increase their use of the Internet, the
Internet infrastructure may not be able to support the demands of this growth.
We depend on improvements being made to the entire Internet infrastructure to
alleviate overloading and congestion. Further, the Internet's performance and
reliability may decline. Similarly, users may experience interruptions in their
services as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays occur frequently,
consumers and businesses may slow or stop their use of the Internet as a
commercial or business medium. If consumers and businesses do not increase their
use of the Internet, our business, operating results and financial condition
would be materially adversely affected.
We rely on the speed and reliability of networks operated by third parties.
We depend on telecommunications carriers to transmit messages and may be unable
to find adequate replacements if their rates increase or they discontinue doing
business with us.
In addition, we rely on arrangements among access providers to carry each
other's traffic. Our ability to transmit our message traffic would be reduced if
these providers were to discontinue these arrangements and alternative providers
did not emerge or were to increase the cost of providing access.
OUR BUSINESS WILL SUFFER IF WE ARE NOT ABLE TO EXPAND INTO INTERNATIONAL MARKETS
OR COMPETE EFFECTIVELY IN THOSE MARKETS
We intend to expand into international markets and to spend significant
financial and managerial resources to do so. We have limited experience in
international markets and may not be able to compete effectively in
international markets. We also face certain risks inherent in conducting
business internationally, such as:
- Legal and governmental regulatory requirements;
- Difficulties and costs of staffing and managing international operations;
- Differing technology standards;
- Language and cultural differences;
- Trade barriers;
- Difficulties in collecting accounts receivable and longer collection
periods;
- Seasonal business activity in certain parts of the world;
- Political and economic instability;
- Fluctuations in currency exchange rates;
- Imposition of currency exchange controls;
- Potentially adverse tax consequences; and
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- Reduced protection for intellectual property rights in certain countries.
Any of these factors could materially adversely affect our international
operations and, consequently, our business, operating results and financial
condition.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN
NEEDED
We believe that, following this offering, our cash reserves and cash flows
from operations should be adequate to fund our operations for at least the next
twelve months. If our capital requirements or revenue vary materially from our
current plans or if unforeseen circumstances occur, we may require additional
financing sooner than we anticipate. This financing may not be available on a
timely basis, in sufficient amounts or on terms acceptable to us. This financing
may also dilute existing stockholders.
If we cannot obtain adequate funds on acceptable terms, then we may not be
able to:
- Fund our capital requirements;
- Take advantage of strategic opportunities;
- Develop or enhance our services; or
- Respond to competitive pressures.
Any of these failures could have a material adverse effect on our business,
operating results and financial condition.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS, CAUSE US TO
INCUR DEBT AND ASSUME CONTINGENT LIABILITIES
We expect to review acquisition or investment prospects that would
complement our current service offerings, augment our market coverage, enhance
our technical capabilities, or offer growth opportunities. While we have no
current agreements or negotiations underway with respect to any such
acquisitions or investments, we may acquire or invest in businesses, products or
technologies in the future. In such an event, we could:
- Issue equity securities which would dilute current stockholders'
percentage ownership;
- Incur substantial debt; or
- Assume unknown or contingent liabilities.
Such actions by us could materially adversely affect our operating results
and the price of our common stock. Acquisitions also entail numerous risks,
including:
- Difficulties in integrating acquired operations, technologies or
services;
- Unanticipated costs associated with the acquisitions that materially
adversely affect our operating results;
- Diversion of management's attention from other business concerns; and
- Risks of entering markets in which we have no or limited prior
experience.
Any of these risks could result in a material adverse effect on our
business, financial condition and operating results.
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IF OUR SYSTEMS OR THOSE OF THIRD PARTIES ARE NOT YEAR 2000 COMPLIANT, OUR
BUSINESS MAY BE SEVERELY DISRUPTED AND OUR OPERATING RESULTS MAY BE ADVERSELY
AFFECTED
Failure of our internal computer systems or third party hardware or
software, or of systems maintained by third parties, to operate properly with
regard to Year 2000 and thereafter could cause systems interruptions or loss of
data or could require us to incur significant unanticipated expenses to remedy
any problems. Presently, we believe we are unable to reasonably estimate the
duration and extent of any such interruption, or quantify the effect it may have
on our future revenue. We have not yet developed a comprehensive contingency
plan to address these issues, which could result from such failure. We are
prepared to develop such a contingency plan if our ongoing assessment indicates
areas of significant exposure.
If our present efforts to address the Year 2000 compliance issues are not
successful, or if third party vendors, licensors and providers of hardware,
software and services with which we conduct business do not successfully address
such issues, our business, operating results and financial condition would be
materially adversely affected. Please refer to our discussion in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Issues."
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY ADVERSELY AFFECT
OUR ABILITY TO COMPETE
Trademarks, service marks, trade secrets, copyrights and other proprietary
rights are important to our success and competitive position. Our efforts to
protect our proprietary rights may be inadequate and may not prevent others from
claiming violations of their proprietary rights. Effective trade secret,
copyright, patent and trademark protection may not be available in every country
in which we make our services available through the Internet. The unauthorized
misappropriation of our proprietary technology could have a material adverse
effect on our business, financial condition and operating results.
WE ARE SUBJECT TO CLAIMS ALLEGING INFRINGEMENT OF THIRD PARTIES' INTELLECTUAL
PROPERTY RIGHTS
We may be subject to claims alleging that we have infringed third party
proprietary rights. If we were to discover that any of our services infringed a
third party's rights, we may not be able to obtain permission to use those
rights on commercially reasonable terms. If we resort to legal proceedings to
enforce our proprietary rights or defend against alleged infringements, the
proceedings could be burdensome and expensive and could involve a high degree of
risk. Any of these events could have a material adverse effect on our business,
operating results and financial condition.
INCREASED GOVERNMENT REGULATION MAY INCREASE OUR COST OF DOING BUSINESS OR CAUSE
US TO CHANGE THE WAY WE CONDUCT OUR BUSINESS
Any new legislation or regulation regarding the Internet, or the
application or uncertainty relating to the application of existing laws and
regulations to the Internet, could materially adversely affect our business,
operating results and financial condition.
Legislation could impair the growth of the Internet and decrease the
acceptance of the Internet as a communications and commercial medium. This could
decrease the demand for our services, increase our cost of doing business or
otherwise have a material adverse affect on our business, financial condition
and operating results.
Further, the growth and development of the Internet messaging market may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on companies conducting business online. These laws may
impose additional burdens on our business. For example, because we rely on the
collection and use of personal data from our users for targeting advertisements,
any laws or regulations that restrict our ability to collect or use such
information may harm us. Some states, including New York and California, have
enacted laws or adopted regulations that apply various consumer fraud and false
advertising requirements to parties who conduct business over the Internet.
There have also been numerous legislative initiatives proposed to address the
prevalence of spam on the Internet.
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CHANGES IN TELECOMMUNICATIONS REGULATIONS COULD DECREASE THE DEMAND FOR OUR
SERVICES
Several telecommunications carriers are advocating that the Federal
Communications Commission regulate the Internet in the same manner as other
telecommunications services by imposing access fees on Internet service
providers. Any such regulations could substantially increase the costs of
communicating on the Internet. This, in turn, could slow the growth in Internet
use and thereby decrease the demand for our services or otherwise have a
material adverse effect on our business, operating results and financial
condition.
OUR BUSINESS AND REPUTATION MAY SUFFER IF WE ARE SUBJECT TO CLAIMS BASED ON THE
NATURE AND CONTENT OF MATERIALS TRANSMITTED THROUGH OUR SERVICES
As a provider of Internet messaging services, we may be subject to legal
claims involving matters such as defamation, negligence, invasion of privacy,
copyright infringement and other claims based on the nature and content of the
materials transmitted via email. We do not and cannot screen all of the content
generated by our users and we could be exposed to liability with respect to this
content. Online content restrictions cover many areas, including indecent or
obscene content and gambling. Several federal and state regulations prohibit the
transmission of indecent or obscene information and content. Certain foreign
governments have enforced laws and regulations related to content distributed
over the Internet that are more strict than those currently in place in the
United States.
GOVERNMENT REGULATION OF THE COLLECTION AND USE OF PERSONAL DATA COULD DECREASE
OUR REVENUE AND INCREASE OUR COSTS
We are continuing to review our practices in light of recent Federal Trade
Commission ("FTC") activity and the enactment of the Children's Online Privacy
Protection Act regarding the collection and use of personal data. However, we
cannot predict the exact form of the regulations that the FTC may adopt.
Accordingly, we cannot assure you that our current practices will comply with
the regulatory scheme which the FTC ultimately adopts or that we will not have
to make significant changes to comply with such laws or similar laws adopted by
other domestic or foreign regulatory bodies.
In October 1998, the Children's Online Privacy Protection Act was signed
into law, which directs the FTC to develop regulations for the collection of
data from children by commercial Web site operators. Separately, the Federal
Trade Commission Act prohibits unfair and deceptive practices in and affecting
commerce. The FTC Act authorizes the FTC to seek injunctive and other relief for
violations of the FTC Act and provides a basis for government enforcement of
fair information practices. For instance, failure to comply with a stated
privacy policy may constitute a deceptive practice in some circumstances and the
FTC would have authority to pursue the remedies available under the FTC Act for
any violations. Furthermore, in some circumstances, information practices may be
inherently deceptive or unfair, regardless of whether the entity has publicly
adopted any privacy policies. The FTC has begun investigations into the privacy
practices of companies that collect information on the Internet.
At the international level, the European Union adopted a directive that
requires EU member countries to impose restrictions on the collection and use of
personal data, effective October 25, 1998. Among other provisions, the directive
generally requires member countries to prevent the transfer of
personally-identifiable data to countries that do not offer equivalent privacy
protections. At present, the EU has indicated that the United States does not
provide protections equivalent to that of the directive. The directive could,
among other things, affect United States companies that collect information over
the Internet from individuals in EU member countries, and may impose
restrictions that are more stringent than current Internet privacy standards in
the United States.
WE MAY BE SUBJECT TO LIABILITY AND OUR REPUTATION MAY SUFFER BECAUSE OF
SPAMMING, LOST OR MISDIRECTED MESSAGES OR OTHER PROBLEMS.
We may be subject to risks from claims resulting from unsolicited email (or
spamming), lost or misdirected messages, illegal or fraudulent use of email or
interruptions or delays in service. Even to the
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extent these claims do not result in liability, we could incur significant costs
in investigating or defending against these claims, or in implementing measures
to reduce our exposure to such liability. These types of claims may also hurt
our reputation.
Our insurance may not cover claims of these types or may not provide
sufficient coverage. Any imposition of liability that our insurance does not
cover or exceeds our insurance coverage could materially adversely affect our
business, financial condition and operating results.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO FALL
The market price of our common stock could fall if our stockholders sell
substantial amounts of common stock, including shares issued upon the exercise
of outstanding options, in the public market following this offering. Such sales
might also make it more difficult for us to sell equity securities in the future
at a time and price that we deem appropriate. Please refer to our discussion in
"Shares Eligible for Future Sale."
CERTAIN PROVISIONS IN OUR CORPORATE DOCUMENTS MAY DISCOURAGE OUR ACQUISITION BY
OTHERS AND THUS DEPRESS OUR STOCK PRICE
Our corporate documents and Delaware law could make it more difficult for a
third party to acquire us, even if a change in control would be beneficial to
our stockholders. These and other provisions might discourage, delay or prevent
a change in control of us or of our management. These provisions could also
limit the price that investors might be willing to pay in the future for shares
of common stock. Please refer to our discussion in "Description of Capital
Stock."
CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME
OF DIRECTOR ELECTIONS AND OTHER MATTERS REQUIRING STOCKHOLDER APPROVAL
Our executive officers and directors will, in the aggregate, beneficially
own approximately 35.5% of the common stock following this offering. These
stockholders may be able to significantly influence matters that we require our
stockholders to approve, including electing directors and approving significant
corporate transactions. This concentration of ownership may also have the effect
of delaying or preventing a change in control of us, which could result in a
lower stock price.
THE PRICE FOR OUR COMMON STOCK IS LIKELY TO BE HIGHLY VOLATILE, AND YOU MAY NOT
BE ABLE TO RESELL SHARES AT OR ABOVE THE OFFERING PRICE
The market price of our common stock is likely to be highly volatile as the
stock market in general, and the market for Internet-related and technology
companies in particular, has been highly volatile. Investors may not be able to
resell their shares of our common stock following periods of volatility because
the market reacts adversely to volatility. We cannot predict the extent to which
investor interest in us will lead to the development of a trading market or how
liquid that market might become.
The trading prices of many technology and Internet-related companies'
stocks reached historical highs within the last 52 weeks and reflect relative
valuations that are substantially above historical levels. During the same
period, these companies' stocks have also recorded lows well below historical
highs. We cannot assure you that our stock will trade at the same levels of
other Internet stocks or that we can sustain our stock's trading price and
financial ratios.
Factors that could cause volatility in our stock price may include, among
other things:
- Actual or anticipated variations in our quarterly operating results;
- If we or our competitors announce technological innovations;
- If we launch new sales formats or new services;
- If securities analysts change their financial estimates for us or our
competitors;
- Conditions or trends in the Internet industry;
- If other Internet companies experience changes in their market
valuations;
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- General conditions or trends in the stock market;
- If we or our competitors announce significant acquisitions, strategic
partnerships or joint ventures;
- If we add or lose key personnel; and
- If our stockholders sell common stock.
Many of these factors are beyond our control. These factors may materially
adversely affect the market price of our common stock, regardless of how we
operate.
FORWARD-LOOKING STATEMENTS; MARKET DATA
We make many statements in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business," and elsewhere that are
forward-looking and are not based on historical facts. These statements relate
to our future plans, objectives, expectations and intentions. We may identify
these statements by the use of words such as "believes," "expects,"
"anticipates," "intends," "plans" and similar expressions. Because we make
forward-looking statements that involve risks and uncertainties, you need to
consider the important factors that could cause our actual results to differ
materially from those we express or imply in these forward-looking statements,
including those we discuss under "Risk Factors." Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including those we discuss in "Risk Factors" and
elsewhere in this prospectus. The forward-looking statements speak only as of
the date of this prospectus and we caution you not to place undue reliance on
those statements.
This prospectus contains market data related to us and the Internet. This
data has been included in the studies the Internet market research firms of
International Data Corporation, Jupiter Communications, Gartner Group, Forrester
Research, Creative Networks and MediaMetrix publish. These market research firms
assume certain events, trends and activities will occur and they project
information on those assumptions. If the market research firms are wrong about
any of their assumptions, then their projections may also be wrong.
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USE OF PROCEEDS
We estimate that we will receive approximately $60,310,000 in net proceeds
from this offering ($69,517,000 if the underwriters exercise their
over-allotment option in full) based upon an assumed initial public offering of
$11.00 per share. This amount reflects deductions from the gross proceeds of the
offering of approximately $4,620,000 for underwriting discounts and $1,070,000
for estimated offering expenses.
We expect that in 1999, we will use approximately $21 million of the net
proceeds to build a data center and disaster recovery center in Denver,
Colorado. We intend to build additional data centers and disaster recovery
centers in 2000, although we currently do not have cost estimates for such
centers. We also expect to use approximately $1.7 million of the net proceeds to
repay outstanding borrowings under our revolving credit facility. At March 31,
1999, borrowings outstanding under this facility were approximately $1.7
million. Borrowings under this credit facility bear interest at the bank's prime
rate, which was 7.75% at March 31, 1999.
We do not have specific uses identified for the remaining proceeds. We plan
to use the remaining proceeds to fund capital expenditures, expand our product
development and sales and marketing activities including the hiring of
additional personnel, for working capital and for other general corporate
purposes. We may use a portion of such proceeds to acquire or invest in
businesses that would complement our current service offerings, augment our
market coverage or enhance our technical capabilities, or that may otherwise
offer growth opportunities. We have no current plans, agreements or commitments
with respect to any such acquisition or investment, and we are not currently
engaged in any negotiations with respect to any such transaction.
The amounts we actually expend in each of the areas described above may
vary significantly from our current plans as a result of a number of factors,
including competitive conditions and our future revenue. Accordingly, management
will retain broad discretion in the allocation of the net proceeds of this
offering. You will not have the opportunity to evaluate the economic, financial
or other information on which we base our decisions on how to use the proceeds.
Pending such uses, the net proceeds of this offering will be invested in
short term, interest bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of our board of directors and will depend
upon our financial condition, operating results, capital requirements and such
other factors as the board of directors deems relevant.
18
<PAGE> 25
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999. Our
capitalization is presented:
- On an actual basis;
- On a pro forma basis to reflect the automatic conversion of all
outstanding shares of preferred stock into 26,576,963 shares of common
stock at the same time as the closing of this offering; and
- As adjusted to give effect to the sale of 6,000,000 shares of common
stock offered in this offering at an assumed initial public offering
price of $11.00 per share (after deducting the estimated underwriting
discounts and commissions and offering expenses) and the application of
the net proceeds therefrom. The as adjusted column also reflects the
repayment of $1,709,000 of short-term debt outstanding at March 31, 1999.
This table should be read together with the financial statements and notes
to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------
ACTUAL PRO FORMA
(UNAUDITED) PRO FORMA AS ADJUSTED
----------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
Short-term debt, including current portion of long-term debt
and capital lease obligations............................. $ 3,210 $ 3,210 $ 1,501
Long-term capital lease obligations, less current portion... 4,925 4,925 4,925
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, 5,536,871 shares issued and outstanding
actual; no shares issued and outstanding pro forma and
as adjusted............................................ 44,785 -- --
Common stock, $.001 par value, 150,000,000 shares
authorized; 2,633,802 shares issued and outstanding
actual; 29,210,765 shares issued and outstanding pro
forma; 35,210,765 shares issued and outstanding pro
forma as adjusted...................................... 3 29 35
Additional paid-in capital.................................. 8,851 53,610 113,914
Warrant for common stock.................................... 313 313 313
Deferred compensation....................................... (7,241) (7,241) (7,241)
Accumulated deficit......................................... (30,581) (30,581) (30,581)
-------- -------- --------
Total stockholders' equity............................. 16,130 16,130 76,440
-------- -------- --------
Total capitalization.............................. $ 24,265 $ 24,265 $ 82,866
======== ======== ========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of April 30, 1999. We are
permitted, and in some cases obligated, to issue shares of common stock in
addition to the common stock to be outstanding after this offering. The
following is a summary of these additional shares of common stock:
- 6,559,080 shares that could be issued upon the exercise of options
outstanding as of April 30, 1999 under our stock option plans, at a
weighted average exercise price of $3.14 per share;
- 10,442,600 additional shares that could be issued under our stock option
plans;
- 220,771 shares that could be issued upon exercise of an outstanding
warrant at an exercise price of $3.08; and
- 1,250,000 shares that can be issued to our employees who elect to buy
stock in the future under our employee stock purchase plan.
19
<PAGE> 26
DILUTION
Our unaudited pro forma net tangible book value as of March 31, 1999 was
$10,505,338, or approximately $0.36 per share. Pro forma net tangible book value
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of common stock outstanding, assuming conversion of all
outstanding shares of preferred stock into common stock. Without taking into
account any other changes in the net tangible book value after March 31, 1999,
other than to give effect to our receipt of the net proceeds from the sale of
the 6,000,000 shares of common stock in this offering at an assumed initial
public offering price of $11.00 per share and the repayment of $1,709,000 of
short-term debt outstanding at March 31, 1999, our pro forma net tangible book
value as of March 31, 1999 would have been approximately $70,815,338, or $2.01
per share. This represents an immediate increase in net tangible book value of
$1.65 per share to existing stockholders and an immediate dilution of $8.99 per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share before the
offering............................................... $0.36
Increase per share attributable to new investors.......... $1.65
-----
Pro forma net tangible book value per share after this
offering.................................................. $ 2.01
Dilution per share to new investors......................... $ 8.99
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the differences between existing stockholders and the new investors with respect
to:
- The number of shares of common stock purchased, assuming conversion of
all outstanding shares of preferred stock into common stock;
- The total consideration paid; and
- The average price per share existing stockholders and new investors pay
when they buy common stock in this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 29,210,765 83.0% $ 46,692,208 41.4% $ 1.60
New investors................. 6,000,000 17.0% 66,000,000 58.6% $11.00
---------- ----- ------------ ----- ------
Total............... 35,210,765 100.0% $112,692,208 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and tables assume no exercise of the underwriters'
over-allotment option or of any outstanding stock options or warrants after
March 31, 1999. As of March 31, 1999, there were outstanding options to purchase
4,157,040 shares of common stock at a weighted average exercise price of $1.16
per share and a warrant to purchase 220,771 shares at an exercise price of
approximately $3.08 per share. You will suffer further dilution to the extent
any of these options or this warrants is exercised.
20
<PAGE> 27
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements, the notes to those statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere in this prospectus. The selected financial data as of
December 31, 1996, 1997 and 1998 and for each of the three years in the period
ended December 31, 1998, are derived from the audited financial statements
included elsewhere in this prospectus. The selected financial data as of and for
the year ended December 31, 1995 are derived from audited financial statements
not included elsewhere in this prospectus. The selected financial data as of and
for the year ended December 31, 1994 have been excluded because the statement of
operations and balance sheet data relate entirely to discontinued operations.
The selected financial data as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 have been derived from our unaudited financial
statements which, in the opinion of management, includes all adjustments,
consisting of only normal recurring adjustments necessary for a fair
presentation of the results of operations for such periods. Historical results
are not necessarily indications of the results to be expected in the future. We
have also included the number of mailboxes managed by us at certain dates, which
is not derived from our audited financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -------------------------
1995 1996 1997 1998 1998 1999
-------- ---------- ---------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND MAILBOX DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................... $ -- $ 34 $ 782 $ 4,703 $ 520 $ 1,945
Cost of revenue............................ -- 299 1,614 5,329 709 2,180
-------- ---------- ---------- ----------- ----------- -----------
Gross margin............................. -- (265) (832) (626) (189) (235)
Operating expenses:
Selling and marketing.................... 48 876 2,269 6,904 914 2,401
Product development...................... 304 260 1,208 3,042 481 1,362
General and administrative............... 185 674 1,490 2,447 346 892
Amortization of channel acquisition
costs.................................. -- -- -- 1,250 -- 625
Amortization of deferred compensation.... -- -- 362 917 184 321
-------- ---------- ---------- ----------- ----------- -----------
Total operating expenses........... 537 1,810 5,329 14,560 1,925 5,601
-------- ---------- ---------- ----------- ----------- -----------
Net loss from operations................... (537) (2,075) (6,161) (15,186) (2,114) (5,836)
Other income (expense), net................ -- -- 125 291 12 (145)
-------- ---------- ---------- ----------- ----------- -----------
Net loss from continuing operations........ $ (537) $ (2,075) $ (6,036) $ (14,895) $ (2,102) $ (5,981)
======== ========== ========== =========== =========== ===========
Basic and diluted net loss from continuing
operations per share..................... $ (2.46) $ (1.44) $ (2.37) $ (5.77) $ (0.82) $ (2.28)
======== ========== ========== =========== =========== ===========
Weighted average common shares
outstanding -- basic and diluted......... 218,717 1,443,014 2,549,328 2,581,978 2,563,622 2,624,317
======== ========== ========== =========== =========== ===========
Pro forma basic and diluted net loss from
continuing operations per share
(unaudited).............................. $ (0.65) $ (0.15) $ (0.20)
=========== =========== ===========
Pro forma weighted average common shares
outstanding -- pro forma basic and
diluted (unaudited)...................... 22,825,109 14,487,408 29,201,294
=========== =========== ===========
NUMBER OF MAILBOXES AT PERIOD END:
Consumers.................................. -- 135,000 2,496,000 5,676,000 3,385,000 6,700,000
Web portals................................ -- -- -- 1,715,000 -- 2,700,000
Businesses................................. -- -- 44,000 217,000 83,000 258,000
-------- ---------- ---------- ----------- ----------- -----------
Total.............................. -- 135,000 2,540,000 7,608,000 3,468,000 9,658,000
======== ========== ========== =========== =========== ===========
</TABLE>
Pro forma net loss per share (unaudited) in the foregoing table is computed
using the weighted average number of common shares outstanding, including the
pro forma effects of the automatic conversion of our preferred stock into common
stock as if such conversion occurred on January 1, 1998, or at the date of
original issuance, if later. The resulting pro forma adjustment includes an
increase in the weighted average shares used to compute pro forma basic and
diluted net loss per share of approximately 20,243,000 shares for the year ended
December 31, 1998 and 26,577,000 and 11,923,000 for the three months ended March
31, 1999 and 1998, respectively.
21
<PAGE> 28
The following table is a summary of our balance sheet data. The as adjusted
column reflects our receipt of the estimated net proceeds from the sale of
6,000,000 shares of common stock in this offering at an assumed initial public
offering price of $11.00 per share, after deducting estimated underwriting
discounts and expenses and including the repayment of short-term debt of
$1,709,000.
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1999
-------------------------------- MARCH 31, -----------
1995 1996 1997 1998 1999 AS ADJUSTED
---- ------ ------ ------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 6 $ 393 $2,159 $ 6,563 $ 3,437 $62,037
Restricted cash............................... -- -- 1,885 1,487 1,419 1,419
Short-term investments........................ -- -- -- 3,458 2,482 2,482
Working capital (deficit)..................... (27) (135) 2,218 6,454 10 60,320
Total assets.................................. 888 1,048 7,016 33,429 29,848 88,448
Long-term capital lease obligations and notes
payable..................................... 348 -- 1,235 3,997 4,925 4,925
Other long-term liabilities................... -- -- -- 375 250 250
Total liabilities............................. 763 543 3,483 11,642 13,718 12,008
Total stockholders' equity.................... 125 505 3,533 21,787 16,130 76,440
</TABLE>
22
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Financial Data" and the financial statements and notes attached to
those statements included elsewhere in this prospectus. This discussion contains
certain forward-looking statements that involve risks and uncertainties. Please
see "Risk Factors" and "Forward-Looking Statements; Market Data" elsewhere in
this prospectus.
We provide email and advanced messaging solutions on the Internet for
consumers, Web portals and businesses. As of April 30, 1999, we managed over
10.2 million mailboxes across all of our service offerings and processed over
172 million messages during April 1999. Our consumer email service, NET@DDRESS
(www.netaddress.com), is the largest independent Web-based email service on the
Internet with approximately 7 million mailboxes. Netscape and register.com, a
business-oriented portal site, constitute our primary Web portal clients. Our
commercial messaging solutions include specialized business applications for
companies such as American Express, as well as comprehensive message outsourcing
services for a wide range of businesses.
We started our business in 1991 to provide online services, including
Internet access, to consumer and commercial customers. In 1995, we began the
development of our email solutions and in 1996 we launched NET@DDRESS, one of
the first Web-based email services available for consumers free of charge.
Before March 1997, we derived a significant portion of our revenue from the
Internet access business. In March 1997 we sold our Internet access business to
an entity in which certain of our stockholders hold an ownership interest. For
more information about that business, please refer to notes 3 and 9 in the notes
to the financial statements. We are treating our former Internet access business
as a discontinued operation. Since March 1997, our operating activities have
related primarily to planning and developing our advanced messaging solutions,
recruiting personnel, marketing our services, establishing operational
infrastructure, raising capital and purchasing technology infrastructure and
operating assets.
We currently generate revenue from these services:
- Messaging Services for Consumers. We generate revenue from NET@DDRESS by
selling advertising and fee-based premium services.
- Messaging Services for Web Portals and Businesses. We generate revenue
from advertising sales, fee-based premium services and monthly
per-mailbox fees. We share with Netscape and American Express a portion
of our advertising and premium service revenue from Netscape WebMail and
AmExMail.
Our advertising revenue consists of the following:
- Banners, Buttons and Logout Pages. Banners, buttons and logout pages
refer to the advertising we place on our Web-based email access sites. We
charge different rates for the advertising we display on specific areas
of the Web site.
- Direct Delivery Content. We receive revenue for displaying advertising
and promoting content subscription programs for third parties, such as
news agencies, product information, etc.
We typically sell banners, buttons and logout pages under short-term
contracts, which range from one week to one year in length. We also sell
longer-term and exclusive sponsorships, which combine banner advertisements,
button placements and logout pages. We typically guarantee minimum numbers of
impressions, or a stated number of times that an advertisement appears in pages
viewed by users of our email services, in our advertising agreements. If we fail
to supply the guaranteed number of impressions, our advertisers may terminate
their relationships with us. If, and to the extent that, we do not supply the
minimum guaranteed number of impressions, we recognize the corresponding revenue
only when we achieve the minimum guaranteed number. We recognize advertising
revenue as we display the advertising and we generally bill our advertisers on a
monthly basis.
23
<PAGE> 30
In June 1998, we launched our commercial messaging services. We sell our
commercial messaging services on a turnkey basis with a complete customer
service package, including both account management and technical support. Our
commercial messaging customers pay for mailboxes on a monthly basis and we
recognize revenue as we perform the services. We compensate our direct and third
party sales force primarily through commissions, a variable cost that we
determine based on a percentage of the gross revenue that the sales person
generates.
Through December 31, 1998, we generated substantially all of our revenue
through advertising sales and less than 1% from our commercial messaging
services. We believe that our revenue mix will change as we generate more sales
from the services that we recently launched, including our specialized business
applications, message outsourcing solutions and fee-based premium services. We
anticipate that our mix of revenue from advertising may change in the future as
Internet advertising trends change and we develop new advertising products. We
expect that our gross margins may decrease for certain of our co-branded
services as the percentage of revenue that we share with certain of our
strategic partners increases over time. We also may spend significantly on
channel acquisition to ensure our position on strategic Web portals in the
future.
Through March 31, 1999, we recorded aggregate unearned compensation
totaling approximately $8.8 million in connection with the grant of certain
options to employees. This amount is being amortized over the vesting period of
such options, which is approximately 4.5 years. These options were issued to
create incentives for continued performance. Of the total unearned compensation,
approximately $184,000, $178,000, $271,000 and $284,000 were amortized in the
quarters ended March 31, June 30, September 30, and December 31, 1998,
respectively, and approximately $321,000 was amortized in the first quarter of
1999. In April 1999, we granted options for the purchase of additional shares of
common stock which will result in approximately $22 million of unearned
compensation. For all options granted through April 1999, we expect per-quarter
amortization related to unearned compensation to be between $321,000 and $5.8
million during 1999, $1.8 million during 2000, $1.8 million during 2001, $0.6
million during 2002, $0.6 million during 2003, and $0.4 million during 2004.
Additionally, the terms of an employment agreement with an executive officer
will result in recording approximately $3,000,000 of additional compensation
expense through December 31, 2001.
Amortization of deferred compensation represents loss per share of $(0.14)
(actual) for the year ended December 31, 1997; $(0.36) (actual) and $(0.04) (pro
forma, unaudited) for the year ended December 31, 1998; $(0.07) (actual) and
$(0.01) (pro forma, unaudited) for the three months ended March 31, 1998; and
$(0.12) (actual) and $(0.01) (pro forma, unaudited) for the three months ended
March 31, 1999.
Given the early stage of development of our market, we intend to focus
primarily on growing revenue and market share for at least the next three years.
