<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
REGISTRATION NO. [ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
MAIL.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7310 13-3787073
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
11 BROADWAY, 6(TH) FLOOR
NEW YORK, NY 10004
(212) 425-4200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------------
GARY MILLIN
PRESIDENT
MAIL.COM, INC.
11 BROADWAY
NEW YORK, NY 10004
(212) 425-4200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID W. AMBROSIA, ESQ. MARC S. ROSENBERG, ESQ.
WINTHROP, STIMSON, PUTNAM & ROBERTS CRAVATH, SWAINE & MOORE
ONE BATTERY PARK PLAZA WORLDWIDE PLAZA
24 WHITEHALL STREET 825 EIGHTH AVENUE
NEW YORK, NY 10004-1490 NEW YORK, NY 10019-7575
(212) 858-1000 (212) 474-1000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
AGGREGATE OFFERING REGISTRATION
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE(1)(2) FEE(2)
<S> <C> <C>
Class A Common Stock, par value $0.01 per share......................................... $57,500,000 $15,985
</TABLE>
(1) Includes shares that the Underwriters have the option to purchase from
Mail.com solely to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as
amended, solely for the purpose of computing the amount of the registration
fee.
------------------------
THE 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
[LOGO]
SHARES
MAIL.COM, INC.
CLASS A COMMON STOCK
$ PER SHARE
-----------
We are selling shares of Class A common stock. The underwriters named
in this prospectus may purchase up to additional shares of Class A common
stock from Mail.com under certain circumstances.
This is an initial public offering of Class A common stock. Mail.com
currently expects the initial public offering price to be between $ and
$ per share, and has applied to have the Class A common stock included
for quotation on the Nasdaq National Market under the symbol "MLCM".
--------------
INVESTING IN THE CLASS A COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- --------------
<S> <C> <C>
Initial Public Offering Price........................................................ $ $
Underwriting Discount................................................................ $ $
Proceeds to Mail.com (before expenses)............................................... $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------------
SALOMON SMITH BARNEY PAINEWEBBER INCORPORATED
THE UNDERSIGNED ARE FACILITATING INTERNET DISTRIBUTION.
WIT CAPITAL CORPORATION DLJDIRECT INC.
as e-Manager
, 1999
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
MAIL.COM HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
MAIL.COM IS NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER
IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 9
Use of Proceeds............................................................................................ 23
Dividend Policy............................................................................................ 23
Capitalization............................................................................................. 24
Dilution................................................................................................... 25
Selected Financial Data.................................................................................... 26
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 28
Business................................................................................................... 36
Management................................................................................................. 53
Certain Transactions....................................................................................... 64
Principal Stockholders..................................................................................... 67
Description of Capital Stock............................................................................... 69
Shares Eligible For Future Sale............................................................................ 73
Underwriting............................................................................................... 75
Legal Matters.............................................................................................. 76
Experts.................................................................................................... 76
Where You Can Find More Information........................................................................ 77
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------------
Until , 1999, all dealers that buy, sell or trade the Class A
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS: (1) REFLECTS
THE AUTOMATIC CONVERSION OF ALL SHARES OF CONVERTIBLE PREFERRED STOCK INTO
13,161,558 SHARES OF OUR CLASS A COMMON STOCK UPON THE CLOSING OF THIS OFFERING;
(2) REFLECTS THE ISSUANCE OF 1,500,000 SHARES OF CLASS A COMMON STOCK TO CNET
AND NBC UPON THE EXERCISE OF WARRANTS AT A PRICE OF $5 PER SHARE; (3) ASSUMES
THE ISSUANCE OF 2,027,086 SHARES OF CLASS A COMMON STOCK AT THE CLOSING OF THIS
OFFERING IN FULL SETTLEMENT OF CONTINGENT OBLIGATIONS TO ISSUE ADDITIONAL EQUITY
TO OUR PREFERRED STOCKHOLDERS; AND (4) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. REFERENCES IN THIS PROSPECTUS TO "WE," "OUR," AND "US,"
REFER TO MAIL.COM, INC., A DELAWARE CORPORATION.
OUR COMPANY
Mail.com is a leading global provider of email services. At the end of 1998,
we were the sixth largest provider of emailboxes in the world, according to
numbers compiled by ELECTRONIC MAIL & MESSAGING SYSTEMS for its quarterly
emailbox census. Our basic email services are free to our members. We generate
revenues from advertising, direct response marketing and e-commerce offerings,
and from premium services offered to our members on a subscription basis. In
February 1999, we processed approximately 100 million email messages and
delivered approximately 150 million advertisements.
We offer our members Web-based email, also known as Webmail. Webmail has
several benefits when compared to traditional email. Traditional email users
generally access their email only through their own individual computer. Webmail
allows users to access their email through any computer or other device that has
a Web browser with access to the Internet. Webmail users do not need to install
or set up email software. Members obtain a permanent email address that they can
keep even if they switch jobs, change their Internet Service Provider (commonly
referred to as an ISP) or graduate from school. Our Webmail offering includes a
large selection of easy-to-remember, personalized email addresses such as
@mail.com, @email.com, @doctor.com, @lawyer.com, @USA.com and @Asia.com from our
portfolio of approximately 1,200 domain names. The domain name is the part of an
email address that comes after the @ symbol.
OUR PARTNERS
We have grown our member base by signing up members in partnership with
third party Web sites and at our own Web sites. We offer our co-branded email
service at 40 Web sites, including Web sites owned by CBS SportsLine, CNET, CNN,
InfoSpace.com, Lexis-Nexis, Paramount, Snap, Standard & Poor's and Time Warner.
By offering email services to their visitors, our Web site partners seek to
increase traffic, enhance user affinity, broaden reach, collect user demographic
information and generate incremental revenues. We recently launched an
initiative to offer Web-based access for ISP email accounts. We launched this
service in February 1999 with Prodigy and have entered into contracts with GTE
and Cable & Wireless. By offering Web-based access to their customers, our ISP
partners seek to increase user satisfaction, reduce telecommunications and
customer support costs and generate a new revenue stream.
OUR OPPORTUNITY
Email is becoming an increasingly important means of communication, with
both the number of email users and usage levels per individual projected to
increase significantly. According to ELECTRONIC MAIL & MESSAGING SYSTEMS, the
total number of emailboxes increased from approximately 198 million at the end
of 1997 to 325 million at the end of 1998. According to this source, Webmail
accounts are the fastest growing category of emailboxes. Forrester Research
projects that daily global Internet email traffic will increase from 100 million
email messages per day in 1996 to 1.5 billion per day in 2002. We believe that
as the complexity and usage of email increases, there will be an increasing
desire on the part of the Web sites, ISPs, small businesses and educational
institutions to outsource their email to third parties.
4
<PAGE>
We believe that email has several benefits as an advertising, direct
marketing and e-commerce medium. While members are using our email service on
one of our partner's Web sites or one of our own Web sites, we can display
advertising and make offers to them. Also, our members identify themselves every
time they sign in to use their email. Therefore, we can offer marketers a level
of targetability, interactivity and measurability not available in traditional
media. Unlike many Web services, we can target these efforts across a network of
sites based on demographic information that our members provide to us when they
sign up for our services. Since July 1, 1998, approximately 100 companies have
advertised on our email network. Jupiter Communication projects that online
advertising expenditures will grow from $1.9 billion in 1998 to $7.7 billion in
2002.
OUR STRATEGY
We seek to strengthen our position as a leading global provider of email
services. In particular, we plan to:
- Build our member base
- Increase member usage
- Increase our advertising, direct marketing and e-commerce revenue
opportunities
- Expand subscription and other revenue opportunities
- Enter additional market segments
OUR BACKGROUND
We incorporated in Delaware on August 1, 1994. We commenced operations in
1996 and launched our first commercial email service in November 1996 under the
name iName, Inc. We changed our name in January 1999 and began branding our
services as Mail.com, Inc. at our partners' and our own Web sites. In April 1999
we will commence our email service at www.mail.com. Our principal offices are
located at 11 Broadway, New York, New York and our phone number is (212)
425-4200. INFORMATION CONTAINED ON OUR WEB SITES DOES NOT CONSTITUTE PART OF
THIS PROSPECTUS.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock Offered.... shares
Common Stock to be Outstanding
After the Offering............ shares
Class A..................... shares
Class B(1).................. shares
Total....................... shares
Use of Proceeds................. We intend to use the net proceeds of this offering for
expansion of our network infrastructure, development of
Web site and ISP partnerships, expansion of sales and
marketing programs, hiring of personnel, potential
acquisitions and other general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market
Symbol........................ "MLCM"
</TABLE>
SHARES ISSUABLE AFTER THE OFFERING
You should be aware that we are permitted, and in some cases obligated, to
issue shares of common stock in addition to the common stock expected to be
outstanding after the offering. If and when we issue these shares, the
percentage of common stock you own will be diluted. The following is a summary
of additional shares of common stock that we have currently reserved for
issuance upon the exercise of options and warrants or upon partners reaching
performance milestones after the offering:
- pursuant to several of our partner contracts, we will issue shares to our
partners upon launch of our services at their sites, or upon the
achievement of a certain number of sign-ups. See "Risk Factors-- Our
contracts with our Web site partners require us to incur substantial
expenses."
- 6.8 million shares are issuable upon the exercise of outstanding options
at a weighted average exercise price of $1.84 per share; and 1.1 million
options are available for future awards; and
- 199,356 shares are issuable upon the exercise of outstanding warrants at a
weighted average exercise price of $3.25 per share.
- ------------------------
(1) Each share of Class B common stock is entitled to 10 votes per share. See
"Description of Capital Stock."
6
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth our summary financial data. You should read
this information together with our financial statements, the notes to those
statements beginning on page F-1 of this prospectus, the information under
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The following data is presented:
- - on an actual basis;
- - on a pro forma basis to give effect to:
- the issuance of 3.2 million shares of Class E convertible preferred stock
at $5.00 per share on March 10, 1999 for net cash proceeds of
approximately $15.1 million;
- the issuance at the closing of this offering of an aggregate of 1.5
million shares of Class A common stock to CNET and NBC upon the exercise
of $5.00 per share warrants for net proceeds of approximately $7.5
million;
- the automatic conversion of all outstanding shares of convertible
preferred stock into 13,161,558 shares of Class A common stock upon the
closing of this offering; and
- the issuance of 2,027,086 Class A common shares upon the closing of this
offering in full settlement of our contingent obligations to issue
additional equity to our preferred stockholders. We will account for the
issuance of the additional Class A common shares to our preferred
stockholders at the closing of this offering as a non-cash dividend to our
preferred stockholders. For purposes of the pro forma data, we have
calculated the amount of the dividend based on a value of $5.00 per common
share, which is the price paid in our recent private placement. The actual
amount of the dividend will be determined using the initial public
offering price.
- - on a pro forma as adjusted basis to give effect to the sale of shares of
Class A common stock in this offering, assuming an initial offering price of
$ per share.
7
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- ------------- --------------
STATEMENT OF OPERATIONS DATA:
Revenues........................................................... $ 19,015 $ 173,234 $ 1,494,762
Operating expenses:
Cost of revenues................................................. 187,890 1,081,848 2,890,582
Sales and marketing.............................................. 65,096 930,420 7,669,877
General and administrative....................................... 221,932 862,028 3,482,097
Product development.............................................. 93,698 296,140 1,573,465
------------- ------------- --------------
Total operating expenses..................................... 568,616 3,170,436 15,616,021
------------- ------------- --------------
Loss from operations............................................... (549,601) (2,997,202) (14,121,259)
Other income (expense):
Gain on sale of investment....................................... -- -- 438,000
Interest income.................................................. 6,869 36,264 277,164
Interest expense................................................. (1,980) (34,815) (109,187)
------------- ------------- --------------
Total other income, net...................................... 4,889 1,449 605,977
------------- ------------- --------------
Net loss........................................................... $ (544,712) $ (2,995,753) $ (13,515,282)
------------- ------------- --------------
------------- ------------- --------------
Basic and diluted net loss per share............................... $ (0.04) $ (0.21) $ (0.93)
------------- ------------- --------------
------------- ------------- --------------
Weighted average basic and diluted shares outstanding.............. 13,725,278 14,097,500 14,607,915
------------- ------------- --------------
------------- ------------- --------------
Pro forma:
Basic and diluted net loss per common share........................ $ (0.43)
--------------
--------------
Shares used in pro forma basic and diluted net loss per common
share calculation................................................ 31,296,420
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31, 1998
------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C>
PRO FORMA
1996 1997 ACTUAL PRO FORMA AS ADJUSTED
---------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 128,277 $ 909,718 $ 8,414,352 $ 31,014,352
Working capital (deficit)..................... 37,743 (190,963) 5,075,870 27,675,870
Total assets.................................. 665,855 2,645,854 20,344,488 42,944,488
Domain asset purchase obligations, less
current portion............................. -- 150,155 216,886 216,886
Deferred revenue, current and long-term
portion..................................... 6,289 329,187 1,904,645 1,904,645
Capital lease obligations, less current
portion..................................... 146,186 568,728 1,437,731 1,437,731
Redeemable convertible preferred stock........ -- -- 13,047,650 --
Total stockholders' equity (deficit).......... 370,288 566,915 (332,643) 35,315,007
</TABLE>
8
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in our Class A common stock. The risks described below are
not the only ones we face. Additional risks that generally apply to publicly
traded companies, that are not yet identified or that we currently think are
immaterial, may also impair our business operations. Our business, operating
results and financial condition could be adversely affected by any of the
following risks. The trading price of our Class A common stock could decline due
to any of these risks, and you could lose all or part of your investment. You
should also refer to the other information set forth in this prospectus,
including our financial statements and the related notes.
This prospectus also contains certain forward-looking statements that
involve risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "expects," "anticipates," "intends," "plans" and
similar expressions. Our actual results could differ materially from those
discussed in these statements. Factors that could contribute to such differences
include, but are not limited to, those discussed below and elsewhere in this
prospectus.
WE HAVE ONLY A LIMITED OPERATING HISTORY, AND WE ARE INVOLVED IN A NEW AND
UNPROVEN INDUSTRY.
We have only a limited operating history upon which you can evaluate our
business and our prospects. We have offered a commercial email service since
November 1996 under the name iName. We changed our company name to Mail.com,
Inc. in January 1999. Our success will depend first upon the development of a
viable market for email advertising, and then upon our ability to compete
successfully in that market. For the reasons discussed in more detail below,
there are substantial obstacles to our achieving and sustaining profitability.
WE HAVE INCURRED LOSSES SINCE INCEPTION AND EXPECT TO INCUR LOSSES IN THE
FUTURE.
We have generated only limited revenues to date. We have not achieved
profitability in any period, and we may not be able to achieve or sustain
profitability. We incurred a net loss of approximately $13.5 million for the
year ended December 31, 1998. We also had negative cash flow from operations of
approximately $4.8 million for 1998. As of December 31, 1998, we had an
accumulated deficit of approximately $17.1 million.
We expect to continue to incur substantial net losses and negative operating
cash flow for the foreseeable future. We have begun and will continue to
significantly increase our operating expenses in anticipation of future growth.
We intend to expand our sales and marketing operations, upgrade and enhance our
technology, continue our international expansion, and improve and expand our
management information and other internal systems. We are making these
expenditures in anticipation of higher revenues, but there will be a delay in
realizing higher revenues even if we are successful. If we do not succeed in
substantially increasing our revenues, our losses will continue indefinitely and
could increase.
WE WILL HAVE TO SUBSTANTIALLY INCREASE THE NUMBER OF OUR MEMBERS AND THEIR USAGE
OF
OUR SERVICES, WHICH WILL BE EXPENSIVE AND DIFFICULT TO ACCOMPLISH.
To achieve our objective of generating advertising, direct marketing,
e-commerce and subscription revenues, we will have to retain our existing
members and acquire a large number of new members. We will also have to increase
members' usage of our services. These goals present substantial risks and
uncertainties, including the following:
OUR STRATEGY OF ACQUIRING MEMBERS BY PROVIDING WEBMAIL FOR THIRD PARTY WEB
SITES ENTAILS A NUMBER OF RISKS AND COULD BE COSTLY. We have relied upon
strategic alliances with third party Web sites to attract the
9
<PAGE>
majority of our current members. We believe that our success will partially
depend on our ability to maintain our current alliances and to enter into new
ones with Web sites and ISPs on acceptable terms.
- OUR CONTRACTS WITH OUR WEB SITE PARTNERS REQUIRE US TO INCUR SUBSTANTIAL
EXPENSES. In nearly all cases our Web site partners do not pay us to
provide our services. We bear the costs of providing our services. We
generate revenues by selling advertising space to advertisers who want to
target our members and by selling subscriptions services to our members.
We pay the partner a share of the revenues we generate. In addition, a
number of our contracts require us to pay significant fees or to make
minimum payments to the partner without regard to the revenues we realize.
If we are unable to generate sufficient revenues at our partner sites,
these fees and minimum payments can cause the partner's effective share of
our revenues to approach or exceed 100%. In some cases we pay our partners
in shares of our Class A common stock. We will have to account for these
stock issuances at the fair market value on the date of issuance, which
may result in substantial sales and marketing charges in particular
quarters. The following are examples of contracts that require substantial
minimum payments and/or payment in the form of stock:
- AltaVista has the option of receiving $1.00 in cash plus 0.25 shares of
our Class A common stock for each confirmed member registration at
their Web site through June 30, 1999.
- We must issue to CNET, Snap and NBC an aggregate of 1.25 shares of our
Class A common stock for each member who registers at their sites
through December 31, 1999, up to a maximum of two million members. We
must also issue 0.5 shares of our Class A common stock for each
subsequent registration until December 31, 2000, subject to a maximum
of four million members (including members who registered prior to
December 31, 1999). We have guaranteed NBC a minimum of 210,000 shares
if they launch our email services.
- We must issue to RemarQ 40,000 of our shares of Class A common stock
for every 25,000 active members that they generate during the 7 1/2
month term of the contract, up to a total of 100,000 active members.
We cannot predict whether future relationships, or renewals of existing
relationships, will be more expensive than the arrangements we have entered into
to date.
- OUR PARTNER CONTRACTS HAVE ONLY LIMITED TERMS, AND THE FAILURE TO RENEW A
CONTRACT CAN BE VERY COSTLY FOR US. Our partner contracts generally have
one or two year terms. A partner can decide not to renew at the end of the
term for a variety of reasons, including dissatisfaction with our service,
a desire to switch to one of our outsourcing competitors, or a decision to
provide email service themselves. Partners can also choose not to renew
our contract because they have entered into a merger or other strategic
relationship with another company that can provide email service. This
last factor is becoming increasingly common in light of the consolidation
taking place among Web sites, ISPs and other Internet-related businesses.
The loss of a partner can be very disruptive for us for a number of
reasons:
- WE WILL LOSE A SUBSTANTIAL NUMBER OF MEMBERS. When members register for
our service at a partner's Web site, the default domain name members
use for their email address is typically a domain name that is owned by
the partner. A domain name is the part of an email address that comes
after the @ sign (for example, if [email protected] is the email
address then "mail.com" is the domain name). We estimate that
approximately 23% of the members who have registered for our service
have email addresses at partner-owned domain names. Upon expiration,
most partners can require us to relinquish existing members with
addresses at partner-owned domain names. Moreover, even those members
who have selected addresses using our domain names may find it more
convenient to switch to the replacement email service available at the
partner's site. The loss of members due to expiration or non-renewal of
partner contracts may have a material adverse effect on our business.
10
<PAGE>
- LOSING RELATIONSHIPS WITH PROMINENT PARTNERS CAN IMPAIR OUR CREDIBILITY
WITH ADVERTISERS AND OTHER PARTNERS. We believe that partnerships with
premium branded Web sites help give us credibility with other partners
and with advertisers. The loss of our better-known Web site partners
could be damaging to our reputation and adversely affect the
advertising, direct marketing, e-commerce and subscription rates we can
charge.
- SEVERAL OF OUR MOST SIGNIFICANT PARTNER CONTRACTS HAVE EXPIRED OR MAY SOON
TERMINATE. Two of our most important Web site partnerships have been with
Lycos and AltaVista, which collectively have accounted for approximately
26% of the emailboxes we have established through February 28, 1999, and
for approximately 35% of the total page views we delivered in February
1999. Our agreement with Lycos expired on October 8, 1998, shortly after
Lycos acquired WhoWhere, a competitor that provides personal homepage and
Webmail services. Compaq, which owns the AltaVista Web site, recently
entered into a strategic relationship with Microsoft. As part of that
relationship, AltaVista agreed to offer Microsoft's Hotmail Webmail
service starting in July 1999, when our contract with AltaVista expires.
While we will continue to own the right to serve the majority of the
affected members after the expiration of these contracts, we cannot be
sure that these members will continue to use our service as actively as
they have in the past, if at all.
Yahoo! recently announced its agreement to acquire GeoCities, one of our
partner Web sites. The acquisition is expected to close by May 1999.
Yahoo! has its own email service called Yahoo! Mail. Yahoo! may attempt to
terminate our contract. We are contractually obligated to incur
significant development and launch costs to meet our commitments under the
contract. If the contract is terminated, we cannot be sure that these
costs will be reimbursed or that our advance payments of stock and cash
will be returned. While we intend to enforce our contractual rights,
resolution may require expensive and time consuming arbitration or other
legal proceedings. Our commitment of technical resources and management
time to the GeoCities relationship will limit our ability to pursue other
business opportunities and may distract us from successfully managing our
business.
- WE ARE DEPENDENT ON A SMALL NUMBER OF CONTRACTS FOR A SUBSTANTIAL
PERCENTAGE OF OUR ANTICIPATED NEW MEMBERS. Our three largest partners
accounted for 45% of our new members in February 1999. If any of the Web
sites operated by these parties were to experience lower than anticipated
traffic, or if our relationships with any of these parties were disrupted
for any reason, our business would probably suffer in a material way.
OUR RECENT SUBSCRIPTION RATE INCREASES AND NEW BILLING SYSTEM ARE LIKELY TO
RESULT IN THE LOSS OF PREMIUM MEMBERS. On March 10, 1999, we increased our
subscription rates for our premium email services. As a result of these rate
increases, we anticipate that some of our existing premium members may not renew
their subscriptions and that a lower percentage of new members will register for
our premium services. We are also in the process of installing a new billing
system designed to collect and verify credit card information from premium users
at the time they register for our services. In the past we did not seek this
information until after a 30-day trial period had expired, and in most instances
did not terminate services to premium members who did not pay for our services.
With the introduction of our new billing system, we intend to terminate premium
services to members who do not pay for these services. This will not reduce our
subscription revenues, but it will reduce usage by those members and thereby
reduce our potential advertising revenues.
WE HAVE ONLY LIMITED INFORMATION ABOUT OUR MEMBERS AND THEIR USAGE, WHICH
MAY REDUCE OUR POTENTIAL REVENUES. Our ability to generate advertising and
direct marketing revenue is directly related to our members' activity levels and
the quality of our demographic data. We are subject to several constraints that
will limit our ability to maximize the value of our member base:
- WE BELIEVE THAT MOST OF OUR MEMBERS DO NOT USE THEIR EMAILBOXES REGULARLY,
AND MANY DO NOT USE THEM AT ALL. We do not have the computer systems
necessary to regularly monitor emailbox usage. Our most recent information
is for selected Web sites for the two weeks ended January 24, 1999,
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and excludes members who automatically forward their email from their
emailbox provided by Mail.com to another emailbox and members that
subscribe for our upgrade "POP3" access. During that period, no more than
30% of the emailboxes in the sample were accessed by members. Moreover,
approximately one-third of those email boxes that were accessed were
established during the two week period. We expect our proportion of active
members to decrease as our total number of established emailboxes
increases. On an ongoing basis, we believe that a significant number of
members will cease using our service each month. We cannot assure you that
we will be able to add enough new members to compensate for this
anticipated loss of usage.
- WE HAVE ONLY A LIMITED ABILITY TO GENERATE ADVERTISING REVENUES FROM
FORWARDING AND POP3 ACCOUNTS, WHICH REPRESENT A SIGNIFICANT PERCENTAGE OF
OUR EMAILBOXES. Members who choose our forwarding service or subscribe to
our POP3 service do not need to come to our partners' or our Web sites to
access their email. Therefore, we do not deliver Web-based advertisements
to these members. Forwarding and POP3 accounts represented approximately
50% of our total emailboxes as of February 28, 1999, and 25% of the
emailboxes that were established during February 1999. If a
disproportionate percentage of members choose either of these options, it
will adversely affect our ability to generate advertising, direct
marketing and e-commerce revenues.
- OUR DATABASE CONTAINS INACCURACIES THAT COULD REDUCE THE VALUE OF OUR
INFORMATION. Although we attempt to collect basic demographic information
about members at the time they establish their accounts, we do not verify
the accuracy of this information. Moreover, even if the information is
correct when we receive it, members may move, change jobs or die without
our knowledge. As a result, our database contains inaccuracies that could
make our information less appealing to advertisers.
- WE DO NOT KNOW HOW MANY MEMBERS HAVE ESTABLISHED MULTIPLE EMAILBOXES.
Because we do not charge for our basic service, individuals can easily
establish multiple emailboxes. This makes it impossible for us to
determine the number of unique individuals registering for our service,
which may reduce the advertising rates we can command.
WEBMAIL, EMAIL OUTSOURCING AND EMAIL ADVERTISING MAY NOT PROVE TO BE VIABLE
BUSINESSES.
We intend to operate in an industry that is only beginning to develop. Our
success will require the widespread acceptance by consumers of Webmail. We are
also dependent on the development of viable markets for outsourcing email and
email advertising. For a number of reasons, each of these developments is
somewhat speculative:
CONSUMERS MAY NOT BE WILLING TO USE WEBMAIL IN LARGE NUMBERS. As a Web-based
messaging service, Webmail is subject to the same concerns and shortcomings as
the Internet itself. Concerns over the security of information carried over the
Internet, and stored on central computer systems, could inhibit consumer
acceptance of Webmail. Moreover, Webmail can only function as effectively as the
Web itself. If traffic on the Web does not move quickly, or Internet access is
impeded, consumers are less likely to use Webmail. Consumers may also react
negatively to the relatively new concept of advertising being included in their
email service. Our business will suffer if public perception of our service or
of Webmail in general is unfavorable. Articles and reviews published in popular
publications relating to computers and the Internet have a great deal of impact
on public opinion within our markets, and an article or review unfavorable to
Webmail or to our service specifically could slow or prevent broad market
acceptance. Similarly, if employers in large numbers implement policies or
software designed to restrict access to Webmail, Webmail is much less likely to
gain popular acceptance.