To do so, we intend to expand our operations and employee base, including our
sales, marketing, technical, operational and customer support resources. We also
intend to further develop new and existing strategic relationships to expand our
distribution channels. We intend to develop strategic sales offices, data
centers and disaster recovery centers. We also plan to continue to make
investments in technology, which may involve the development, acquisition or
licensing of technologies that complement or augment our existing services and
technologies. We also intend to continue to invest heavily in sales and
marketing activities.
We have incurred significant losses since our inception, and as of December
31, 1998 and March 31, 1999 had an accumulated deficit of $24,600,106 and
$30,580,972, respectively. We expect to incur substantial operating losses at
least through the end of 2001. Based on current budgets, the proceeds of this
offering are expected to meet the Company's capital needs for at least the next
twelve months. However, if we achieve less revenue growth than we anticipate, or
if our operating expenses or capital spending plans increase, we would need to
raise additional capital. Prior to March 1997, we were an S corporation for tax
purposes, and tax net operating losses prior to that date are not available to
offset any future taxable income.
24
<PAGE> 31
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that our revenue and operating results, including
our gross profit margin and operating expenses as a percentage of total revenue,
should not be relied upon as indications of future performance. We do not
believe that our historical growth rates are indicative of future results.
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
The information as of and for the three months ended March 31, 1999 and
1998 have been derived from our unaudited financial statements which, in the
opinion of management, includes all adjustments, consisting of only normal
recurring adjustments necessary for a fair presentation of the results of
operations for such periods.
Revenue. Revenue consists of advertising revenue and, in 1999, per-mailbox
fee revenue and fee-based premium services revenue. Revenue increased to
$1,945,000 in the first quarter of 1999 from $520,000 in the first quarter of
1998. Substantially all of the increase was due to an increase in advertising
revenue. The number of NET@DDRESS mailboxes increased to 6.7 million at March
31, 1999 from 3.5 million at March 31, 1998.
In June 1998, we launched Netscape WebMail Powered by USA.NET. At March 31,
1999 Netscape WebMail Powered by USA.NET had over 2.7 million mailboxes.
Additionally, after the first quarter of 1998, together with American Express,
we launched AmExMail Powered by USA.NET. At March 31, 1999, AmExMail had over
258,000 mailboxes.
In March 1999, we launched fee-based premium services on both NET@ADDRESS
and Netscape WebMail Powered by USA.NET. As of March 31, 1999, we had over 1,200
users who had purchased premium services. Revenue from these services is
amortized over the term that the services are provided.
Cost of Revenue. Cost of revenue consists primarily of sales commissions,
Internet connection charges, depreciation, salaries and benefits of operating
and customer service personnel, occupancy costs and other related operating
costs and, in 1999, Netscape's and American Express' share of revenue that we
generate under our relationships with them. Cost of revenue increased to
$2,180,000 in the first quarter of 1999 from $709,000 in the first quarter of
1998. During the first quarter of 1999, these costs were approximately 112.1% of
total revenue compared to 136.4% in the first quarter of 1998. Our cost of
revenue increased in dollar amounts primarily due to increased personnel costs,
depreciation expense, Netscape's and American Express' revenue shares and sales
commissions. We significantly increased the number of operations and customer
support personnel as follows:
<TABLE>
<CAPTION>
AS OF NUMBER
----- ------
<S> <C>
March 31, 1999...................................... 64
December 31, 1998................................... 67
March 31, 1998...................................... 27
</TABLE>
Selling and Marketing. Selling and marketing expenses consist primarily of
compensation for our sales and marketing personnel, advertising and other
promotional costs. Selling and marketing expenses increased to $2,401,000 in the
first quarter 1999 from $914,000 in the first quarter of 1998. During the first
quarter of 1999, these costs were approximately 123.5% of total revenue compared
to 175.8% in the first quarter of 1998. The increase in dollar amounts in 1999
was primarily due to increases in the number of personnel as follows:
<TABLE>
<CAPTION>
AS OF NUMBER
----- ------
<S> <C>
March 31, 1999...................................... 48
December 31, 1998................................... 44
March 31, 1998...................................... 15
</TABLE>
25
<PAGE> 32
In addition, an increase in the purchase of Web-based advertising to
promote our services and an increased promotional effort for our commercial
messaging solution after the first quarter of 1998 contributed to the increase
in selling and marketing expenses.
Product Development. Product development expenses consist primarily of
salaries and related benefits of development engineers, occupancy costs and
consulting fees. Product development expenses increased to $1,362,000 in the
first quarter of 1999 from $481,000 in the first quarter of 1998. During the
first quarter of 1999, these costs were approximately 70.0% of total revenue
compared to 92.5% in the first quarter of 1998. The increase in dollar amounts
in 1999 was primarily due to ongoing costs relating to the development of
features and functionality of our current consumer and commercial messaging
solutions, as well as increases in the number of product development personnel
as follows:
<TABLE>
<CAPTION>
AS OF NUMBER
----- ------
<S> <C>
March 31, 1999...................................... 44
December 31, 1998................................... 43
March 31, 1998...................................... 16
</TABLE>
General and Administrative. General and administrative expenses include
salaries and related expenses for executives, finance personnel, corporate
support, as well as occupancy costs, professional fees and similar expenses.
General and administrative expenses increased to $892,000 in the first quarter
of 1999 from $346,000 in the first quarter 1998. During the first quarter of
1999 these costs were approximately 45.8% of total revenue compared to 66.5% in
the first quarter of 1998. The increase in dollar amounts in 1999 was primarily
due to increases in the number of personnel as follows:
<TABLE>
<CAPTION>
AS OF NUMBER
----- ------
<S> <C>
March 31, 1999...................................... 24
December 31, 1998................................... 22
March 31, 1998...................................... 10
</TABLE>
Amortization of Channel Acquisition Costs. During 1998, we paid Netscape
$5,000,000 for the exclusive right to provide email services to Netscape's
domestic Netcenter portal and $1,500,000 for similar international rights. We
are obligated to pay Netscape $625,000 and $375,000 in 1999 and 2000,
respectively, and these future payments have been recorded in channel
acquisition costs and accrued liabilities. We are amortizing these payments over
the terms of the related agreements. Amortization begins when the service is
launched. We recorded $625,000 of such amortization in the three months ended
March 31, 1999 related to Netscape's domestic Netcenter. The international
Netcenters are not yet launched.
Amortization of Deferred Compensation. During the first quarter of 1999, we
recorded aggregate unearned compensation in the amount of $2.8 million in
connection with the grant of certain stock options during this period.
Amortization totaled $321,000 during this period. During the first quarter of
1998, $184,000 of such amortization was recorded. Please refer to note 6 of the
notes to the financial statements.
Other Income. Other income consists primarily of interest earnings on our
cash, cash equivalents and short-term investments. We completed a private
placement of equity securities in August 1998, which provided net proceeds of
$21,390,000. During 1998, we also completed additional closings on prior private
placements, which provided proceeds of $10,835,000. As a result of these
closings, interest and other income increased to $114,000 in the first quarter
of 1999 from $36,000 in the first quarter of 1998.
We have incurred interest expense on notes payable and capital lease
obligations. During the first quarter of 1999 interest expense was $259,000
compared to $23,000 in the first quarter of 1998. The increase in interest
expense was due to our use of capital leases to fund equipment purchases.
26
<PAGE> 33
RESULTS OF CONTINUING OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Revenue. Revenue consists of advertising revenue and per-mailbox fees.
Revenue increased to $4,703,000 in 1998 from $782,000 in 1997 and $34,000 in
1996. Substantially all of these increases were due to increases in advertising
revenue. Since 1996, the increased number of users of our email and advanced
messaging solutions, our sales and marketing efforts, and the increased number
of advertisers allowed us to generate additional advertising revenue. The number
of NET@DDRESS mailboxes increased to 5.7 million at December 31, 1998 from 2.5
million at December 31, 1997 and 135,000 at December 31, 1996. Egghead.com
accounted for 27.0% of total revenue in 1998 and 18.1% of total revenue in 1997.
24/7 Media accounted for 14.9% of revenue and Webstakes accounted for 11.4% of
revenue in 1997.
During 1998, we launched Netscape WebMail Powered by USA.NET. At December
31, 1998, Netscape WebMail had over 1.7 million mailboxes. Also in 1998,
together with American Express, we launched AmExMail Powered by USA.NET. At
December 31, 1998, AmExMail had over 214,000 mailboxes. We share with Netscape
and American Express a portion of the revenue that we generate under our
relationships with them. For 1998, the Netscape WebMail and AmExMail services
accounted for approximately 30.4% and 1.4% of revenue, respectively.
Cost of Revenue. Cost of revenue consists primarily of Netscape's and
American Express' share of revenue that we generate under our relationships with
them, sales commissions, Internet connection charges, depreciation, salaries and
benefits of operating and customer service personnel, occupancy costs and other
related operating costs. Since 1996, the growth in the number of mailboxes we
manage has increased the cost of revenue. Cost of revenue increased to
$5,329,000 in 1998 from $1,614,000 in 1997 and $299,000 in 1996. During 1998,
these costs were approximately 113.3% of total revenue. Our cost of revenue
increased primarily due to increased personnel costs, depreciation expense and
sales commissions. We significantly increased the number of operations and
customer support personnel as follows:
<TABLE>
<CAPTION>
AS OF NUMBER
- ----------------- ------
<S> <C> <C>
December 31, 1998 ................................. 67
December 31, 1997 ................................. 25
December 31, 1996 ................................. 6
</TABLE>
In addition, we acquired substantial equipment for our data center
throughout 1998, and as a result, our depreciation expense increased in 1998.
Selling and Marketing. Selling and marketing expenses consist primarily of
compensation for our sales and marketing personnel, advertising, and other
promotional costs. Selling and marketing expenses increased to $6,904,000 in
1998 from $2,269,000 in 1997 and $876,000 in 1996. The increases in 1998 and
1997 were primarily due to increases in the number of personnel as follows:
<TABLE>
<CAPTION>
AS OF NUMBER
- ----------------- ------
<S> <C> <C>
December 31, 1998 ................................. 44
December 31, 1997 ................................. 7
December 31, 1996 ................................. 2
</TABLE>
In addition, an increase in the purchase of Web-based advertising to
promote our services and an increased promotional effort for our commercial
messaging solution during 1998 contributed to the increase in selling and
marketing expenses.
Product Development. Product development expenses consist primarily of
salaries and related benefits of development engineers, occupancy costs and
consulting fees. Product development expenses increased to $3,042,000 in 1998
from $1,208,000 in 1997 and $260,000 in 1996. The increase in product
development expenses in each year since 1996 is primarily due to ongoing costs
relating to the development of features
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<PAGE> 34
and functionality of our current consumer and commercial messaging solutions, as
well as increases in the number of product development personnel as follows:
<TABLE>
<CAPTION>
AS OF NUMBER
- ----------------- ------
<S> <C> <C>
December 31, 1998 ................................. 43
December 31, 1997 ................................. 12
December 31, 1996 ................................. 5
</TABLE>
General and Administrative. General and administrative expenses include
salaries and related expenses for executives, finance personnel, corporate
support, as well as occupancy costs, professional fees and similar expenses.
General and administrative expenses increased to $2,447,000 in 1998 from
$1,490,000 in 1997 and $674,000 in 1996. The increase in each year since 1996 is
primarily due to the increased number of general and administrative personnel as
follows:
<TABLE>
<CAPTION>
AS OF NUMBER
- ----------------- ------
<S> <C> <C>
December 31, 1998 ................................. 22
December 31, 1997 ................................. 11
December 31, 1996 ................................. 3
</TABLE>
In addition, outside consulting, professional fees, recruiting fees and
travel expenses associated with our increased business activities added to the
increase in general and administrative expenses.
Amortization of Channel Acquisition Costs. During 1998, we paid Netscape
$5,000,000 for the exclusive right to provide email services to Netscape's
domestic Netcenter portal and $1,500,000 for similar international rights. We
are obligated to pay Netscape $625,000 and $375,000 in 1999 and 2000,
respectively, and these future payments have been recorded in channel
acquisition costs and accrued liabilities. We are amortizing these payments over
the terms of the related agreements. Amortization begins when the service is
launched. We recorded $1,250,000 of such amortization in 1998 related to
Netscape's domestic Netcenter. The international Netcenters were not yet
launched.
Amortization of Deferred Compensation. During 1998, we recorded aggregate
unearned compensation in the amount of $3.3 million in connection with the grant
of certain stock options. Amortization totaled $917,000 during 1998. Please
refer to note 6 of the notes to financial statements.
Other Income. Other income consists primarily of interest earnings on our
cash, cash equivalents and short-term investments. We completed a private
placement of equity securities in August 1998, which provided net proceeds of
$21,390,000. During 1998, we also completed additional closings on prior private
placements, which provided proceeds of $10,835,000. As a result of these
closings, interest and other income increased to $521,000 in 1998 from $134,000
in 1997. Our other income in 1997 was primarily the result of interest income on
short-term investments.
We have incurred interest expense on notes payable and capital lease
obligations. During 1998, interest expense was $230,000 compared to $9,000 for
1997. The increase in interest expense is due to our use of capital leases to
fund equipment purchases.
INCOME TAXES
No provision or benefit for federal and state income taxes (actual or pro
forma) has been recorded because we incurred net operating losses from inception
through December 31, 1998. Prior to March 1997, we were an S corporation for tax
purposes. As of December 31, 1998 we had approximately $18,779,000 of federal
and state operating loss carryforwards available to offset future taxable income
which expire in varying amounts beginning in 2012. Under the Tax Reform Act of
1986, the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances, including significant changes in
ownership interests. Our existing net operating loss carryforward may be
restricted due to changes in ownership or from future tax legislation.
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<PAGE> 35
We have established a valuation allowance against the entire amount of our
deferred tax asset because our management has not been able to conclude that it
is more likely than not that we will be able to realize the deferred tax asset,
due primarily to our history of operating losses.
QUARTERLY OPERATING DATA
The following table sets forth selected unaudited statements of operations
data and the number of mailboxes for each quarter in 1998 and the three months
ended March 31, 1999. The financial information for each quarter has been
prepared on substantially the same basis as the audited statements included in
other parts of this prospectus and, in the opinion of management, includes all
adjustments, consisting of only normal recurring adjustments necessary for a
fair presentation of the results of operations for such periods. This financial
information should be read in conjunction with the audited financial statements
and the notes attached to those financial statements included elsewhere in this
prospectus. Historical results are not necessarily indicative of the results to
be expected in the future and the results of the interim periods are not
indicative of results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1998 1998 1999
----------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.......................... $ 520,075 $ 778,883 $ 1,495,108 $ 1,908,647 $ 1,944,877
Cost of revenue.................. 709,244 905,134 1,462,715 2,252,142 2,180,235
----------- ----------- ----------- ----------- -----------
Gross margin................... (189,169) (126,251) 32,393 (343,495) (235,358)
Operating expenses:
Selling and marketing.......... 914,400 1,661,259 1,809,175 2,518,776 2,401,277
Product development............ 481,039 588,671 749,780 1,222,735 1,361,768
General and administrative..... 345,953 523,049 751,707 826,006 891,597
Amortization of channel
acquisition costs........... -- -- 625,000 625,000 625,000
Amortization of deferred
compensation................ 183,672 178,244 271,354 283,588 320,865
----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 1,925,064 2,951,223 4,207,016 5,476,105 5,600,507
----------- ----------- ----------- ----------- -----------
Net loss from continuing
operations..................... (2,114,233) (3,077,474) (4,174,623) (5,819,600) (5,835,865)
Other income (expense), net...... 35,574 92,507 118,688 274,409 113,616
Interest expense................. (23,309) (49,434) (60,058) (97,092) (258,617)
----------- ----------- ----------- ----------- -----------
Net loss from continuing
operations..................... $(2,101,968) $(3,034,401) $(4,115,993) $(5,642,283) $(5,980,866)
=========== =========== =========== =========== ===========
NUMBER OF MAILBOXES AT PERIOD
END:
Consumers........................ 3,385,000 4,027,000 4,769,000 5,676,000 6,700,000
Web portals...................... -- -- 869,000 1,715,000 2,700,000
Businesses....................... 83,000 118,000 168,000 217,000 258,000
----------- ----------- ----------- ----------- -----------
Total.................. 3,468,000 4,145,000 5,806,000 7,608,000 9,658,000
=========== =========== =========== =========== ===========
</TABLE>
Our revenue and cost of revenue during these periods closely tracked our
growth in users from quarter to quarter. Our operating expenses increased
quarter over quarter as we grew our sales and marketing capabilities, our
service offerings under development, and our administrative infrastructure.
Other factors that influenced our quarterly results in 1998 include the
following:
- In April 1998 and November 1998, we paid Netscape channel acquisition
costs, and are amortizing them over their terms, as discussed above;
- In June 1998 we launched our commercial messaging services; and
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<PAGE> 36
- In March 1998 and August 1998 we sold equity to investors.
Our annual and quarterly operating results have fluctuated significantly in
the past and we expect them to fluctuate significantly in the future.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents, restricted cash and short-term investment
securities increased by $7,464,000 from December 31, 1997 to $11,508,000 at
December 31, 1998 and decreased by $4,170,000 to $7,338,000 at March 31, 1999.
This net change occurred because we raised $32,235,000 in net proceeds from the
sale of equity securities and incurred a net loss of $14,895,000 during 1998 and
$5,981,000 during the three months ended March 31, 1999, due to the expansion of
our organization and operations. Our investment in property and equipment during
1998 was $12,294,000, of which $5,542,000 was financed with capital leases. Our
investment in property and equipment during the three months ended March 31,
1999 was $3,053,000, of which $551,000 was acquired by the use of accounts
payable and $1,533,000 was financed with capital leases. Installation of network
infrastructure equipment in our data center, equipment for new employees and
leasehold improvements related to office and data center expansions accounted
for most of the increase in our capital expenditures. We expect that our
investment in property and equipment will continue to grow as we increase our
capacity to provide email services, although we have no formal commitments to do
so. In 1998, we paid $6,500,000 to Netscape in 1998 for channel acquisition
costs. We also have to pay an additional $625,000 and $375,000 to Netscape in
1999 and 2000, respectively, for additional fees. These future payments totaling
$1,000,000 have been recorded as channel acquisition costs and as a liability at
December 31, 1998 and March 31, 1999.
We have a credit facility with a bank that provides for borrowings up to
$2,000,000. As of December 31, 1998 and March 31, 1999, $1,767,000 and
$1,709,000, respectively, were outstanding under this credit facility.
Borrowings under this credit facility bear interest at the bank's prime rate,
which was 7.75% at March 31, 1999. Certain of our assets collateralize
borrowings under this facility and a stockholder that is an officer and director
has guaranteed the facility. Our capital lease obligations, including both
short-term and long-term portions, increased by $5,237,000 during 1998 (net of
repayments) because we secured financing for a substantial share of our
additions to property and equipment.
We have financed the majority of our operations through the issuance of
equity securities. We have sold common stock and preferred stock generating
aggregate net proceeds of $44,295,000, of which $1,419,000 was restricted at
March 31, 1999 for certain marketing and technical development efforts and is
reflected as restricted cash on our balance sheet.
To date, we have derived substantially all of our revenue from the sale of
advertising on our Web sites. The Internet has not been available as an
advertising medium long enough to gauge its effectiveness as compared to
traditional advertising outlets. We may not be successful in marketing our
current services or other new or enhanced services. In addition, the market for
our services is characterized by rapid technological developments, frequent new
service introductions and evolving industry standards. These changes require us
to continually improve the performance, features, and reliability of our
services, particularly in response to competition. We may not be successful in
responding to these changes.
We believe that the net proceeds from the sale of common stock offered
hereby, together with our current cash, cash equivalents and short-term
investment balances, cash generated from operations and cash available under our
credit facility, will be sufficient to meet our working capital and capital
expenditure requirements for at least the next twelve months. Our operating and
investing activities may require us to obtain additional equity or debt
financing. In addition, although there are no present understandings,
commitments or agreements with respect to any acquisition of other businesses,
products, and technologies, to consummate potential acquisitions, we may need
additional equity or debt financing in the future.
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<PAGE> 37
We believe that capital is available to us from third parties if this
offering is not consummated. If this capital is not made available, a
stockholder has committed to fund our operations through 1999, if necessary.
YEAR 2000 ISSUES
The Year 2000 issue arose because many computer programs were written using
two digits rather than four to define the applicable year. Any computer programs
or hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the Year 2000. This could result in
system failures or miscalculations causing disruptions of operations for any
company using such computer programs or hardware, including, among other things,
an inability to connect to the Internet, process transactions, send invoices or
engage in normal business activities. As a result, many companies must upgrade
or replace their computer systems to avoid "Year 2000" issues.
We are a comparatively new enterprise, and, accordingly, the software and
hardware we use to manage our business has all been purchased or developed by us
within the last 24 months. While this fact pattern does not uniformly protect us
against Year 2000 exposure, we believe we gain some mitigation from the fact
that the information technology we use to manage our business is not based upon
"legacy" hardware and software systems. "Legacy system" is a term often used to
describe hardware and software systems that were developed in previous decades
when there was less awareness of Year 2000 issues. Generally, hardware and
software design within the current decade and the past several years in
particular has given greater consideration to Year 2000 issues. All of the
software code we have internally developed to manage our network traffic, for
example, is written with four digits to define the applicable year.
We are in the process of testing our internal information technology and
non-information technology systems. We have a dedicated Year 2000 project
manager and our own personnel have performed all of the testing we have
completed. To date, we have completed testing of our internally developed
information technology and non-information technology software. Based on such
testing, we believe that such software is Year 2000 compliant.
In addition to our internally developed software, we use software and
hardware developed by third parties both for our network and internal
information systems. We have not performed any testing of such third-party
software or hardware to determine Year 2000 compliance. We are, however, in the
process of obtaining certifications from our key vendors to ensure that their
hardware and software is Year 2000 compliant. Based on our initial evaluation of
our list of material software and hardware providers, we believe that these
providers are presently compliant or are reviewing and implementing their own
Year 2000 compliance programs. We intend to work with these providers to address
the Year 2000 issue and continue to seek assurances from them that their
products are Year 2000 compliant.
In addition, we rely on third party network infrastructure providers to
gain access to the Internet. If such providers experience business interruptions
as a result of their failure to achieve Year 2000 compliance, our ability to
provide Internet connectivity could be impaired, which could have a material
adverse effect on our business, results of operations and financial condition.
Our users' success in maintaining Year 2000 compliance is also significant
to our ability to generate revenue and execute our business plan. Interruptions
in our users' services and on-line activities caused by Year 2000 problems could
have a material adverse effect on our revenue.
We have not incurred any significant expenses to date and we are not aware
of any material costs associated with our anticipated Year 2000 efforts.
However, if we, a significant number of our users, our providers of hardware and
software or our third-party network providers fail to remedy any Year 2000
issues, we could experience a material loss of revenue that could materially
adversely affect our business, results of operations and financial condition. We
would consider an interruption in our ability to provide our services to be the
most reasonably likely unfavorable result of any failure by us, or failure by
the third parties upon whom we rely, to achieve Year 2000 compliance. Presently,
we believe we are unable to reasonably estimate the duration and extent of any
such interruption, or quantify the effect it may have on our future revenue. We
have not yet developed a comprehensive contingency plan to address these issues,
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<PAGE> 38
which could result from such failure. We are prepared to develop such a
contingency plan if our ongoing assessment indicates areas of significant
exposure.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, operating results or cash flows due to adverse changes in financial
and commodity market prices and rates. We are exposed to market risk in the
areas of changes in United States interest rates and changes in foreign currency
exchange rates as measured against the United States Dollar. These exposures are
directly related to our normal operating and funding activities. Historically
and as of March 31, 1999, we have not used derivative instruments or engaged in
hedging activities.
INTEREST RATE RISK
The interest payable on our credit facility is variable based on the prime
rate, and, therefore, affected by changes in market interest rates. At March 31,
1999 and December 31, 1998, approximately $1,709,000 and $1,767,000,
respectively, was outstanding on the note payable. The note payable matures in
January 2000. We manage interest rate risk by investing excess funds in cash
equivalents and short-term investments bearing variable interest rates, which
are tied to various market indices. As a result, we do not believe that
near-term changes in interest rates will result in a material effect on our
future earnings, fair values or cash flows.
FOREIGN CURRENCY RISK
We may enter into contracts where we pay or a third party pays us in a
foreign currency. This exposes us to changes in exchange rates. Changes in the
foreign exchange rates may positively or negatively affect our financial
position, results of operations or cash flows. We do not believe that near-term
changes in exchange rates will result in a material effect on future earnings,
fair values or cash flows, and therefore, have chosen not to enter into foreign
currency hedging instruments. There can be no assurance that such an approach
will be successful, especially in the event of a significant and sudden decline
in the foreign exchange rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance on accounting for the cost of such software. SOP No. 98-1 is effective
for financial statements for fiscal years beginning after December 15, 1998. The
Company does not expect that the adoption of SOP No. 98-1 will have a material
impact on its 1999 financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The Company is required to
adopt SFAS No. 133 in the year ended December 31, 2000. SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. To
date, the Company has not entered into any derivative financial instruments or
hedging activities.
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BUSINESS
We provide email and advanced messaging solutions on the Internet for
consumers, Web portals and businesses. As of April 30, 1999, we managed over
10.2 million mailboxes across all of our service offerings and processed over
172 million messages during the month of April 1999. Our consumer email service,
NET@DDRESS (www.netaddress.com), is the largest independent Web-based email
service on the Internet with approximately 7 million mailboxes. Netscape and
register.com, a business-oriented portal site, constitute our primary Web portal
clients. Our commercial messaging solutions include specialized business
applications for companies such as American Express, as well as comprehensive
message outsourcing services for a wide range of businesses. We base our
messaging solutions on highly reliable and scalable, or expandable, technology
that includes advanced features, universal accessibility and a high level of
security. We believe that our proven experience in meeting the rapidly evolving
messaging needs of consumers, Web portals and businesses positions us to
capitalize on the continuing rapid growth of Internet-based messaging.
We started our business in 1991 as Community News Service, Inc., to provide
Internet access and other Internet-related services to consumer and commercial
customers throughout the United States. In 1995, we began the development of our
email solutions. In March 1997, we sold our Internet service provider business
to focus exclusively on our email and advanced messaging solutions.
CONSUMERS
In April 1996, we launched NET@DDRESS, the first Web-based email service
for consumers. NET@DDRESS, which we offer as a free service, has allowed us to
quickly build a large user base, establish our reputation for providing quality
service and scale-up our technology infrastructure. In 1998, NET@DDRESS won
awards from PC Magazine, CNET and Windows Magazine in comparisons of the overall
features and functionality of free email services. In December 1998,
MediaMetrix, an Internet usage measuring firm, ranked NET@DDRESS as the sixth
most popular site on the Web based on the ability of a Web site to keep users'
attention. We generate revenue from NET@DDRESS by selling advertising space and
by offering fee-based premium services. We intend to increase advertising
revenue from NET@DDRESS by using enhanced targeted marketing techniques and by
expanding our user base. We also plan to offer our users additional fee-based
premium services.
WEB PORTALS
We provide our messaging solutions to Web portals to enhance our reputation
as a provider of messaging services and to build our brand awareness among both
consumers and businesses. Web portals offer a one-stop source of information for
a broad range of consumers and business users. We host and manage the Web-based
email services for Netscape's Netcenter Web portal. Before we launched Netscape
WebMail Powered by USA.NET in June 1998, Netscape did not offer email capability
to its Netcenter members. Netscape WebMail currently has over 3 million
mailboxes. According to Netscape, in April 1999 there were approximately 15
million Netcenter members generating more than 55 million pageviews per day. In
September 1998, PC Magazine recognized Netscape WebMail as the top-ranked
Web-based email service in its review of the features of 12 major Web portals.
We are also developing foreign language-based email services for certain of
Netscape's international Netcenter Web portals. We generate revenue from
Netscape WebMail by selling advertising space through our internal sales force
and from fee-based premium services. We share this advertising and premium
service revenue with Netscape. Netscape invested in us in August 1998.
In March 1999, we entered into an agreement with register.com to offer
businesses an integrated solution that combines our email and other advanced
messaging solutions with register.com's domain name registration service. We
plan to generate revenue by charging a monthly fee for each mailbox established
through this relationship.
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BUSINESSES
We develop and deploy our messaging solutions to address specialized
business messaging needs. In April 1998, together with American Express, we
launched AmExMail, a Web-based email service that is available to all consumers
free of charge but which has special features available exclusively to American
Express Cardmembers. AmExMail enables American Express to communicate with its
customers and prospects in a variety of ways and helps American Express build
customer loyalty. American Express invested in us in April 1997 and March 1998.
We also offer comprehensive message outsourcing services to businesses to
meet their need for a cost-effective and reliable solution to their increasingly
complex messaging requirements. Outsourcing occurs when a company chooses to
have a third party provide a particular service that it might otherwise perform
itself. We introduced this service in June 1998 and currently market it to
companies in a wide range of industries, including Internet service providers,
wireline and wireless telecommunications companies, publishers, information
technology service companies, professional service providers and consumer
products companies.
We generate revenue from these application-specific and comprehensive
outsourcing solutions primarily by charging a monthly fee for each mailbox. We
also offer fee-based premium services and sell advertising in select situations.
We believe that we are well positioned to capitalize on the growing
importance of email as a communications medium for consumers, Web portals and
businesses. We believe that our messaging solutions will function as a central
message center that allows users to take advantage of the convergence of email,
voice mail and fax communications over the Internet. We believe that the
development of unified messaging will create new opportunities for expanded
services for a variety of Internet access devices, including computers, wireless
phones, pagers, personal digital assistants and television set-top boxes.
EMAIL AND MESSAGING BACKGROUND AND TRENDS
GROWTH OF THE INTERNET AND INTERNET MESSAGING
The Internet is quickly becoming an important communications tool,
advertising medium and sales channel for both consumers and businesses
worldwide. International Data Corporation estimates that the number of Internet
users worldwide will grow from 97 million in 1998 to 320 million by the end of
2002, and that the number of devices able to access the Internet will increase
from 120 million in 1998 to 515 million by the end of 2002. Jupiter
Communications estimates that online advertising revenue will grow from
approximately $1.9 billion in 1998 to approximately $7.7 billion in 2002.
We believe that email and advanced messaging services will continue to be
key drivers of Internet usage and growth because they are among the most popular
Internet applications today. Email is a powerful yet inexpensive means of
handling a wide variety of business-to-business, business-to-consumer and
personal communications at any time and from any location. According to
Forrester Research, the number of email users in the United States is expected
to increase from 75 million in 1998 to 135 million in 2001. In addition,
International Data Corporation estimates that the total number of email messages
sent per day in the United States will increase from 2.1 billion in 1998 to 7.9
billion in 2002. We believe that the growth in the use of email is being driven
by its convenience, speed, relatively low cost and the ability to send
multimedia attachments, such as video clips, graphics files, audio files,
documents and spreadsheets.
DEVELOPMENT OF INDUSTRY PROTOCOLS
The creation and widespread acceptance of industry protocols have driven
the rapid growth in the use of the Internet as a messaging medium. The first
email protocols enabled users to send messages across a variety of computer
operating systems. Recently adopted Internet protocols facilitate a user's
access to messages from a variety of devices. New email solutions, including
those offered free of charge, allow users with a Web browser, such as Netscape
Navigator or Microsoft Internet Explorer, to access their messages from any
computer, terminal or kiosk that is connected to the Internet.
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Simple Mail Transport Protocol is currently the standard mail protocol on
the Internet. It allows Internet servers to route mail from the sender to a
destination. All Internet messages are transported using this protocol. Users of
proprietary email systems must convert their internal mail formats to the Simple
Mail Transport Protocol before sending messages over the Internet.
Web-based mail allows users to access their messages from any computer or
device with a Web browser and Internet access. This eliminates the need to
maintain a separate program to access email. Post Office Protocol and Internet
Messaging Access Protocol are emerging standards that improve the functionality
of email. Post Office Protocol allows users to connect to a shared mail server
and download their mail to their computer or alternative Internet access device.
After a user downloads the mail, the user manages the mail on the user's
computer or device.
Internet Messaging Access Protocol provides greater flexibility at the
server level than Post Office Protocol because Internet Messaging Access
Protocol allows a user to sort messages, search for specific text in a message,
and manipulate folders and mailboxes while those files are still on the server
host instead of on the user's computer or alternative Internet access device.
This is particularly valuable for users who access their messages from different
computers with different email software. In addition, Internet Messaging Access
Protocol allows users to have a common mailbox and customized folders and
mailboxes that are not specific to a particular computer or alternative access
device.
INTERNET MESSAGING CONVERGENCE
Emerging Internet protocols, such as Internet Messaging Access Protocol,
are facilitating a convergence in messaging. Today, businesses use multiple
platforms to communicate by email, voice mail and fax. These platforms generally
use different technologies that are based on different communications standards.
The new Internet standards are leading to the convergence of email, voice mail
and fax communications onto a single platform with a single standard. For
example, these new standards will allow voice mail messages to become audio
attachments and faxes to become image attachments to email messages. As a
result, users will be able to read, view, listen and respond to different
message types using a common interface that can be accessed by traditional
personal computers or a variety of other Internet access devices, including
wireless phones, network computers, pagers, personal digital assistants and
television set-top boxes.
As email becomes an essential communications medium, businesses and
consumers expect their email service to be as reliable as their telephone
service. To remain competitive, businesses must be able to rapidly deploy an
advanced email system, manage the system effectively and increase its capacity.
As the number of email users grows and the volume and complexity of messages
increases, email systems must be able to accommodate increasing user demand and
rising storage requirements.
SPECIALIZED BUSINESS APPLICATIONS AND MESSAGE OUTSOURCING SERVICES
Today, many businesses have implemented in-house email systems which
require hardware, software and technical and administrative resources. Creative
Networks, an e-business consulting and research firm, estimates that to acquire,
deploy and operate an in-house messaging solution for 5,000 users, a business
must spend approximately $640 per user's mailbox per year. Even with this level
of investment, we believe many businesses still face significant downtime and
unreliable service. According to the Gartner Group, the percentage of large
businesses that expect to outsource at least some of their email systems is
estimated to grow from 10% in 1998 to 25% in 2000. Additionally, Forrester
Research estimates that the amount spent on outsourced email services will
increase from an estimated $8 million in 1997 to over $1 billion in 2002. We
believe that a growing number of businesses will outsource their messaging
services to ensure a more reliable, cost-effective and less resource-intensive
solution than their own in-house email system.
The rapid proliferation in the number of email users, together with
advances in messaging technology, have enabled new applications for Internet
messaging such as enhanced customer care and service and targeted direct
marketing. However, many businesses lack the internal expertise or resources to
exploit
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these opportunities. We believe there is a significant need for a provider of
solutions for business communications needs.
USA.NET: MEETING THE MESSAGING NEEDS OF CONSUMERS, WEB PORTALS AND BUSINESSES
Our advanced messaging solutions are designed to capitalize on developing
Internet messaging trends and to service the expanding messaging needs of
consumers, Web portals and businesses. We use our experience in managing
millions of emailboxes to provide our users with a robust set of features that
satisfy these needs.
CONSUMER NEEDS
We believe that consumers want a messaging solution that:
- Provides a permanent email address that does not change when the user
switches employers, schools or Internet service providers;
- Permits users to easily access their messages through any computer or
device connected to the Internet without having to download or install
special software;
- Offers a robust set of basic features to easily retrieve and send
messages, consolidate messages from multiple Post Office
Protocol-compliant mailboxes, filter and organize messages and create
automatic replies to incoming messages;
- Offers optional advanced functionality such as virus scanning, email
forwarding and message notification; and
- Ensures email account privacy and secure delivery of messages.
WEB PORTAL AND BUSINESS NEEDS
We believe that Web portals and businesses require a comprehensive advanced
messaging solution that:
- Eliminates the need to incur significant hardware, software and ongoing
operational support costs;
- Can be rapidly deployed;
- Can be readily upgraded and expanded as their businesses and message
volume grow;
- Allows them to focus management resources on their core competencies;
- Is reliable and provides a high level of security;
- Permits users to easily access their messages through any computer or
device connected to the Internet without having to download or install
special software;
- Can be customized to ensure a consistent "look and feel" with their
corporate images;
- Is compatible with popular software programs such as Netscape Messenger
and Microsoft Outlook;
- Offers specialized applications and value-added features to allow
strategic business-to-business or business-to-consumer communications;
and
- Offers sophisticated and accessible customer service and technical
support.
STRATEGY
Our objective is to be the leading provider of email and advanced messaging
solutions for consumers, Web portals and businesses. We intend to pursue this
objective by employing the following strategies:
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<PAGE> 43
DEVELOP SPECIALIZED APPLICATIONS TO SOLVE UNIQUE BUSINESS NEEDS
We are aggressively developing solutions for a wide range of business
communications needs. We believe that our experience and success in developing
specialized messaging services for American Express will help us identify and
develop solutions to address numerous other specific business needs. Our
specialized messaging solutions allow a business to:
- Improve its ability to directly target promotional offers and other
marketing initiatives to its customer base;
- Attract and retain customers and increase customer satisfaction through
ongoing communication and interaction on the Internet;
- Differentiate itself from its competitors by offering new and enhanced
services; and
- Improve its business-to-business and business-to-consumer communication
capabilities.
EXPAND OUR MESSAGE OUTSOURCING SERVICES
Our message outsourcing services are designed to address the needs of
businesses for cost-effective, reliable messaging solutions that can handle the
increasingly complex messaging requirements resulting from the convergence of
email, voice and fax communications. As a result, we are devoting significant
attention to expanding our message outsourcing services. We are pursuing this
opportunity by expanding our sales and marketing activities and by establishing
relationships with information technology service companies, resellers and
distributors which have access to a broad customer base. We also intend to focus
on developing strategic partnerships with selected telecommunications and other
service providers to bundle our commercial messaging services with their
communication services.
CONTINUE LEADERSHIP IN CONSUMER MESSAGING
We intend to continue to expand our NET@DDRESS user base and to increase
our average revenue per user. We plan to significantly expand our marketing
activities to broaden consumer awareness of NET@DDRESS and to attract mainstream
consumers, who are increasingly accessing the Internet and using email. We also
seek to increase our average revenue per user by enabling advertisers to pursue
targeted marketing initiatives and by offering fee-based premium services to
existing and new users.
DEVELOP AND STRENGTHEN RELATIONSHIPS WITH WEB PORTALS
We seek to maintain and expand our Netscape and register.com relationships
and to selectively pursue other Web portal relationships. We intend to generate
additional advertising and premium service revenue from Netscape's WebMail, and
we plan to broaden our per-mailbox revenue opportunities through our
relationship with register.com and other Web portals. We are focusing on
developing relationships with additional Web portals that we believe may further
build our reputation and provide us with access to significant user bases and
revenue opportunities.
MAINTAIN TECHNOLOGY LEADERSHIP
We have developed highly reliable and scalable messaging technology, and we
use the best available third party software where appropriate. We plan to
continue to be a leader in advanced messaging by combining the best available
third party hardware and software with our proprietary applications and
technology. We intend to:
- Continue our focus on creating value-added solutions for specialized
business applications;
- Develop software to enhance our services; and
- Ensure that our systems can be easily integrated with those of our users.
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<PAGE> 44
PROVIDE SUPERIOR CUSTOMER SERVICE
We are dedicated to providing superior customer service to satisfy
businesses' and consumers' demand for reliable, high quality messaging services.
We provide customer support through live agents at our dedicated call center and
through online services. Our highly trained customer support staff of over 40
people uses the leading voice, e-service and interactive online technologies to
enhance the quality of our support. We plan to expand our customer support staff
and continue to dedicate significant resources to monitoring and improving the
quality of our customer support services.
OUR ADVANCED MESSAGING SERVICES
We have developed a wide range of reliable, easy-to-use advanced messaging
solutions to meet the rapidly evolving needs of consumers, Web portals and
businesses. We base our messaging solutions on highly reliable and scalable
technology that includes advanced features, universal accessibility and a high
level of security. We have multiple diverse revenue opportunities, including
advertising revenue, fee-based premium services and monthly per-mailbox fees.
MESSAGING SOLUTIONS FOR CONSUMERS
NET@DDRESS users receive a permanent email address of their choice with a
"usa.net" domain name (e.g. [email protected]). We provide the basic service free
of charge. The user's email address does not change regardless of how often the
user switches employers, schools or Internet service providers.
NET@DDRESS users can send or retrieve email through the NET@DDRESS Web site
(www.netaddress.com) from any computer connected to the Internet with a standard
Web browser. Since NET@DDRESS is Web-based, users do not need to download or
install special software to access the service, but if they desire, they can
view their messages through popular software programs such as Netscape Messenger
or Microsoft Outlook.
All NET@DDRESS users can use our robust set of free basic features to:
- Store up to five megabytes of data;
- Consolidate messages from multiple Post Office Protocol-compliant
mailboxes into one mailbox;
- Block unwanted messages;
- Attach large, complex files to their messages;
- Store frequently used email addresses in an address book;
- Spell check messages;
- Organize and archive messages in customized folders;
- Add customized signatures to their messages; and
- Create automatic replies to incoming messages.
NET@DDRESS also offers advanced privacy and security features. Each user
has an account that the user can access only after entering a unique user name
and an individually selected password. Users accessing their accounts via a
public computer or other access device can choose to disable their memory cache,
meaning that viewed pages are expired rather than stored in the browser's memory
so that subsequent users of the public computer or other access device will not
be able to read the user's messages.
NET@DDRESS users can also subscribe to several fee-based premium services,
including virus scanning, pager notification, email forwarding and Post Office
Protocol access. Users pay for these premium services on a monthly or annual
basis.
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<PAGE> 45
In return for providing basic messaging services free-of-charge, we place
advertising on the NET@DDRESS Web site. We generate revenue from these
advertising sales as well as from the promotion of opt-in content delivery,
which is marketing information and special offers from advertisers that users
can choose to receive. We gather demographic data during the initial
registration process, which we use for targeting advertisements and other
service offerings to users. We offer advertisers a number of programs to target
advertisements to various demographic segments of our user base to increase
advertising effectiveness.
MESSAGING SOLUTIONS FOR WEB PORTALS
Netscape WebMail Powered by USA.NET
In 1998, we entered into a relationship with Netscape to host and manage
email services for Netscape's Netcenter Web portal. Netscape WebMail Powered by
USA.NET is accessible from the Netscape Netcenter Web site (www.netcenter.com)
as well as from a button on the toolbar of Netscape browser software. The email
service offers the same features and functionality as our NET@DDRESS service. We
host the email services at our facilities. Netscape WebMail users are also
automatically enrolled as Netcenter members.
According to Netscape, Netscape WebMail Powered by USA.NET has become the
leading source of attracting new members to Netcenter. We believe that hosting
the Netscape WebMail service has provided us with high visibility and has
significantly helped us build brand awareness. We intend to market our
commercial messaging services to the business users that frequent the Netscape
Netcenter site.
Our agreement with Netscape provides us with multiple revenue
opportunities, including advertising and additional fee-based premium services
similar to those offered by NET@DDRESS users. We are responsible for selling all
advertising space on Netscape WebMail Powered by USA.NET. We share advertising
and premium service revenue with Netscape. We recently expanded the scope of our
agreement with Netscape to develop foreign language-based email services for
certain of Netscape's international Netcenter Web portals. We also expect to
generate revenue on the international Web portals by selling advertising space
and fee-based premium services.
Strategic Partnership with register.com
In March 1999, we entered into an agreement with register.com, a business
portal site that is the largest single domain name registration service on the
Internet. We believe that the first two steps for a business to establish a
presence on the Internet are to register for a domain name and establish email
service. Together with register.com, we expect to provide businesses with a
bundled offering of domain name registration and business messaging services.
Under the terms of our agreement, register.com offers its customers the
opportunity to receive a Web-based email account with the customer's new domain
name. We plan to generate revenue from this relationship by charging a monthly
per-mailbox fee.
MESSAGING SOLUTIONS FOR BUSINESSES
Specialized Messaging Application for American Express
In April 1998, together with American Express, we launched AmExMail Powered
by USA.NET (www.amexmail.com). As of April 30, 1999, AmExMail had over 273,000
mailboxes. The AmExMail service is offered free to all consumers with all of the
features and functionality of our NET@DDRESS service. American Express'
Cardmembers, however, receive without charge certain services and features that
other users must pay for, including Post Office Protocol access and message
management features.
We host the AmExMail services on secure servers located at our facilities.
We generate revenue from the AmExMail service from advertisements. We also plan
to offer fee-based premium services to
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<PAGE> 46
AmExMail users. We share advertising and will share premium service revenue from
AmExMail with American Express.
Other Specialized Messaging Applications
We plan to develop other specialized messaging applications that address
specific business and communications needs. We believe that businesses can apply
these solutions to increase customer service quality, enhance their products and
services, interact directly with their customer base, employ direct marketing
techniques and increase customer loyalty. We are currently developing a solution
for newspaper publishers to help classified advertisers communicate with
potential buyers. Our newspaper classifieds solution provides a unique value
proposition to both newspapers and advertisers. Some of the other specialized
applications that we are currently developing include solutions for:
- Universities and other groups to establish affinity programs with their
alumni or membership base;
- Telecommunications and wireless service providers to bundle our messaging
solutions with their telecommunications services; and
- Internet service providers and Web hosting companies to combine our
services with theirs and provide a complete communications package for
their customers.
Message Outsourcing Services
We launched our commercial message outsourcing service in June 1998. This
service is a cost-effective, easy-to-use email service that is scalable as a
customer's business grows. We sell this service on a turnkey basis with a
complete customer service package, including both account management and
technical support. We currently sell our commercial messaging services directly
through our sales force and indirectly through sales channel partners, such as
information technology service companies and Internet service providers. We are
also pursuing relationships with resellers and distributors aggressively. We
charge a monthly per-mailbox fee that allows a business to avoid expensive
up-front capital expenditures and to scale its spending as its business grows.
We believe that we may have additional revenue opportunities through the sale of
premium services and advertising space in select situations. We manage these
services at our data center, which is monitored by our team of trained systems
operations professionals seven days a week, twenty-four hours per day.
When a business signs up for the commercial messaging services, it
designates a domain name and selects an initial number of mailboxes. The
business also designates one of its employees as a "postmaster" to
self-administer email addresses, customize the client's email interfaces and add
and delete users when appropriate. We train the postmaster and provide ongoing
customer support.
We designed our commercial messaging services to complement and enhance a
business' existing email software. Our commercial messaging services can
streamline a business' messaging functions because it can integrate disparate
email systems that a business may have in different office locations. These
services also permit businesses to standardize their email services using any
email software, such as Netscape Messenger or Microsoft Outlook. As a result,
our services can be implemented easily and with minimal impact on business
operations. We also designed our commercial messaging services to grow so that
businesses can manage increasing volumes of messages in a cost-effective manner.
Our commercial messaging services can also add new features and
functionality to a business' existing system. For example, we provide gateway
filtering for virus detection, filtering for unwanted junk email, and email
certification and encryption. In addition, because our service is Web-based,
users can access their messages from any Internet-connected device with a Web
browser at any time from any location.
A business can also customize its email for a professional "look and feel"
that fits with its corporate image. A business using our commercial messaging
services receives a unique email address for each employee that contains the
business' domain name (e.g. [email protected]) allowing it to have a
complete professional company image on the Internet that is consistent with any
current or future Web site it may have.
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FEATURES AND FUNCTIONALITY
BASIC SERVICE FEATURES
We designed the features and functionality of our service offerings to
provide reliable, cost-effective solutions to meet our users' messaging needs.
The following table lists features that we currently offer free of charge to
consumers and Web portals, and as basic services to businesses.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
FEATURE DESCRIPTION BENEFITS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Message Storage - Five megabytes of storage on - Allows for centralized message
our centralized server storage on our servers rather
than on a user's personal
computer
- Provides secure server-based
storage and back-up, as well
as universal access to
messages
- ---------------------------------------------------------------------------------------------------
Mail Collection - Consolidate messages from - Simplifies message management
multiple Post Office Protocol- by automatically consolidating
compliant mailboxes into one all messages in one place
mailbox
- ---------------------------------------------------------------------------------------------------
Spam Blocking - Block or delete spam - Detects and blocks spam before
(unsolicited junk email) it reaches the user's mailbox
messages
- ---------------------------------------------------------------------------------------------------
File Attachment - Attach files of up to five - Allows attachment and
megabytes to messages transportation of documents,
presentations and other text,
graphic or video files via the
Internet rather than by fax,
mail or other traditional
media
- ---------------------------------------------------------------------------------------------------
Address Book - Organize email addresses in an - Permits universal access to
easily accessible address book address book
- Allows users to create and
store individual and group email
addresses
- ---------------------------------------------------------------------------------------------------
Company Directory - Organize employee email - Allows employees universal
addresses in a common company access to their company
directory directory
- ---------------------------------------------------------------------------------------------------
Spell Check - Check spelling - Enhances ability to send
accurate and professional
messages by checking for
spelling errors before sending
a message
- ---------------------------------------------------------------------------------------------------
Folder Management - Filter, organize and store - Allows users to classify and
incoming and outgoing messages store messages in personalized
on our servers folders that they establish
according to their own
preferences
- ---------------------------------------------------------------------------------------------------
Message Management - Create rules for screening and - Users can establish
filtering messages instructions and rules to store,
forward or block messages
according to sender, subject,
date and time
- ---------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 48
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
FEATURE DESCRIPTION BENEFITS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unique User Profiles - Establish unique settings for - Users can customize the look
email viewing and feel of their mailbox by,
for example, setting the font
- Change passwords and size of their messages and
signatures for email messages establishing the number of
messages they can view on the
screen
- Allows for customized
signature containing user's
address, phone number or other
information to be attached to
each outgoing message
- ---------------------------------------------------------------------------------------------------
Automatic - Send automatic responses to - Allows users to automatically
Responses/Vacation incoming email respond to messages before
Reply reading them, for example to
let others know that a user is
on vacation or travelling
- ---------------------------------------------------------------------------------------------------
Email Scheduling - Send emails at designated - Allows users to create a
times message to be sent at a
designated time
- Send reminders of specific
events - Users can schedule message
reminders for specific daily,
weekly, monthly or yearly
events such as meetings,
birthdays or anniversaries
- ---------------------------------------------------------------------------------------------------
Security/Memory Cache - Viewed pages are expired - Increases privacy and security
Disabling rather than stored in the when a user accesses messages
browser's memory cache so that through public computers or
subsequent users of a public other access devices
computer or other access
device will not be able to
read a previous user's
messages
- ---------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 49
BASIC BUSINESS ADMINISTRATIVE FEATURES
We also offer the following administrative services to Web portals and
businesses enabling a comprehensive outsourcing solution.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
FEATURE DESCRIPTION BENEFITS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Web-based Provisioning - Web-based interface for - Provides remote
adding, deleting and modifying self-administration of an
email addresses and services outsourced email environment
- Allows administrators to
retain control and flexibility
- ---------------------------------------------------------------------------------------------------
Lightweight Directory - Lightweight Directory Access - Provides remote
Access Protocol-based Protocol interface for adding, self-administration of an
Provisioning deleting and modifying email outsourced email environment
addresses and services
- Allows administrators to
retain control and flexibility
- Provides a means to integrate
end-user provisioning into
pre-existing order processing
systems or applications
- ---------------------------------------------------------------------------------------------------
</TABLE>
PREMIUM SERVICES
We offer the following premium services for a fee or as a special feature
for a select group of users. These features augment the existing capabilities of
our email services and provide us with additional sources of revenue other than
advertising and per-mailbox fees.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
FEATURE DESCRIPTION BENEFITS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Email Forwarding - Forward email messages to - Users can establish rules to
other email accounts forward
some or all
of their
messages to
other email
accounts
- ---------------------------------------------------------------------------------------------------
Post Office Protocol - Download messages using - Users can connect to a shared
Email Access standard Post Office Protocol mail server, download messages
to their desktop email
software such as Microsoft
Outlook and work and manage
their messages offline
- ---------------------------------------------------------------------------------------------------
Additional Message - Additional storage on our - Provides increased message
Storage centralized server in five storage space
megabyte increments
- ---------------------------------------------------------------------------------------------------
Advertisement - Suppress advertising banners, - Allows users to elect not to
Suppression buttons and log out pages receive any advertisements
- ---------------------------------------------------------------------------------------------------
Tagline Suppression - Remove our tagline from the - Enhances professional
end of all outgoing messages appearance of outgoing messages
- ---------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 50
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
FEATURE DESCRIPTION BENEFITS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Virus Scanning - Scan for viruses on all - Protects user systems from
incoming messages computer viruses before the
messages reach a user's
mailbox
- ---------------------------------------------------------------------------------------------------
Pager Notification - Send notification of email - Automatically informs users
arrival to any enabled pager or that important messages have
digital phone arrived in their mailbox
- ---------------------------------------------------------------------------------------------------
</TABLE>
PLANNED FEATURES
We are currently developing additional features and premium, fee-based
services for all of our offerings. The following lists examples of some of the
planned features and services that we are developing, either alone or with third
party technology providers.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
FEATURE DESCRIPTION BENEFITS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unified Messaging - Send or receive a fax from an - Allows users to send or
email interface, forward retrieve faxes and voice
messages to a fax from a messages by logging into their
mailbox and retrieve messages email
from any telephone through
text-to-speech technology - Allows users to retrieve faxes
and emails through a telephone
- ---------------------------------------------------------------------------------------------------
Secure Document - Encryption and authentication - Provides enhanced security of
Delivery of messages messages
- Allows users to securely send
sensitive documents over the
Internet without fear of
interception or eavesdropping
- Verifies that the intended
recipient received the message
- ---------------------------------------------------------------------------------------------------
Calendar Services - Web-based calendar integrated - Integrates scheduling function
with email services with the ability to access the
user's schedule and those of
colleagues
- ---------------------------------------------------------------------------------------------------
Greeting Cards - Electronic greeting cards and - Integrates online greeting
messages cards with email
- ---------------------------------------------------------------------------------------------------
Translation Services - Translating Web-based email - Allows display, transfer and
messages from one language to storage of messages and
another attachments in different
languages
- ---------------------------------------------------------------------------------------------------
Internet Messaging - Access and manage messages - Allows users to sort messages,
Access Protocol using Internet Messaging search for specific text in
Access Protocol messages, and manipulate
folders and mailboxes from
multiple email environments
without the need to transfer
the messages from the server
to a user's computer
- ---------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 51
The descriptions in this prospectus regarding our planned service offerings
and the anticipated features of those planned service offerings are
forward-looking statements. Actual services and features could differ materially
from those projected as a result of a variety of factors, some or all of which
may be out of our control.
CLASSES OF SERVICE
We offer classes of our email services designed to address the specific
needs of businesses and consumers. The classes of services reflect different
combinations of our premium features with our basic services. For example, a
NET@DDRESS user may only need Web access, while a Web portal might want Internet
Messaging Access Protocol and Post Office Protocol access and a business might
want all of these services plus encryption.
ADVERTISING SALES AND PROGRAMS
Advertising plays an important role in the business models for NET@DDRESS,
Netscape WebMail Powered by USA.NET and AmExMail Powered by USA.NET. We gather
demographic data on each user who registers for these services with which
advertisers can conduct targeted marketing. We work closely with our advertising
and sponsorship partners to monitor the effectiveness of their advertisements on
our sites and to develop customized solutions to best meet our advertisers' and
sponsorship partners' needs. We believe that our use of sophisticated targeted
marketing tools is critical to our ability to sell our advertising space on the
Internet.
We sell a variety of advertising and sponsorship options to our clients. In
addition to providing banner and button advertising, we specialize in selling
innovative advertising packages to our advertisers at higher rates. Such
programs include:
- Direct Delivery Programs. We promote content from our direct delivery
providers on our services. Users choose to receive content from categories
such as news, sports, entertainment and special offers that meet their
specific interests. Our direct delivery providers in March 1999 included
iVillage, Launch, Sports Illustrated and US News and World Report.
- Logout Page Redirects. When a user logs out of an email session, we
automatically link that user to the advertiser's Web site where the user
can further explore the advertiser's product and service offerings.
- E-direct Programs. We target promotional offers to users that have
"opted-in" and indicated an interest in receiving promotions and special
offers.
Generally, banner advertising is purchased on a price-per-impression basis.
We also receive advertising revenue through fixed fees from content providers,
fees charged in connection with bundling a sponsorship package and bounty fees
we receive when a user signs up for an advertiser's or sponsor's service.
We sell advertisements to companies and organizations from a broad range of
markets, including online services, telecommunications, publishing, online
retailing and consumer goods and services. Following is a list of our top
advertisers during the twelve months ended March 31, 1999:
<TABLE>
<S> <C> <C>
ABCNews.com E-Pub MiningCo.com
Ameritech Emaginet Movie Mail
Audio Books Fox Online Nextcard
Brainplay Getsmart Riverbelle
CBS Marketwatch Go2Net Rodale Press
Cendant Corporation iVillage Simple Networks Communications
Cybergold Launch Spree
drkoops.com Macy's US News and World Report
Egghead.com Marketing Direct Women.com
E! Online Matchlogic Ziff-Davis
</TABLE>
These advertisers accounted for 88% of our total revenue for the twelve
months ended March 31, 1999.
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<PAGE> 52
Egghead.com accounted for 27.0% of total revenue in 1998 and 18.1% of total
revenue in 1997. 24/7 Media accounted for 14.9% of revenue and Webstakes
accounted for 11.4% of revenue in 1997. In April 1999, we entered into one year
agreements with Egghead.com to advertise on the NET@DDRESS and Netscape WebMail
Web sites. The agreements provide that Egghead.com will receive banner
impressions, button impressions and logout page transfers on such Web sites as
well as participation in inbox direct signups on NET@DDRESS.
We have an internal advertising sales staff of five professionals. We
compensate our sales staff primarily through sales commissions. We currently
sell our entire advertising inventory through our internal sales staff, allowing
us to better control pricing and inventory, maintain brand consistency and
capture maximum revenue.
MARKETING STRATEGY AND EXECUTION
Our marketing objective is to establish ourselves as the leading provider
of advanced messaging services by building brand awareness and developing a
strong core of strategic relationships and partners and a large, loyal user
base. We base our strategy for achieving these objectives on an integrated set
of marketing initiatives, including public relations programs and generating
targeted sales leads.
CONSUMER MESSAGING
Our marketing strategy for NET@DDRESS includes:
- Building awareness of NET@DDRESS through public relations activities and
banners;
- Acquiring users through word of mouth, banner ads and co-marketing
programs;
- Driving use of our services through welcome page communications, new
features, direct delivery of content and value-added services; and
- Building loyalty through retention programs, newsletters and superior
customer service.
To execute this strategy, we buy advertising on leading Internet sites and
in other media. In addition, we offer bounty programs to leading Web sites, in
which we pay the Web sites for each new NET@DDRESS mailbox that the Web site
obtains for us. We also have an ongoing public relations campaign that we target
to consumers, potential advertisers and the financial and business community. We
also have co-marketing programs with strategic partners. Our marketing strategy
includes using the NET@DDRESS Web site welcome page to deliver sponsorships for
advertisers, while offering users content and special offers on products and
services. We intend to increase our marketing efforts for NET@DDRESS at targeted
audiences, such as students, business executives and travelers. In addition, we
plan to expand use of NET@DDRESS and build brand loyalty through the marketing
and distribution of enhanced email service features.
WEB PORTAL AND BUSINESS MESSAGING
Our marketing strategy for Netscape WebMail Powered by USA.NET is to build
awareness of our service primarily by gaining exposure to visitors to the
Netcenter site and by leveraging Netscape's public relations campaigns. We
intend to continue working with Netscape to optimize the use of Netscape WebMail
as a customer distribution channel for Netscape. We also plan to explore
opportunities to expand our relationship with Netscape to target other potential
commercial messaging service users.
We plan to continue to build awareness of the AmExMail services through
advertising online, including through Web site links, and on other media, such
as newsletters, flyers and mailers. We are also working with American Express to
identify additional opportunities to provide other exclusive services on
AmExMail and to develop special services and specific marketing programs, such
as Membership Rewards.
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<PAGE> 53
Our marketing strategy for our other Web portal and business messaging
services is to:
- Develop sales leads through direct contacts, channel partner
opportunities, direct mail, print advertising and online advertising;
- Leverage co-marketing opportunities for our advanced messaging services
with selected Web portals, such as register.com;
- Advertise in publications directed at specific industries, professional
and trade associations, and targeted partner channels;
- Seek strategic partnerships with selected telecommunications, Internet
and other service providers to bundle our advanced messaging services
with their services; and
- Leverage our existing brand awareness developed from managing over 10.2
million mailboxes across all of our service offerings.
We also intend to identify unique messaging needs of businesses and to
develop and market specialized applications to address them. We believe that we
can leverage our advanced messaging technology by developing and marketing
value-added solutions to specific business needs such as targeted direct
marketing, customer care, business-to-business communications and affinity
programs.
In order to maximize our penetration of these potential markets, we plan to
market our solutions through our direct sales force as well as through third
party resellers and distributors who can offer bundled service offerings or can
co-market our services in connection with their core business.
CUSTOMER SERVICE
Offering our customers a high level of customer service and technical
support is a top priority of ours and we believe that it is critical to our
success. We believe that the quality of our customer service distinguishes us
from our competitors. Our customer service staff consists of customer service
representatives, technical support specialists, account coordinators, quality
assurance analysts, order processors and our management. As of April 30, 1999,
we employed 43 people in this group.
Our customer service representatives, account coordinators and technical
support specialists are trained, experienced service professionals. Our customer
service representatives provide multifunctional end-user support across all of
our consumer and commercial messaging services. Our account coordinators and
dedicated customer support representatives provide support, training, account
set-up and provisioning for our business accounts. Our technical support
specialists use e-service tools to categorize, trouble-shoot, and resolve
escalated end-user inquiries or "trouble tickets." We staff our call center
seven days per week, twelve hours per day. We provide additional customer
support seven days per week, twenty-four hours per day, by contractual
arrangement.
We provide full-service customer support through voice, e-service and
interactive online end user support. We use third party, interactive e-service
technology to resolve most of our end-user inquiries within our Web site. We
also provide a "frequently asked questions" section, online knowledge-based
self-help and interactive e-service inquiry tools on our Web site. We make
available traditional toll or toll-free live agent telephone support to some
businesses by contract. We also contract with a third party to provide
multi-lingual interactive on-line support.