There are even greater uncertainties about our ability to successfully
market premium Webmail services. Consumers have generally been very reluctant to
pay for services provided over the Internet. Moreover, if our competitors choose
to provide POP3 access, premium names or other services without charge or as
part of a bundled offering, we may be forced to do the same.
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THERE ARE SIGNIFICANT OBSTACLES TO THE DEVELOPMENT OF A SIZABLE MARKET FOR
EMAIL OUTSOURCING. Outsourcing is one of the principal methods by which we will
attempt to reach the size we believe is necessary to be successful. Security and
the reliability of the Internet, however, are likely to be of concern to Web
sites, ISPs, schools and businesses deciding whether to outsource their email or
continue to provide it themselves. These concerns are likely to be particularly
strong at larger businesses, which are better able to afford the costs of
maintaining their own systems.
THE MARKET FOR EMAIL ADVERTISING IS ONLY BEGINNING TO DEVELOP AND THE
EFFECTIVENESS OF THIS FORM OF ADVERTISING IS UNPROVEN. Even if Webmail proves to
be popular with consumers and outsourcing customers, we will still need large
numbers of advertisers to purchase space on our Webmail service. Because we, and
our competitors, have only recently begun to offer email advertising, our
potential advertising customers have little or no experience with this medium.
We do not yet have enough experience to demonstrate the effectiveness of this
form of advertising. As a result, those customers willing to try email
advertising are likely to allocate only a limited portion of their advertising
budgets. If early customers do not find email advertising to be effective for
promoting their products and services, the market for our products will be
unlikely to develop. Recent reports have indicated that prices for banner
advertisements on the Internet have begun to fall, in part because of
diminishing "click" or response rates. Advertisers have also begun to request
fewer "cost per thousand advertisements" pricing arrangements and more "cost per
click" pricing, which effectively lowers advertising rates.
- THERE ARE CURRENTLY NO STANDARDS FOR MEASURING THE EFFECTIVENESS OF
WEBMAIL ADVERTISING. Standard measurements may need to be developed to
support and promote Webmail advertising as a significant advertising
medium. Our advertising customers may refuse to accept our own
measurements or third-party measurements of advertisement delivery, which
would adversely affect our business.
- FILTERING SOFTWARE COULD PREVENT US FROM DELIVERING ADVERTISING.
Inexpensive software programs are available which limit or prevent the
delivery of advertising to a user's computer. The widespread adoption of
this software would materially and adversely affect the commercial
viability of email advertising, and of our business.
THERE ARE SIGNIFICANT OBSTACLES TO OUR ABILITY TO INCREASE ADVERTISING REVENUES.
Our success will largely depend on our ability to substantially increase our
advertising, direct marketing and e-commerce revenues. Several factors will make
it very difficult for us to achieve this objective:
A LIMITED NUMBER OF ADVERTISERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR
REVENUES. We are dependent on a limited number of advertisers to derive a
substantial portion of our revenues. In 1998, approximately 31% of our revenues
were attributable to N2K/Music Boulevard, and revenues from our five largest
advertisers accounted for an aggregate of 44% of our revenues. Our future
success will depend upon our ability to retain these advertisers, to generate
significant revenues from new advertisers and to reduce our reliance on any
single advertiser. Our existing contracts with advertisers generally have terms
of only one or two months, and we may be unable to renew them. The loss of one
of our major advertisers or our inability to attract new advertisers could have
a material adverse effect on our business.
ADVERTISEMENTS DELIVERED ON OUR WEBMAIL SERVICE HAVE LOW "CLICK RATES",
WHICH COULD ADVERSELY AFFECT OUR REVENUES. Only a small percentage of our
members "click" on the advertisements we deliver with their Webmail. Because we
do not control the creative elements of the advertisements, we have very little
ability to increase our click rate. Continued low click rates could reduce the
amounts advertisers, direct marketers and e-commerce companies will be willing
to pay us.
- WE MAY NOT BE ABLE TO GENERATE AS MUCH REVENUE ON A "COST PER THOUSAND"
BASIS. To date, we have generated a significant portion of our advertising
revenues on a "cost per thousand" basis. These
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agreements require the advertiser to pay us a fixed fee in exchange for
our agreement to deliver a specified number of advertising impressions. We
believe that this type of agreement is the most effective for us, but we
may not be able to charge as much for these agreements, or to continue to
sell as much advertising on this basis, in the future.
- WE FACE GREATER RISKS WHEN SELLING ADVERTISING ON A "COST PER CONVERSION"
BASIS. We have also sold, and expect to continue to sell, advertising on a
"cost per click" or "cost per conversion" basis. In cost per click
contracts, an advertiser agrees to pay us a fee for each occasion on which
a member "clicks" on the advertisement. Cost per conversion contracts
provide that we receive a fee when the member not only "clicks", but
actually proceeds to purchase an item, order a catalog or take some other
step specified by the advertiser. In general, these arrangements do not
yield as much revenue for us for each advertising impression. Moreover,
cost per conversion contracts present additional risks for us because we
have no control over the advertiser's ability to convert a "click" into a
sale. We also must rely on the advertiser to report to us the number of
conversions. These reports may not be accurate, and they may not be
timely, both of which can adversely affect our revenues. Notwithstanding
these risks, we may have to sell more of our advertising on a cost per
click or cost per conversion basis in the future.
WE MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF FLUCTUATIONS IN OUR QUARTERLY
OPERATING RESULTS, WHICH WOULD CAUSE OUR STOCK PRICE TO DECLINE.
Although we intend to steadily increase our spending and investment to
support our planned growth, our revenues (and some of our costs) will be much
less predictable. This is likely to result in significant fluctuations in our
quarterly results, and to limit the value of quarter-to-quarter comparisons.
Because of our limited operating history and the emerging nature of our
industry, we anticipate that securities analysts will have difficulty in
accurately forecasting our results. It is likely that our operating results in
some quarters will be below market expectations. In this event, the price of our
Class A common stock is likely to decline.
The following are among the factors that could cause significant
fluctuations in our operating results:
- payments to our Web site partners in the form of stock that we will be
required to value at then-current market prices;
- delay or cancellation of even a small number of advertising contracts;
- expiration or termination of partnerships with Web sites or ISPs, which
can result from mergers or other strategic combinations as Internet
businesses continue to consolidate;
- system outages, delays in obtaining new equipment or problems with planned
upgrades;
- disruption or impairment of the Internet;
- introduction of new or enhanced services by us or our competitors;
- changes in our pricing policy or that of our competitors;
- seasonality in the demand for advertising or changes in our own
advertising rates or advertising rates in general both on and off the
Internet;
- changes in governmental regulation of the Internet and email in
particular; and
- general economic and market conditions, and particularly those affecting
email advertising.
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SEVERAL OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER RESOURCES, LONGER
OPERATING HISTORIES, LARGER CUSTOMER BASES AND BROADER PRODUCT OFFERINGS.
Our business is, and we believe will continue to be, intensely competitive.
Our competitors with respect to email services include such large and
established companies as Microsoft, America Online, @Home, Yahoo!, Excite,
Disney (which owns the GO Network) and Lycos. Microsoft offers free Webmail
through its Hotmail Web site, and has dominant market share with 35 million
emailboxes. In addition, we compete for advertisers with DoubleClick, 24/7
Media, and other Internet advertising networks. We also compete for advertisers
with other Internet publishers as well as traditional media such as television,
radio, print and outdoor advertising.
Some of our competitors provide a variety of Web-based services such as
Internet access, browser software, homepage design, hosting and calendars, in
addition to email. The ability of these competitors to offer a broader suite of
complementary services may give them a considerable advantage over us. In
addition, some competitors who have other sources of revenue do not, or in the
future may not, place advertising on their Webmail pages. Consumers may prefer a
service that does not include advertisements.
The level of competition is likely to increase as current competitors
increase the sophistication of their offerings and as new participants enter the
market. In the future, as we expand our service offerings, we expect to
encounter increased competition in the development and delivery of these
services. Further, some of our competitors may offer services at or below cost.
In addition, new technologies and the expansion of existing technologies may
increase competitive pressures on us. We may not be able to compete successfully
against our current or future competitors.
For more information please see "Business--Competition."
OUR RAPID EXPANSION IS STRAINING OUR EXISTING RESOURCES, AND WE MAY NOT BE ABLE
TO MANAGE OUR GROWTH EFFECTIVELY.
In anticipation of an increasing number of strategic alliances and a
corresponding increase in the number of members we have begun aggressively
expanding our operations. The number of our employees increased from 29 on
December 31, 1997 to 92 on December 31, 1998. This expansion has placed, and we
expect it to continue to place, a significant strain on our managerial,
operational and financial resources. If we cannot manage our growth effectively,
our business and operating results will suffer. We face a number of significant
challenges if we are to effectively manage our growth:
WE MUST IMPROVE OUR BILLING, MANAGEMENT INFORMATION AND OTHER SYSTEMS. We
need to improve or replace our existing operational, customer service and
financial systems, procedures and controls.
- WE DO NOT HAVE THE NECESSARY SYSTEMS TO REGULARLY MONITOR OUR MEMBERS'
ACTIVITY LEVELS. We cannot regularly generate statistics such as the
number of our emailboxes that members access, and the pages they view, on
a daily, weekly and monthly basis. Data of this nature is of significant
value to potential advertisers, and our inability to provide this
information reduces the effectiveness of our marketing efforts.
- OUR CURRENT SUBSCRIPTION BILLING SYSTEM IS INADEQUATE. Until March 1999,
we did not request credit card information from new premium service
members at the time they registered, but sought instead to obtain billing
information upon expiration of a 30-day free trial period. This proved to
be unsuccessful, and consequently approximately 94% of our premium members
received subscription services for which they did not pay. Our new billing
system has been designed to require a member to supply credit card
information at the time of registration for subscription services, but we
are still in the process of installing the system. If our new billing
system does not significantly improve our ability to collect payments for
subscription services, our business will be materially and adversely
affected.
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- OUR MERCHANT BANK OR CREDIT CARD SERVICE PROVIDERS MAY CANCEL OUR RIGHTS
TO ACCEPT ON-LINE CREDIT CARD PAYMENTS. Because of the anonymity the
Internet affords its users, there are a large number of fraudulent credit
card transactions passed through Internet billing systems. We have
exceeded the level of credit card chargebacks usually accepted by our
merchant banks and credit card service providers--VISA, Mastercard and
American Express. We had to change merchant banks once during the last 18
months as a result of this. Our new billing system is designed to reduce
fraud and the resulting chargebacks. Because the new billing software is
tightly integrated into a different merchant bank, we are also in the
process of changing our merchant bank. Initially, this new bank will
require us to maintain a reserve account equal to 5% of the monthly bank
card sales drafts we submit. We cannot be sure that our new billing system
and the reserve account will fully address the concerns of our merchant
bank and credit card service providers. If any of our credit card service
providers cancelled our account we would expect a significant reduction in
subscription revenues. If our merchant bank cancelled our account and we
could not find a replacement merchant bank, it would be difficult if not
impossible to charge our users for subscription services.
WE WILL NEED TO RETAIN OUR EXISTING KEY PERSONNEL AND ATTRACT ADDITIONAL
QUALIFIED EMPLOYEES. Our future success depends to a significant extent on the
continued service of our key technical, sales and senior management personnel,
but they have no contractual obligation to remain with us. In particular, our
success depends on the continued service of Gerald Gorman, our Chief Executive
Officer and Chairman of the Board of Directors, Gary Millin, our President, Lon
Otremba, our Chief Operating Officer, Debra McClister, our Chief Financial
Officer, and Charles Walden, our Executive Vice President, Technology. The loss
of the services of Messrs. Gorman, Millin, Otremba or Walden, or of Ms.
McClister, or several other key employees, would likely have a material adverse
effect on our business.
To manage our existing business and handle any future growth, we will have
to attract, retain and motivate additional highly skilled employees. In
particular, we will need to hire and retain qualified salespeople if we are to
meet our sales goals. Competition for employees in Internet-related businesses
is intense. We have in the past experienced, and expect to continue to
experience difficulty in hiring and retaining employees with appropriate
qualifications. If we are unable to do so, our management may not be able to
effectively manage our business, exploit opportunities and respond to
competitive challenges.
OUR BUSINESS IS HEAVILY DEPENDENT ON TECHNOLOGY, INCLUDING TECHNOLOGY THAT HAS
NOT YET BEEN PROVEN RELIABLE AT HIGH TRAFFIC LEVELS AND TECHNOLOGY THAT WE DO
NOT CONTROL.
The performance of our hardware and software infrastructure (together
referred to as our "network infrastructure") is critical to the quality of
service we are able to provide to our members. If our service is unavailable or
fails to perform to our members' satisfaction, they may cease using our service.
Reduced use of our service decreases our revenues by decreasing the advertising
space that we have available to sell. In addition, our agreements with some of
our partners establish minimum performance standards. If we fail to meet these
standards, our partners could terminate their relationships with us and assert
claims for monetary damages.
We face substantial technological challenges in providing the necessary
level of service, including the following:
WE NEED TO UPGRADE OUR NETWORK INFRASTRUCTURE TO ACCOMMODATE INCREASES IN
EMAIL TRAFFIC, BUT WE MAY NOT BE ABLE TO DO SO WHILE MAINTAINING OUR CURRENT
LEVEL OF SERVICE, OR AT ALL. We must continue to expand and adapt our network
infrastructure as the number of members and the amount of information they wish
to transmit increases, and as their requirements change. Because we have only
been providing our services for a limited time, and because our network
infrastructure has not been tested at greater capacities, we cannot guarantee
the ability of our network to connect and manage a substantially larger number
of members at high transmission speeds. If we cannot provide the necessary
service while maintaining expected performance, our business would be materially
and adversely affected.
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The expansion and adaptation of our network infrastructure will require
substantial financial, operational and managerial resources. We may not be able
to accurately project the timing of increases in email traffic or other customer
requirements. In addition, the very process of upgrading our network
infrastructure is likely to cause service disruptions. This is because we will
have to take various elements of the network out of service in order to install
some upgrades.
OUR NETWORK INFRASTRUCTURE MAY FAIL AND INTERRUPT OUR SERVICE. Our members
have in the past experienced interruptions in our email service. We believe that
these interruptions will continue to occur from time to time. These
interruptions are due to hardware failures, unsolicited bulk emails that
overload our system and other network infrastructure failures. These failures
have resulted and may continue to result in significant disruptions to our
service.
Some aspects of our network infrastructure are not redundant, including our
member database and the emails and other data we store for our members. In
addition, substantially all of our computer and communications systems are
currently located in our primary data center in lower Manhattan. We currently do
not have an alternate site from which we could conduct operations in the event
of a disaster. Our computer and communications hardware is vulnerable to damage
or interruption from fire, flood, earthquake, power loss, telecommunications
failure and similar events. Our services would be suspended for a significant
period of time in the event our primary data center were severely damaged or
destroyed. We might also lose stored emails and other member files, causing
significant member dissatisfaction giving rise to possible claims for monetary
damages. Although we plan to build a secondary data center outside New York City
to address this contingency, that facility will not be operational in the near
future and may never be successfully deployed as a fully redundant facility.
OUR SERVICES WILL BECOME LESS DESIRABLE OR OBSOLETE IF WE ARE UNABLE TO KEEP
UP WITH THE RAPID CHANGES CHARACTERISTIC OF OUR BUSINESS. Our success will
depend on our ability to enhance our existing services and to introduce new
services in order to adapt to rapidly changing technologies, industry standards
and customer demands. To compete successfully, we will have to accurately
anticipate changes in consumer demand and add new features to our services very
rapidly. We also have to regularly upgrade our software to ensure that it
remains compatible with the wide and changing variety of Web browsers and other
software used by our members. For example, our system currently cannot properly
receive files sent using some third party email programs. We may not be able to
integrate the necessary technology into our network infrastructure on a timely
basis or without degrading the performance of our existing services. We cannot
be sure that, once integrated, new technology will function as expected. Delays
in introducing effective new products and services could cause existing and
potential members to forego use of our services and to use instead those of our
competitors.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO PROVIDE ADEQUATE SECURITY FOR
OUR SERVICE, OR IF OUR SERVICE IS IMPAIRED BY SECURITY MEASURES IMPOSED BY THIRD
PARTIES. Security is a critical issue for any online service, and presents a
number of challenges for us.
- WE MAY BE UNABLE TO MAINTAIN THE SECURITY OF OUR SERVICE. Third parties
may attempt to breach our security or that of our members. If they are
successful, they could obtain our members' confidential information,
including our members' profiles, passwords, financial account information,
credit card numbers, stored email or other personal information. Our
members' claims for money damages for any breach in our security and any
breach could harm our reputation.
Our computers are vulnerable to computer viruses, physical or electronic
break-ins and similar incursions, which could lead to interruptions,
delays or loss of data. We expect to expend significant capital and other
resources to license or create encryption and other technologies to
protect against security breaches or to alleviate problems caused by any
breach. Nevertheless, these measures may prove ineffective. Our failure to
prevent security breaches may have a material adverse effect on our
business and operating results.
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- SECURITY MEASURES TAKEN BY OTHERS MAY INTERFERE WITH THE EFFICIENT
OPERATION OF OUR SERVICE. "Firewalls" and similar network security
software employed by many ISPs, employers and schools can interfere with
the operation of our Webmail service, including denying our members access
to their email accounts. Similarly, in their efforts to filter out
unsolicited bulk emails, ISPs and other organizations may block email from
all or some of our members.
WE ARE DEPENDENT ON LICENSED TECHNOLOGY. We license a significant amount of
technology from third parties, including our Web server and encryption
technology. We anticipate that we will need to license additional technology to
remain competitive. We may not be able to license these technologies on
commercially reasonable terms or at all. Third-party licenses expose us to
increased risks, including risks relating to the integration of new technology,
the diversion of resources from the development of our own proprietary
technology, and a greater need to generate revenues sufficient to offset
associated license costs.
OUR BUSINESS DEPENDS ON THE EFFICIENCY OF THE INTERNET AND OTHER THIRD PARTY
NETWORKS. Our business depends on the effectiveness of the Internet as a means
of transmitting data. The recent growth in the use of the Internet has caused
frequent interruptions and delays in accessing and transmitting data over the
Internet. Any deterioration in the performance of the Internet as a whole could
undermine the benefits of our services. Therefore, our success depends on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion. We also depend on telecommunications network
suppliers such as MFS, BBN Planet and UUNET to transmit email messages across
their networks.
WE ARE DEPENDENT UPON A THIRD PARTY FOR THE ACTUAL DELIVERY OF THE
ADVERTISEMENTS WE SELL. We contract with DoubleClick, Inc. to deliver the
advertisements that we sell and that appear on our Web pages and on the Web
pages of our partners. If DoubleClick experiences technical difficulties or
otherwise fails to perform, our business may be adversely affected. Furthermore,
DoubleClick may not have the same priorities for technology development as we do
and this may limit our ability to improve our delivery of advertising for our
specific needs. We are investigating delivering advertisements ourselves using
software licensed from a third party. We do not currently know whether we will
switch our advertising delivery process. If we switch, we may experience
problems in making the transition and the new software may not function as we
expect.
OUR SYSTEMS, AND THE SYSTEMS OF OTHERS THAT WE DEPEND ON, MAY NOT OPERATE
PROPERLY BECAUSE OF YEAR 2000 PROBLEMS. We may have substantial exposure to the
Year 2000 problems both with our own systems and with systems we do not control.
The Year 2000 problem could adversely affect our business and financial results.
Many currently installed computer systems and software products have been coded
to accept or recognize only two digit entries to define the applicable year.
These systems may erroneously recognize the year 2000 as the year 1900. This
could result in major failures or malfunctions.
This risk is particularly significant for our business. In addition to
relying on our internal computer network, we depend upon the continued viability
of many external systems, most importantly the Internet, in order to make our
services available to our members. We use the Internet to deliver all our
services to our members and to transmit and receive their email. Because no
single entity or organization manages or controls the Internet, we have no way
to determine how many of the devices or systems that contribute to the efficient
transmission of data over the Internet may be prone to the Year 2000 risk. If
the performance or the availability of the Internet as a data communications
medium is compromised because of Year 2000 problems, our business could be
materially and adversely affected even if our own internal systems are fully
operational.
In addition, many of our members are dependent upon the availability of our
partners' Web sites in order to gain access to our services. While we are in the
process of identifying any potential Year 2000 problems at our partners' sites,
we cannot be sure that Year 2000 problems will not materialize at these sites.
Moreover, our members rely on a wide variety of hardware and software, as well
as numerous ISPs, in order to reach the Internet and our Web-based services. If
our members are unable to access our
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services because of Year 2000 problems associated with their own computers or
their ISPs, our business could be materially and adversely affected.
With respect to our internal systems, we are working with our hardware and
software vendors to identify any exposure to the Year 2000 problem. Although we
are seeking to identify and remediate all Year 2000 problems in our internal
systems by the end of this year, we cannot ensure that we will be successful in
this effort. Any significant Year 2000 problems in our internal systems will
have a material adverse effect on our business. Please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
GERALD GORMAN WILL CONTINUE TO CONTROL MAIL.COM AFTER THIS OFFERING AND BE ABLE
TO PREVENT A CHANGE OF CONTROL.
After this offering, Gerald Gorman will beneficially own Class A and Class B
common stock representing approximately % of the voting power of our
outstanding common stock. Each share of Class B common stock entitles the holder
to 10 votes on any matter submitted to the stockholders. As a result of his
share ownership, Mr. Gorman will be able to determine the outcome of all matters
requiring stockholder approval, including the election of directors, amendment
of our charter and approval of significant corporate transactions. Mr. Gorman
will be in a position to prevent a change in control of Mail.com even if the
other stockholders were in favor of the transaction.
Mail.com and Mr. Gorman have agreed to permit the former holders of our
preferred stock and CNET/Snap to designate a total of four members of our board
of directors.
Our charter contains provisions that could deter or make more expensive a
takeover of Mail.com. These provisions include the ability to issue "blank
check" preferred stock without stockholder approval.
For more information on these matters, please see "Certain Transactions,"
"Principal Stockholders" and "Description of Capital Stock".
IT IS OUR INTENTION TO ACQUIRE OTHER BUSINESSES, AND WE MAY HAVE DIFFICULTY
INTEGRATING SUCH BUSINESSES OR GENERATING AN ACCEPTABLE RETURN FROM SUCH
ACQUISITIONS.
We will attempt to acquire strategic businesses and member accounts. Such
acquisitions will involve risks, including:
- inability to raise the required capital;
- difficulty in assimilating the acquired operations and personnel;
- inability to retain any acquired member accounts;
- disruption of our ongoing business;
- inability to successfully incorporate acquired technology and rights into
our service offerings and maintain uniform standards, controls,
procedures, and policies; and,
- lack of the necessary experience to enter new markets.
We may not successfully overcome problems encountered in connection with
potential acquisitions. In addition, an acquisition could materially adversely
affect our operating results by diluting our shareholders' equity, causing us to
incur additional debt, or requiring us to amortize acquisition expenses and
acquired assets.
OUR GOAL OF BUILDING BRAND IDENTITY IS LIKELY TO BE DIFFICULT AND EXPENSIVE.
We believe that a quality brand identity will be essential if we are to
increase membership, traffic on our sites and revenues. We intend to use a
portion of the proceeds of the offering to substantially increase
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our marketing budget as part of our efforts to build the Mail.com brand. We do
not have experience with some of the types of marketing that we are
contemplating. If our marketing efforts cost more than anticipated or if we
cannot increase our brand awareness, our business, financial condition and
results of operations would be materially adversely affected. Please see "Use of
Proceeds."
EXPANDING IN INTERNATIONAL MARKETS WILL BE EXPENSIVE AND SUBJECT TO SIGNIFICANT
RISKS.
We intend to continue to expand into international markets and to spend
significant financial and managerial resources to do so. We have limited
experience in international operations and may not be able to compete
effectively in international markets. If our revenues from international
operations do not exceed the expense of establishing and maintaining these
operations, our business, financial condition and operating results will suffer.
We face significant risks inherent in conducting business internationally, such
as:
- uncertain demand in foreign markets for Webmail advertising, direct
marketing and e-commerce;
- difficulties and costs of staffing and managing international operations;
- differing technology standards;
- difficulties in collecting accounts receivable and longer collection
periods;
- economic instability and fluctuations in currency exchange rates and
imposition of currency exchange controls;
- potentially adverse tax consequences; and
- political instability, unexpected changes in regulatory requirements, and
reduced protection for intellectual property rights in some countries.
WE WILL HAVE BROAD DISCRETION WITH RESPECT TO THE EXPENDITURE OF THE PROCEEDS
FROM THIS OFFERING.
As of the date of this prospectus, we cannot specify the particular uses for
the net proceeds we will receive from the offering. If our management does not
apply these funds effectively it could have a material adverse effect on our
business. Please see "Use of Proceeds".
WE MAY NOT BE ABLE TO RAISE NECESSARY CAPITAL IN THE FUTURE.
We anticipate the need to raise additional capital in the future. However,
we may not be able to raise on terms favorable to us, or at all, amounts
necessary to fund our planned expansion, develop new or enhanced services,
respond to competitive pressures, promote our brand name or acquire
complementary businesses, technologies or services. Some of our shareholders
have registration rights that could interfere with our ability to raise needed
capital.
If we raise additional funds by issuing equity securities, stockholders may
experience dilution of their ownership interest. Moreover, we could issue
preferred stock that has rights senior to those of the Class A common stock. If
we raise funds by issuing debt, our lenders may place limitations on our
operations, including our ability to pay dividends.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Certain Transactions--Registration Rights."
REGULATION OF EMAIL AND INTERNET USE IS EVOLVING AND MAY ADVERSELY IMPACT OUR
BUSINESS.
There are currently few laws or regulations that specifically regulate
activity on the Internet. However, laws and regulations may be adopted in the
future that address issues such as user privacy, pricing, and the
characteristics and quality of products and services. For example, the
Telecommunications Act of 1996
20
<PAGE>
sought to prohibit transmitting certain types of information and content over
the Internet. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate ISPs and online services providers in a
manner similar to long distance telephone carriers and to impose access fees on
these companies. This could increase the cost of transmitting data over the
Internet. Any new laws or regulations relating to the Internet could adversely
affect our business.
Moreover, the extent to which existing laws relating to issues such as
property ownership, pornography, libel and personal privacy are applicable to
the Internet is uncertain. We could face liability for defamation, copyright,
patent or trademark infringement and other claims based on the content of the
email transmitted over our system. We do not and cannot screen all the content
generated and received by our members. Some foreign governments, such as
Germany, 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. We may be subject to legal proceedings and damage claims if we are found
to have violated laws relating to email content.
OUR INTELLECTUAL PROPERTY RIGHTS ARE CRITICAL TO OUR SUCCESS, BUT MAY BE
DIFFICULT TO PROTECT.