In an effort to further improve customer satisfaction, we regularly
evaluate the latest customer support technology and tools. We also track
recurring customer issues to identify opportunities for us to improve our
services.
NETWORK AND TECHNOLOGY
We base all of our services on highly reliable and scalable technology that
includes advanced features, universal accessibility and a high level of
security.
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Our messaging network is designed to take advantage of the approaching
convergence of email, voice mail and fax communications. Since we base our
infrastructure on standard Internet protocols, our services can be readily
expanded to enable multiple kinds of messaging with many types of devices and
software. We plan to combine the best available third party hardware and
software with our proprietary applications and technology to provide reliable,
easy-to-use and versatile email and other advanced messaging services.
We use leading hardware and software solutions, such as Cisco Systems
routers, EMC storage devices, Oracle database software and Sun Microsystems
servers. We plan to continue to leverage high quality services and technologies
to enhance the design and performance of our messaging networks.
Our experience in handling massive volumes of messages and Internet
requests through our email engine technology has allowed us to refine our
scalable email messaging solutions. We designed our email engine components to
be independently scalable, allowing the addition of hardware and software units
as we approach capacity thresholds. We provide a true, distributed and scalable
Internet email messaging architecture. Each hardware and software process within
our network has "fail-over" protections to provide complete service redundancy.
We designed our network for maximum service availability, including load-
balanced message routing and queuing, peering (or multiple public and private
Internet network connections) and redundant interconnection.
We have a robust, tiered, stand-alone testing environment that has the same
hardware and layered products as our production environment. We have separate
integration and production test environments to isolate our system so that we
can do the functional and performance testing that is essential for us to
deliver "carrier grade" messaging services. We partition our testing environment
so that we can simultaneously test multiple scenarios across our services and
protocols. As a result of this increased efficiency we can provide our users
with robust services that have fewer defects and we can achieve internal cost
savings.
Our proprietary messaging technology streamlines incoming and outgoing
message traffic, message filtering and Web-based email client requests. We
receive each request type through our proprietary queuing and look-up process,
which examines a local cache of recent requests and then gathers the results
from the appropriate cache or appropriate database. We deliver the request
through a corresponding Internet protocol, such as Simple Mail Transport
Protocol, Post Office Protocol or Internet Messaging Access Protocol.
Our robust network infrastructure provides our customers with diverse, high
bandwidth connectivity between the Internet and our facilities. We currently
have agreements in place with Qwest, AT&T, MCI WorldCom (via UUNET) and e.spire
for high capacity, high speed data connection. We are not dependent on any
co-location facilities. Through these agreements we have direct, private
connections to most major Internet backbone providers. These connections,
together with the number of bandwidth providers with which we have primary
agreements, provides our users with a significant level of both diversity and
redundancy in their email services Internet connection.
We manage this Internet backbone connectivity at our facilities through
redundant Cisco Systems routers using Hot Standby Routing Protocol. Failure of
any given network component, circuit or provider should have minimal impact on
the performance of our services for our users. All nodes within our facilities
operate on full 100 megabytes switched Ethernet in a collapsed backbone
configuration for optimal switching efficiency. We trunk our switches at 1
gigabyte to provide high performance interconnectivity between our Virtual Local
Area Network environments. Finally, our computing facilities are separated from
the public networks through multiple firewalls provided through Cisco Systems
and Sun Microsystems technologies.
Our messaging data center, located in Colorado Springs, is connected
through these diverse network providers to multiple high-performance, high
bandwidth providers that carry all email messaging and Internet traffic. One of
the advantages of our Colorado Springs data center site is its location halfway
between London and Tokyo and its relative lack of susceptibility to major
natural disasters. Our data center is supported by redundant server and network
hardware to achieve carrier-grade uptime and
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performance. We protect our physical assets within the data center with video
surveillance, twenty-four hours a day, seven days a week staffing and
monitoring, automated fire suppression and secure badges. We protect our
intellectual property and our user data with two layers of firewall technology
combined with an encrypted access system and individual component access
tracking.
We currently manage more than 19 terabytes of customer data in our data
center. We expect to deploy an additional 15 terabytes of storage capacity in
late 1999. All of our databases are stored on high-speed EMC disk arrays, are
three-way, mirrored and have business continuance volumes configured to maximize
reliability and performance. We backup our databases to a tape library that we
store offsite in a fireproof safe.
We are expanding our existing data center and increasing our available
floor space to better support our growing base of users. We also expect to open
an additional data center in 1999. This center will increase our available space
by a factor of five and further increase our level of redundancy and our ability
to serve our customer base. As we expand our services internationally, we intend
to open data centers in Europe and Asia. These data centers would add further
redundancy and improve local connectivity in those markets.
Unsolicited bulk mail, or spam, is a significant problem for email service
providers. All of our email services include integrated spam blocking features.
We have developed proprietary technology and implemented procedures for
detecting and blocking spam twenty-four hours a day, seven days a week. We have
also designed systems to detect and terminate mailbox accounts that engage in
spam activity.
COMPETITION
Competition in the advanced messaging services industry is intense and we
expect competition to persist, intensify and increase in the future. The market
for selling advertising space on the Internet is also very competitive.
We compete against other mailbox server vendors and operators, many of whom
are larger and have greater resources than we have. According to Electronic Mail
and Messaging Solutions, Microsoft, IBM/Lotus, Yahoo! Mail and AOL/Netscape
accounted for over 55% of the mailboxes served and operated as of March 31,
1999.
Our consumer email service primarily competes against Hotmail (a service of
Microsoft). In addition, we compete against Web portal sites that have email
services, such as Yahoo!, Excite, Lycos and AltaVista. We also compete against
independent email providers, such as Juno Online Services and Mail.com.
According to Electronic Mail and Messaging Systems, as of March 31, 1999, Yahoo!
Mail and Hotmail accounted for approximately 73.7% of the worldwide freemail and
Web-based mail.
Our NET@DDRESS service also competes against Internet service providers,
such as America Online, who include portable email address solutions within
their basic service offerings. According to Electronic Mail and Messaging
Solutions, America Online had almost 17 million subscribers as of March 31,
1999. A number of companies offering Internet products and services recently
have begun to integrate Web-based email within the products and services they
offer to consumers and businesses. Other vertical market portal sites and
affinity groups also offer or may in the future offer email services to their
users.
There are a growing number of companies offering various consumer and
commercial email outsourcing services. In the consumer outsourcing market,
companies such as Mail.com, CommTouch and Lycos provide outsourcing for consumer
applications. In addition, entities that provide an initial point of entry for
Internet users, such as the Regional Bell Operating Companies, AT&T and IBM, can
be expected to consider further development, acquisition or licensing of
Web-based email functions and services competitive with our services.
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Commercial outsourcing competition consists of companies offering services
to businesses and service providers. Competitors in this market include, or are
expected to include, Critical Path, CompuServe and PSINet. In addition, we
expect that other companies, particularly large service providers,
telecommunications companies and data outsourcing companies, such as EDS and
Computer Sciences, will begin to offer solutions in commercial outsourcing in
the relatively near term.
Our ability to compete depends on many factors, many of which are outside
of our control. We believe the primary competitive factors determining success
in our markets are the following:
- Service quality and reliability;
- Price;
- Feature sets;
- Customer support;
- Ease-of-use of products and services;
- Our ability to anticipate and adapt to a developing market and rapidly
changing technologies;
- The sales and marketing efforts of us and our competitors;
- The timing and introduction of new products and services; and
- General industry and economic conditions.
In selling advertising space, we compete with many of the market
participants listed above, as well as with various advertising-supported Web
sites, including portal sites such as Yahoo! and Excite, content sites such as
CNET and CNN.com and interactive advertising networks and agencies such as
DoubleClick and 24/7 Media. We also compete with traditional media such as print
and television for a share of our advertisers' total advertising budgets. If
advertisers perceive the Internet to be a limited or ineffective advertising
medium or perceive us to be less effective or less desirable than other Internet
advertising vehicles, advertisers may be reluctant to advertise on our services.
To compete for Internet advertisers, we must offer effective methods of
targeting subscribers with demographic characteristics attractive to these
advertisers.
STRATEGIC RELATIONSHIPS
We enter into strategic relationships to build our reputation as a premier
provider of advanced messaging services, to build our brand awareness and to
sell application-specific messaging solutions that address specialized industry
messaging needs. We have entered into the following alliances:
AMERICAN EXPRESS
In April 1997, we entered into a two-year renewable co-marketing and
program agreement with American Express, a global travel, financial and network
services provider, to build and operate AmExMail Powered by USA.NET. In May
1999, we extended the agreement so that it now expires December 31, 1999. If the
agreement expires or terminates, American Express would need to find an
alternate email service and we would forward the AmExMail users' email to the
new service. American Express would pay us a fee for forwarding the mail.
Under our agreement with American Express we have agreed not to administer
or directly offer email or similar services on behalf of or in conjunction with
any competitor of American Express without their consent. A competitor of
American Express includes any charge, credit or debit card business, financial
services business or travel agency business.
In April 1997 and March 1998, American Express purchased an aggregate of
883,652 shares of preferred stock (which will convert into 4,241,529 shares of
common stock on the closing of this offering).
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NETSCAPE
In April 1998, we entered into a renewable services agreement that
terminates in June 2000 with Netscape, a leading provider of open software for
linking people and information over enterprise networks and the Internet, to
build and operate Netscape WebMail Powered by USA.NET. In October 1998, we
extended the agreement to include a two-year renewable services agreement for
certain of Netscape's international Netcenter Web portals, for which we are
developing foreign language-based email services. On expiration or termination
of the agreement, we can market replacement email services to the Netscape
WebMail users if we contact them by means other than through the information we
obtain from their registration with Netscape WebMail.
We have agreed not to display on WebMail any advertisements or other
promotional text or graphics for third party products or services that are
directly competitive with Netscape's software products and online services.
Netscape purchased 67,797 shares of preferred stock (which will convert
into 325,425 shares of common stock on the closing of this offering) in August
1998.
REGISTER.COM
In March 1999, we entered into a one-year, renewable reseller agreement
with register.com, a business portal site which is the largest single domain
name registration service on the Internet. register.com will offer its customers
the opportunity to receive a Web-based email account for each employee that
contains the business' domain name, such as [email protected]. This
service allows businesses to have a company-branded domain name for all of its
employees and to outsource its business messaging needs through our commercial
messaging services. register.com is responsible for all billing and collection
from its customers. If our agreement with register.com expires or terminates, we
can acquire all of the mailbox customers by paying register.com a one-time fee.
We have agreed to promote register.com as the exclusive domain name
registration service for our email messaging services, subject to certain
exceptions. Similarly, register.com has agreed not to promote or sell
competitive email messaging services.
PREMIERE TECHNOLOGIES
In October 1997, we entered into a two-year, renewable co-marketing and
integration agreement with Premiere Technologies, a public company that provides
enhanced communications management services, including unified messaging
(integrated email, fax and voice messaging and conference calling managed from
either a Web or telephone interface), networked voice messaging, electronic
document distribution (email and fax) and conference calling and enhanced
calling card services. In May 1999, we extended the initial term of this
agreement to October 2001.
We are working with Premiere to develop enhanced features for our email
services. We are also working on a co-marketing plan to market each other's
services and we have agreed to dedicate up to $1,900,000 of the proceeds
received from Premiere's prior investment in us to this marketing program. We
intend to generate revenue from the sale of co-developed premium services on our
email services. We will share revenue from our co-developed premium services
with Premiere.
In October 1997 and March 1998, Premiere purchased an aggregate of 883,652
shares of preferred stock (which will convert into 4,241,529 shares of common
stock on the closing of this offering).
Under our agreement with Premiere, we have agreed to use Premiere as our
exclusive provider of mobile telecommunications services, including calling
card, text-to-speech email, conference calling and Web-based conference calling,
as well as fax services, including email-to-fax, pager or voice notification of
messages and services.
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INTELLECTUAL PROPERTY
Trademarks, service marks, trade secrets, copyrights and other proprietary
rights are important to our success and competitive position. We have registered
and applied for registration of certain service marks and trademarks with the
appropriate state and federal agencies, and will continue to evaluate the
registration of additional service marks and trademarks, as appropriate. We have
one allowed United States patent. We may not gain any competitive advantages
from any patents or be able to exploit them profitably. Further, any patents may
not be able to withstand challenges from third parties.
We seek to protect our proprietary rights, but our efforts may be
inadequate. Existing trade secret, copyright, patent and trademark laws offer
only limited protection. Further, effective trade secret, copyright, patent and
trademark protection may not be available in every country in which we make our
services available through the Internet, and policing unauthorized use of our
proprietary information is difficult. The unauthorized misappropriation of our
proprietary technology could have a material adverse effect on our business,
financial condition and operating results. If we resort to legal proceedings to
enforce our proprietary rights, the proceedings could be burdensome and
expensive and could involve a high degree of risk.
We may also be subject to claims alleging that we have infringed third
party proprietary rights. If we were to discover that any of our services
infringed third party rights, we may not be able to obtain permission to use
those rights on commercially reasonable terms. This may require us to expend
significant resources to make our services non-infringing or to discontinue the
use of our services. We might incur substantial costs defending against an
infringement claim, even if the claim is invalid. If we have to defend against
an infringement claim it could distract our management from our business.
Further, a party making a claim could secure a judgment that requires us to pay
substantial damages or that prevents us from using or selling our products and
services. Any of these events could have a material adverse effect on our
business, financial condition and operating results. Our success depends
significantly upon our proprietary technology, including our advanced email
technology.
GOVERNMENTAL REGULATION
We are subject to laws and regulations that are applied to various Internet
activities. There are many legislative and regulatory proposals under
consideration by federal, state, local and foreign governments and agencies,
including matters related to:
- Online content;
- User privacy;
- Access charges;
- Jurisdiction;
- International, federal, state and local taxation;
- Liability for third party actions;
- Intellectual property; and
- Characteristics and quality of products and services.
Legislation in these areas could impair the growth of the Internet and
decrease the acceptance of the Internet as a communications and commercial
medium. This could decrease the demand for our services, increase our cost of
doing business or otherwise have a material adverse affect on our business,
financial condition and operating results.
Further, the growth and development of the market for Internet email may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on companies conducting business online. For example, any
laws or regulations that restrict our ability to collect or use personal data
from
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our users to target advertisements may adversely affect us. There have also been
numerous legislative initiatives proposed to address the prevalence of spam
email on the Internet. These laws may impose additional burdens on our business.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
Any new legislation or regulation regarding the Internet, or the
application of existing laws and regulations to the Internet, could harm our
business. Additionally, because we expect to expand our operations outside of
the United States, the international regulatory environment relating to the
Internet could have a material adverse effect on our business.
EMPLOYEES
As of April 30, 1999, we employed 190 people, all of whom are full-time.
The 190 employees include 23 in general and administrative functions, 67 in
operations functions, 53 in sales and marketing and 47 in product development.
We outsource our human resources operations to The Personnel Department, a
privately-held company. Our employees are not represented by a labor union or
covered by any collective bargaining agreements. We consider our employee
relations to be good.
FACILITIES
Our principal offices are located in over 21,000 square feet of space in
Colorado Springs, Colorado, under a lease expiring on October 31, 2002. We lease
two other facilities in Colorado Springs, one with over 4,000 square feet that
houses our data center and one with over 19,000 square feet that is primarily
used by our information technology staff. We lease additional office space in
Denver, Colorado, San Francisco, California and New York, New York. We believe
that our current facilities and the data center we plan to open in 1999 will be
adequate for our needs for at least the next twelve months.
LEGAL PROCEEDINGS
From time to time, we are subject to legal proceedings arising out of our
operations. We are not currently a party to any material legal proceedings.
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MANAGEMENT
Our directors, executive officers and key employees and their ages as of
April 30, 1999, are as follows:
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John W. Street (1)................... 42 Chairman of the Board
John W. Gerdelman.................... 46 Chief Executive Officer, President and Director
Kaukab N. Chaudhry................... 42 Chief Financial Officer
C. Scott Chasin...................... 28 Chief Technology Officer
Mary M. Beazley (2).................. 43 Executive Vice President of Administration and Investor
Relations, Treasurer and Director
Geoffrey E. Lind..................... 50 Executive Vice President of Sales and Service
Carrie L. Schiff..................... 33 Senior Vice President of Business and Legal Affairs,
General Counsel and Secretary
S. Brian Stout....................... 43 Senior Vice President of Product Management
Jeffrey A. Allred (1)................ 45 Director
Karen Griffith Gryga (1)(2).......... 33 Director
Lawrence S. Sharnak (2).............. 45 Director
Bruns Grayson........................ 51 Director-Nominee
Michael C. Ruettgers................. 56 Director-Nominee
Gerald H. Taylor..................... 57 Director-Nominee
</TABLE>
- ---------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
KEY EMPLOYEES
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jonothan A. Alcorn................... 38 Vice President of Product Marketing
Rodel C. Alejo....................... 28 Vice President of Product Development
Kevin W. Burns....................... 33 Vice President of Marketing
Annette C. Hicks..................... 38 Vice President of Customer Service
Michael G. Kovacs.................... 45 Vice President of Commercial Sales
Michael Lipfield..................... 45 Vice President of Finance
Brian P. Schade...................... 36 Vice President of Information Technology
Steven A. Suslow..................... 30 Vice President of Media Sales
Daniel M. Winokur.................... 28 Vice President of Business Development
</TABLE>
JOHN W. STREET has served as a member of our Board of Directors since
October 1992 and as our Chairman of the Board since March 1997. Mr. Street also
served as our Chief Executive Officer from March 1997 to April 1999, our
President from January 1996 to April 1999, and our Treasurer from October 1992
to January 1996. From September 1987 to December 1995, Mr. Street was President
and Chairman of the Board of Telephone Express, a regional telecommunications
provider which was thirteenth on Inc. Magazine's 1992 list of the 500 fastest
growing private companies in the United States. Prior to that, Mr. Street held
various accounting and finance positions in several companies, including Senior
Tax Accountant at Arthur Andersen. In 1995, Mr. Street was named by Ernst &
Young as Co-
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Entrepreneur of the Year in the Rocky Mountain region for telecommunications
along with Ms. Beazley. Mr. Street is a certified public accountant and earned a
B.S. in Business Administration from the University of Notre Dame. Mr. Street is
married to Ms. Beazley.
JOHN W. GERDELMAN was elected to serve as our Chief Executive Officer and
President in April 1999 and became a member of our Board of Directors in May
1999. Prior to joining us, Mr. Gerdelman was employed with MCI Communications
Corporation as President of networkMCI Services from September 1994 to April
1999 and Senior Vice President of Sales and Service Operations from June 1992 to
September 1994. From June 1989 to June 1992, Mr. Gerdelman served as President
and Chief Executive Officer of Long Lines Limited/MCI Services, a telemarketing
sales, service and technology company, which was purchased by MCI in 1992. Mr.
Gerdelman served as a U.S. Naval Aviator after graduating from the College of
William and Mary, where he obtained a B.S. in Chemistry.
KAUKAB N. CHAUDHRY was elected to serve as our Chief Financial Officer in
April 1999. Prior to joining us, Mr. Chaudhry was employed with Credit Suisse
First Boston as Director of Investment Banking from April 1997 to April 1999.
Mr. Chaudhry served as a Vice President and Director in the Investment Banking
Division of PaineWebber Inc. from June 1993 to September 1996, and as an
Associate and a Vice President in the Investment Banking Division of Merrill
Lynch & Company from December 1984 to January 1990. Mr. Chaudhry holds
undergraduate degrees from Dickinson College and the University of Punjab in
Lahore, Pakistan, and an M.B.A. from Syracuse University's Graduate School of
Management.
MARY M. BEAZLEY has been a member of our Board of Directors since October
1992 and has served as our Executive Vice President of Administration and
Investor Relations and Treasurer since April 1999. Ms. Beazley also served as
our Senior Vice President and Chief Financial Officer from March 1997 to April
1999, our Treasurer from January 1996 to February 1997, and our Secretary from
October 1992 to April 1999. From January 1996 to February 1997, she served as
President and Chairman of the Board of Directors of Telephone Express, a
regional telecommunications provider that was thirteenth on Inc. Magazine's 1992
list of the 500 fastest growing private companies in the United States, and
served as its Executive Vice President from September 1987 to December 1995. Ms.
Beazley previously served as a Senior Tax Manager at Arthur Andersen. In 1995,
Ms. Beazley was named by Ernst & Young as Co-Entrepreneur of the Year in the
Rocky Mountain region for telecommunications along with Mr. Street. Ms. Beazley
is a certified public accountant and earned a B.S. in Communication Disorders
from Colorado State University and attended its graduate school of accounting.
Ms. Beazley is married to Mr. Street.
GEOFFREY E. LIND has served as our Executive Vice President of Sales and
Service since April 1999 and our Executive Vice President, Chief Operating
Officer and Treasurer from February 1997 to April 1999. Prior to joining us, Mr.
Lind served as Vice Chairman of UMB Financial Corporation, a banking company,
from May 1993 to September 1996. From January 1985 to September 1996 he held
various positions at UMB Bank Colorado and UMB Bank, Kansas City, most recently
serving as Chairman of the Board of Directors and Chief Executive Officer of UMB
Bank Colorado, from May 1991 to September 1996. Between 1974 and 1985, Mr. Lind
was a practicing attorney. Mr. Lind earned a J.D. and a B.S. in Business
Administration, both from the University of Kansas.
C. SCOTT CHASIN joined us in December 1994 and has served as our Chief
Technology Officer since September 1997. From October 1995 to September 1997,
Mr. Chasin served as our Director of Software Development and Research, and from
December 1994 to October 1995, he served as our Director of Operations. From
January 1992 to October 1994, Mr. Chasin served as an Information Security
Officer and Senior Unix Administrator for Amoco Production Company. Mr. Chasin
attended Houston Community College where he studied Computer Science.
CARRIE L. SCHIFF joined us in April 1999 as our Senior Vice President of
Business and Legal Affairs, General Counsel and Secretary. Prior to joining us,
Ms. Schiff was an attorney with the law firm of Cooley Godward LLP, a private
law firm and our counsel, since September 1991 and a partner of that firm since
January 1999. Ms. Schiff earned an A.B. in Political Science from the University
of Chicago and a J.D. from the University of California, Los Angeles.
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S. BRIAN STOUT has served as our Vice President of Market Development since
May 1998 and was promoted to Senior Vice President of Product Management in
March 1999. Prior to joining us, he served as President of SBS
Telecommunications, LLC, a consulting firm he founded in September 1996 that
provides consulting services to telecommunications start-up companies. From
August 1994 to September 1996, Mr. Stout served as Director, Product Management
of Omnipoint Corporation, a New York City and East Coast cellular/PCS operator.
Prior to that, he served as Director, Market Development at Omnipoint from June
1991 to August 1994, during the company's early stages. Mr. Stout has an M.S.E.
and a B.S.E. in Engineering, both from the University of Michigan.
JEFFREY A. ALLRED has been a member of our Board of Directors since
November 1998. Mr. Allred has served as President and Chief Operating Officer of
Premiere Technologies, Inc. since February 1999 and as a member of its Board of
Directors since May 1998. From August 1998 to February 1999, Mr. Allred served
as an Executive Vice President of Strategic Development of Premiere
Technologies, Inc. From June 1996 to July 1997, Mr. Allred was a partner in the
Atlanta, Georgia office of the law firm of Alston & Bird LLP. From February 1992
to June 1996, Mr. Allred was a partner in the Atlanta, Georgia office of the law
firm of Nelson, Mullins, Riley & Scarborough, L.L.P. Mr. Allred has a B.A. in
Political Science and J.D. and M.B.A. degrees from The University of North
Carolina at Chapel Hill.
KAREN GRIFFITH GRYGA has been a member of our Board of Directors since
October 1997. Ms. Griffith Gryga is a founder and Vice President of Liberty
Ventures, Inc., a venture capital firm, and has been with the firm since May
1996. Ms. Griffith Gryga was previously a Managing Director at Philadelphia
Ventures, Inc. She received an M.B.A. and an M.S. in Computer Science from the
University of Pennsylvania and a B.S. in Computer Science from the College of
William and Mary.
LAWRENCE S. SHARNAK has been a member of our Board of Directors since
November 1998. Mr. Sharnak has been the Senior Vice President of Fee and
Merchandise Services at American Express since November 1995. From January 1993
to October 1995, Mr. Sharnak served as the Vice President of Cardmember
Marketing Services for the Consumer Card Group of American Express. Mr. Sharnak
has been with American Express since 1980. Mr. Sharnak holds a B.B.A. from the
University of Massachusetts and an M.B.A. from Babson College.
We have increased the size of our board of directors from six persons to
nine persons effective upon the closing of this offering. Bruns Grayson, Michael
C. Ruettgers and Gerald H. Taylor have agreed to become directors at that time.
BRUNS GRAYSON has served as the Managing Partner of ABS Ventures, a series
of venture capital funds, since May 1983. Mr. Grayson holds a B.A. in History
and Literature from Harvard College, an M.A. in Politics and Philosophy from
Oxford University, and a J.D. from the University of Virginia Law School. Mr.
Grayson was a Rhodes Scholar in 1974. Mr. Grayson also served in the U.S. Army
in Vietnam and separated as a Captain in 1970. Mr. Grayson also serves as a
director of Anadigics, Inc., and Intelligent Life Corporation.
MICHAEL C. RUETTGERS has served as the President of EMC Corporation since
October 1989, as its Chief Executive Officer since January 1992 and as a member
of its Board of Directors since May 1992. Previously, Mr. Ruettgers served as
EMC's Chief Operating Officer from October 1989 to January 1992, and as its
Executive Vice President of Operations from July 1988 to October 1989. Prior to
joining EMC, Mr. Ruettgers was the Chief Operating Officer of Technical
Financial Services, Incorporated, a high-technology consulting company, from
February 1987 to July 1988. Mr. Ruettgers also serves as a director of
Commonwealth Energy System, a public utility, and EG&G Inc., a diversified
technology company. Mr. Ruettgers holds a B.S. in Marketing from Idaho State
University and an M.B.A. from the Harvard Graduate School of Business.
GERALD H. TAYLOR served as the Chief Executive Officer of MCI
Communications Corporation from November 1996 until his retirement in October
1998 at the time of the merger of MCI and WorldCom and as the President and
Chief Operating Officer of MCI from July 1994 to November 1996. Mr. Taylor
joined MCI in 1969 and also served as the President and Chief Operating Officer
of MCI
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Telecommunications Corporation ("MCIT") from April 1994 to July 1994, and as an
Executive Vice President and Group Executive of MCIT from September 1993 to
April 1994. Mr. Taylor holds a B.S. in Physics from San Francisco State
University.
JONOTHAN A. ALCORN has served as our Vice President of Product Marketing
since April 1999. Prior to joining us, Mr. Alcorn served as Vice President of
Interactive Services for Cendant, Inc., a consumer membership services and
e-commerce company, from April 1998 to April 1999, and as Cendant's Director of
Interactive Services from January 1996 to December 1997. From July 1989 to
December 1995, Mr. Alcorn was employed with Sara Lee Corporation, a Fortune 50
consumer packaged goods company, first as its Associate Marketing Manager and
then as its Manager of Electronic Retailing. Mr. Alcorn holds a B.A. in
psychology from Wake Forest University and an M.B.A. from the University of
North Carolina at Greensboro.
RODEL C. ALEJO joined us in October 1998 as Director of Program Management
and has served as our Vice President of Product Development since March 1999.
Prior to joining us, Mr. Alejo held several positions with MCI
Telecommunications, Inc., including Product Development Manager, Product Manager
and Operations Manager, from March 1992 to October 1998. Prior to that, he
served as a Systems Engineer at Hughes Aircraft from August 1990 to December
1991. Mr. Alejo holds a B.S.B.A. in Marketing, and is currently pursuing an
M.B.A. in International Business, both from Colorado University.
KEVIN W. BURNS has served as our Vice President of Marketing since April
1999. Prior to joining us, Mr. Burns was employed with MCI WorldCom, a leading
provider of advanced global data services, from 1986 to April 1999, serving as
its Vice President of Technology Services from September 1998 to April 1999, its
Executive Director of Strategic Marketing from October 1997 to August 1998, its
Director of Network Marketing from December 1996 to September 1997, its Senior
Manager of Strategy and Technology from September 1994 to November 1996, and its
Senior Manager of Information Services for MCI Consumer Markets from December
1993 to September 1994. Mr. Burns holds a B.A. in English from Georgetown
University.
ANNETTE C. HICKS has served as our Vice President of Customer Service since
November 1997. Prior to joining us, Ms. Hicks was Director of Customer Service
of Telephone Express, a regional telecommunications provider, from December 1987
to February 1997, and served as its General Manager from March to June 1997. Ms.
Hicks received her B.A. in Communications from the University of Colorado at
Colorado Springs.
MICHAEL G. KOVACS has served as our Vice President of Commercial Sales
since April 1999. Prior to joining us, Mr. Kovacs served as Vice President of
Sales of Adaptive Broadband Systems (formerly California Microwave, Inc.), a
broad band, wireless systems developer, from January 1999 to April 1999. From
October 1997 to December 1998, Mr. Kovacs was the founder and served as
President of Kovacs and Associates, a firm that provided business management
consulting services to Fortune 1000 companies. From June 1997 to October 1997,
Mr. Kovacs was Director of Channel Sales for Motorola Corporation's Cellular
Infrastructure Group, a leading global wireless provider. From April 1995 to
June 1997, Mr. Kovacs was North American Sales Manager for Omnipoint
Corporation, a broad band, wireless developer. From February 1982 to March 1995,
Mr. Kovacs held several positions with AT&T Paradyne, a leading
telecommunications provider, most recently as National Manager, Wireless
Industry, from 1993 to 1995, and Strategic Manager of Emerging Markets during
1992. Mr. Kovacs holds a B.A. of Business Administration in Management and
Accounting from Ohio University.
MICHAEL LIPFIELD joined us in May 1997 as Director of Finance and has
served as our Vice President of Finance since June 1998. Prior to joining us, he
served as Director of Finance and Administration for MCI Direct, a division of
MCI Telecommunications Corporation, from May 1996 to May 1997. From November
1988 to May 1996, Mr. Lipfield was Director of Finance at PST Incorporated, an
outsource marketing company in the telecommunications industry. Mr. Lipfield is
a certified public accountant and received his M.S. degree in Accounting/Finance
and his B.S. degree in Psychology, both from the University of Colorado.
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BRIAN P. SCHADE has served as our Vice President of Information Technology
since October 1998. Prior to joining us, Mr. Schade served as Chief Architect of
MCI Telecommunications, Inc. from August 1991 to September 1998, and was
responsible for all aspects of Internet, intranet and messaging architecture,
and managed the development and delivery of messaging, multimedia and unified
messaging services for the Internet. Mr. Schade holds degrees in Applied
Mathematics and Engineering Mechanics from Virginia Polytechnic and State
University, and is currently pursuing a Ph.D. in Applied Mathematics.
STEVEN A. SUSLOW joined us in 1996 as Director of Sales and has served as
our Vice President of Media Sales since March 1999. Prior to joining us, he
served as a founding partner and President of Infinity Promotions, a media
consulting firm focusing on interactive strategies for Fortune 500 companies,
from April 1993 to January 1996. From May 1990 to April 1993, Mr. Suslow was a
founding partner and Vice President of Sales for Collegiate Marketing, a direct
marketing firm targeting college students throughout the Southwestern United
States. Mr. Suslow received his B.A. degree from The Colorado College.