We regard our copyrights, service marks, trademarks, trade secrets, domain
names and similar intellectual property as critical to our success. We rely on
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with our employees, members, strategic partners and others to
protect our proprietary rights. Despite our precautions, unauthorized third
parties may improperly obtain and use information that we regard as proprietary.
Third parties may submit false registration data attempting to transfer key
domain names to their control. Our failure to pay annual registration fees for
key domain names may result in the loss of these domains to third parties. Third
parties have challenged our rights to use some of our domain names, and we
expect that they will continue to do so.
End-user license provisions protecting against unauthorized use, copying,
transfer and disclosure of the licensed program may be unenforceable under the
laws of certain jurisdictions and foreign countries. The status of United States
patent protection for software products is not well defined and will evolve as
additional patents are granted. We do not know if our current or future patent
applications will be issued with the scope of the claims we seek, if at all.
Current United States law does not adequately protect our database of member
contact and demographic information. In addition, the laws of some foreign
countries do not protect proprietary rights to the same extent as do the laws of
the United States. Our means of protecting our proprietary rights in the United
States or abroad may not be adequate and competitors may independently develop
similar technology.
Third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights. In addition, other parties may assert infringement
claims against us. Although we have not received notice of any alleged
infringement, we cannot be certain that our products do not infringe issued
patents that may relate to our products. Because patent applications in the
United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to our software products. We may
be subject to legal proceedings and claims from time to time in the ordinary
course of our business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third parties. Intellectual
property litigation is expensive and time-consuming and could divert
management's attention away from running our business.
A SUBSTANTIAL AMOUNT OF CLASS A COMMON STOCK MAY COME ONTO THE MARKET IN THE
FUTURE, WHICH COULD DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of Class A common stock in the
public market following this offering could cause the market price of our Class
A common stock to decline. After this offering, we will have shares of
Class A common stock outstanding. All the shares sold in this offering will be
freely
21
<PAGE>
tradable. The remaining shares of Class A common stock outstanding
after this offering are subject to lock-up agreements that prohibit the sale of
the shares for 180 days after the date of this prospectus. Beginning, ,
1999 (181 days after the date of this prospectus), shares will become
available for sale. The remaining shares will become available at
various later dates upon the expiration of one-year holding periods. We are
likely to issue large amounts of additional Class A common stock, which may also
be sold and which could adversely affect the price of our stock. See "Our
contracts with our Web site partners require us to incur substantial expenses"
and "Investors in this offering will suffer immediate and substantial dilution,
and they will experience more dilution in the future because of additional stock
issuances."
The holders of approximately shares of Class A common stock have
the right, subject to conditions, to require us to file registration statements
covering their shares, or to include their shares in registration statements
that we may file for ourselves or for other stockholders. By exercising their
registration rights and selling a large number of shares, these holders could
cause the price of the Class A common stock to fall. For more information on
these registration rights, please see "Description of Securities--Registration
Rights."
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION, AND
THEY WILL EXPERIENCE MORE DILUTION IN THE FUTURE BECAUSE OF ADDITIONAL STOCK
ISSUANCES.
We expect the initial public offering price to be substantially higher than
the pro forma net tangible book value per share of our Class A common stock.
Purchasers in this offering will experience immediate dilution of $
(assuming a public offering price of $ per share). For more
information, please see "Dilution."
Several of our existing agreements with Web site partners provide for the
issuance of substantial numbers of additional shares. We also have outstanding
vested and unvested employee stock options to purchase an aggregate of 6,826,359
shares of Class A common stock. We have made a number of Internet-related asset
acquisitions using stock and options to pay part or all of the purchase price.
In the future, we expect to continue to issue shares and options, particularly
in connection with our efforts to attract, retain and motivate qualified
personnel and in connection with acquisitions. We may also issue additional
shares or options to attract or retain Web site or ISP partners when we believe
it is appropriate. We anticipate that the number of shares involved in these
arrangements will be substantial.
For more information about our existing commitments to issue Class A common
stock, please see
" -- Our contracts with our Web site partners require us to incur substantial
expenses" and "Management--Compensation."
WE DO NOT INTEND TO PAY ANY CASH DIVIDENDS ON OUR CLASS A COMMON STOCK.
We have never paid or declared any cash dividends on our Class A common
stock or other securities and intend to retain any future earnings to finance
the development and expansion of our business. We do not anticipate paying any
cash dividends on our Class A common stock in the foreseeable future. See
"Dividend Policy."
IT IS DIFFICULT TO PREDICT THE DEVELOPMENT OF THE MARKET FOR OUR STOCK, BUT OUR
STOCK PRICE IS LIKELY TO BE VOLATILE.
We cannot predict the extent to which investor interest in Mail.com will
lead to the development of a trading market or how liquid that market might
become. As discussed above, our financial results are difficult to predict and
could fluctuate significantly. In addition, the market prices of securities of
Internet-related companies have been highly volatile. A stock's price is often
influenced by rapidly changing perceptions about the future of the Internet or
the results of other Internet or technology companies, rather than specific
developments relating to the issuer of that particular stock. If our stock price
is volatile, a securities class action may be brought against us. Class-action
litigation could result in substantial costs and divert our management's
attention and resources.
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<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of
Class A common stock in the offering will be approximately $ million at an
assumed offering price of $ per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses. If the Underwriters over-allotment option is exercised in full, we
estimate that such net proceeds will be approximately $ . The principal
purposes of the offering are to obtain additional capital, create a public
market for our Class A common stock and facilitate our future access to the
public capital markets.
We intend to use the net proceeds for expansion of our network
infrastructure, the development of Web site and ISP partnerships, expansion of
sales and marketing activities, hiring of personnel, potential acquisitions and
other general corporate purposes. In addition, we may use a portion of the net
proceeds to acquire or invest in complementary businesses, technologies,
services or products, However, we currently have no commitments or agreements
and are not involved in any negotiations with respect to any material
transactions. As of the date of this prospectus, we cannot specify with
certainty the particular uses for the net proceeds to be received upon
completion of the offering. Accordingly, we will have broad discretion in the
application of the net proceeds. Pending these uses, we will invest the net
proceeds of this offering in short-term, interest-bearing, investment grade
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance the expansion of our business.
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Mail.com as of December
31, 1998:
- - on an actual basis;
- - on a pro forma basis to give effect to:
- the issuance of 3.2 million shares of Class E convertible preferred stock
at $5.00 per share on March 10, 1999 for net cash proceeds of
approximately $15.1 million;
- the issuance at the closing of this offering of an aggregate of 1.5
million shares of Class A common stock to CNET and NBC upon the exercise
of $5.00 per share warrants for net proceeds of approximately $7.5
million;
- the automatic conversion of all outstanding shares of convertible
preferred stock into 13,161,558 shares of Class A common stock upon the
closing of this offering; and
- the issuance of 2,027,086 Class A common shares at the closing of this
offering in full settlement of our contingent obligations to issue
additional equity to our preferred stockholders. We will account for the
issuance of the additional Class A common shares to our preferred
stockholders at the closing of this offering as a non-cash dividend to our
preferred stockholders. For purposes of the pro forma data, we have
calculated the amount of the dividend based on a value of $5.00 per common
share, which is the price paid in our recent private placement. The actual
amount of the dividend will be determined using the initial public
offering price.
- - on a pro forma as adjusted basis to give effect to the sale of shares of
Class A common stock in this offering, assuming an initial offering price of
$ per share.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -------------
Cash and cash equivalents.................................................. $8,414,352 $31,014,352
---------- ---------- -------------
---------- ---------- -------------
Domain asset purchase obligations, excluding current portion............... $ 216,886 $ 216,886
Obligations under capital leases, excluding current portion................ 1,437,731 1,437,731
Redeemable convertible preferred stock, Class C, $0.01 par value;
12,000,000 shares authorized, 3,776,558 shares issued and outstanding
actual, no shares issued and outstanding pro forma and as pro forma
adjusted................................................................. 13,047,650 --
Stockholders' equity:
Convertible preferred stock, Class A, D, and E, $0.01 par value; 60,000,000
shares authorized, 6,185,000 shares issued and outstanding actual; no
shares issued and outstanding, pro forma and as pro forma as adjusted.... 61,850 --
Common stock, Class A and B, $0.01 par value; 130,000,000 shares
authorized, 15,931,405 shares issued and outstanding actual; 32,620,049
shares issued and outstanding pro forma and shares issued and outstanding
pro forma as adjusted.................................................... 159,314 326,200
Additional paid in capital................................................. 16,502,440 62,179,791
Stock subscriptions receivable............................................. (500) (500)
Accumulated deficit........................................................ (17,055,747) (27,190,484)
---------- ---------- -------------
Total stockholders' equity (deficit)....................................... (332,643) 35,315,007
---------- ---------- -------------
Total capitalization....................................................... $14,369,624 $36,969,624
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
Mail.com expects that there will be shares of Class A common stock
and 10,000,000 shares of Class B common stock outstanding after the offering.
The number of shares of Class A common stock includes in addition to the
adjustments described above, shares issued upon option and warrant exercises
that occurred after December 31, 1998. After the closing of this offering, no
shares of convertible preferred stock will be issued and outstanding. The
foregoing discussion and table assume no exercise of any stock options and
warrants outstanding as of December 31, 1998 (except CNET and NBC). As of
December 31, 1998, there were options outstanding to purchase a total of 6.7
million shares of Class A common stock with a weighted average exercise price of
$1.77 per share and 1.7 million shares of common stock reserved for issuance
upon exercise of outstanding warrants (including the CNET and NBC warrants) at a
weighted average exercise price of $4.79 per share. To the extent that any of
these options are exercised, there will be further dilution to new investors.
See "The Offering--Shares Issuable After The Offering" and Notes to Financial
Statements.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1998 was
approximately $ , or $ per share of common stock. Pro forma net
tangible book value per share is determined by dividing the amount of our pro
forma total tangible assets less total liabilities by the pro forma number of
shares of common stock outstanding at that date. Dilution in net tangible book
value per share represents the difference between the amount per share paid by
purchasers of shares of Class A common stock in this offering and the pro forma
net tangible book value per share of common stock immediately after the
completion of this offering. After giving effect to the issuance and sale of the
shares of Class A common stock in this offering (at an assumed initial
public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses), our pro
forma net tangible book value as of December 31, 1998 would have been $ ,
or $ per share. This represents an immediate increase in pro forma net
tangible book value of $ per share to existing stockholders and an immediate
dilution in pro forma net tangible book value of $ per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......................... $
Pro forma net tangible book value per share at December 31, 1998
Increase in pro forma net tangible book value per share attributable
to new investors..................................................
---------
Pro forma net tangible book value per share after offering
---------
Dilution per share to new investors..................................... $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis, as of December 31,
1998, the differences between the total number of shares of common stock
purchased from Mail.com and the total consideration paid and the average price
per share paid by existing stockholders and new investors purchasing shares of
Class A common stock in this offering based upon an assumed initial public
offering price of $ per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE
PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ---------- ----------- ------------
Existing stockholders................................... % $ % $
New investors...........................................
---------- ----- ---------- ----- ------------
Total............................................. 100.0% $ 100.0% $
---------- ----- ---------- ----- ------------
---------- ----- ---------- ----- ------------
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of December 31, 1998 (except CNET and NBC). As of December 31,
1998, there were options outstanding to purchase a total of 6.7 million shares
of Class A common stock with a weighted average exercise price of $1.77 per
share and 1.7 million shares of common stock reserved for issuance upon exercise
of outstanding warrants (including the CNET and NBC warrants) at a weighted
average exercise price of $4.79 per share. To the extent that any of these
options are exercised, there will be further dilution to new investors. See "The
Offering--Shares Issuable After The Offering" and Notes to Financial Statements.
25
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth our selected financial data. 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
"Summary Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The following data is presented:
- - on an actual basis;
- - on a pro forma basis to give effect to:
- the issuance of 3.2 million shares of Class E convertible preferred stock
at $5.00 per share on March 10, 1999 for net cash proceeds of
approximately $15.1 million;
- the issuance at the closing of this offering of an aggregate of 1.5
million shares of Class A common stock to CNET and NBC upon the exercise
of $5.00 per share warrants for net proceeds of approximately $7.5
million;
- the automatic conversion of all outstanding shares of convertible
preferred stock into 13,161,558 shares of Class A common stock upon the
closing of this offering; and
- the issuance of 2,027,086 Class A common shares at the closing of this
offering in full settlement of our contingent obligations to issue
additional equity to our preferred stockholders. We will account for the
issuance of the additional Class A common shares to our preferred
stockholders at the closing of this offering as a non-cash dividend to our
preferred stockholders. For purposes of the pro forma data, we have
calculated the amount of the dividend based on a value of $5.00 per common
share, which is the price paid in our recent private placement. The actual
amount of the dividend will be determined using the initial public
offering price.
- - on a pro forma as adjusted basis to give effect to the sale of shares of
Class A common stock in this offering, assuming an initial offering price of
$ per share.
26
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- ------------- --------------
STATEMENT OF OPERATIONS DATA:
Revenues........................................................... $ 19,015 $ 173,234 $ 1,494,762
Operating expenses:
Cost of revenues................................................. 187,890 1,081,848 2,890,582
Sales and marketing.............................................. 65,096 930,420 7,669,877
General and administrative....................................... 221,932 862,028 3,482,097
Product development.............................................. 93,698 296,140 1,573,465
------------- ------------- --------------
Total operating expenses..................................... 568,616 3,170,436 15,616,021
------------- ------------- --------------
Loss from operations............................................... (549,601) (2,997,202) (14,121,259)
Other income (expense):
Gain on sale of investment....................................... -- -- 438,000
Interest income.................................................. 6,869 36,264 277,164
Interest expense................................................. (1,980) (34,815) (109,187)
------------- ------------- --------------
Total other income, net...................................... 4,889 1,449 605,977
------------- ------------- --------------
Net loss........................................................... $ (544,712) $ (2,995,753) $ (13,515,282)
------------- ------------- --------------
------------- ------------- --------------
Basic and diluted net loss per share............................... $ (0.04) $ (0.21) $ (0.93)
------------- ------------- --------------
------------- ------------- --------------
Weighted average basic and diluted shares outstanding.............. 13,725,278 14,097,500 14,607,915
------------- ------------- --------------
------------- ------------- --------------
Pro forma:
Basic and diluted net loss per common share........................ $ (0.43)
--------------
--------------
Shares used in pro forma basic and diluted net loss per common
share calculation................................................ 31,296,420
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31, 1998
------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C>
PRO FORMA
1996 1997 ACTUAL PRO FORMA AS ADJUSTED
---------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 128,277 $ 909,718 $ 8,414,352 $ 31,014,352
Working capital (deficit)..................... 37,743 (190,963) 5,075,870 27,675,870
Total assets.................................. 665,855 2,645,854 20,344,488 42,944,488
Domain asset purchase obligations, less
current portion............................. -- 150,155 216,886 216,886
Deferred revenue, current and long term
portion..................................... 6,289 329,187 1,904,645 1,904,645
Capital lease obligations, less current
portion..................................... 146,186 568,728 1,437,731 1,437,731
Redeemable convertible preferred stock........ -- -- 13,047,650 --
Total stockholders' equity (deficit).......... 370,288 566,915 (332,643) 35,315,007
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF FEDERAL SECURITIES LAW. SUCH STATEMENTS CAN BE IDENTIFIED BY THE
USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "ESTIMATE," "CONTINUE" OR OTHER SIMILAR WORDS. THESE STATEMENTS
DISCUSS FUTURE EXPECTATIONS, CONTAIN PROJECTIONS OF RESULTS OF OPERATIONS OR OF
FINANCIAL CONDITION OR STATE OTHER "FORWARD-LOOKING" INFORMATION. ALTHOUGH
MANAGEMENT BELIEVES THAT THE EXPECTATIONS REFLECTED IN THESE FORWARD-LOOKING
STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, CERTAIN FACTORS SUCH AS RAPID
CHANGES IN THE MARKETS IN WHICH THE COMPANY COMPETES OR GENERAL ECONOMIC
CONDITIONS MIGHT CAUSE A DIFFERENCE BETWEEN ACTUAL RESULTS AND THESE
FORWARD-LOOKING STATEMENTS. WHEN CONSIDERING THESE FORWARD-LOOKING STATEMENTS,
PROSPECTIVE INVESTORS SHOULD CONSIDER THE "RISK FACTORS" AND OTHER CAUTIONARY
STATEMENTS IN THIS PROSPECTUS.
OVERVIEW
Mail.com is a leading global provider of email services. Our basic email
services are free to our members. We generate revenues from advertising, direct
response marketing and e-commerce offerings, and from premium services offered
to our members on a subscription basis. In February 1999, we processed
approximately 100 million email messages and delivered approximately 150 million
advertisements.
We have grown our member base by signing up members in partnership with
third-party Web sites and at our own Web sites. We offer our co-branded Webmail
service at 40 Web sites. We recently launched an initiative to offer Web-based
access for ISP email accounts. Our ISP partners include Prodigy, GTE and Cable &
Wireless.
Prior to 1998, we generated most of our revenues from subscription services
and trading of domain names. We collect subscriptions by charging members'
credit cards in advance, usually after a 30-day trial period. Until recently, we
offered one-year, two-year, five-year and lifetime subscription periods. During
March 1999, we increased our subscription rates and began offering only monthly
and annual subscriptions. We record subscriptions as deferred revenues and
recognize the revenues ratably over the term of the subscription. We use an
eight year amortization period for lifetime subscriptions. We recognize revenues
from the sale of domain names at the time of sale.
During 1998, our member base became large enough to provide a platform for
advertising, direct marketing, and e-commerce revenues. We expect that most of
our revenues will be derived from these sources in the future. We price
advertisements based on a variety of factors, including whether the advertising
is targeted to a specific category of members or whether it is run across our
entire network. We attempt to sell all of our available advertising space, or
inventory, through a combination of advertisements that we sell on either a
"CPM" basis (whereby the advertiser pays us an agreed amount for each 1,000
advertisements) or a "cost-per-action" basis (whereby we generate revenue only
if the member responds to the advertisement with an action, such as by
"clicking" on the advertisement or purchasing the product advertised). In a
CPM-based advertising contract, we recognize revenues from advertising sales
ratably as we deliver individual advertisements, or impressions. In a cost per
action contract, we recognize revenues as members "click" or otherwise respond
to the advertisement. In the case of contracts requiring actual sales of
advertised items, we may experience delays in recognizing revenues pending
receipt of data from the advertiser.
On some occasions, we have also received upfront "placement" fees from
direct marketers and e-commerce companies. These arrangements give the customer
the exclusive right to use our network to promote goods or services within their
category. These exclusive arrangements generally last one year. We
28
<PAGE>
record placement fees as deferred revenues, and we recognize the revenues
ratably over the term of the agreement.
We also engage in barter transactions. Under these arrangements, we deliver
advertisements promoting a third party's goods and services in exchange for
their agreement to run advertisements promoting our Webmail service. The number
of advertisements that each party agrees to deliver, and hence the effective
CPM, may not be equal. We recognize barter revenues ratably as the third party's
advertisements are delivered to our members. We record cost of revenues ratably
as our advertisements are delivered by the third party. Although our revenues
and related costs of revenues will be equal at the conclusion of the barter
transaction, the amounts may not be equal in any particular quarter. We record
barter revenues and expenses at the fair market value of either the services we
provide or of those we receive, whichever is more readily determinable in the
circumstances. Barter revenues were 14% of revenues for the year ended December
31, 1998, but decreased to 10% of revenues in the fourth quarter of 1998. On an
annual basis, we anticipate that barter revenues will remain below 10%, although
the actual percentage may fluctuate in any given quarter.
In most of our contracts with our partners we provide the Webmail service at
no cost to the partner. In exchange for assuming the costs to provide service,
we retain a percentage (generally at least 50%) of any advertising and
subscription revenues attributable to our Webmail service at the partner's site.
While most of our partners share in advertising and subscription revenues on a
quarterly basis during the contract term, some of our partners are compensated
or have the option to be compensated based on the number of member
registrations. These contracts call for us to pay an amount in cash and/or
shares of our Class A common stock for each member registration or confirmed
member registration at the partner's site. In addition, under some of our
contracts we pay our partners guaranteed minimum amounts and/or upfront or
scheduled payments, usually in the form of sponsorship or license fees. Because
we expect to retain at contract termination most of the members that establish
emailboxes, we account for both revenue sharing and per-member costs as customer
acquisition costs. We record these costs as sales and marketing expenses as we
incur them.
Because some of our contracts require us to issue shares of Class A common
stock on a contingent basis, we could experience substantial fluctuations in our
quarterly earnings. The amount of stock we are required to issue is usually
based upon the number of member registrations during the preceding quarter or
upon the achievement of certain targets. We record the non-cash expense as of
the date we issue the stock or as of the date the targets are achieved, at the
then fair market value of our stock. These expenses aggregated approximately
$2,982,000 for the year ended December 31, 1998. As required by our contracts,
we expect to continue issuing shares of our Class A common stock to AltaVista,
CNET, Snap, NBC and RemarQ. See "Risk Factors--Our contracts with our Web site
partners require us to incur substantial expenses" and "--We may fail to meet
market expectations because of fluctuations in our quarterly operating results,
which would cause our stock price to decline."
In our agreements with GeoCities and CNN, we agreed to issue stock either
upon launch of the Webmail service at their sites or on execution of the
contract. In general, these stock issuances are not dependent on a certain
number of subscriptions or revenues, but rather on certain promotional
obligations of the partner. We capitalize as a partner advance the market value
of all stock we issue and then amortize that amount over the length of the
contract. We recorded approximately $173,000 of amortization expense for these
agreements in 1998. This amortization is included in sales and marketing
expenses.
Although we have experienced substantial growth in revenues in recent
periods, we have incurred substantial operating losses since our inception and
we expect to incur substantial operating losses for the foreseeable future. As
of December 31, 1998, we had an accumulated deficit of approximately $17.1
million. We intend to invest heavily in sales and marketing and continued
development and enhancements to our network infrastructure and service
offerings. Our prospects should be considered in
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light of risks, expenses and difficulties encountered by companies in the early
stages of development, particularly companies in the rapidly evolving Internet
market. See "Risk Factors."
In light of the evolving nature of our business and our limited operating
history, we believe that period-to-period comparisons of our revenues and
operating results are not meaningful and should not be relied upon as
indications of future performance. We believe that advertising sales in
traditional media, such as television and radio, generally are lower in the
first calendar quarter. Our revenues are also affected by seasonal patterns in
advertising, which would become more noticeable if our revenue growth does not
continue at its recent rate. We do not believe that our historical growth rates
are indicative of future results.
RESULTS OF OPERATIONS
Our financial statements as of December 31, 1994 and 1995 and for the period
from August 1, 1994 through December 31, 1995 reflect only immaterial
transactions. These activities have been included in the 1996 financial
statements to facilitate presentation.
REVENUES
Revenues increased to approximately $1.5 million in 1998 from approximately
$173,000 in 1997. The increase was due primarily to our commencing advertising
sales in July 1998. These sales became possible because of the growth in our
number of emailboxes. From inception through December 31, 1998, our members had
established an aggregate of approximately 4 million emailboxes. This represents
an increase of approximately 3 million emailboxes during 1998. See "Risk
Factors--We have only limited information about our members and their usage,
which may reduce our potential revenues." Revenues for 1998 included
approximately $1.1 million of advertising revenue. Of this revenue,
approximately $461,000 was attributable to one customer, N2K/Music Boulevard.
This amount included barter revenues of approximately $162,000, representing all
of our barter revenues for the year. Our revenues from subscriptions increased
to approximately $286,000 in 1998 from approximately $61,000 in 1997. The
remaining type of revenue, from the sale of domain names, decreased to
approximately $92,000 in 1998 from approximately $112,000 in 1997.
In the fourth quarter of 1998, revenues from members acquired through the
Lycos and AltaVista Web sites accounted for approximately 40% of our revenue.
Our agreement with Lycos expired on October 8, 1998, shortly after Lycos
acquired WhoWhere, a competitor which provides homepage and Webmail services.
Compaq, the owner of the AltaVista Web site, has recently entered into a
strategic relationship with Microsoft. As part of that relationship, AltaVista
agreed to offer Microsoft's Hotmail Webmail service starting in July 1999, when
our contract with AltaVista expires. While these contracts either have or will
soon expire, we expect that we will continue to serve the majority of the
affected members. See "Risk Factors--Several of our most significant partner
contracts have expired or may soon terminate."
We launched our commercial email service in 1996 and therefore had only
$19,000 in revenues in this period. These consisted of $2,000 from subscription
services and $17,000 from the sale of domain names.
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OPERATING EXPENSES
COST OF REVENUES
Cost of revenues was approximately $2.9 million in 1998, an increase from
approximately $1.1 million in 1997. Cost of revenues consists primarily of costs
incurred in the delivery and support of our email services, including
depreciation of equipment used in our network infrastructure, the cost of
telecommunications service, and personnel costs associated with our systems,
databases and graphics. Cost of revenues also includes costs associated with
licensing third party network software. In addition, we report the cost of
barter trades, amortization of domain assets, and the cost of domain names that
have been sold in cost of revenues. During the second half of 1998, we purchased
significant amounts of capital equipment for the network to accommodate the
growth in the number of emailboxes. As a result, depreciation expense increased
significantly during this period. Also, we substantially increased headcount in
the above groups in the second half of the year. We anticipate continuing to
purchase significant amounts of hardware and software and to continue to hire
technical personnel.
Cost of revenues increased from approximately $188,000 in 1996 to
approximately $1.1 million in 1997. The increase was due primarily to increased
depreciation expense, personnel costs and amortization of domain names.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased to approximately $7.7 million in 1998
from approximately $930,000 in 1997. The primary component of sales and
marketing expenses is customer acquisition costs. The costs related to customer
acquisitions paid in cash were approximately $1.7 million in 1998 and
approximately $631,000 in 1997. The costs related to customer acquisitions
through the issuance of Class A common stock were approximately $2.8 million in
1998. We did not issue shares related to customer acquisitions before 1998. We
also recorded $173,000 in amortization of partner advances in 1998. There were
no partner advances before 1998. The remainder of the costs in this category
relate to salaries and commissions for sales, marketing, and business
development personnel and their related travel and entertainment, as well as
marketing promotions and advertising. We increased our sales and marketing
efforts in the latter part of 1997 and continued to increase these efforts
through 1998. We expect sales and marketing expenses to increase as we continue
to invest in sales and marketing personnel, expand our partner network, and
build our brand name.