DANIEL M. WINOKUR has served as our Vice President of Business Development
since June 1998. From January to May 1998, Mr. Winokur served as Vice President
of Internet Services at Executive TeleCard, Ltd., a company that provides
Internet services for global telecommunications companies. Prior to that, he
served as President of eGlobe, Ltd., a wholly-owned subsidiary of Executive
TeleCard, Ltd., from May 1997 to January 1998, and served as its Senior Vice
President from January 1996 to May 1997. From June 1994 to January 1996, Mr.
Winokur held various positions with us, including Director of Marketing from
June 1995 to January 1996. From December 1993 to June 1994, Mr. Winokur was
President of Euclid Consulting, Inc., an Internet access company he founded in
1993. Mr. Winokur received his B.A. in history from Brown University.
DIRECTORS' TERMS
We currently have six authorized directors. In March 1999, the board of
directors approved, subject to stockholder approval, the amendment of our
certificate of incorporation to provide for the division of the board of
directors into three classes, with only one class standing for election each
year. At each annual meeting, directors are chosen to succeed those in the class
whose term expires at that meeting and to serve for a term of three years. Under
this provision, Mr. Street serves as a class I director, Mr. Allred, Mr.
Gerdelman and Ms. Griffith Gryga serve as class II directors, and Ms. Beazley
and Mr. Sharnak serve as class III directors, with terms of office scheduled to
expire at our 2000, 2001 and 2002 annual meetings of stockholders. We have
increased the size of our board of directors from six persons to nine persons
effective upon the closing of this offering. Bruns Grayson, Michael C. Ruettgers
and Gerald H. Taylor have agreed to become directors at that time. Mr. Grayson
and Mr. Taylor will serve as class I directors and Mr. Ruettgers will serve as a
class III director.
Our current certificate of incorporation provides for the designation of
one member of the board of directors by the holders of the company's preferred
stock (currently, Ms. Griffith Gryga), the designation of one member of the
board of directors by the holders of the company's Series A Preferred Stock
(currently, Ms. Beazley), the designation of one member of the board of
directors by the holders of the company's Series B Preferred Stock (currently,
Mr. Sharnak), and the designation of one member of the board of directors by the
holders of the company's Series C Preferred Stock (currently, Mr. Allred). In
addition, the current certificate of incorporation provides that the company's
chief executive officer will serve as one of the remaining directors (currently,
Mr. Gerdelman). These provisions of the certificate of incorporation will
terminate upon the closing of this offering. Thereafter, the current directors
will continue to serve as directors but will be elected by plurality vote of all
stockholders voting together as one class.
BOARD COMMITTEES
Our audit committee consists of Mr. Allred, Ms. Griffith Gryga and Mr.
Street. The audit committee makes recommendations to the board of directors
regarding the selection of independent auditors, reviews
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the results and scope of the audit and other services provided by our
independent auditors, and evaluates our internal accounting procedures.
Our compensation committee consists of Ms. Beazley, Ms. Griffith Gryga and
Mr. Sharnak. The compensation committee reviews and approves compensation and
benefits for our executive officers. The compensation committee also administers
our compensation and stock plans and makes recommendations to the board of
directors regarding such matters.
DIRECTOR COMPENSATION
Other than reimbursing directors for customary and reasonable expenses of
attending board of directors and committee meetings, we do not currently
compensate our directors.
On the effective date of this offering, we will automatically grant to our
non-employee directors certain options to purchase shares of common stock.
Additionally, we will make automatic annual option grants to our non-employee
directors beginning in 2000. Please see our discussion in "-- Stock Plans --
1999 Non-Employee Directors' Stock Option Plan" for further discussion of our
non-employee directors' stock option plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee currently consists of Ms. Beazley, Ms. Griffith
Gryga and Mr. Sharnak. Ms. Beazley and Ms. Griffith Gryga have served on the
compensation committee since April 1998, the date of its formation. Mr. Sharnak
became a member of the committee in November 1998, replacing Gregg Freishtat, a
former director of the company who had served on the committee since April 1998.
Other than Ms. Beazley, our Executive Vice President of Administration and
Investor Relations, and Treasurer, none of the persons serving as members of the
Compensation Committee during 1998 is or has been an officer or employee of
ours. Ms. Beazley also serves as a director of a small privately held S
corporation in which Mr. Street serves as a director and executive officer. This
entity is not affiliated with us and does not transact any business with us.
Ms. Beazley has participated in several of our past financings and engaged
in certain additional business transactions with the company. In addition, Ms.
Griffith Gryga and Mr. Sharnak are affiliated with Liberty Ventures I, L.P. and
American Express, respectively, and Mr. Freishtat was formerly affiliated with
Premiere Technologies, Inc., each of which is a principal stockholder of ours
that participated in previous financings and related commercial transactions.
Please see our discussion in "Certain Transactions" for further discussion of
these transactions.
]EMPLOYMENT AGREEMENTS
To reduce our liability and personnel administrative costs, we have entered
into an agreement with The Personnel Department. Under this agreement, The
Personnel Department hires all of our employees and then leases our employees
back to us. The Personnel Department withholds and deposits applicable federal,
state and local income and employment taxes from the wages of our employees, and
provides workers compensation and employment coverage. The Personnel Department
also provides a health plan and 401(k) retirement plan for our employees. We
reimburse The Personnel Department for all wages, taxes and benefit payments
made on our behalf in addition to paying a yearly administrative fee per
employee.
In May 1999, we entered into an employment agreement with John W. Gerdelman
to serve as our Chief Executive Officer and President. According to our
employment agreement with Mr. Gerdelman he receives a base salary of $225,000
per year, adjustable in accordance with our policies, and options to purchase
1,080,000 shares of our common stock. He is also eligible to receive a
performance bonus or bonuses in the discretion of our compensation committee. If
Mr. Gerdelman is terminated by us upon the sale of the company or without cause,
Mr. Gerdelman will be entitled to accelerated vesting of any outstanding stock
options and continuation of his benefits for a period of 12 months. In addition,
we
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agreed to pay Mr. Gerdelman an amount equal to two times his then current annual
salary if there is a sale of the company and he is terminated, has his
responsibilities significantly reduced or is relocated in connection with that
sale of the company.
In May 1999, we entered into an employment agreement with Kaukab N.
Chaudhry to serve as our Chief Financial Officer. According to our employment
agreement with Mr. Chaudhry he receives a base salary of $150,000 per year,
adjustable in accordance with our policies, and options to purchase 768,000
shares of our common stock. He is also eligible to receive a performance bonus
or bonuses in the discretion of our compensation committee. If Mr. Chaudhry is
terminated by us upon the sale of the company or without cause, he will be
entitled to accelerated vesting of any outstanding stock options and
continuation of his benefits for a period of 12 months. In addition, we agreed
to pay Mr. Chaudhry a cash bonus in the amount of $750,000 if we do not complete
our initial public offering or enter into a binding agreement for our sale on or
before October 31, 1999. Further, we agreed to pay Mr. Chaudhry cash bonuses in
an aggregate amount of up to $3,000,000 if the spread between the fair market
value of the shares underlying Mr. Chaudhry's options and the aggregate option
exercise price falls below $5,000,000. We will measure the fair market value of
Mr. Chaudhry's options over a 30-day period in November of each of 1999, 2000
and 2001.
In April 1999, we entered into employment agreements with John W. Street,
C. Scott Chasin and Geoffrey E. Lind, and in May 1999, we entered into an
employment agreement with Mary M. Beazley. According to these agreements, each
of these officers serves in the capacity and receives the base salary shown in
the chart below and is eligible to receive a performance bonus or bonuses in the
discretion of the compensation committee. If the officer is terminated by us
upon the sale of the company or without cause, he or she will be entitled to
accelerated vesting of any outstanding stock options and continuation of his or
her benefits for a period of 12 months.
<TABLE>
<CAPTION>
EXECUTIVE CAPACITY SALARY
--------- -------- ------
<S> <C> <C>
John W. Street......................... Chairman of the Board.................... $150,000
C. Scott Chasin........................ Chief Technology Officer................. 140,000
Mary M. Beazley........................ Executive Vice President of
Administration and Investor Relations,
Treasurer................................ 140,000
Geoffrey E. Lind....................... Executive Vice President of Sales and
Service.................................. 150,000
</TABLE>
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EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to our Chief Executive Officer and our three other most highly compensated
executive officers whose annual salary and bonus exceeded $100,000 for services
rendered in all capacities to us during 1998 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ---------------------
------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- --------------------------- -------- -------- --------------------- ---------------
<S> <C> <C> <C> <C>
John W. Street.......................... $145,773 $ -- -- $ 58
Chairman of the Board and former Chief
Executive Officer
C. Scott Chasin......................... 104,075 -- 48,000 --
Chief Technology Officer
Mary M. Beazley......................... 104,286 -- -- 600
Executive Vice President of
Administration and Investor
Relations and Treasurer
Geoffrey E. Lind........................ 151,473 -- 48,000 --
Executive Vice President of Sales and
Service
</TABLE>
The amounts reflected in the "All Other Compensation" column of the
foregoing table represent contributions we made on behalf of the individuals to
a 401(k) plan which is currently managed by The Personnel Department.
OPTION GRANTS IN 1998
The following table sets forth information regarding options granted to the
Named Executive Officers during 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
PERCENT OF TOTAL STOCK PRICE
OPTIONS APPRECIATION FOR
NUMBER OF GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED 1998 ($/SHARE) DATE 5% 10%
- ---- --------- ---------------- ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
John W. Street........... -- -- -- -- -- --
C. Scott Chasin.......... 48,000(4) 2.8% $1.46 5/17/08 $44,073 $111,689
Mary M. Beazley.......... -- -- -- -- -- --
Geoffrey E. Lind......... 48,000(4) 2.8 1.46 5/17/08 44,073 111,689
</TABLE>
The percent of total options granted to employees in the above table is
based on 1,717,440 total options granted in 1998. The options granted to Messrs.
Lind and Chasin vest in five equal annual installments beginning June 30, 1999.
Our board of directors may reprice options under the terms of our stock option
plans.
Options were granted at an exercise price equal to the fair market value of
our common stock, as determined by the board of directors on the date of grant.
In making this determination, the board of directors considered a number of
factors, including:
- our historical and prospective future revenue and profitability;
- our cash balance and rate of cash consumption;
- the development and size of the market for our services;
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- the status of our financing activities;
- the stability and tenure of our management team; and
- the breadth of our service offerings.
The amounts reflected in the "Potential Realizable Value" column of the
foregoing table are calculated assuming that the fair market value of the common
stock on the date of the grant as determined by the board of directors
appreciates at the indicated annual rate compounded annually for the entire term
of the option, and that the option is exercised and the common stock received
therefor is sold on the last day of the term of the option for the appreciated
price. The 5% and 10% rates of appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of future increases in the price of the common stock.
1998 OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth information concerning the value realized
upon exercise of options during 1998 and the number and value of unexercised
options held by each of the Named Executive Officers at December 31, 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT DECEMBER 31, 1998 DECEMBER 31, 1998
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John W. Street....... -- -- 456,000 216,000 $896,160 $425,520
C. Scott Chasin...... -- -- 144,000 264,000 283,680 455,760
Mary M. Beazley...... -- -- 120,000 -- 236,400 --
Geoffrey E. Lind..... -- -- 115,200 220,800 226,944 370,656
</TABLE>
In the table above, the value of unexercised in-the-money options is based
on the fair market value of our common stock as of December 31, 1998 (determined
by the board of directors in the manner discussed above to be $2.09 per share),
minus the per share exercise price, multiplied by the number of shares
underlying the option.
401(K) PLAN
Our employees are eligible to participate in The Personnel Department
401(k) Retirement Plan (the "401(k) Plan"). Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation by up to the lesser of
24% of eligible compensation or the statutorily prescribed annual limit ($10,000
in 1999). Employees may contribute this amount to the 401(k) Plan. The trustee
under the 401(k) Plan, at the direction of each participant, invests the assets
of the 401(k) Plan in up to 10 different investment funds. The 401(k) Plan is
intended to qualify under Section 401(a) of the Internal Revenue Code of 1986,
as amended (the "Code") so that contributions by employees to the 401(k) Plan,
and income earned on plan contributions, are not taxable to employees until
withdrawn, and so that the contributions by employees will be deductible by The
Personnel Department, Inc. when made. The Personnel Department, Inc. will make
matching contributions to the 401(k) Plan in an amount equal to 50% of the first
2% of an employee's pretax contributions. An employee becomes eligible for the
matching contribution only if he or she makes a pretax contribution.
Additionally, The Personnel Department may make annual discretionary profit
sharing contributions in amounts to be determined annually by the board of
directors of The Personnel Department. We reimburse The Personnel Department for
any matching or profit sharing contributions on behalf of our employees.
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STOCK PLANS
1997 STOCK OPTION PLAN
Our 1997 Stock Option Plan (the "Option Plan") was adopted and approved by
our board of directors and stockholders on March 12, 1997. The Option Plan was
amended on October 9, 1997 and on June 15, 1998. The board of directors
terminated the Option Plan on March 19, 1999, and we will make no further
options grants under the Option Plan. Options currently outstanding under the
Option Plan will continue in full force and effect under the terms of the Option
Plan until such outstanding options are exercised or terminated in accordance
with their terms.
As of March 19, 1999, we granted options under the Option Plan to purchase
an aggregate of approximately 4,719,120 shares of common stock, of which options
to purchase approximately 83,520 shares had been exercised, options to purchase
approximately 789,120 shares had been cancelled (due to expiration or otherwise)
and options to purchase approximately 3,846,480 shares at a weighted average
exercise price of approximately $0.74 per share remained outstanding. We will
make no future grants under the Option Plan.
The Option Plan provides for the grant of incentive stock options under the
Code to employees and nonstatutory stock options to employees, directors and
consultants. The Option Plan is administered by the board or a committee
appointed by the board which determines recipients and types of awards to be
granted, including the exercise price, number of shares subject to the award and
the exercisability thereof.
The terms of stock options granted under the Option Plan generally may not
exceed 10 years. The board determines the exercise price of options granted
under the Option Plan, provided that the exercise price of an incentive stock
option cannot be less than 100% of the fair market value of the common stock on
the date of the option grant and the exercise price of a nonstatutory stock
option cannot be less than 50% of the fair market value of the common stock on
the date of the option grant. Options granted under the Option Plan vest at the
rate specified in the applicable option agreement. Notwithstanding any other
provisions of the Option Plan to the contrary, options granted under the Option
Plan will be fully vested in the event of the optionee's death or total and
permanent disability. An optionee may not transfer an incentive stock option
other than by will or the laws of descent or distribution and a nonstatutory
stock option is only be transferable to the spouse, children and lineal
descendents of the optionee (or to a trust created solely for the benefit of the
optionee and his or her spouse, children and lineal descendants) or to an
organization exempt from taxation pursuant to Section 501(c)(3) of the Code or
to which tax deductible contributions may be made under Section 170 of the Code,
or upon such terms as stated in an option agreement as the board in its
discretion determines. An optionee whose relationship with us or any related
corporation ceases for any reason (other than by death or permanent and total
disability) may exercise vested options in the three-month period following such
cessation (unless such options terminate or expire sooner by their terms) or in
such longer or shorter period specified in the option agreement. Vested options
may be exercised for up to 12 months after an optionee's relationship with us or
related corporations ceases due to death or disability (unless such options
terminate or expire sooner by their terms).
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of us or any affiliate, unless the option exercise
price is at least 110% of the fair market value of the stock subject to the
option on the date of grant, and the term of the option does not exceed five
years from the date of grant. The aggregate fair market value, determined at the
time of grant, of the shares of common stock with respect to which incentive
stock options are exercisable for the first time by an optionee during any
calendar year (under all such plans of us and our affiliates) may not exceed
$100,000. Options may be immediately exercisable (whether such options are
vested or not) at the discretion of the board and if specified in the option
agreement, subject to our right to repurchase any unvested shares.
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The options may provide that, prior to our first registration of an equity
security under Section 12 of the Exchange Act of 1934, as amended (the "Exchange
Act"), we may repurchase all or any part of the vested shares exercised, or may
exercise a right of first refusal on any proposed transfer of shares exercised.
Upon certain changes in control of our ownership, each outstanding option
will be assumed or an equivalent option substituted by the successor corporation
or, if the successor corporation refuses to assume or substitute for outstanding
options, such options held by optionees who are then providing services to us
will become fully vested and exercisable prior to such change in control or
thereafter terminate.
1999 EQUITY INCENTIVE PLAN
In March 1999, the board adopted and the stockholders approved the 1999
Equity Incentive Plan (the "Incentive Plan"), which replaces the Option Plan
effective as of March 19, 1999. In April 1999 and in May 1999, the board amended
and the stockholders approved the Incentive Plan. Effective upon the completion
of this offering, there will be an aggregate of 13,000,000 shares of common
stock authorized for issuance under the Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options, as
defined under the Code, to employees (including officers and employee-directors)
and nonstatutory stock options, restricted stock purchase awards, stock bonuses
and stock appreciation rights to our and our affiliates' employees (including
officers and employee-directors), directors and consultants. The Incentive Plan
is administered by the board (or a committee appointed by the board) which
determines recipients and types of awards to be granted, including the exercise
price, number of shares subject to the award and the exercisability thereof.
The terms of options granted under the Incentive Plan may not exceed 10
years. The board (or committee) determines the exercise price of options granted
under the Incentive Plan. However, the exercise price for an incentive stock
option cannot be less than 100% of the fair market value of the common stock on
the date of the option grant, and the exercise price for a nonstatutory stock
option cannot be less than 85% of the fair market value of the common stock on
the date of the option grant. Options granted under the Incentive Plan vest at
the rate specified in the option agreement. Generally, the optionee may not
transfer a stock option other than by will or the laws of descent or
distribution unless the optionee holds a nonstatutory stock option that provides
for transfer in the stock option agreement. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death. An
optionee whose service relationship with us or any affiliate ceases for any
reason may exercise vested options for the term provided in the option
agreement.
No incentive stock option (and prior to our stock being publicly traded, no
nonstatutory stock option) may be granted to any person who, at the time of the
grant, owns (or is deemed to own) stock possessing more than 10% of the total
combined voting power of us or any affiliate, unless the option exercise price
is at least 110% of the fair market value of the stock subject to the option on
the date of grant and the term of the option does not exceed five years from the
date of grant. In addition, the aggregate fair market value, determined at the
time of grant, of the shares of common stock with respect to which incentive
stock options are exercisable for the first time by an optionee during any
calendar year (under the Incentive Plan and all other stock plans of us and our
affiliates) may not exceed $100,000.
When we become subject to Section 162(m) of the Code (which denies a
deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000), no person may be granted options under the Incentive Plan
covering more than 3,250,000 shares of common stock in any calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the Incentive Plan. Under its general authority to grant and to
amend options, the board (or committee) has the implicit authority to reprice
outstanding options or to offer optionees the opportunity to replace outstanding
options with new
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options for the same or a different number of shares. Both the original and new
options will count toward the Code Section 162(m) limitation set forth above.
Restricted stock purchase awards granted under the Incentive Plan may be
granted subject to a repurchase option in our favor in accordance with a vesting
schedule determined by the board (or committee). The price of a restricted stock
purchase award under the Incentive Plan can not be less than 85% of the fair
market value of the stock subject to the award on the date of grant. Stock
bonuses may be awarded in consideration of past services without a purchase
payment. Unless otherwise specified, rights under a stock bonus or restricted
stock bonus agreement generally may not be transferred other than by will or the
laws of descent and distribution during such period as the stock awarded
pursuant to such an agreement remains subject to the agreement.
If there is any sale, lease or other disposition of all or substantially
all of our assets, any merger, reverse merger or any consolidation in which we
are not the surviving corporation, or any acquisition by certain persons,
entities or groups of 50% or more of our stock, all outstanding awards under the
Incentive Plan either will be assumed or substituted for by any surviving
entity. If the surviving entity refuses to assume or substitute for such awards,
the vesting provisions of such stock awards held by optionees who are then
performing services for us will be accelerated and the awards terminated if not
exercised prior to such transaction. In addition, if after this offering certain
specified changes in control of more than 50% of the board occur, then the
vesting provisions of all stock awards held by optionees who are then performing
services for us will be accelerated.
As of April 30, 1999, no shares of common stock had been issued upon the
exercise of options granted under the Incentive Plan, options to purchase
2,858,400 shares of common stock were outstanding. The Incentive Plan will
terminate on March 18, 2009 unless sooner terminated by the board (or
committee). As of April 30, 1999, no stock bonuses or restricted stock had been
granted under the Incentive Plan.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In April 1999, the board adopted the 1999 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of common stock to our non-employee directors. In May
1999, the board amended and the stockholders approved the Directors' Plan. The
Directors' Plan will become effective on the effective date of this offering.
The board administers the Directors' Plan, unless the board delegates
administration to a committee.
The aggregate number of shares of common stock that may be issued pursuant
to options granted under the Directors' Plan is 301,000 shares.
Under the terms of the Directors' Plan, on the effective date of this
offering each director who is not otherwise an employee or consultant of us or
our affiliates (a "Non-Employee Director") will automatically be granted an
option for 25,000 shares of common stock. After the effective date of this
offering each individual who is first elected or appointed a Non-Employee
Director automatically will be granted an option for 25,000 shares of common
stock. All initial grants vest in three equal annual installments each year
after the date of the grant. Commencing in 2000, each Non-Employee Director will
automatically be granted an option for 5,000 shares of common stock on the day
of each annual meeting of our stockholders. All annual grants vest in 12 equal
monthly installments each month after the date of the grant. Also commencing in
2000, on the day of each annual meeting of our stockholders, each Non-Employee
Director who is serving on a committee of the board will automatically be
granted an option for 500 shares of common stock for each such committee on
which such Non-Employee Director is serving and an additional grant of 500
shares of common stock for each such committee of which such Non-Employee
Director is the chairperson. All committee grants will be fully vested on the
date of the grant. Notwithstanding the foregoing or any provisions of the
Directors' Plan to the contrary, a Non-Employee Director will not receive any
grants under the Directors' Plan if he or she is affiliated with one of our
stockholders whose policies prohibit the receipt of such grants.
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The exercise price of the options granted under the Directors' Plan will be
equal to the fair market value of the common stock on the date of grant. No
option granted under the Directors' Plan may be exercised after the expiration
of five years from the date it was granted. Options granted under the Directors'
Plan generally are non-transferable. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death. An
optionee whose service relationship with us or our affiliates (whether as a
Non-Employee Director or subsequently as an employee, director or consultant of
us or our affiliates) ceases for any reason may exercise vested options for the
term provided in the option agreement (three months generally, 12 months in the
event of disability, 18 months in the event of death).
If there is any sale of all or substantially all of our assets, any merger,
reverse merger or any consolidation in which we are not the surviving
corporation, or any acquisition by certain persons, entities or groups of 50% or
more of our stock, the vesting provisions of all outstanding options under the
Directors' Plan will be accelerated and the options terminated if not exercised
prior to such transaction. In addition, if after this offering certain specified
changes in control of more than 50% of the board occur, then the vesting
provisions of all options will be accelerated.
As of April 30, 1999, no options to purchase common stock had been granted
pursuant to the Directors' Plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
In April 1999 the board adopted the 1999 Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 1,250,000 shares of common stock. The
Purchase Plan will become effective on the effective date of our initial public
offering. The Purchase Plan is intended to qualify as an "employee stock
purchase plan" within the meaning of Section 423 of the Code. Under the Purchase
Plan, the board may authorize participation by eligible employees, including
officers, in periodic offerings following the adoption of the Purchase Plan. The
offering period for any offering will be no longer than 27 months.
The Purchase Plan provides a means by which our and our designated
affiliates' employees may purchase our common stock through payroll deductions.
The Purchase Plan is implemented by offerings of rights to eligible employees.
Under the Plan, we may specify offerings with a duration of not more than 27
months, and may specify shorter purchase periods within each offering. The first
offering will begin on the effective date of our initial public offering and
will end on June 30, 2000. Purchases will occur on December 31, 1999 and June
30, 2000. Unless otherwise determined by the board, common stock is purchased
for accounts of employees participating in the Purchase Plan at a price per
share equal to the lower of (i) 85% of the fair market value of a share of
common stock on the date of commencement of participation in the offering or
(ii) 85% of the fair market value of a share of common stock on the date of
purchase. Generally, all regular employees, including executive officers, who
work at least 20 hours per week and who are customarily employed by us or an
affiliate for at least five months per calendar year may participate in the
Purchase Plan and may authorize payroll deductions of up to 15% of their base
compensation for the purchase of stock under the Purchase Plan.
Eligible employees may be granted rights only if the rights together with
any other rights granted under employee stock purchase plans do not permit such
employee's rights to purchase our stock to accrue at a rate which exceeds
$25,000 of fair market value of such stock for each calendar year in which such
rights are outstanding. No employee is eligible for the grant of any rights
under the Purchase Plan if immediately after such rights are granted, such
employee has voting power over 5% or more of our outstanding capital stock.
As of April 30, 1999, no shares of common stock had been purchased under
the Purchase Plan.
In the event of certain changes in control of our ownership, the board has
discretion to provide that each right to purchase common stock will be assumed
or an equivalent right substituted by the successor corporation, or the board
may shorten the offering period and provide for all sums collected by payroll
deductions to be applied to purchase stock immediately prior to the change in
control. The Purchase Plan will terminate at the board's direction or when all
of the shares reserved for issuance have been purchased.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock as of April 30, 1999 for:
- Each person (or group of affiliated persons) known to us to own
beneficially more than 5% of the common stock,
- Each of our directors, nominees for director and Named Executive
Officers, and
- All of our directors and executive officers as a group.
The information has been adjusted to reflect the sale of the common stock
in this offering (assuming no exercise of the underwriters' over-allotment
option) and the conversion of all outstanding shares of preferred stock into
common stock.
In accordance with the rules of the Securities and Exchange Commission, the
table gives effect to the shares of common stock that could be issued upon the
exercise of outstanding options within 60 days of April 30, 1999. Unless
otherwise noted in the footnotes to the table and subject to community property
laws where applicable, the following individuals have sole voting and investment
control with respect to the shares beneficially owned by them.
We have calculated the percents of shares beneficially owned based on
29,345,523 shares of common stock outstanding before this offering and
35,345,523 shares of common stock outstanding after the offering. An asterisk
indicates ownership of less than one percent.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES --------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ---------------- ------------------ --------------- --------------
<S> <C> <C> <C>
John W. Street (1)................................. 6,198,236 20.7% 17.3%
Mary M. Beazley (2)................................ 6,198,236 20.7 17.3
American Express Travel Related Services
Company, Inc. (3)................................ 4,241,529 14.5 12.0
Premiere Technologies, Inc. (4).................... 4,241,529 14.5 12.0
Walter J. Frank (5)................................ 2,734,192 9.3 7.7
Liberty Ventures I, L.P. (6)....................... 1,767,302 6.0 5.0
ABS Ventures IV, L.P. / ABX Fund, L.P. (7)......... 1,719,042 5.9 4.9
C. Scott Chasin (8)................................ 144,000 * *
Geoffrey E. Lind (9)............................... 144,000 * *
Jeffrey A. Allred (10)............................. 4,277,529 14.6 12.1
Karen Griffith Gryga (11).......................... 1,767,302 6.0 5.0
Lawrence S. Sharnak................................ -- -- --
Bruns Grayson (12)................................. 1,719,042 5.9 4.9
Michael C. Ruettgers............................... -- -- --
Gerald H. Taylor................................... -- -- --
All executive officers and directors as a group (11
persons) (13).................................... 13,031,467 42.5 35.5
</TABLE>
- ---------------------------------
(1) Includes 2,874,982 shares of common stock, including 456,000 shares of
common stock subject to stock options exercisable within 60 days of April
30, 1999, held by Mr. Street. Also includes an aggregate of 2,459,254
shares of common stock held by Mary M. Beazley, Mr. Street's spouse (see
note 2 below), as to which Mr. Street disclaims beneficial ownership, and
864,000 shares owned by The Beazley/Street Investments, L.L.L.P. Mr.
Street's address is c/o USA.NET, Inc., 1155 Kelly Johnson Boulevard, Suite
400, Colorado Springs, Colorado 80920.
(2) Includes 2,459,254 shares of common stock, including 120,000 shares of
common stock subject to stock options exercisable within 60 days of April
30, 1999, held by Ms. Beazley. Also includes an aggregate of 2,874,982
shares of common stock held by John W. Street, Ms. Beazley's spouse
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(see note 1 above), as to which Ms. Beazley disclaims beneficial ownership,
and 864,000 shares owned by The Beazley/Street Investments, L.L.L.P. Ms.
Beazley's address is c/o USA.NET, Inc., 1155 Kelly Johnson Boulevard, Suite
400, Colorado Springs, Colorado 80920.
(3) The address of American Express Travel Related Services Company, Inc. is
American Express Tower, World Financial Center, New York, New York 10285.
(4) The address of Premiere Technologies, Inc. is 3399 Peachtree Road, N.E.,
Suite 600, Atlanta, Georgia 30326.
(5) Mr. Frank's address is c/o USA.NET, Inc., 1155 Kelly Johnson Boulevard,
Suite 400, Colorado Springs, Colorado 80920.
(6) The address of Liberty Ventures I, L.P. is 441 North 5th Street,
Philadelphia, Pennsylvania 19123.
(7) Includes 1,375,233 shares of common stock owned by ABS Ventures IV, L.P.
and 343,809 shares of common stock owned by ABX Fund, L.P. The address of
ABS Ventures IV, L.P. and ABX Fund, L.P. is One South Street, Suite 2150,
Baltimore, Maryland 21202.
(8) Consists solely of shares of common stock subject to stock options
exercisable within 60 days of April 30, 1999.
(9) Includes 28,800 shares of common stock owned by The Lind 1999 Children's
Trust and 114,240 shares of common stock subject to stock options
exercisable within 60 days of April 30, 1999.
(10) Includes 4,241,529 shares held by Premiere Technologies, Inc., of which Mr.
Allred is the President and Chief Operating Officer.
(11) Consists solely of shares held by Liberty Ventures I, L.P., of which Ms.
Griffith Gryga is a limited partner. Ms. Griffith Gryga disclaims
beneficial ownership of such shares except to the extent of her pecuniary
interest therein.
(12) Consists solely of shares held by ABS Ventures IV, L.P. and ABX Fund, L.P.,
the general partner of which is a limited liability company of which Mr.
Grayson is the managing member. Mr. Grayson disclaims beneficial ownership
of such shares except to the extent of his pecuniary interest therein.
(13) Includes the shares of common stock discussed in notes 1, 2, 8, 9, 10 and
11 above and an additional 500,400 shares of common stock subject to stock
options exercisable within 60 days of April 30, 1999. Does not include
shares held by Mr. Grayson, who was not a director as of April 30, 1999.
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CERTAIN TRANSACTIONS
TRANSACTIONS WITH TELECONCEPTS
During 1996 and 1997, we purchased certain administrative and operating
services from TeleConcepts. The aggregate amount of services purchased by us
from TeleConcepts during 1996 and 1997 was approximately $1.2 million and
approximately $113,000, respectively. During 1996, TeleConcepts (whose sole
shareholders were Ms. Beazley, Mr. Street and Mr. Frank) periodically made
advances to fund our operations. TeleConcepts distributed such receivables to
Ms. Beazley, Mr. Street and Mr. Frank, who converted them into shares of common
stock. Please see our discussion in "-- Common Stock Financing of Colorado
Predecessor" below.