In 1997, sales and marketing expenses were approximately $930,000, up from
approximately $65,000 in 1996 when we started conducting business. During 1997,
we entered into several partner relationships and began incurring customer
acquisition costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of compensation and
other employee costs not included in other expense line items, as well as
overhead expenses, customer support and bad debt expense. These expenses
increased from approximately $862,000 in 1997 to approximately $3.5 million in
1998. The increase was primarily due to increases in the number of personnel to
support and grow our business, increasing customer service coverage to 24 hours
per day, 7 days per week and increased facilities space. We expect these
expenses to continue to grow as necessary to support the growth of our business
and to operate as a public company.
General and administrative expenses increased from approximately $222,000 in
1996 and to approximately $862,000 in 1997 as our business started to grow. The
increase was due primarily to increases in personnel, recruiting and consulting
expenses.
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PRODUCT DEVELOPMENT
Product development expenses consist primarily of salaries and benefits,
consulting expenses and depreciation of equipment. These expenses relate to the
development of new services and the enhancement of existing ones. These costs
increased from approximately $296,000 in 1997 to approximately $1.6 million in
1998. The increase in expenses was due to increased staffing, the costs of
adding new features to our services, designing new services and redesigning
products. To date, we have expensed all of our product development costs as
incurred. We need to continue to invest in product development to attain our
goals, and as a result we expect product development expenses to increase
significantly.
Product development costs increased from approximately $94,000 in 1996 to
approximately $296,000 in 1997. This increase was also due to increased
staffing, consulting expenses and depreciation.
OTHER INCOME (EXPENSE)
Interest income increased from approximately $36,000 in 1997 to
approximately $277,000 in 1998. The increase was due to higher cash balances
after we completed private placements of preferred stock in May and December of
1997 and January, July and August of 1998. In 1998, we realized a gain of
approximately $438,000 when we sold shares of Lycos common stock. We received
the Lycos stock as consideration in March 1998, when Lycos exercised an option
to acquire preferred stock. We had granted Lycos the option when we entered into
a partner contract with them in October 1997. Interest expense of approximately
$109,000 in 1998 consists of interest recorded on our capital lease obligations.
Interest income increased from $7,000 in 1996 to $36,000 in 1997. The
increase was due primarily to higher cash balances after we completed private
placements of preferred stock in May and December of 1997. Interest expense on
capital leases increased from $2,000 in 1996 to $35,000 in 1997, as we continued
to finance our computer equipment purchases.
QUARTERLY RESULTS OF OPERATIONS DATA
The following table sets forth unaudited quarterly statements of operations
for each of the four quarters in 1998. We have prepared this data on
substantially the same basis as the audited financial statements appearing
elsewhere in this prospectus. We believe this data includes all necessary
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation. You should read the quarterly data together with the
financial statements and the notes to those statements appearing elsewhere in
this prospectus. The results of operations for any quarter are not necessarily
indicative of the results of operations for any future period. We expect that
our quarterly revenues may fluctuate significantly. See "Risk Factors--We may
fail to meet market expectations because of fluctuations in our quarterly
operating results, which would cause our stock price to decline."
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------
MARCH 31, 1998 JUNE 30, 1998 SEPTEMBER 30, 1998 DECEMBER 31, 1998
------------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 80,413 $ 139,094 $ 272,636 $ 1,002,619
Operating expenses:
Cost of revenues...................... 351,665 592,677 800,728 1,145,512
Sales and marketing................... 149,281 509,722 1,800,597 5,210,277
General and administrative............ 275,206 489,082 960,093 1,757,716
Product development................... 218,292 277,750 489,723 587,700
---------- ------------- ------------------ -----------------
Total operating expenses.......... 994,444 1,869,231 4,051,141 8,701,205
---------- ------------- ------------------ -----------------
Loss from operations.................. (914,031) (1,730,137) (3,778,505) (7,698,586)
Other income (expense):
Gain on sale of investment............ -- 438,000 -- --
Other income.......................... 6,905 26,475 107,437 136,347
Interest expense...................... (13,368) (20,265) (29,199) (46,355)
---------- ------------- ------------------ -----------------
Total other income, net............... (6,463) 444,210 78,238 89,992
---------- ------------- ------------------ -----------------
Net loss.............................. $ (920,494) $ (1,285,927) $ (3,700,267) $ (7,608,594)
---------- ------------- ------------------ -----------------
---------- ------------- ------------------ -----------------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have obtained financing through private placements
of equity securities and through equipment leases. To date, we have raised
approximately $37.5 million through the sale of preferred stock, including the
most recent sale of Class E convertible preferred stock of $16 million in March
1999. Upon completion of this offering we will receive $7.5 million from CNET
and NBC in payment for the exercise of their warrants to purchase Class A common
stock. As of December 31, 1998, we had approximately $8.4 million in cash and
cash equivalents. We have had significant negative cash flows from operating
activities for each fiscal and quarterly period to date. Net cash used in
operating activities was approximately $439,000 for 1996, approximately $1.8
million for 1997 and approximately $4.8 million for 1998. Cash used in operating
activities consisted mostly of net operating losses, decreased by issuances of
stock for member acquisitions, non-cash compensation and depreciation and
amortization.
Net cash used in investing activities was approximately $135,000, $489,000
and $3.9 million for the years ended December 31, 1996, 1997, and 1998,
respectively. Net cash used in investing activities consisted primarily of
purchases of computer equipment and domain name assets. Net cash provided by
investing activities resulted from the sale leaseback of computer equipment. We
expect that net cash used in investing activities will increase as we acquire
significant new hardware and software in the future.
We have entered into various capital leases for computer equipment. These
capital lease obligations resulted in non-cash financing activities aggregating
approximately $212,000, $750,000 and $1.4 million in 1996, 1997, and 1998,
respectively. The capital leases are with various institutions and have various
terms ranging from three to five years. The weighted average interest rate under
the leases was approximately 11.5% in 1998.
We have entered into various arrangements in connection with our domain name
assets. The obligations resulted in non-cash financing activities aggregating
approximately $227,000 and $169,000 in 1997 and 1998, respectively. These
agreements have terms ranging from two to seven years.
Our net cash provided by financing activities was approximately $700,000,
$3.0 million and $16.2 million during 1996, 1997 and 1998, respectively. The
principal component in 1996 was the net proceeds from the issuance of Class A
and B common stock to founders. The main component in 1997 was the
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proceeds from Class A preferred stock and in 1998 the main components were the
proceeds from Class A and C preferred stock.
We believe that the net proceeds from the offering, the recent private
placement and the exercise of the warrants held by CNET and NBC, together with
our existing cash and cash equivalents, will be sufficient to meet our working
capital and capital expenditure requirements for at least the next 12 months.
Our operating and investing activities may require us to obtain additional
equity or debt financing. In addition, we may evaluate potential acquisitions of
other businesses, products, and technologies. In order to complete these
potential acquisitions, we may need additional equity or debt financing in the
future. Sales of additional equity securities could result in additional
dilution to our stockholders.
YEAR 2000 COMPLIANCE
Our business could suffer if the systems on which we are dependent to
conduct our operations are not Year 2000 compliant.
Our potential areas of exposure include internal information technology,
including computers and software; non-information technology, including
telephone systems and other equipment that we use internally; and external,
third party systems, particularly the systems that comprise the Internet and
those products and services that allow our members to access the Internet.
We have completed our initial assessment of current Year 2000 compliance for
both our information and non-information technology. We are in the process of
preparing a detailed testing plan. We expect the details of this plan to be
complete by April 15, 1999.
Based on our initial assessment, we believe all non-information technology,
including security and phone systems, upon which we are materially dependent, is
Year 2000 compliant. With respect to information technology that we use
internally, we expect to resolve any Year 2000 compliance issues primarily
through normal upgrades or, when necessary, through replacement of existing
software with Year 2000 compliant products. We do not expect the cost of these
upgrades or replacements to be material to our financial position or results of
operations. We estimate that our total cost to become Year 2000 compliant will
not exceed $200,000. However, necessary upgrades and replacements may not be
completed on schedule or within estimated costs or may not successfully address
our Year 2000 compliance issues. We intend to complete the replacement or
correction of our non-compliant technologies, as well as the testing of any
replacement or corrected technologies, by September 30, 1999.
In the event that our production and operational facilities that support our
Web sites are not Year 2000 compliant, portions of our services may become
unavailable. Our review of our systems has shown that there is no single
application that would make our services totally unavailable and we believe that
we can quickly address any difficulties that may arise.
We are unable to determine the extent to which the external, third-party
systems on which our business depends may be prone to Year 2000 risks. In the
event that the Internet or widespread access to the Internet is compromised
because of Year 2000 problems, our services may not be available to or
accessible by our members. See "Risk Factors--Our systems, and the systems of
others that we depend on, may not operate properly because of Year 2000
problems." We are in the process of seeking verification from our key Web site
and ISP partners, manufacturers and suppliers that they are Year 2000 compliant
or, if they are not presently compliant, to provide an assurance that they plan
to become so. As of March 9, 1999, we have received notification from over 90%
of our manufacturers and suppliers and approximately 10% of our partners that
they are either Year 2000 compliant or are taking necessary steps to become Year
2000 compliant. We expect to receive certifications from the remaining
manufacturers, suppliers, and partners by April 15, 1999. To the extent that
vendors fail to provide certification that they are Year 2000 compliant by July
31, 1999, we will reevaluate our relationships.
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In the event that any of our partner sites are unable to operate due to Year
2000 operational difficulties, we could offer most of the affected members the
ability to bypass the partner site and access their emailbox through one of our
own sites.
We do not currently have a contingency plan to deal with the worst-case
scenario that might occur if technologies on which we are dependent are not Year
2000 compliant and fail to operate effectively. We intend to develop a plan for
this scenario by August 1, 1999.
If our present efforts to address the Year 2000 compliance issues are not
successful, or if partners, manufacturers, suppliers and other third parties do
not successfully address these issues, our business, operating results and
financial position could be materially and adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accounts issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1")." SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. We believe that the adoption of this
Statement will not have a significant impact on our financial statements.
We adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" in 1998. SFAS No. 130
requires us to report in our financial statements, in addition to our net income
(loss), comprehensive income (loss). Comprehensive income or loss includes all
changes in equity during a period from non-owner sources, including foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on investments in debt and equity securities. There were no differences
between our comprehensive loss and net loss as reported.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public enterprises report information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic area and major customers. We have determined that we do not have any
separately reportable segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
We do not expect this statement to affect us, as we do not have any derivative
instruments or hedging activities.
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BUSINESS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in these forward-looking statements. Factors that may cause such a
difference include, but are not limited to, those discussed in "Risk Factors."
MAIL.COM OVERVIEW
Mail.com is a leading global provider of email services. At the end of 1998,
we were the sixth largest provider of emailboxes in the world, according to
numbers compiled by ELECTRONIC MAIL & MESSAGING SYSTEMS for its quarterly
emailbox census. Our basic email services are free to our members. We generate
revenues from advertising, direct marketing, e-commerce offerings and premium
services offered to our members on a subscription basis. In February 1999, we
processed approximately 100 million email messages and delivered approximately
150 million advertisements.
We offer our members Web-based email, also known as Webmail. Webmail has
several benefits when compared to traditional email. Traditional email users
generally access their email only through their own individual computer. Webmail
allows users to access their email through any computer or other device that has
a Web browser with access to the Internet. Webmail users do not need to install
or set up email software. Members obtain a permanent email address that they can
keep even if they switch jobs, change their ISP or graduate from school. Our
Webmail offering includes a large choice of easy-to-remember, personalized email
addresses such as @mail.com, @email.com, @doctor.com, @lawyer.com, @USA.com and
@Asia.com from our portfolio of approximately 1,200 domain names.
We have grown our member base by signing up members in partnership with
third party Web sites and at our own Web sites. We offer our co-branded email
service at 40 Web sites, including Web sites owned by CBS SportsLine, CNET, CNN,
InfoSpace, Lexis-Nexis, Paramount, Snap, Standard & Poor's and Time Warner. By
offering email services to their visitors, our Web site partners seek to
increase traffic, enhance user affinity, broaden reach, collect user demographic
information and generate incremental revenues. We recently launched an
initiative to offer Web-based access for ISP email accounts. We launched this
service in February 1999 with Prodigy and have entered into contracts with GTE
and Cable & Wireless. By offering Web-based access to their customers, our ISP
partners seek to increase user satisfaction, reduce telecommunications and
customer support costs and generate a new revenue stream.
We believe that email has several benefits as an advertising, direct
marketing and e-commerce medium. While members are using our email service on
one of our partner Web sites or one of our own Web sites, we can display
advertising to them. We can target advertising because our members identify
themselves when they sign in to use their email. This permits us to direct
particular advertisements, direct marketing or e-commerce opportunities to
selected members on the basis of age, gender or other demographic criteria. We
also benefit from the fact that much of our content is important to our users,
having been written by their colleagues, friends and family. This valuable
content costs nothing for us to produce. As our number of active members grows,
we hope to increase our advertising rates by offering access to larger but
increasingly segmented pools of members who fit an advertiser's desired
demographic criteria. Since July 1, 1998, approximately 100 advertisers have
advertised on our email network.
The email industry is highly fragmented with large numbers of ISPs,
businesses and schools maintaining their own systems. We believe that as the
complexity and usage of email increases there will be an increasing desire on
the part of Web sites, ISPs, small businesses and educational institutions to
outsource their email to third parties. We believe our economies of scale,
flexible technology platform and email focus will enable us to offer these
market segments an attractive outsourcing alternative, both domestically and
internationally.
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INDUSTRY BACKGROUND
Use of the Internet and Internet related applications is growing rapidly.