COMMON STOCK FINANCING OF COLORADO PREDECESSOR
From March 1, 1996 through December 30, 1996, prior to our reincorporation
in Delaware, our Colorado predecessor corporation sold an aggregate of 857,350
shares of its common stock to certain existing stockholders at a purchase price
of $4.76 per share. 850,000 of the shares (which, in connection with the
reincorporation, were converted into an aggregate of 2,039,980 shares of our
common stock (after giving effect to the 4.8-for-1 stock split) and 850,000
shares of our Series A Preferred Stock (which Series A Preferred Stock will
convert into 4,080,000 shares of common stock on the closing of this offering))
were sold to the following directors, executive officers and principal
stockholders for an aggregate purchase price of $4,046,000:
<TABLE>
<CAPTION>
NUMBER OF SHARES
PRIOR TO AGGREGATE PURCHASE
PURCHASER REINCORPORATION PRICE
--------- ---------------- ------------------
<S> <C> <C>
John W. Street...................................... 269,166 $1,281,230
Mary M. Beazley..................................... 269,166 1,281,230
Walter J. Frank..................................... 311,668 1,483,540
</TABLE>
All of these shares were issued upon the conversion of the advances
discussed above in "-- Transactions with TeleConcepts."
TRANSACTIONS WITH INTERNET EXPRESS, LLC
On March 1, 1997, we sold to Internet Express, LLC ("IEX") certain assets
related to our Internet access business in exchange for $925,000 and the
assumption of related liabilities. The price was based, in part, on the purchase
price for these assets negotiated with an independent third-party (which
transaction was not consummated). The board of directors subsequently increased
the purchase price to reflect the current market value of the assets. This
transaction was approved by the independent director and our stockholders. We
also entered into a Co-Location Agreement with IEX pursuant to which IEX leases
space at our offices on a month-to-month basis at the rate of $500 per month. In
addition, we purchased Internet access and subleased office space from IEX
during 1997 and 1998. The aggregate amount of the payments made to IEX during
1997 and 1998 was $44,900 and $22,789, respectively. Mr. Street and Ms. Beazley
each own approximately 20% of the membership interests in IEX.
SERIES B FINANCING
On April 8, 1997, we issued 527,579 shares of Series B Preferred Stock to
American Express, a principal stockholder, at a purchase price of $5.69 per
share. We also granted to American Express a one-year option to purchase up to
527,579 additional shares of Series B Preferred Stock. On March 23, 1998,
American Express exercised a portion of such option and acquired an additional
356,073 shares of Series B Preferred Stock at $5.69 per share. The unexercised
portion of the option terminated. The 883,652 shares of Series B Preferred Stock
purchased by American Express will convert into 4,241,529 shares of common stock
on the closing of this offering. In connection with its investment, American
Express received the
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right, subject to certain restrictions, to designate a member of our board of
directors. Mr. Sharnak currently serves as that designee.
In connection with its initial investment, American Express also entered
into a Co-Marketing Program Agreement with us pursuant to which we provide
Web-based email services to American Express Cardmembers and other consumers.
Please refer to our discussion in "Business -- Strategic Relationships" for our
discussion of this agreement.
In connection with the initial American Express investment, we entered into
Stock Restriction Agreements with each of Mr. Street, Ms. Beazley and Mr. Frank.
The agreements granted to us an option to repurchase shares of common stock and
Series A Preferred Stock held by Mr. Street, Ms. Beazley and Mr. Frank, at a
price of $0.12 per share of common stock and a price of $4.76 per share of
Series A Preferred Stock, in the event that Mr. Street is terminated for cause
or voluntarily ceases to be an employee, director or consultant prior to October
8, 1998 (in the case of the agreements with Ms. Beazley and Mr. Frank) or April
8, 2000 (in the case of the agreement with Mr. Street).
SERIES C FINANCING
On October 17, 1997, we issued an aggregate of 736,376 shares of Series C
Preferred Stock to Premiere Technologies, a principal stockholder, and certain
other investors at a purchase price of $6.79 per share. We also granted options
exercisable on or prior to May 1, 1998 to purchase up to 736,376 additional
shares of Series C Preferred Stock. On March 23, 1998, such options were
exercised in full, at which time we also issued an additional 486,918 shares of
Series C Preferred Stock, all at $6.79 per share. On May 13, 1998, we issued an
additional 74,000 shares of Series C Preferred Stock at $6.79 per share. Of the
2,033,670 shares of Series C Preferred Stock sold by us, an aggregate of
1,958,170 shares (which will convert into an aggregate of 9,399,216 shares of
common stock upon the closing of this offering) were sold to the following
directors, officers and principal stockholders for an aggregate purchase price
of $13,295,974:
<TABLE>
<CAPTION>
AGGREGATE
PURCHASER NUMBER OF SHARES PURCHASE PRICE
- --------- ---------------- --------------
<S> <C> <C>
Premiere Technologies, Inc. ........................... 883,652 $5,999,997
ABS Ventures IV, L.P. / ABX Fund, L.P. ................ 389,096/97,274 3,302,452
Liberty Ventures I, L.P. .............................. 368,188 2,499,996
John W. Street......................................... 90,645 615,480
Mary M. Beazley........................................ 90,645 615,480
Annette C. Hicks....................................... 16,170 109,794
Walter J. Frank, Jr. .................................. 10,000 67,900
Michael Lipfield....................................... 7,500 50,925
Geoffrey E. Lind....................................... 5,000 33,950
</TABLE>
In connection their initial investments, Premiere and Liberty Ventures each
received the right, subject to certain restrictions, to designate a member of
our board of directors. Mr. Allred currently serves as the Premiere designee and
Ms. Griffith Gryga currently serves as the Liberty Ventures designee. Premiere
also entered into a Co-Marketing and Integration Agreement with us pursuant to
which we and Premiere expect to jointly offer certain telecommunications
services. Please refer to our discussion in "Business -- Strategic
Relationships" for our discussion of this agreement.
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SERIES D FINANCING
In August 1998, we issued an aggregate of 1,557,318 shares of Series D
Preferred Stock at a purchase price of $14.75 per share. An aggregate of 25,790
of such shares (which will convert into an aggregate of 123,792 shares of common
stock upon the closing of this offering) were sold to the following directors
and officers for an aggregate purchase price of $380,403:
<TABLE>
<CAPTION>
AGGREGATE
PURCHASER NUMBER OF SHARES PURCHASE PRICE
- --------- ---------------- --------------
<S> <C> <C>
John W. Street.......................................... 20,000 $295,000
Mary M. Beazley......................................... 3,390 50,003
Michael Lipfield........................................ 1,400 20,650
Geoffrey E. Lind........................................ 1,000 14,750
</TABLE>
GUARANTEE OF BANK LOAN
Mr. Street is the co-signer of our Business Loan Agreement with State Bank
and Trust of Colorado Springs. As of March 31, 1999, the outstanding principal
amount under such agreement was approximately $1.7 million. In consideration for
his personal guarantee of the loan, during 1997 we granted to Mr. Street options
to purchase an aggregate of 312,000 shares of common stock under the Option Plan
at a weighted average exercise price of $0.13 per share.
EQUIPMENT PURCHASES FROM EMC CORPORATION
From time to time since June 1997, we have purchased certain computer
storage hardware and software from EMC Corporation. Mr. Ruettgers, who will
become one of our directors upon the closing of this offering, is the President
and Chief Executive Officer of EMC Corporation. The payments made to EMC
Corporation during 1997 and 1998 totaled approximately $213,000 and $4,299,000,
respectively, and the payments made and currently scheduled to be made to EMC
Corporation during 1999 total approximately $8,508,000.
We believe that each of the transactions described above was carried out on
terms that were no less favorable to us than those that would have been obtained
from unaffiliated third parties. Any future transactions between us and any of
our directors, officers or principal stockholders will be on terms no less
favorable to us than could be obtained from unaffiliated third parties and will
be approved by a majority of the independent and disinterested members of the
board of directors.
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DESCRIPTION OF SECURITIES
The following description of our securities reflects changes that will be
made to our certificate of incorporation and bylaws upon the closing of this
offering. We have filed our restated certificate of incorporation and amended
and restated bylaws as exhibits to the registration statement of which this
prospectus is a part.
Our authorized capital stock consists of 150,000,000 shares of common
stock, par value $.001 per share, and 10,000,000 shares of preferred stock, par
value $.001 per share.
COMMON STOCK
As of the date of this prospectus, there are 29,345,523 shares of common
stock outstanding and held of record by approximately 180 stockholders. Upon the
closing of this offering, there will be 35,345,523 shares of common stock
outstanding (assuming no exercise of the underwriters' over-allotment option).
Holders of common stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders. Holders of common stock are not
entitled to cumulative voting rights in the election of directors. Accordingly,
minority stockholders will not be able to elect directors on the basis of their
votes alone. Subject to preferences that may be applicable to any
then-outstanding shares of preferred stock, holders of common stock are entitled
to receive ratably such dividends as may be declared by our board of directors.
In the event we liquidate, dissolve or wind up our affairs, holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preferences of any then-outstanding shares of
preferred stock. Holders of common stock have no preemptive, subscription,
redemption or conversion rights.
PREFERRED STOCK
Our board of directors is authorized, without further stockholder approval,
to issue up to an aggregate of 10,000,000 shares of preferred stock in one or
more series. The board of directors may fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series, and the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption price or prices and
liquidation preferences. The issuance of preferred stock could:
- Adversely affect the voting power of holders of common stock;
- Adversely affect the likelihood that the holders of common stock will
receive dividend payments and payments upon liquidation; and
- Delay, defer or prevent a change in control.
We have no present plans to issue any shares of preferred stock.
WARRANT
As of the date of this prospectus, we have one outstanding warrant to
purchase 220,771 shares of common stock at an exercise price of $3.08 per share.
We issued the warrant to an investment banking firm in connection with its
services as placement agent for our August 1998 private placement of shares of
Series D Preferred Stock. The warrant expires on August 12, 2003. The warrant
contains anti-dilution provisions providing for adjustments of the exercise
price and the number of shares of common stock underlying the warrant upon the
occurrence of any recapitalization, reclassification, stock dividend, stock
split, stock combination or similar transaction. The shares of common stock
issuable upon exercise of the warrant carry registration rights, as discussed
below.
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<PAGE> 79
REGISTRATION RIGHTS
Pursuant to the Second Amended and Restated Investor Rights Agreement,
holders of 29,280,814 shares of common stock, including the common stock
issuable under the warrant described in the preceding paragraph, have certain
rights to require us to register their shares for resale under the Securities
Act of 1933, as amended (the "Securities Act"), during the five-year period
following this offering.
With certain limitations, the holders of more than 50% of such shares may
demand that we register shares having an aggregate offering price to the public
of more than $10,000,000. We are not required to effect more than two demand
registrations, provided at least 70% of the shares requested to be included in
the demand registrations are, in fact, included therein. In addition, these
stockholders are entitled to piggyback registration rights with respect to any
public offering registration statement we file under the Securities Act
following this offering, with certain limitations. Further, at any time after we
become eligible to file a registration statement on Form S-3 or any similar
short-form registration statement, such stockholders may require us to file such
registration statements from time to time, again with certain limitations. We
are generally required to bear all of the expenses of these registrations,
except underwriting discounts and commissions. Registration of any of the shares
of common stock entitled to these registration rights would result in such
shares becoming freely tradable without restriction under the Securities Act.
Upon completion of this offering, the registration rights with respect to
the shares held by a stockholder will terminate if the stockholder holds less
than 1% of the then-outstanding shares of common stock and the stockholder's
shares are entitled to be resold in a 90-day period under Rule 144 promulgated
under the Securities Act.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE
OF INCORPORATION
AND BYLAWS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, which generally prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the interested stockholder attained
that status with the approval of the corporation's board of directors or unless
the business combination is approved in a prescribed manner. "Business
combinations" include mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. With certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, fifteen percent (15%) or more
of a corporation's voting stock. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change-in-control attempts and,
accordingly, may discourage attempts to acquire us.
The following provisions of our restated certificate of incorporation and
amended and restated bylaws that will become effective upon the closing of this
offering may have an anti-takeover effect and may delay or prevent a tender
offer or takeover attempt that a stockholder might consider to be in its best
interest, including attempts that might result in a premium over the market
price for the common stock:
CLASSIFIED BOARD OF DIRECTORS. Our board of directors will be divided into
three classes. The directors in class I will hold office until the first annual
meeting of stockholders following this offering, the directors in class II will
hold office until the second annual meeting of stockholders following this
offering, and the directors in class III will hold office until the third annual
meeting of stockholders following this offering. After each such election, the
directors in that class will serve for terms of three years. The classification
system of electing directors may tend to discourage a third party from making a
tender offer or otherwise attempting to obtain control of us and may maintain
the incumbency of the board of directors, since such classification generally
increases the difficulty of replacing a majority of the directors.
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<PAGE> 80
BOARD OF DIRECTOR VACANCIES. The board of directors will be authorized to
fill vacant directorships and to increase the size of the board of directors.
This may deter a stockholder from removing incumbent directors and
simultaneously gaining control of the board of directors by filling the
resulting vacancies with its own nominees.
STOCKHOLDER ACTION; SPECIAL MEETINGS OF STOCKHOLDERS. Our stockholders will
not be permitted to take action by written consent, but only at duly called
annual or special meetings of stockholders. In addition, special meetings of
stockholders may be called only by the chairman of the board, the chief
executive officer or a majority of the board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Stockholders seeking to bring business before an annual meeting of
stockholders, or to nominate candidates for election as directors at an annual
meeting of stockholders, must deliver a written notice to our principal
executive offices within a prescribed time period. Our amended and restated
bylaws also set forth specific requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from bringing
matters before an annual meeting of stockholders or from making nominations for
the election of directors at an annual meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval, subject to limitations imposed by the Nasdaq National
Market. We may use these additional shares for a variety of corporate purposes,
including future public offerings to raise additional capital, acquisitions and
employee benefit plans. The existence of authorized but unissued and unreserved
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
Our amended and restated bylaws that will become effective upon the closing
of this offering provide that we will indemnify our directors and executive
officers to the fullest extent permitted by Delaware law and may indemnify our
other officers, employees and other agents to the fullest extent permitted by
Delaware law.
In addition, our restated certificate of incorporation that will become
effective upon the closing of this offering provides that, to the fullest extent
permitted by Delaware law, our directors will not be personally liable to us or
our stockholders for monetary damages for any breach of fiduciary duty as
directors. This provision of the restated certificate of incorporation does not
eliminate the directors' duty of care. In appropriate circumstances, equitable
remedies such as an injunction or other forms of non-monetary relief are
available under Delaware law. This provision also does not affect the directors'
responsibilities under any other laws, such as the federal securities laws and
state and federal environmental laws.
Each director will continue to be subject to liability for:
- Breach of a director's duty of loyalty to us and our stockholders;
- Acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- Unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
- Any transaction from which a director derived an improper personal
benefit.
We also intend to enter into indemnity agreements with our directors and
executive officers. We have purchased liability insurance for our directors and
executive officers.
There is no pending litigation or proceeding involving any of our directors
or officers as to which indemnification is being sought. We are not aware of any
pending or threatened litigation that may result in a claim for indemnification.
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LISTING
The common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol MBOX.
TRANSFER AGENT AND REGISTRAR
We have appointed Norwest Bank Minnesota, National Association, to serve as
the transfer agent and registrar for the common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. We cannot predict what effect, if any, market sales of shares or the
availability of shares for sale will have on the market price of our common
stock prevailing from time to time. Nevertheless, sales of substantial amounts
of common stock in the public market, or the perception that such sales could
occur, could adversely affect the market price of the common stock and could
impair our future ability to raise capital through the sale of our equity
securities.
Upon the closing of this offering, we will have a total of 35,345,523
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of options or warrants. Of the outstanding
shares, the 6,000,000 shares being sold in this offering will be freely
tradable, except that any shares held by our "affiliates" may only be sold in
compliance with the limitations described below. The remaining 29,345,523 shares
of common stock will be "restricted securities" that may be sold in the public
market only if they are registered under the Securities Act or if they qualify
for an exemption from registration under Rule 144, 144(k) or 701 promulgated
under the Securities Act.
Subject to the lock-up agreements described below and the provisions of
Rules 144, 144(k) and 701, additional shares will become available for sale in
the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ------------------- ------------------------------------------------------------
<C> <S>
-- Upon the date of this prospectus (shares eligible for resale
under Rule 144(k) and not subject to lock-up agreements)
453,907 90 days following the date of this prospectus (additional
shares eligible for resale under Rules 144 and 701 and not
subject to lock-up agreements)
28,546,537 180 days following the date of this prospectus (additional
shares eligible for resale under Rules 144 and 701 upon
release of lock-up agreements)
</TABLE>
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated), including an affiliate, who has beneficially owned shares for
at least one year is entitled to sell, within any three-month period commencing
90 days after the date of this prospectus, a number of shares that does not
exceed the greater of (i) 1% of the then-outstanding shares of common stock
(approximately 353,455 shares immediately after this offering) or (ii) the
average weekly trading volume of the common stock during the four calendar weeks
preceding the date on which notice of that sale is filed. In addition, a person
who is not considered an affiliate at any time during the 90 days preceding a
sale and who has beneficially owned the shares proposed to be sold for at least
two years is entitled to sell such shares under Rule 144(k) without regard to
the volume limitations described above.
In addition, following the closing of this offering, we intend to file a
registration statement to register for resale the 18,251,680 shares of common
stock available for issuance under our stock plans. Accordingly, shares issued
under those plans will become eligible for resale in the public market from time
to time, subject to the lock-up agreements described below and, in the case of
affiliates, the volume limitations of Rule 144 described above. As of the date
of this prospectus, options and purchase rights to acquire a total of 6,650,280
shares of common stock are outstanding under our stock plans.
Directors, officers and stockholders holding an aggregate of 28,891,616
shares of common stock have agreed that they will not sell any shares of common
stock without the prior written consent of Bear, Stearns & Co. Inc for a period
of 180 days from the date of this prospectus. Please refer to our discussion in
"Underwriting" for further discussion of these agreements.
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of this prospectus, other
than the grant of options and purchase rights under our stock plans and the
issuance of common stock pursuant thereto, provided the holders of such shares,
options or rights agree to the 180-day lock-up agreement.
Following this offering, certain of our stockholders will have rights to
have their shares of common stock registered for resale under the Securities
Act. Please refer to our discussion in "Description of
Securities -- Registration Rights" for further discussion of these registration
rights.
76
<PAGE> 83
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the underwriters and us, each of the underwriters named below, for whom
Bear, Stearns & Co. Inc., Volpe Brown Whelan & Company, LLC and CIBC World
Markets Corp. are acting as representatives, has severally agreed to purchase
from us the aggregate number of shares of common stock set forth opposite its
name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ------------------------------------------------------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. ...................................
Volpe Brown Whelan & Company, LLC...........................
CIBC World Markets Corp. ...................................
---------
Total............................................. 6,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the underwriters' obligations is that
they are committed to purchase and pay for all of the above shares of common
stock if any are purchased.
The underwriters propose to offer the shares of common stock directly to
the public at the "initial public offering price" set forth on the cover page of
this prospectus and at that price less a concession not in excess of $ per
share of common stock to certain other dealers who are members of the National
Association of Securities Dealers, Inc. The underwriters may allow, and those
dealers may reallow, concessions not in excess of $ per share of common
stock to certain other dealers. After this offering, the offering price,
concessions and other selling terms may be changed by the underwriters.
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of 900,000 additional shares of common stock at the
"initial public offering price" less the "underwriting discounts," each as set
forth on the cover page of this prospectus. If the underwriters exercise this
option in whole or in part, then each of the underwriters will be severally
committed, subject to certain conditions, including the approval of certain
matters by counsel, to purchase the additional shares of common stock in
proportion to their respective purchase commitments as indicated in the
preceding table.
The underwriters, at our request, have reserved for sale at the initial
public offering price up to five percent (5%) of the shares of common stock to
be sold in this offering for sale to our employees and directors and to other
persons designated by us. Any purchase of these reserved shares will reduce the
number of shares available for sale to the general public. The underwriters will
offer any reserved shares not so purchased on the same basis as the other shares
offered hereby.
The underwriters do not intend to confirm sales of common stock to any
accounts over which they exercise discretionary authority.
The underwriting agreement provides that we will indemnify the underwriters
against certain liabilities under the Securities Act or will contribute to
payments that the underwriters may be required to make in respect thereof.
Directors, officers and stockholders who hold in the aggregate 28,891,616
shares of common stock have agreed that they will not sell any shares of common
stock without the prior written consent of Bear, Stearns & Co. Inc for a period
of 180 days from the date of this prospectus. However, Bear, Stearns & Co. Inc.
may, in its sole discretion and at any time or from time to time, without notice
to our stockholders or Nasdaq, release all or any portion of the shares subject
to lock-up agreements.
We have agreed that for a period of 180 days after the date of this
prospectus we will not, without the prior written consent of Bear, Stearns & Co.
Inc., sell or otherwise dispose of any shares of common stock, except for the
shares of common stock offered by this prospectus, the shares of common stock
issuable upon exercise of outstanding options and warrants, the grant of
additional options and purchase rights
77
<PAGE> 84
under our stock plans and the issuance of common stock pursuant thereto and the
issuance of shares in connection with certain acquisitions and investments,
provided the holders of such shares, options or rights agree to the 180 day
lock-up agreement.
Prior to this offering, there has been no public market for our common
stock. Accordingly, negotiations between us and the representatives of the
underwriters will determine the initial public offering price for the common
stock. Among the factors to be considered in those negotiations will be:
- Our recent results of operations;
- Estimates of our prospects as well as the industry in which we compete;
- An assessment of our management;
- The general state of the securities markets at the time of this offering;
and
- The prices of similar securities of generally comparable companies.
The common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol MBOX. We cannot assure you that an active or
orderly trading market will develop or that the common stock will trade in the
public markets subsequent to this offering at or above the initial public
offering price.
The following table shows the underwriting discounts and commissions to be
paid by us to the underwriters in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share........................................ $ $
Total............................................ $ $
</TABLE>
In order to facilitate this offering, persons participating in the offering
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock during and after the offering, including
over-allotment, stabilizing and short-covering transactions and the impositions
of penalty bids. Persons participating in this offering also may engage in
passive market-making transactions in the common stock on the Nasdaq National
Market. Specifically, the underwriters may over-allot or otherwise create a
short position in the common stock for their own account by selling more shares
of common stock than have been sold to them by us. The underwriters may elect to
cover this short position by purchasing shares of common stock in the open
market or by exercising the over-allotment option granted to the underwriters.
In addition, the underwriters may stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock in the open market and
may impose penalty bids, under which selling concessions allowed to syndicate
members or other broker-dealers participating in this offering are reclaimed if
shares of common stock previously distributed in the offering are repurchased in
connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid also may affect the price of the common stock to the extent that it
discourages resales. No representation is made as to the magnitude or effect of
this stabilization or other transactions. These transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
A prospectus in electronic format is being made available on an Internet
web site maintained by Wit Capital. In addition, all dealers purchasing shares
from Wit Capital in this offering have agreed to make a prospectus in electronic
format available on web sites maintained by each of these dealers. Other than
the prospectus in electronic format, the information on such web site and any
information contained on any other web site maintained by Wit Capital is not
part of this prospectus or the registration statement of which this prospectus
forms a part, has not been approved and/or endorsed by us or any underwriter in
such capacity and should not be relied on by prospective investors.
78
<PAGE> 85
LEGAL MATTERS
Cooley Godward LLP, Boulder, Colorado will pass upon the validity of the
shares of common stock offered hereby. Attorneys with Cooley Godward LLP,
through an investment partnership, own 7,500 shares of our Series C Preferred
Stock (which will convert into 36,000 shares of common stock on the closing of
this offering) that were purchased in our March 1998 private placement.
Morrison & Foerster LLP, Irvine, California will pass upon certain legal
matters in connection with the offering for the underwriters.
EXPERTS
The audited financial statements included in this prospectus to the extent
and for the periods indicated in their report have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits, schedules and amendments) under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus does not contain all of the information in the registration
statement. For further information about us and our common stock, please refer
to the registration statement. For additional information, please refer to the
exhibits that have been filed with our registration statement.
You may read and copy all or any portion of the registration statement or
any other information the company files at the SEC's public reference room at
450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. Our SEC filings, including the registration statement, are also
available to you on the SEC's Web site (http://www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended. In
accordance with those requirements, we will file periodic reports, proxy
statements and other information with the SEC. You may also inspect these
reports, proxy statements and other information at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
We intend to furnish our stockholders with annual reports containing
audited financial statements and with quarterly reports for the first three
quarters of each year containing interim financial information.
80
<PAGE> 86
USA.NET, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To USA.NET, Inc.:
We have audited the accompanying balance sheets of USA.NET, Inc. (a
Delaware corporation) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of USA.NET, Inc., as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 4, 1999 (except with respect to the
matters discussed in Note 10, as to which
the date is May 10, 1999).
F-2
<PAGE> 88
USA.NET, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
----------- ------------ ------------ -------------
(UNAUDITED)
(UNAUDITED) (SEE NOTE 2)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,158,612 $ 6,562,792 $ 3,436,868
Restricted cash (Note 6).................................. 1,884,704 1,486,775 1,419,196
Short-term investments (Note 2)........................... -- 3,458,015 2,482,428
Accounts receivable, net (Note 2)......................... 260,868 1,357,440 781,348
Related party accounts receivable (Note 3)................ 61,290 17,285 --
Prepaid expenses and other assets......................... 82,737 289,287 395,697
Deposits.................................................. 16,522 552,871 36,480
----------- ------------ ------------
Total current assets................................ 4,464,733 13,724,465 8,552,017
----------- ------------ ------------
Property and equipment, net (Note 2)........................ 2,543,739 13,449,516 15,666,671
Channel acquisition costs, net.............................. -- 6,250,000 5,625,000
Other assets................................................ 7,142 5,342 4,207
----------- ------------ ------------
$ 7,015,614 $ 33,429,323 $ 29,847,895
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,536,122 $ 2,643,070 $ 2,642,489
Accrued liabilities....................................... 113,518 899,327 1,770,944
Accrued payroll and benefits.............................. 237,631 441,672 707,588
Related party accounts payable (Note 3)................... 94,900 268,026 178,440
Deferred revenue.......................................... -- 11,199 33,086
Current maturities of note payable (Note 4)............... 264,842 1,767,423 1,709,381
Current capital lease obligations (Note 5)................ -- 1,239,357 1,500,526
----------- ------------ ------------
Total current liabilities........................... 2,247,013 7,270,074 8,542,454
----------- ------------ ------------
Long-term note payable (Note 4)............................. 1,235,158 -- --
Long-term capital lease obligations (Note 5)................ -- 3,997,147 4,925,103
Other long-term liabilities................................. -- 375,000 250,000
Commitments and contingencies (Notes 1, 5, 6 and 10)
Stockholders' equity (Note 6):
Convertible preferred stock, $.001 par value, 10,000,000
shares authorized --
Convertible preferred stock, Series A, 1,100,000 shares
designated; 1,062,231 issued and outstanding, no
shares outstanding pro forma (unaudited), entitled to
$5,056,220 in liquidation............................. 4,872,255 4,872,255 4,872,255 $ --
Convertible preferred stock, Series B, 1,055,158 shares
designated; 527,579, 883,652 and 883,652 issued and
outstanding, respectively, no shares outstanding pro
forma (unaudited), stated at liquidation value........ 3,001,925 5,027,980 5,027,980 --
Convertible preferred stock, Series C, 2,033,670 shares
designated; 736,376, 2,033,670, and 2,033,670 issued
and outstanding, respectively, no shares outstanding
pro forma (unaudited), stated at liquidation value.... 4,999,995 13,808,621 13,808,621 --
Convertible preferred stock, Series D, 2,033,898 shares
designated; 0, 1,557,318 and 1,557,318 issued and
outstanding, respectively, no shares outstanding pro
forma (unaudited), entitled to $22,970,441 in
liquidation........................................... -- 21,076,389 21,076,389 --
Common stock, $.001 par value, 150,000,000 shares
authorized; 2,549,328, 2,609,328 and 2,633,802 shares
issued and outstanding, respectively, 29,210,765 shares
issued and outstanding pro forma (unaudited)............ 2,549 2,609 2,634 29,211
Additional paid-in capital (Note 1)....................... 2,714,567 6,061,496 8,851,348 53,610,016
Warrant for common stock.................................. -- 313,251 313,251 313,251
Deferred compensation..................................... (2,352,387) (4,775,393) (7,241,168) (7,241,168)
Accumulated deficit....................................... (9,705,461) (24,600,106) (30,580,972) (30,580,972)
----------- ------------ ------------ ------------
Total stockholders' equity.......................... 3,533,443 21,787,102 16,130,338 $ 16,130,338
----------- ------------ ------------ ============
$ 7,015,614 $ 33,429,323 $ 29,847,895
=========== ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE> 89
USA.NET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Advertising revenue............................ $ 33,564 $ 782,517 $ 4,661,644 $ 520,075 $ 1,906,072
Other revenue.................................. -- -- 41,069 -- 38,805
----------- ----------- ------------ ----------- -----------
Total revenue............................ 33,564 782,517 4,702,713 520,075 1,944,877
Cost of revenue.................................. 298,863 1,614,247 5,329,235 709,244 2,180,235
----------- ----------- ------------ ----------- -----------
Gross margin............................. (265,299) (831,730) (626,522) (189,169) (235,358)
Operating expenses:
Selling and marketing.......................... 875,972 2,269,373 6,903,610 914,400 2,401,277
Product development............................ 259,735 1,207,433 3,042,225 481,039 1,361,768
General and administrative..................... 674,066 1,490,214 2,446,715 345,953 891,597
Amortization of channel acquisition costs...... -- -- 1,250,000 -- 625,000
Amortization of deferred compensation.......... -- 362,180 916,858 183,672 320,865
----------- ----------- ------------ ----------- -----------
Total operating expenses................. 1,809,773 5,329,200 14,559,408 1,925,064 5,600,507
----------- ----------- ------------ ----------- -----------
Loss from operations............................. (2,075,072) (6,160,930) (15,185,930) (2,114,233) (5,835,865)
Other income (expense):
Interest expense............................... -- (9,247) (229,893) (23,309) (258,617)
Interest income................................ -- 85,111 501,958 35,574 113,616
Other.......................................... -- 48,974 19,220 -- --
----------- ----------- ------------ ----------- -----------
Other income (expense), net.............. -- 124,838 291,285 12,265 (145,001)
----------- ----------- ------------ ----------- -----------
Net loss from continuing operations.............. (2,075,072) (6,036,092) (14,894,645) (2,101,968) (5,980,866)
Discontinued operation (Note 9):
Net income (loss) from operation of
discontinued operation....................... (1,602,778) 27,150 -- -- --
Gain on sale of discontinued operation......... -- 672,827 -- -- --
----------- ----------- ------------ ----------- -----------
(1,602,778) 699,977 -- -- --
----------- ----------- ------------ ----------- -----------
Net loss......................................... $(3,677,850) $(5,336,115) $(14,894,645) $(2,101,968) $(5,980,866)
=========== =========== ============ =========== ===========
Basic and diluted net loss from continuing
operations per share........................... $ (1.44) $ (2.37) $ (5.77) $ (0.82) $ (2.28)
=========== =========== ============ =========== ===========
Basic and diluted net loss per share............. $ (2.55) $ (2.09) $ (5.77) $ (0.82) $ (2.28)
=========== =========== ============ =========== ===========
Weighted average common shares
outstanding -- basic and diluted............... 1,443,014 2,549,328 2,581,978 2,563,622 2,624,317
=========== =========== ============ =========== ===========
Pro forma net loss from continuing operations per
share (unaudited):
Basic and diluted net loss per share......... $ (0.65) $ (0.15) $ (0.20)
============ =========== ===========
Weighted average common shares outstanding --
basic and diluted.......................... 22,825,109 14,487,408 29,201,294
============ =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE> 90
USA.NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
CONVERTIBLE WARRANT
PREFERRED STOCK COMMON STOCK ADDITIONAL FOR
----------------------- ------------------ PAID-IN COMMON DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK COMPENSATION
--------- ----------- --------- ------ ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995..... -- $ -- 507,528 $ 507 $ 816,147 $ -- $ --
Issuance of common stock...... -- -- 2,041,800 2,042 4,056,108 -- --
Net loss...................... -- -- -- -- -- -- --
--------- ----------- --------- ------ ----------- -------- -----------
Balances, December 31, 1996..... -- -- 2,549,328 2,549 4,872,255 -- --
Issuance of Series A preferred
stock in connection with
recapitalization (Note 6)... 1,062,231 4,872,255 -- -- (4,872,255) -- --
Issuance of Series B preferred
stock (Note 6).............. 527,579 3,001,925 -- -- -- -- --
Issuance of Series C preferred
stock (Note 6).............. 736,376 4,999,995 -- -- -- -- --
Deferred compensation......... -- -- -- -- 2,714,567 -- (2,714,567)
Amortization of deferred
compensation................ -- -- -- -- -- -- 362,180
Net loss...................... -- -- -- -- -- -- --
--------- ----------- --------- ------ ----------- -------- -----------
Balances, December 31, 1997..... 2,326,186 12,874,175 2,549,328 2,549 2,714,567 -- (2,352,387)
Issuance of Series B preferred
stock (Note 6).............. 356,073 2,026,055 -- -- -- -- --
Issuance of Series C preferred
stock (Note 6).............. 1,297,294 8,808,626 -- -- -- -- --
Issuance of Series D preferred
stock (Note 6), net of
offering costs.............. 1,557,318 21,076,389 -- -- -- 313,251 --
Exercise of stock options
(Note 6).................... -- -- 60,000 60 7,065 -- --
Deferred compensation......... -- -- -- -- 3,339,864 -- (3,339,864)
Amortization of deferred
compensation................ -- -- -- -- -- -- 916,858
Net loss...................... -- -- -- -- -- -- --
--------- ----------- --------- ------ ----------- -------- -----------
Balances, December 31, 1998..... 5,536,871 44,785,245 2,609,328 2,609 6,061,496 313,251 (4,775,393)
Exercise of stock options
(unaudited)................. -- -- 24,474 25 3,212 -- --
Deferred compensation
(unaudited)................. -- -- -- -- 2,786,640 -- (2,786,640)
Amortization of deferred
compensation (unaudited).... -- -- -- -- -- -- 320,865
Net loss (unaudited).......... -- -- -- -- -- -- --
--------- ----------- --------- ------ ----------- -------- -----------
Balances, March 31, 1999
(unaudited)................... 5,536,871 $44,785,245 2,633,802 $2,634 $ 8,851,348 $313,251 $(7,241,168)
========= =========== ========= ====== =========== ======== ===========
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Balances, December 31, 1995..... $ (691,496) $ 125,158
Issuance of common stock...... -- 4,058,150
Net loss...................... (3,677,850) (3,677,850)
------------ ------------
Balances, December 31, 1996..... (4,369,346) 505,458
Issuance of Series A preferred
stock in connection with
recapitalization (Note 6)... -- --
Issuance of Series B preferred
stock (Note 6).............. -- 3,001,925
Issuance of Series C preferred
stock (Note 6).............. -- 4,999,995
Deferred compensation......... -- --
Amortization of deferred
compensation................ -- 362,180
Net loss...................... (5,336,115) (5,336,115)
------------ ------------
Balances, December 31, 1997..... (9,705,461) 3,533,443
Issuance of Series B preferred
stock (Note 6).............. -- 2,026,055
Issuance of Series C preferred
stock (Note 6).............. -- 8,808,626
Issuance of Series D preferred
stock (Note 6), net of
offering costs.............. -- 21,389,640
Exercise of stock options
(Note 6).................... -- 7,125
Deferred compensation......... -- --
Amortization of deferred
compensation................ -- 916,858
Net loss...................... (14,894,645) (14,894,645)
------------ ------------
Balances, December 31, 1998..... (24,600,106) 21,787,102
Exercise of stock options
(unaudited)................. -- 3,237
Deferred compensation
(unaudited)................. -- --
Amortization of deferred
compensation (unaudited).... -- 320,865
Net loss (unaudited).......... (5,980,866) (5,980,866)
------------ ------------
Balances, March 31, 1999
(unaudited)................... $(30,580,972) $ 16,130,338
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE> 91
USA.NET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(3,677,850) $(5,336,115) $(14,894,645) $(2,101,968) $(5,980,866)
Adjustments to reconcile net loss to net cash used
in operating activities --
Depreciation and amortization.................... 165,490 337,307 1,387,868 160,474 836,905
Amortization of channel acquisition costs........ -- -- 1,250,000 -- 625,000
Amortization of deferred compensation............ -- 362,180 916,858 183,672 320,865
Provision for bad debts.......................... 64,484 34,290 253,405 15,725 58,057
Gain on sale of property and equipment........... (2,472) -- -- -- --
Gain on sale of Internet service provider
segment........................................ -- (672,827) -- -- --
Changes in operating assets and liabilities --
Accounts receivable, net....................... 19,818 (292,667) (1,349,977) (957,125) 518,035
Related party accounts receivable.............. (4,283) (57,007) 44,005 (1,204) 17,285
Prepaid expenses............................... 11,812 (2,134) (206,550) (50,705) 18,727
Deposits....................................... -- (82,737) (536,349) -- 516,391
Inventory...................................... 93,750 -- -- -- --
Other assets................................... 301 (7,500) 1,800 -- --
Accounts payable............................... (154,829) 1,262,401 1,106,948 562,019 (551,781)
Accrued liabilities............................ 478,134 86,212 364,850 (17,827) 1,012,533
Deferred revenue............................... -- (3,746) 11,199 -- 21,887
Related party accounts payable................. (13,973) 65,314 173,126 (50,000) (89,586)
----------- ----------- ------------ ----------- -----------
Net cash used in operating activities........ (3,019,618) (4,307,029) (11,477,462) (2,256,939) (2,676,548)
----------- ----------- ------------ ----------- -----------
Cash flows from investing activities:
Purchase of short-term investments................. -- -- (3,458,015) -- (24,413)
Proceeds from sale of short-term investments....... -- -- -- -- 1,000,000
Purchase of property and equipment................. (514,480) (2,445,106) (6,751,794) (1,154,341) (968,725)
Proceeds from sale of property and equipment....... 14,129 -- -- -- --
Proceeds from sale of Internet service provider
segment.......................................... -- 925,000 -- -- --
Payments for channel acquisition costs............. -- -- (6,500,000) -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) investing
activities................................. (500,351) (1,520,106) (16,709,809) (1,154,341) 6,862
----------- ----------- ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from note payable......................... -- 2,570,000 500,000 500,000 --
Repayment of note payable.......................... (150,983) (1,094,257) (232,577) -- (58,042)
Repayment of capital lease obligations............. -- -- (305,347) -- (343,875)
Decrease (increase) in restricted cash............. -- (1,884,704) 397,929 -- 67,579
Advances from affiliates........................... 4,046,000 -- -- -- --
Proceeds from issuance of common stock............. 12,150 -- 7,125 2,165 3,237
Proceeds from issuance of Series B preferred
stock............................................ -- 3,001,925 2,026,055 2,026,055 --
Proceeds from issuance of Series C preferred
stock............................................ -- 4,999,995 8,808,626 8,306,166 --
Proceeds from issuance of Series D preferred
stock............................................ -- -- 22,970,441 -- --
Offering costs for issuance of Series D preferred
stock............................................ -- -- (1,580,801) -- --
Increase in deferred initial public offering
costs............................................ -- -- -- -- (125,137)
----------- ----------- ------------ ----------- -----------
Net cash provided by financing activities.... 3,907,167 7,592,959 32,591,451 10,834,386 (456,238)
----------- ----------- ------------ ----------- -----------
Net increase in cash and cash equivalents............ 387,198 1,765,824 4,404,180 7,423,106 (3,125,924)
Cash and cash equivalents, beginning of period....... 5,590 392,788 2,158,612 4,043,316 6,562,792
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents, end of period............. $ 392,788 $ 2,158,612 $ 6,562,792 $11,466,422 $ 3,436,868
=========== =========== ============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest............................. $ 39,901 $ 14,186 $ 229,893 $ 23,309 $ 258,617
=========== =========== ============ =========== ===========
Equipment acquired with capital leases............. $ -- $ -- $ 5,541,851 $ -- $ 1,533,000
=========== =========== ============ =========== ===========
Equipment acquired by use of accounts payable...... $ -- $ -- $ -- $ -- $ 551,200
=========== =========== ============ =========== ===========
Issuance of Series A preferred stock in connection
with recapitalization............................ $ -- $ 4,872,255 $ -- $ -- $ --
=========== =========== ============ =========== ===========
Conversion of advances into common stock........... $ 4,046,000 $ -- $ -- $ -- $ --
=========== =========== ============ =========== ===========
Value of warrant issued to purchase common stock to
Series D preferred stock placement agent......... $ -- $ -- $ 313,251 $ -- $ --
=========== =========== ============ =========== ===========
Accrued channel acquisition costs.................. $ -- $ -- $ 1,000,000 $ -- $ --
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE> 92
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS
UNAUDITED)
(1) ORGANIZATION AND NATURE OF BUSINESS
USA.NET, Inc., a Delaware corporation ("USA.NET-Delaware" or, with its
predecessor entity, the "Company") is a leading provider of email and advanced
messaging solutions on the Internet for consumers, Web portals and businesses.
The Company's consumer email service, NET@DDRESS, is offered free of charge and
provides users with a permanent, portable and private email address accessible
from any computer connected to the Internet. During 1998, the Company introduced
its messaging services for Web portals and its specialized and comprehensive
outsourced solutions for businesses.
USA.NET, Inc., a Colorado corporation ("USA.NET-Colorado") was formed as a
S corporation in 1991, as Community News Service Inc., an information services
company providing Internet access and other Internet-related services to
consumer and commercial customers throughout the United States. In 1995, the
Company began the development of its email solutions. Effective March 1, 1997,
the Company sold the Internet service provider ("ISP") business segment (Notes 3
and 9).
On March 12, 1997, a reincorporation of USA.NET-Colorado as a Delaware
corporation was effected by a merger (the "Reincorporation Merger") of
USA.NET-Colorado with and into USA.NET-Delaware, and each share of
USA.NET-Colorado common stock was exchanged for one-half share of USA.NET-
Delaware common stock and one share of USA.NET-Delaware Series A convertible
preferred stock ("Series A"). USA.NET-Delaware was the surviving corporation.
Also as a result of the Reincorporation Merger, the Company increased the total
number of authorized common and preferred shares and established a par value of
$.001 per share for both common and preferred stock.
The Company is subject to various risks and uncertainties frequently
encountered by companies in the early stages of development, particularly
companies in the new and rapidly evolving market for Internet-based products and
services. Such risks and uncertainties include, but are not limited to, its
limited operating history, an evolving and unpredictable business model and the
management of rapid growth. To address these risks, the Company must, among
other things, maintain and increase its customer base, implement and
successfully execute its business and marketing strategy, continue to develop
and upgrade its technology, provide superior customer service and attract,
retain and motivate qualified personnel. There can be no guarantee that the
Company will be successful in addressing such risks. To date, substantially all
of the Company's revenue has been derived from the sale of advertising on its
Web sites. The Internet as an advertising medium has not been available for a
sufficient period of time to gauge its effectiveness as compared to traditional
advertising outlets.
The Company has not yet achieved profitability and expects to incur net
losses at least through the end of 2001. The Company incurred net losses from
continuing operations of $2,075,072 in 1996, $6,036,092 in 1997 and $14,894,645
in 1998. The Company incurred net losses from continuing operations (unaudited)
of $2,101,968 and $5,980,866 for the three months ended March 31, 1998 and 1999,
respectively. As of December 31, 1998 and March 31, 1999, the Company's
accumulated deficit was $24,600,106 and $30,580,972 (unaudited), respectively.
The Company has not generated sufficient revenue to cover the substantial
amounts spent to create, launch and enhance its services. If the Company's
revenue does not increase substantially, the Company may never become
profitable. Even if the Company does achieve profitability in the future, it may
not sustain or increase its profitability. The Company has historically funded
its operations by selling stock and obtaining loans from banks. If the Company
is unable to complete the initial public offering discussed in Note 10, the
Company will require significant external financing within the next year. In
this event, management believes that the Company has capital available to it
from third parties, and if such capital is not forthcoming, a stockholder has
committed to fund the Company's operations through at least December 31, 1999,
if necessary.
F-7
<PAGE> 93
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The interim financial statements for the three months ended March 31, 1998
and 1999, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire year.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions may affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers investments in highly liquid instruments purchased
with an original maturity of 90 days or less to be cash equivalents.
All of the Company's short-term investments, consisting principally of
commercial paper and medium term notes, are classified as available for sale.
Unrealized holding gains and losses, if material, are included as a separate
component of other comprehensive income. At December 31, 1997 and 1998,
unrealized holding gains and losses are not material. Realized gains and losses
are recorded in the statement of operations upon selling the security.
ACCOUNTS RECEIVABLE
The Company maintains an allowance for doubtful accounts based upon the
expected collectibility of accounts receivable. At December 31, 1997 and 1998,
the allowance for doubtful accounts was approximately $29,000 and $151,000,
respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. The Company has no significant
off-balance sheet concentrations of credit risk, such as foreign exchange
contracts, option contracts or other foreign currency hedging arrangements. The
Company maintains its cash balances in the form of bank demand deposits and
money market accounts with financial institutions that management believes are
creditworthy. The Company maintains its short-term investments in certificates
of deposit, and high quality commercial paper and corporate debt securities.
Accounts receivable are typically unsecured and are derived from transactions
with and from advertisers primarily located in the United States. The Company
performs ongoing credit evaluations of its customers and maintains reserves for
potential credit losses.
As discussed in Note 7, the Company has three and one customers that
accounted for more than 10% of 1997 and 1998 revenue, respectively, and four and
two customers that accounted for more than 10% of
F-8
<PAGE> 94
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
accounts receivable at December 31, 1997 and 1998, respectively. The loss of
significant advertisers and/or distribution channels to the Company's users
could result in a significant reduction of revenues.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciation is provided
using the straight-line method, generally over estimated useful lives of five
years. Maintenance and repairs are expensed as incurred and major additions,
replacements and improvements are capitalized.
Leasehold improvements are amortized using the straight-line method over
the shorter of the useful life of five years or the life of the lease.
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and licensed
software............................. $2,613,752 $13,763,462 $16,422,669
Office equipment....................... 188,342 1,007,497 1,186,807
Leasehold improvements................. 105,550 430,330 644,738
---------- ----------- -----------
2,907,644 15,201,289 18,254,214
Less -- accumulated depreciation and
amortization......................... (363,905) (1,751,773) (2,587,543)
---------- ----------- -----------
$2,543,739 $13,449,516 $15,666,671
========== =========== ===========
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company evaluates the recoverability of its long-lived
assets based on estimated undiscounted future cash flows and provides for
impairment if such undiscounted cash flows are insufficient to recover the
carrying amount of the long-lived asset.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash equivalents, short-term
investments, short-term trade receivables and payables, and a note payable. The
carrying values of the cash equivalents, short-term investments and short-term
trade receivables and payables approximate their fair values. Based on borrowing
rates currently used by the Company for financing, the carrying value of the
note payable approximates its estimated fair value.
REVENUE RECOGNITION
The Company currently generates substantially all of its revenue from the
sale of advertising via its Web-based email services. Certain of the Company's
advertising revenue is recognized under co-marketing agreements, whereby the
Company and/or its co-marketing partners sell advertising on certain of the
Company's services. A portion of the advertising revenue that is generated from
such arrangements is shared with such co-marketing partners.
Advertising revenue consists of sponsorships, banner advertising, the
placement of buttons, and the use of a logout page, all of which provide users
with direct links to the advertiser's Web site, and from advertising for direct
delivery content providers. Advertising revenue is derived from both short-term
and
F-9
<PAGE> 95
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
long-term advertising contracts in which the Company delivers impressions (a
single display of an advertisement to a subscriber) for a fee or is compensated
for generating leads or transactions. Revenue generated by these contracts are
generally recognized ratably as earned, which typically coincides with when the
services are performed, provided that the Company does not have any significant
remaining obligations and collection of the resulting receivable is probable.
Company obligations typically include guarantees of a minimum number of
impressions. To the extent minimum guaranteed impressions are not met, the
Company defers recognition of the corresponding revenue until the remaining
guaranteed impression levels are achieved.
As discussed in Note 5, certain agreements require that a portion of the
revenue recorded under these agreements be shared.
STOCK SPLIT
Upon the consummation of the initial public offering discussed in Note 10,
the Company will effect a 4.8:1 split of its common stock, and increase its
authorized common stock to 150,000,000 shares and preferred stock to 10,000,000
shares. In connection with the common stock split, the Company will change its
conversion ratios on the preferred stock to reflect the split. All references in
the accompanying financial statements to the number of common shares have been
retroactively restated to reflect the common stock split, the increase in the
authorized common and preferred stock and the preferred stock conversion ratios.
INCOME TAXES
Prior to the Reincorporation Merger, the Company elected to be taxed as an
S corporation under Subchapter S of the Internal Revenue Code, and accordingly,
income or loss attributed to the Company's operations was allocated to its
stockholders to be reported on their personal tax returns. Tax net operating
losses incurred during this period are not available to offset the Company's
future taxable income, if any.
Subsequent to the Reincorporation Merger, the Company elected to be taxed
as a C corporation. The current provision for income taxes represents actual or
estimated amounts payable on tax return filings each year. Deferred tax assets
and liabilities are recorded for the estimated future tax effects of temporary
differences between the tax basis of assets and liabilities and amounts reported
in the accompanying balance sheets, and for operating loss and tax credit
carryforwards. The change in deferred tax assets and liabilities for the period
measures the deferred tax provision or benefit for the period. Effects of
changes in enacted tax laws on deferred tax assets and liabilities are reflected
as adjustments to the tax provision or benefit in the period of enactment. The
Company's deferred tax assets have been completely reduced by a valuation
allowance because management does not believe realization of the deferred tax
assets is sufficiently assured at each balance sheet date (Note 8).
PRODUCT DEVELOPMENT
Costs incurred in the development of new products and enhancements to
existing products and services are charged to expense as incurred.
CHANNEL ACQUISITION COSTS
Channel acquisition costs paid to acquire access to customers are
capitalized and amortized over the terms of the related agreement. Amortization
begins at the point the Company commences the services that are the subject of
such agreements.
F-10
<PAGE> 96
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in sales and
marketing expense in the accompanying statements of operations. The Company does
not incur any material direct-response advertising costs. Advertising expense
totaled $251,778, $1,681,738 and $3,988,501 in 1996, 1997 and 1998,
respectively, related to continuing operations.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock option plans and other
stock-based compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25"), and related interpretations. The Company
adopted the disclosure-only provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), which allows entities to continue to
apply the provisions of APB Opinion No. 25 for transactions with employees and
provide pro forma disclosures for employee stock grants made in 1997 and future
years as if the fair-value-based method of accounting in SFAS No. 123 had been
applied to these transactions. The Company accounts for equity instruments
issued to non-employees in accordance with the provisions of SFAS No. 123.
NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share" ("SFAS No. 128"), and Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No.
128 and SAB 98, basic net loss per share is computed by dividing net loss for
the period by the weighted average number of common shares outstanding for the
period. Diluted net loss per share is computed by dividing the net loss for the
period by the weighted average number of common and potential common shares
outstanding during the period if the effect of the potential common shares is
dilutive. The Company has excluded the weighted average effect (using the
treasury stock method) of common stock issuable upon conversion of all
convertible preferred stock, warrants and stock options from the computation of
diluted earnings per share as the effect of all such securities is anti-dilutive
for all periods presented. The shares excluded are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1996............................................ --
1997............................................ 6,881,822
1998............................................ 22,548,883
FOR THE THREE MONTHS ENDED MARCH 31, 1999....... 29,925,034
</TABLE>
At December 31, 1998, the Company had issued rights to 30,788,454 shares of
common stock under such agreements. At March 31, 1999, the Company had issued
rights to 30,954,774 (unaudited) shares of common stock under such agreements.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1998 is
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of the Company's
Series A, B, C and D convertible preferred stock into shares of the Company's
common stock as if such conversion occurred on January 1, 1998, or at the date
of original issuance, if later. The resulting pro forma adjustment includes an
increase in the weighted average shares used to compute basic and diluted net
loss per share of approximately 20,240,000 shares for the year ended December
31, 1998 and 26,580,000 (unaudited) and 11,920,000 (unaudited) for the three
months ended March 31, 1999 and 1998, respectively. The pro forma effects of
these transactions are unaudited.
F-11
<PAGE> 97
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of the Company's planned initial public
offering, all outstanding shares of Series Preferred (as defined below) will
automatically convert into 26,576,963 shares of common stock. The pro forma
effects of these transactions are unaudited and have been reflected in the
accompanying pro forma balance sheet at December 31, 1998.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting comprehensive income and its components in financial
statements. Comprehensive income, as defined, includes all changes in equity
(net assets) during a period from non-owner sources. From its inception through
December 31, 1998, the Company has not had any material transactions that are
required to be reported in comprehensive income as compared to its net loss.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. In accordance with the provisions of SFAS
No. 131, the Company has determined that it has one reportable operating segment
at December 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance on accounting for the cost of such software. SOP No. 98-1 is effective
for financial statements for fiscal years beginning after December 15, 1998. The
Company does not expect that the adoption of SOP No. 98-1 will have a material
impact on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The Company is required to
adopt SFAS No. 133 in the year ended December 31, 2000. SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. To
date, the Company has not entered into any derivative financial instruments or
hedging activities.
RECLASSIFICATIONS
Certain prior years' balances were reclassified to conform to the current
year presentation.
(3) RELATED PARTY TRANSACTIONS
Prior to 1997, the Company substantially relied upon an entity affiliated
through common ownership for management, facilities and other administrative and
operating activities. This entity charged the Company for its calculated share
of the related costs incurred and paid by the affiliated entity. Such costs
totaled $816,948 in 1996, of which $528,282 relates to continuing operations.
Because such costs were shared, the Company's management believes that the costs
incurred on a stand-alone basis would have been greater than amounts allocated
to the Company by the affiliated entity. During 1996, the Company ceased its
dependence on the affiliated entity. During 1997, the affiliated entity was sold
to a third party.
F-12
<PAGE> 98
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
This entity also provided long distance telephone services to the Company.
For the periods prior to its sale, the related telephone services totaled
$373,531 and $113,159 for the years ended December 31, 1996 and 1997,
respectively, of which $3,142 and $54,717, respectively, are reflected in
continuing operations. The Company had no payables to this affiliated entity for
telephone services at December 31, 1997.
During 1996, this entity periodically made advances to fund the Company's
operations. This entity distributed such receivables to certain mutual
stockholders, who converted them into shares of the Company's common stock.
During March 1997, the Company entered into a lease agreement for office
space with a related party. The total rent expense related to this lease for the
years ended December 31, 1997 and 1998 was $16,000 and $4,000, respectively. The
Company also recognized $11,912 and $34,592 of expense for Internet access
provided by this related party for the years ended December 31, 1997 and 1998,
respectively. Additionally, the Company subleased office space to the related
party. At December 31, 1997 and 1998, the Company had a payable to the related
party of $44,900 and $22,789, respectively, for rent and other miscellaneous
expenses. At December 31, 1997 and 1998, the related party owed the Company
$61,290 and $16,420, respectively, for rent and other miscellaneous reimbursable
expenses.
In March 1997, the Company sold its ISP business segment to an entity which
is 40% owned by certain directors, officers and principal stockholders of the
Company for $925,000 plus the assumption of a note payable (Note 9).
Also in March 1997, the Company purchased office furniture and equipment
for $50,000 from a related party. The purchase price was paid in full in 1998.
In consideration for a personal guarantee provided by a stockholder on a
credit facility held with a bank (Note 4), the Company granted stock options to
purchase 312,000 shares of common stock to the stockholder.
During August 1998, the Company issued a five-year warrant to a financial
institution for investment banking and underwriting services rendered in the
Series D preferred stock offering. The warrant entitles the related party to
purchase 220,771 shares of the Company's common stock at a price per share of
approximately $3.08. At December 31, 1998, the warrant has not been exercised.
The Company also paid this financial institution $1,416,786 in fees for services
performed related to the Series D preferred stock offering.
At December 31, 1998, the Company has $2,029,355 of cash equivalents on
deposit at this financial institution. For the year ended December 31, 1998,
$19,023 of gains realized on maturity of commercial paper and $23,667 of
interest and dividend income were earned and recognized in the statement of
operations related to the cash equivalents held with this related party.
In August 1998, a party with which the Company has a revenue sharing
agreement purchased shares of Series D preferred stock. For the period from the
date such shares were purchased through December 31, 1998, $287,118 of royalty
fees were due to this investor pursuant to the revenue sharing agreement. At
December 31, 1998, the Company owed the related party $245,237 for unpaid
royalty fees.
(4) NOTE PAYABLE
In August 1997, the Company obtained a credit facility from a bank whereby
the Company may draw on the available principal up to an aggregate amount of
$1,500,000, which was amended to $2,000,000 in January 1998. The interest rate
on notes payable under this credit facility is based on the bank's prime rate
(8.5% and 7.75% at December 31, 1997 and 1998, respectively). Interest expense
related to the line of credit was $9,050 and $151,469 for the years ended
December 31, 1997 and 1998, respectively. The borrowings are collateralized by
accounts receivable and property and equipment. This facility is also
F-13
<PAGE> 99
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
personally guaranteed by a stockholder for its full amount. As consideration for
the personal guarantee, the stockholder was granted options to purchase 312,000
shares of common stock that will become fully exercisable on the earlier of: (1)
the Company reaching a $100 million valuation, (2) the Company undergoing a
public stock offering, or (3) the passing of four years. The options fully
vested in 1998. The value of the options was immaterial as determined using the
Black-Scholes option pricing model.
The note payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable -- interest at the bank's prime
rate, monthly, interest only payments
beginning February 1999, with the principal
due upon demand or January 2000, whichever is
earlier....................................... $1,500,000 $1,767,423 $ 1,709,381
Less -- current portion......................... (264,842) (1,767,423) (1,709,381)
---------- ---------- -----------
Long-term portion............................... $1,235,158 $ -- $ --
========== ========== ===========
</TABLE>
In December 1995, the Company obtained bank financing of $500,000 for the
purchase of equipment. Interest expense related to this facility was $39,901 and
$4,938 for the years ended December 31, 1996 and 1997, respectively. This note
payable was assumed by the purchaser of the ISP business segment sold in March
1997 (Note 9) and the Company has no further obligations thereunder.
(5) COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE OBLIGATIONS
During 1998, the Company entered into several capital leases for computer
equipment. The leases are for terms ranging from 36 to 45 months, expiring at
various times through 2002. Interest on the Company's capital lease obligations
is at rates ranging from 14.7% to 15.1% at December 31, 1998.
Equipment purchased under capital leases is included in the cost of
property and equipment. The following is a summary of property and equipment
purchased under capital leases:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Computer equipment.......................................... $5,541,851
Less -- accumulated depreciation............................ (590,550)
----------
Net book value.............................................. $4,951,301
==========
</TABLE>
F-14
<PAGE> 100
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, future minimum lease payments under capitalized lease
obligations are as follows:
<TABLE>
<S> <C>
Year ended December 31,
1999...................................................... $ 1,863,512
2000...................................................... 1,815,356
2001...................................................... 1,815,356
2002...................................................... 1,239,339
-----------
6,733,563
Less -- amounts representing interest....................... (1,497,059)
-----------
Total obligation............................................ 5,236,504
Less -- current portion..................................... (1,239,357)
-----------
Long-term capital lease obligation.......................... $ 3,997,147
===========
</TABLE>
Interest expense under such leases was $78,424 for the year ended December
31, 1998.
OPERATING LEASE OBLIGATIONS
The Company leases certain facilities under operating leases that expire at
various times through 2003. Future minimum lease payments for such operating
leases are as follows at December 31, 1998:
<TABLE>
<S> <C>
Year ended December 31,
1999...................................................... $1,141,380
2000...................................................... 1,159,480
2001...................................................... 1,159,480
2002...................................................... 820,016
2003...................................................... 227,256
----------
$4,507,612
==========
</TABLE>
Lease expense related to continuing operations for the years ended December
31, 1996, 1997 and 1998, was $50,346, $93,758 and $570,692, respectively.
On July 28, 1998, the Company entered into a new lease for office space,
which required the Company to provide a letter of credit for $160,000.
Subsequent to yearend, the Company entered into a new lease agreement for
additional office space. The lease term is for 38 months and requires monthly
rental payments of approximately $20,500 plus variable operating expenses. This
commitment is included as a future minimum lease payment in the table above.
LITIGATION
In the normal course of business, the Company is subject to, and may become
a party to, litigation arising out of its operations. In management's opinion,
none of the matters currently in actual or threatened litigation will have a
material impact on the Company's financial position or results of operations.
F-15
<PAGE> 101
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE SHARING AGREEMENTS
On April 17, 1998, the Company and Netscape Communications Corporation
("Netscape") signed a strategic business agreement and trademark license
agreement (collectively, the "Agreement") to offer a free email service through
Netscape's portal site, Netscape Netcenter. The service is called Netscape
WebMail Powered by USA.NET. The Agreement is a revenue sharing arrangement
between the two companies that includes advertising and premium email service
revenue. Under the terms of the trademark license agreement, the Company made a
one-time non-refundable payment of $5 million. In addition, each party has
obligations with regard to performance and marketing. The Company's rights under
the Agreement may be terminated if the Company does not meet such performance
criteria or under other specified conditions.
On October 31, 1998, the Company and Netscape signed an addendum to the
Agreement to expand the territory in which Netscape WebMail Powered by USA.NET
will be offered. Such service may now be offered in specified foreign countries
and is subject to a revenue sharing arrangement between the two companies. Under
the terms of the addendum, the Company made an additional one-time
non-refundable payment of $1.5 million. The Company is also required to pay an
additional $625,000 and $375,000 to Netscape in 1999 and 2000, respectively, for
additional fees. The future payment of $1,000,000 has been recorded as channel
acquisition costs and as a liability at December 31, 1998 and March 31, 1999.
The Agreements were entered into by the Company primarily to gain access to
Netscape's customers and for general strategic marketing purposes. The Company
has capitalized such payments. Amortization begins when the service is launched.
The Company recorded $1,250,000 of amortization expense in 1998 and $625,000
during the three months ended March 31, 1999 (unaudited) related to Netscape's
domestic Netcenter. The international Netcenters are not yet launched.
On April 8, 1997, the Company entered into an agreement with a certain
holder of its preferred stock, in which the Company provides co-branded,
advertising supported email services. Under the terms of the agreement, the
Company must remit to the investor a percentage of gross revenues, as defined,
generated from the use of this service. Through December 31, 1998, no material
payments were due under the agreement.
(6) STOCKHOLDERS' EQUITY
The Board of Directors of the Company is authorized under the Company's
Restated Certificate of Incorporation which will be effective upon the
completion of an initial public offering (the "Restated Certificate") to issue
160,000,000 shares of capital stock; 150,000,000 shares of which are authorized
for common stock and 10,000,000 of which are authorized for preferred stock.
Prior to the completion of an initial public offering, the Board of Directors of
the Company is authorized to issue 6,222,726 shares of preferred stock
(1,100,000 shares are designated for Series A, 1,055,158 shares are designated
for Series B convertible preferred stock ("Series B"), 2,033,670 shares are
designated for Series C convertible preferred stock ("Series C"), and 2,033,898
shares are designated for Series D convertible preferred stock ("Series D")
(collectively, "Series Preferred")).
COMMON AND PREFERRED STOCK
In connection with the Reincorporation Merger, each share of
USA.NET-Colorado common stock was exchanged for one-half share of
USA.NET-Delaware common stock and one share of Series A, and the Company
established a par value for both common and preferred stock of $.001 per share.
In April 1997, the Company entered into a Series B Preferred Stock Purchase
Agreement, Investor Rights Agreement and Co-Marketing Program Agreement
(collectively the "Series B Agreement") under which it sold 527,579 shares of
Series B at $5.69 per share for proceeds of $3,001,925. The Series B
F-16
<PAGE> 102
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Agreement also granted the purchaser an option to purchase a minimum of 351,494
shares and a maximum of 527,579 shares of additional Series B at a price equal
to the lower of $5.69 per share or the price per share of any preferred stock
sold by the Company prior to April 8, 1998. The option was exercised on March
23, 1998 with regard to 356,073 shares at $5.69 per share for proceeds of
$2,026,055. The option for the remaining shares expired.
The Series B Agreement requires that the Company utilize at least
$1,675,352 of the proceeds from the sale of Series B for marketing purposes as
specified in the Series B Agreement. At December 31, 1997 and 1998, the balance
of the restricted cash pursuant to this agreement was $734,704 and $839,504,
respectively. Any cash not used for this specified purpose becomes unrestricted
between April 1999 and March 2000, or the termination of the Series B Agreement,
whichever is earlier.
In connection with the Series B Agreement, an officer of the Company has
entered into a stock restriction agreement. Shares of common stock and Series A
held by the officer at the time of issuance of the Series B are subject to
repurchase by the Company, at the Company's option, in the event that such
officer is terminated for cause or voluntarily ceases to be an employee,
director or consultant prior to April 8, 2000. The repurchase price is
approximately $0.12 per share for common stock and $4.76 per share for Series A.
In October 1997, the Company entered into a Series C Preferred Stock
Purchase Agreement and an Investor Rights Agreement with various purchasers
pursuant to which it sold 736,376 shares of Series C for $6.79 per share for
proceeds of $4,999,995. In addition, the Company entered into a Co-Marketing
Program Agreement with one of those investors. These three agreements are
collectively referred to as the Series C Agreement. The Series C Agreement also
granted the purchasers an option to purchase a minimum of 98,085 to 490,426
shares (dependent upon the number of purchasers who exercise the option) and up
to a maximum of 736,376 shares of Series C at a price of $6.79 per share. The
option was exercised on March 23, 1998 with regard to 736,376 shares at $6.79
per share for total proceeds of $4,999,993. On March 23, 1998 and May 13, 1998,
the Company sold an additional 486,918 and 74,000 shares of Series C,
respectively, at $6.79 per share for proceeds of $3,306,173 and $502,460,
respectively, to various Series C stockholders and other investors.
The Series C Agreement requires that the Company utilize $1,150,000 of the
proceeds from the sale of Series C in October 1997 and $1,000,000 from the sale
on March 23, 1998, for marketing and technical development efforts as specified
in the Series C Agreement. The unused balance of the restricted cash pursuant to
this agreement was released from restriction on May 1, 1998 with regard to the
October 1997 sale of Series C and was originally to be released in April 1999
with regard to the March 23, 1998 sale. The unused balance of the restricted
cash, with regard to the March 23, 1998 sale, will be released from restriction
in October 1999. At December 31, 1997 and 1998, the balance of the restricted
cash under this agreement was $1,150,000 and $647,271, respectively.
In August 1998, the Company entered into a Series D Preferred Stock
Purchase Agreement and Investor Rights Agreement (collectively the "Series D
Agreement") with various purchasers pursuant to which it sold 1,557,318 shares
of Series D for $14.75 per share for proceeds of $22,970,441 (prior to offering
costs of $1,894,052, including $313,251 for the issuance of the warrant
discussed below).
The holders of Series Preferred have various rights and preferences as
follows:
Conversion
The holders of the Series Preferred may, at the option of the holder, be
converted at any time into shares of common stock at a current conversion rate
of 4.8 shares of common stock for each share of Series Preferred. The conversion
ratios will be adjusted in certain circumstances, primarily to prevent dilution.
Additionally, each share of Series Preferred will automatically convert into
shares of common
F-17
<PAGE> 103
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
stock based on the then current conversion rate (i) at any time upon the
affirmative election of the holders of at least 70% of the outstanding shares of
Series Preferred or (ii) upon the closing of a firmly underwritten public
offering of the common stock of not less than $20 million (before deduction of
underwriters' discounts, commissions and fees) and which results in a per share
price of at least 150% of the then applicable price at which the Series D
converts into common stock.
Voting
The Series Preferred are voted equally with the shares of common stock of
the Company, on an as-if converted to common stock basis.
Dividends
Holders of the Series B, C and D are entitled to receive on a pari passu
basis non-cumulative dividends in preference to any dividend payable on the
Series A and the common stock at the rate of 6% of the original purchase for
each Series price per annum, when, as and if declared by the Board of Directors.
After such payment, the holders of Series A are entitled to receive
non-cumulative dividends in preference to any dividends payable on common stock,
at the rate of 6% of the stated value ($4.76) per annum, when, as and if
declared by the Board of Directors. The holders of Series B, C and D are also
entitled to participate pro rata in any dividends paid on the Series A or common
stock, on an as-if converted basis. The holders of Series A are also entitled to
participate in any dividends paid on the common stock on an as-if converted
basis. No dividends on Series Preferred or common stock have been declared by
the Board of Directors.
The Series B and C Agreements also require the prior approval of the
Director representative of the Series B and C to the Company's Board of
Directors prior to the Company issuing any debt security in excess of 50% of the
Company's equity at the closing of such financing, acquiring or obtaining a 10%
or greater interest in any other corporation, partnership or entity, declaring
or paying dividends on shares of common stock other than in compliance with the
Restated Certificate, or selling additional shares of Series B or C,
respectively. The rights terminate with respect to the Series B when the
original holders of Series B no longer hold at least 250,000 shares of Series B
and with respect to the Series C when there are no longer 250,000 shares of
Series C outstanding.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, including a merger, acquisition, sale of
voting control or sale of substantially all of the assets of the Company in
which the stockholders of the Company do not own a majority of the outstanding
shares of the surviving corporation, the holders of the Series D shall be
entitled to receive in preference to the holders of the Series A, B and C and
the common stock, $14.75 per share plus any declared but unpaid dividends. After
distribution of such amounts to the holders of Series D, the holders of Series B
and Series C shall be entitled to receive on a pari passu basis $5.69 and $6.79
per share, respectively, plus any declared but unpaid dividends. After
distribution of such amounts, the holders of Series A will be entitled to
receive $4.76 per share plus any declared but unpaid dividends. Following such
distributions, the remaining assets shall be distributed ratably to the holders
of the common stock provided, however, that the Series Preferred will be
entitled to participate in distributions to the common stockholders such that,
after giving effect to the applicable liquidation preferences of each series,
the holders of each series of Series Preferred shall receive aggregate
distributions equal to the greater of (i) the liquidation preference applicable
to such series and (ii) the amount such holders would have received if their
shares of Series Preferred had been converted into common stock immediately
prior to such liquidation, dissolution
F-18
<PAGE> 104
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
or winding up of the Company. If the Company's assets are insufficient to repay
any such amounts, as described above, the remaining assets will be distributed
ratably, in order of liquidation preference.
WARRANT
In connection with the August 1998 issuance of the Series D, the Company
issued a warrant to purchase 220,771 shares of the Company's common stock at an
exercise price of approximately $3.08 per share, exercisable for a five-year
period commencing August 12, 1998. The warrant was valued at a total of $313,251
utilizing the Black-Scholes option pricing model, assuming a volatility factor
of 92%, which is based upon an average of comparable public companies.
STOCK OPTION PLAN
During 1997, the Company adopted the 1997 Stock Option Plan (the "Plan")
under which the Company is authorized to grant incentive and non-qualified stock
options to acquire up to 5,973,662 shares of the Company's common stock to
employees and directors of the Company. Under the Plan, the exercise price per
share of a non-qualified stock option must be equal to at least 50% of the fair
market value of the common stock on the date of grant, and the exercise price
per share of an incentive stock option must equal the fair market value of the
common stock on the date of grant. Options granted vest over various terms with
a maximum vesting period of five years and expire after a maximum of 10 years.
The Company accounts for the Plan under APB Opinion No. 25, under which no
compensation cost has been recognized in the accompanying financial statements.
The following table summarizes the Plan at December 31, 1997 and 1998, and
activity during the years then ended:
<TABLE>
<CAPTION>
1997 1998
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year.............. -- $ -- 2,776,800 $ 0.12
Granted..................................... 2,930,400 0.12 1,717,440 1.65
Forfeited or canceled....................... (153,600) (0.12) (443,520) (0.31)
Exercised................................... -- -- (60,000) (0.12)
--------- ----- --------- ------
Outstanding, end of year.................... 2,776,800 $0.12 3,990,720 $ 0.76
========= ===== ========= ======
Exercisable, end of year.................... 613,440 $0.12 1,326,960 $ 0.24
========= ===== ========= ======
Weighted average fair value of options
granted during the year................... $0.04 $ 0.35
===== ======
</TABLE>
F-19
<PAGE> 105
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The status of stock options outstanding and exercisable under the Plan at
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
----------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
RANGE OF NUMBER OF CONTRACTUAL AVERAGE NUMBER OF EXERCISE
EXERCISE PRICES SHARES LIFE (YEARS) EXERCISE PRICE SHARES PRICE
- --------------- --------- ------------ -------------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.12-$0.14.................. 2,361,120 8.25 $0.12 1,212,960 $0.12
$0.83-$1.46.................. 744,000 9.33 1.24 114,000 1.46
$1.88-$2.08.................. 885,600 9.75 2.05 -- --
--------- ---- ----- --------- -----
3,990,720 8.78 $0.76 1,326,960 $0.24
========= ==== ===== ========= =====
</TABLE>
PRO FORMA FAIR VALUE DISCLOSURES
The fair value of each option grant is calculated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Risk-free interest rate................................. 6.1% 5.0%
Expected dividend yield................................. 0% 0%
Expected lives outstanding.............................. 4.5 years 4.8 years
Expected volatility..................................... 0.001% 0.001%
</TABLE>
Cumulative compensation costs recognized in pro forma net income or loss
with respect to options that are forfeited prior to vesting are adjusted as a
reduction of pro forma compensation expense in the period of forfeiture.
Had compensation cost for the Plan been determined consistent with SFAS No.
123, the Company's net loss would have been increased to the following pro forma
amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998
----------- ------------
<S> <C> <C>
Net loss:
As reported..................................... $(5,336,115) $(14,894,645)
=========== ============
Pro forma....................................... $(5,355,267) $(14,967,224)
=========== ============
Basic and diluted net loss per share:
As reported..................................... $ (2.09) $ (5.77)
=========== ============
Pro forma....................................... $ (2.10) $ (5.80)
=========== ============
</TABLE>
UNEARNED STOCK-BASED COMPENSATION
In connection with certain stock option grants and common stock issuances
during the years ended December 31, 1998 and 1997, the Company recognized
unearned compensation totaling $6,054,431 which is being amortized over the
vesting periods of the related options. Amortization expense recognized during
the years ended December 31, 1998 and 1997 was $916,858 and $362,180,
respectively.
F-20
<PAGE> 106
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) MAJOR CUSTOMERS AND SERVICES
Advertising and other revenue was recorded by the Company in the following
significant service categories:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
--------- -----------
<S> <C> <C>
Consumer email service................................ $782,517 $3,170,445
Messaging solutions for Web portals................... -- 1,427,820
Business email and messaging solutions................ -- 104,448
-------- ----------
$782,517 $4,702,713
======== ==========
</TABLE>
A significant portion of the Company's revenue is derived from a limited
number of customers. The Company's sales to customers in excess of 10% of
revenues are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998
--------------- -----------------
$ % $ %
-------- ---- ---------- ----
<S> <C> <C> <C> <C>
Customer A............................... $142,150 18.1% $1,271,625 27.0%
Customer B............................... 116,917 14.9% -- --
Customer C............................... 89,289 11.4% -- --
</TABLE>
The Company's accounts receivable balances from customers in excess of 10%
of the accounts receivable balance are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1998
-------------- ---------------
$ % $ %
------- ---- -------- ----
<S> <C> <C> <C> <C>
Customer A.................................. $92,150 35.3% $145,000 9.7%
Customer B.................................. 35,335 13.5% -- --
Customer D.................................. 31,500 12.0% -- --
Customer E.................................. 29,000 11.1% -- --
Customer F.................................. -- -- 198,153 13.2%
Customer G.................................. -- -- 174,330 11.6%
</TABLE>
(8) INCOME TAXES
The Company terminated its S corporation status effective February 28,
1997. Because the Company incurred losses prior to this date, there is no pro
forma income tax provision/benefit, as the Company's history of operating losses
result in no benefit being recorded for such losses. Tax net operating losses
incurred during this period are not available to offset the Company's future
taxable income, if any.
F-21
<PAGE> 107
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred income tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $1,624,000 $7,136,000
Other.............................................. 19,000 143,000
---------- ----------
1,643,000 7,279,000
Deferred tax liabilities:
Excess depreciation for tax........................ (72,000) (395,000)
---------- ----------
Net deferred income tax asset........................ 1,571,000 6,884,000
Valuation allowance.................................. (1,571,000) (6,884,000)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
At December 31, 1998, for income tax purposes, the Company has
approximately $18,779,000 of net operating loss carryforwards for the period
from March 1, 1997 through December 31, 1998. Such net operating losses begin
expiring in 2012. The net operating loss for tax purposes differs from that for
financial reporting purposes due to differences in reporting certain
transactions for income tax and financial reporting purposes.
The Tax Reform Act of 1986 contains provisions which may limit the net
operating loss carryforwards available to be used in any given year if certain
events occur, including significant changes in ownership interests.
No provision or benefit (actual or pro forma) has been recorded for any
period presented due to the Company's history of net losses.
The Company has determined that approximately $1,571,000 and $6,884,000 of
net deferred tax assets at December 31, 1997 and 1998, did not satisfy the
realization criteria set forth in SFAS No. 109, "Accounting for Income Taxes."
Management believes, that based on all available evidence, it is more likely
than not that the deferred tax assets will not be realized. Accordingly, a
valuation allowance was recorded against the entire net deferred tax asset.
(9) DISCONTINUED OPERATION
In March 1997, the Company sold its ISP business segment in order to focus
its resources on its Internet email business. This business segment was sold to
an entity in which certain significant stockholders of the Company hold a
substantial interest. The Company has no interest in, and does not exercise
influence over, the ISP.
The ISP business segment was sold for a promissory note of $925,000, which
was collected in full during 1997, and the assumption of a note payable of
$324,760. The gain on the sale of the Internet
F-22
<PAGE> 108
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
service provider business segment was $672,827. Summarized results of operations
and financial position data of this discontinued operation were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996 1997
----------- --------
<S> <C> <C>
Results of operations:
Revenues........................................... $ 1,759,538 $197,496
=========== ========
Income (loss) from operations...................... $(1,629,441) $ 32,088
=========== ========
Net income (loss) from discontinued operation...... $(1,602,778) $ 27,150
=========== ========
</TABLE>
Basic and diluted per share information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996 1997
----------- --------
<S> <C> <C>
Basic and diluted net income (loss) from
discontinued operation.......................... $ (1.11) $ 0.01
=========== ========
Basic and diluted gain on sale of discontinued
operation....................................... $ -- $ 0.26
=========== ========
</TABLE>
(10) SUBSEQUENT EVENTS
LEASE
On January 21, 1999, the Company entered into a new lease agreement for
additional office space. The lease term is for 38 months and requires monthly
rental payments of approximately $20,500 plus variable operating expenses (see
Note 5).
1997 STOCK OPTION PLAN
At March 19, 1999, the Company had granted stock options under the Plan to
purchase an aggregate of approximately 4,719,120 shares of common stock, of
which options to purchase approximately 83,520 shares had been exercised,
options to purchase approximately 789,120 shares had been forfeited or cancelled
and options to purchase approximately 3,846,480 shares at a weighted average
exercise price of approximately $0.74 per share remained outstanding. As
discussed below, the Company will make no future grants under the Plan.
1999 EQUITY INCENTIVE PLAN
The Company adopted the 1999 Equity Incentive Plan (the "1999 Plan"), which
replaces the Plan effective March 19, 1999. Effective upon the completion of
this offering, there will be an aggregate of 13,000,000 shares of common stock
authorized for issuance under the 1999 Plan.
The 1999 Plan provides for the grant of incentive stock options and
non-qualified stock options, restricted stock purchase awards, stock bonuses and
stock appreciation rights to employees, including officers and
employee-directors, directors and consultants of the Company.
Through March 31, 1999, options to purchase 319,200 shares of common stock
had been granted under the 1999 Plan and no stock bonuses or restricted stock
had been granted.
F-23
<PAGE> 109
USA.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1999 EMPLOYEE STOCK PURCHASE PLAN
On April 1, 1999 the Board of Directors approved the 1999 Employee Stock
Purchase Plan (the "Purchase Plan"). There is currently an aggregate of
1,250,000 shares of common stock authorized for issuance under the Purchase
Plan. The Purchase Plan will become effective on the effective date of the
initial public offering of the Company's common stock. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" within the meaning of
Section 423 of the Internal Revenue Code. The first offering under the Purchase
Plan will begin on the effective date of the initial public offering of the
Company's common stock, with the first purchase date being December 31, 1999.
Unless otherwise determined, common stock is purchased under the Purchase Plan
at a price per share equal to the lower of (i) 85% of the fair market value of a
share of common stock on the commencement date of the offering or (ii) 85% of
the fair market value of a share of common stock on the date of purchase.
Generally, all regular employees, including executive officers, may participate
in the Purchase Plan and may authorize payroll deductions for the purchase of
stock. The Purchase Plan will terminate at the Board of Directors direction or
when all of the shares reserved for issuance have been purchased.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In April 1999, the board adopted and the stockholders approved the 1999
Non-Employee Directors' Stock Option Plan (the "Directors' Plan") to provide for
the automatic grant of options to purchase shares of common stock to
non-employee directors of USA.NET. The Directors' Plan will become effective on
the effective date of the initial public offering of USA.NET's common stock. The
board administers the Directors' Plan, unless the board delegates administration
to a committee.
The aggregate number of shares of common stock that may be issued pursuant
to options granted under the Directors' Plan is 301,000 shares.
STOCK OPTION GRANTS
From January 1999 through April 1999, the Company granted stock options to
employees to purchase 2,929,680 shares of common stock at exercise prices
ranging between $2.50 and $6.25 per share. In connection with such option
grants, the Company recognized unearned compensation totaling approximately $26
million which is being amortized over the vesting period of the related options.
Additionally, in April 1999 the Company entered into an employment agreement
which will require it to record compensation of $3,000,000 through December 31,
2001 in addition to the $26 million discussed above.
INITIAL PUBLIC OFFERING
On April 5, 1999, the Company filed a registration statement with the SEC
on Form S-1.
F-24
<PAGE> 110
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount and commissions, payable by the registrant in connection
with the sale of the common stock being registered hereby. All amounts shown are
estimates, except the Securities and Exchange Commission registration fee, the
NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 46,200
NASD filing fee............................................. 17,118
Nasdaq National Market listing application fee.............. 95,000
Blue Sky fees and expenses.................................. 6,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 475,000
Accounting fees and expenses................................ 200,000
Transfer agent and registrar fees........................... 15,000
Miscellaneous expenses...................................... 15,682
----------
TOTAL............................................. $1,070,000
==========
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
We have issued and sold the following securities since April 1, 1996:
- From May 1, 1996 through December 30, 1996, our Colorado predecessor
corporation sold an aggregate of 657,350 shares of common stock to
certain existing stockholders at a purchase price of $4.76 per share.
650,000 of these shares were issued pursuant to the conversion of
$3,094,000 in indebtedness owed to three of our principal stockholders.
The issuance and sale to the shares was exempt from registration pursuant
to Section 4(2) of the Securities Act.
- On March 14, 1997, in connection with our reincorporation from Colorado
to Delaware, we issued an aggregate of 2,549,328 shares of common stock
and an aggregate of 1,062,231 shares of Series A Preferred Stock (which
Series A Preferred Stock will convert into 5,098,708 shares of common
stock on the closing of this offering) in exchange for cancellation of
the issued and outstanding shares of common stock of our Colorado
predecessor. The issuance of the shares was exempt from registration
pursuant to Section 3(a)(9) of the Securities Act.
- On April 8, 1997 and March 23, 1998, we issued and sold an aggregate of
883,652 shares of Series B Preferred Stock (which will convert into
4,241,529 shares of common stock on the closing of this offering) at a
purchase price of $5.69 per share to an accredited investor. The issuance
and sale of the shares was exempt from registration pursuant to Section
4(2) of the Securities Act.
- On October 17, 1997, March 23, 1998 and May 13, 1998, we issued and sold
an aggregate of 2,033,670 shares of Series C Preferred Stock (which will
convert into 9,761,616 shares of common stock on the closing of this
offering) at a purchase price of $6.79 per share to accredited investors.
The issuance and sale of the shares was exempt from registration pursuant
to Section 4(2) of the Securities Act.
- In August 1998, we issued and sold an aggregate of 1,557,318 shares of
Series D Preferred Stock (which will convert into 7,475,126 shares of
common stock on the closing of this offering) at a purchase price of
$14.75 per share to accredited investors. The issuance and sale of the
shares was exempt from registration pursuant to Section 4(2) of the
Securities Act.
- On August 12, 1998, we issued a warrant to purchase 220,771 shares of
common stock at an exercise price of $3.08 per share to BT Alex. Brown
Incorporated, as partial consideration for its
II-1
<PAGE> 111
services as placement agent for our Series D Preferred Stock financing. The
issuance of the warrant was exempt from registration pursuant to Section 4(2) of
the Securities Act.
- We have issued an aggregate of 219,240 shares of common stock pursuant to
the exercise of stock options having a weighted average exercise price of
$.31 per share. The issuance and sale of such shares was exempt from
registration pursuant to Rule 701 under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Restated Certificate of Incorporation of the Company.
3.2* Certificate of Amendment of Restated Certificate of
Incorporation of the Company.
3.3* Form of Restated Certificate of Incorporation of the Company
to become effective upon the closing of the Offering.
3.4* Bylaws of the Company.
3.5* Amended and Restated Bylaws of the Company to become
effective upon the closing of the Offering.
4.1 Reference is made to Exhibits 3.1 through 3.5.
4.2* Specimen stock certificate representing shares of Common
Stock of the Company.
5.1* Opinion of Cooley Godward LLP regarding the legality of the
securities being registered.
10.1* 1997 Stock Option Plan of the Company.
10.2* 1999 Equity Incentive Plan of the Company.
10.3* 1999 Non-Employee Directors' Stock Option Plan of the
Company.
10.4* 1999 Employee Stock Purchase Plan of the Company.
10.5* Second Amended and Restated Investor Rights Agreement among
the Company and certain of its stockholders.
10.6* Common Stock Purchase Warrant issued by the Company to BT
Alex. Brown Incorporated.
10.7* Stock Restriction Agreement between the Company and John W.
Street.
10.8* Non-Competition Agreement between the Company and John W.
Street.
10.8A* Employment Agreement between the Company and John W.
Gerdelman.
10.8B* Employment Agreement between the Company and Kaukab N.
Chaudhry.
10.8C* Form of Employment Agreement between the Company and each of
its other executive officers.
10.9* Form of Indemnity Agreement between the Company and each of
its directors and executive officers.
10.10*+ Co-Marketing Program Agreement between the Company and
American Express Travel Related Services Company, Inc., as
amended.
10.11*+ Netcenter Services Agreement between the Company and
Netscape Communications Corporation, as amended.
10.12*+ Trademark License Agreement between the Company and Netscape
Communications Corporation, as amended.
10.13*+ Partnership Agreement between the Company and Register.com.
</TABLE>
II-2
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.13A*+ Website Advertising Agreements between the Company and
Egghead.com.
10.14* Business Loan Agreement between the Company and State Bank
and Trust of Colorado Springs.
10.15* Office Lease Agreement between the Company and BVT Chapel
Hills, Ltd., as amended.
10.16* Asset Purchase Agreement between the Company and Internet
Express, LLC.
10.17* Series B Preferred Stock Purchase Agreement between the
Company and American Express Travel Related Services
Company, Inc., as amended.
10.18* Series C Preferred Stock Purchase Agreement between the
Company and the purchasers of its Series C Preferred Stock,
as amended.
10.19* Series D Preferred Stock Purchase Agreement between the
Company and the purchasers of its Series D Preferred Stock.
23.1* Consent of Cooley Godward LLP (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1* Powers of attorney.
27.1* Financial Data Schedule for 1997 and 1998.
27.2* Financial Data Schedule for 1996.
27.3* Financial Data Schedule for March 31, 1998 and March 31,
1999.
99.1* Consent of Bruns Grayson, Director-Nominee.
99.2* Consent of Michael C. Ruettgers, Director-Nominee.
99.3* Consent of Gerald H. Taylor, Director-Nominee.
</TABLE>
- ---------------
* Previously filed.
+ The Company is applying for confidential treatment with respect to portions
of these exhibits.
(B) FINANCIAL STATEMENT SCHEDULES.
Not applicable.
II-3
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Colorado Springs, County of El Paso, State of Colorado, on June 29,
1999.
By: /s/ JOHN W. GERDELMAN
----------------------------------
John W. Gerdelman
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN W. GERDELMAN Chief Executive Officer, President June 29, 1999
- ----------------------------------------------------- and Director (Principal
John W. Gerdelman Executive Officer)
/s/ KAUKAB N. CHAUDHRY Chief Financial Officer (Principal June 29, 1999
- ----------------------------------------------------- Financial and Accounting
Kaukab N. Chaudhry Officer)
* Director June 29, 1999
- -----------------------------------------------------
Jeffrey A. Allred
/s/ MARY M. BEAZLEY Director June 29, 1999
- -----------------------------------------------------
Mary M. Beazley
* Director June 29, 1999
- -----------------------------------------------------
Karen Griffith Gryga
* Director June 29, 1999
- -----------------------------------------------------
Lawrence S. Sharnak
* Chairman of the Board June 29, 1999
- -----------------------------------------------------
John W. Street
*By: /s/ MARY M. BEAZLEY
------------------------------------------------
Mary M. Beazley
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 114
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Restated Certificate of Incorporation of the Company.
3.2* Certificate of Amendment of Restated Certificate of
Incorporation of the Company.
3.3* Form of Restated Certificate of Incorporation of the Company
to become effective upon the closing of the Offering.
3.4* Bylaws of the Company.
3.5* Amended and Restated Bylaws of the Company to become
effective upon the closing of the Offering.
4.1 Reference is made to Exhibits 3.1 through 3.5.
4.2* Specimen stock certificate representing shares of Common
Stock of the Company.
5.1* Opinion of Cooley Godward LLP regarding the legality of the
securities being registered.
10.1* 1997 Stock Option Plan of the Company.
10.2* 1999 Equity Incentive Plan of the Company.
10.3* 1999 Non-Employee Directors' Stock Option Plan of the
Company.
10.4* 1999 Employee Stock Purchase Plan of the Company.
10.5* Second Amended and Restated Investor Rights Agreement among
the Company and certain of its stockholders.
10.6* Common Stock Purchase Warrant issued by the Company to BT
Alex. Brown Incorporated.
10.7* Stock Restriction Agreement between the Company and John W.
Street.
10.8* Non-Competition Agreement between the Company and John W.
Street.
10.8A* Employment Agreement between the Company and John W.
Gerdelman.
10.8B* Employment Agreement between the Company and Kaukab N.
Chaudhry.
10.8C* Form of Employment Agreement between the Company and each of
its other executive officers.
10.9* Form of Indemnity Agreement between the Company and each of
its directors and executive officers.
10.10*+ Co-Marketing Program Agreement between the Company and
American Express Travel Related Services Company, Inc., as
amended.
10.11*+ Netcenter Services Agreement between the Company and
Netscape Communications Corporation, as amended.
10.12*+ Trademark License Agreement between the Company and Netscape
Communications Corporation, as amended.
10.13*+ Partnership Agreement between the Company and Register.com.
10.13A*+ Website Advertising Agreements between the Company and
Egghead.com.
10.14* Business Loan Agreement between the Company and State Bank
and Trust of Colorado Springs.
10.15* Office Lease Agreement between the Company and BVT Chapel
Hills, Ltd., as amended.
10.16* Asset Purchase Agreement between the Company and Internet
Express, LLC.
</TABLE>
<PAGE> 115
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.17* Series B Preferred Stock Purchase Agreement between the
Company and American Express Travel Related Services
Company, Inc., as amended.
10.18* Series C Preferred Stock Purchase Agreement between the
Company and the purchasers of its Series C Preferred Stock,
as amended.
10.19* Series D Preferred Stock Purchase Agreement between the
Company and the purchasers of its Series D Preferred Stock.
23.1* Consent of Cooley Godward LLP (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1* Powers of attorney.
27.1* Financial Data Schedule for 1997 and 1998.
27.2* Financial Data Schedule for 1996.
27.3* Financial Data Schedule for March 31, 1998 and March 31,
1999.
99.1* Consent of Bruns Grayson, Director-Nominee.
99.2* Consent of Michael C. Ruettgers, Director-Nominee.
99.3* Consent of Gerald H. Taylor, Director-Nominee.
</TABLE>
- ---------------
* Previously filed.
+ The Company is applying for confidential treatment with respect to portions
of these exhibits.
<PAGE> 1
[ARTHUR ANDERSEN LLP LETTERHEAD]
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Denver Colorado,
June 29, 1999.