The International Data Corporation (IDC) projects that the number of Web users
will increase from 69 million worldwide at the end of 1997 to 320 million by the
end of 2002.
GROWTH OF EMAIL
Email is becoming an increasingly important means of communication, with
both the number of email users and usage levels per individual projected to
increase significantly. According to an October 1998 Jupiter Communications
survey, approximately 97% of respondents reported using email. Email has the
highest usage of any service on the Internet. According to the Jupiter survey
there are over three times as many people using email as there are viewing or
creating a personal homepage, visiting a sports, music or games related site, or
participating in online chat. At the end of 1998, there were approximately 325
million emailboxes worldwide, an increase of 64% from a year before according to
a study by ELECTRONIC MAIL & MESSAGING SYSTEMS. Forrester Research projects that
the daily global Internet email traffic will increase from 100 million messages
per day in 1996 to 1.5 billion messages per day in 2002.
We believe the growth in email usage reflects several advantages over
traditional methods of communication. An email is easier to send than printed
correspondence and typically arrives in minutes. Email is easily distributed and
forwarded to many recipients or distributed to mailing lists. The electronic
format of email offers electronic filing, searching and editing capabilities not
generally available for faxes, voicemail and other forms of communications.
Email also allows for computer file attachments, permitting the recipient to
open and use files if they have the appropriate application software. In
addition, email can be integrated with other applications such as automated
scheduling, document sharing, and messaging applications such as email-to-fax
and email-to-pager.
Webmail accounts are the fastest growing category of emailboxes, according
to ELECTRONIC MAIL & MESSAGING SYSTEMS. According to this source, the number of
Webmail accounts increased from 2.4 million at the end of 1996 to 82.6 million
at the end of 1998. Webmail allows users to access their email through any
computer or other device that has a Web browser and access to the Internet. The
feature email users request most is universal access to their email service,
according to a survey conducted by Jupiter Communications/NFO Interactive.
EMERGENCE OF THIRD PARTY EMAIL SERVICE PROVIDERS
Prior to 1996, nearly all email services were provided directly by users'
employers, schools or ISPs. The emergence of Webmail has given third party
providers the ability to provide email services to any user with access to the
Web. This permits the development of large third-party email providers that
often have economy of scale advantages over traditional email providers,
including:
- the ability to spread costs of developing specialized email products and
services over large numbers of users;
- the ability to service many customer locations from one or more large
centralized data centers;
- sufficient global traffic to warrant 24 hour customer support and system
maintenance staff;
- volume purchasing of hardware, software, telecommunications and other
services;
- sufficient member base to attract general interest advertisers as well as
specialized advertisers seeking users in specific demographic targets; and
- sufficient member base to develop direct marketing and e-commerce
opportunities.
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ADVERTISING, DIRECT MARKETING AND E-COMMERCE ON THE INTERNET
The Web is emerging as an attractive new medium for advertisers, offering a
level of targetability, interactivity and measurability not available in
traditional media. Jupiter Communications projects that the amount of
advertising dollars spent on the Internet is expected to increase from
approximately $1.9 billion in 1998 to $7.7 billion by 2002, a compound annual
growth rate of 42%. By advertising on the Web, advertisers have the ability to
target their messages to specific groups of consumers. The Web also allows
advertisers to measure the number of times that a particular advertisement has
been viewed and the responses to the advertisement.
We also believe that the Web improves advertisers' direct marketing efforts,
which have been traditionally conducted through direct mail and telemarketing.
The interactive nature of the Web gives advertisers the potential to establish
dialogues and one-to-one relationships with potential consumers. Advertisers can
then make highly targeted product offers to consumers at the point of sale over
the Web at lower costs.
We believe that the growth in Web users and usage and the increasing amounts
of e-commerce will continue to create growth in Web advertising and direct
marketing. The Web is becoming a powerful e-commerce platform, since online
purchases of goods and services can be less expensive and more convenient than
traditional transactions. We believe that as the volume of e-commerce
transactions expands, retailers will offer a greater variety of products and
services over the Web. Forrester Research has estimated that online sales for
retail goods other than automobiles totaled $4.8 billion in 1998 and projects
that such sales will increase to $50.2 billion in 2002.
BUSINESS STRATEGY
As a leading global provider of email services, we seek to grow our member
base and increase usage of our services by expanding our partner network,
developing the Mail.com brand and by adding additional features to our services.
We believe this will provide us with greater advertising and other revenue
opportunities and economies of scale. Our strategies include:
- BUILDING OUR MEMBER BASE. We intend to add new members by expanding our
partner network to include additional Web sites and ISPs. We plan to use a
portion of the proceeds of this offering to launch marketing, promotional
and communications programs in an attempt to increase our brand
recognition, attract new partners and stimulate higher usage by our
members. We will also seek to acquire businesses with established user
bases to which we can offer our service.
- INCREASING MEMBER USAGE. We believe that adding features to our service
will increase member usage and generate more page views and revenue
opportunities. For example, in 1999 we plan to introduce a spell checker
and integrated personal calendars with "to do" lists and event reminders.
We also plan to expand our portfolio of domain names from which members
can select their email addresses. We are designing our technology to be
the foundation for additional messaging services. Our long-term objective
is to become a member's communications portal on the Web by combining
email, fax, voicemail, calendars, address books and related tools into one
fully-integrated service.
- INCREASING OUR ADVERTISING, DIRECT MARKETING AND E-COMMERCE REVENUE
OPPORTUNITIES. As our number of active members grows, we will seek to
increase our advertising revenues by using the demographic data we collect
to offer advertisers access to larger and increasingly segmented pools of
members who fit their desired criteria. We plan to offer advertisers a
broader array of advertising formats and tools. Examples include custom
mailings to members who have requested special advertiser offers and
instant member polls regarding their planned purchases, brand preferences,
price sensitivity and other areas of interest to our sponsors. We also
intend to continue to develop additional e-commerce relationships.
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- EXPANDING SUBSCRIPTION AND OTHER REVENUE OPPORTUNITIES. We plan to offer
additional premium services during 1999. MailPro will provide members with
larger email storage and attachment capacity and priority customer
support. MailFax will permit low cost faxing through a Web-based
interface. We have designed our new subscription infrastructure to permit
us to add additional Internet messaging and related services on a regular
basis. In the fourth quarter of 1998, we started requiring fees from
select Web sites seeking our co-branded email services and intend to
continue this practice in the future where appropriate.
- ENTERING ADDITIONAL MARKET SEGMENTS. We also plan to offer our
third-party email services to small businesses, colleges and other
organizations. In addition, we plan to expand our international member
base by adding additional international partners and by providing new
features such as email language translation. We plan to add foreign
language sites in addition to the German, Italian, Spanish, French, Dutch
and Japanese sites we offer today. We will also continue to seek to
acquire strategic businesses and technology that will help us serve these
markets.
OUR SERVICES
Our Webmail services differ from traditional email in several respects.
Traditional email services are typically provided by ISPs, employers and schools
as part of a larger offering, usually including Internet access. An ISP customer
generally uses a computer containing the ISP's software to download their email
from their ISP or other source to their own computer. The user then reads their
email using a program provided by the ISP or a commercial program such as
Eudora, Microsoft Outlook or Netscape Messenger.
Members sign up for our free Webmail services at one of our partners' or our
own Web sites. After a brief sign-up procedure, which includes providing
selected demographic data, a member selects an email address and establishes a
password. Our members are not required to install or set up any email software
on their computers. In order to access and read their email, our members visit
the site at which they established service using any computer with Web access
and a Web browser, such as Microsoft Internet Explorer or Netscape Navigator. In
addition, members store their email, address books, folders and other data on
our computers, rather than on the individual computer they used for a particular
visit. With our basic service, members perform all their email tasks while on
line and connected to the Web.
We have recently begun to offer a service which gives members free universal
Web access to their existing ISP email accounts. Customers of ISPs that offer
our service can access their ISP email by going to their ISP's Web site and
signing in using their existing ISP email address and password.
We have developed a broad array of services to provide Internet messaging
capabilities. All of our services share a common foundation of technology,
features and applications. The primary services are described below.
<TABLE>
<CAPTION>
BASIC FREE SERVICES
<S> <C>
Universal access Universal access to all email sending and receiving
capabilities, including reply, forward, attachments, address
book, and storage folders, from any computer or other device
with a Web browser and a connection to the Internet. This
permits members to read and send email when they are away
from home, school or work. Universal access also allows for
permanent email addresses. Our members keep their email
addresses even if they change ISPs, leave school or switch
jobs.
Email forwarding Set an account to forward email to any emailbox anywhere in
the world.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
External mail collection Consolidate mail from up to five emailboxes into one Webmail
account. This feature permits a user with multiple
emailboxes to manage their email without having to check all
their emailboxes on a regular basis. Mail collection will
not work with any third party account that is protected by a
"firewall" or similar software that prevents us from
accessing the account. Many ISPs, schools and businesses use
software of this nature.
Multiple accounts Members can create separate email accounts for different
family members or colleagues even if they have only one
Internet account.
Storage capacity Free service includes up to four megabytes of storage on our
system.
Privacy Messages are stored centrally on Mail.com's system and are
accessed only after a password is verified. With traditional
email, messages are downloaded onto a user's computer, where
they could potentially be viewed by others who have access
to the computer.
Spam blocking Using proprietary software, we attempt to block unsolicited
bulk email (spam) from members' accounts.
PREMIUM PAY SERVICES
Premium address Members can select a personalized email address from a list
of unique domain names owned either by us or by one of our
partners. Such popular email addresses include
[email protected] and [email protected].
Post Office Protocol The ability to download email to a computer, including a
("POP3") access laptop or other portable device. The member can then read
their email while offline, such as when traveling or
commuting, using an email program such as Microsoft Outlook,
Eudora or Netscape Messenger. This also permits members to
save telephone and ISP charges.
OTHER SERVICES SCHEDULED TO LAUNCH IN 1999
MailPro (pay service) Increased storage capacity (above current limit of four
megabytes of data), ability to send and receive larger file
attachments (above current limit of 500 kilobytes of data)
and priority customer service.
Web-based calendar Universal access to manage calendar, address book and
(free service) electronic reminders of appointments, birthdays and
anniversaries.
MailFax messaging Send faxes through one universally accessible Web site.
(pay service)
</TABLE>
PORTFOLIO OF DOMAIN NAMES
We have a portfolio of approximately 1,200 domain names in a variety of
categories including professions, business, entertainment, places and sports. We
offer a portion of these domain names to our members as choices for email
addresses. Some domain names are offered for free to members and some are
offered on a subscription basis. On certain sites, members are offered one free
choice and on other sites members are offered multiple free and pay domain
names, up to a maximum of 300 domain names at a site. Often the free default
domain name offered on a partner's site is owned by the partner, along with a
few other domain names, and the rest are controlled by us. We either own the
domain names in our portfolio or have the right to use them to offer email
services. In some cases, with respect to the domain names that we have rights
to, we pay a royalty to the seller or owner of the domain name.
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We may also offer our domain names in the future as personalized addresses
for member homepages. Many of these domain names also present potential business
opportunities as independent Web sites. For example, we have licensed the domain
names London.com, Britain.com and England.com as Web site addresses for Web
sites being developed by the London Tourist Board. We have also entered into an
agreement with Southam, Inc., the parent of THE DAILY TELEGRAPH, a large English
daily newspaper, to offer email services to their newspaper readers using the
domain name London.com. We intend to acquire further domain names to appeal to
additional segments of users.
Below is a sample of our domain names by category.
<TABLE>
<S> <C> <C> <C>
- --------------------- --------------------- --------------------- ---------------------
MAIL PLACES PROFESSION SPORTS / AFFINITY
Mail.com USA.com Doctor.com SPORTS
Email.com Asia.com Lawyer.com Fan.com
Webmail.com Europe.com Engineer.com Footballmail.com
Post.com India.com Accountant.com Hockeymail.com
Homemail.com London.com Consultant.com MUSIC
Schoolmail.com Rome.com Teacher.com Bluesfan.com
Workmail.com Madrid.com Journalist.com Jazzfan.com
</TABLE>
DISTRIBUTION NETWORK
We have built our member base by signing up members in partnership with
third party Web sites and ISPs as well as by signing up members directly through
our own Web sites. We generally share a portion of our revenues with our
partners in exchange for their making our service available to their users.
WEBMAIL FOR OUR WEB SITE PARTNERS
One of our core strategies since inception has been to offer our email
service in partnership with third party Web sites. These partner sites attract a
large number of visitors and provide a cost-effective way for us to rapidly add
new members to our service. We believe that when we launched our email service
for InfoSpace in 1996, we became the first party to outsource email for a Web
site. Since then we have built our partner network and currently offer our email
service at 40 Web sites in diverse categories such as technology, media, sports,
entertainment and business.
We enable partners to offer Webmail without having to incur the expense of
developing and maintaining the necessary technology and infrastructure. We
provide the technology development, manage the hardware infrastructure, and
provide users with customer support. Since our technology allows for flexibility
in the design of Web pages, we can allow our partners to customize the look and
feel of the user interface to provide a better integration between the partner's
Web site and our email service.
By offering our Webmail service to their visitors, Web site partners seek to
increase the traffic at their site because they expect that visitors will return
to the site to check their email. By attaching customized tag lines to outgoing
emails that identify the partner's Web site, we believe our service can enhance
a partner's branding efforts. We believe that our selection of personalized
domain names can also help the partner to promote user affinity and consequently
to increase traffic. In addition, the demographic data that we request at sign
up can help a partner learn about its user base and give the partner access to
information that might otherwise be difficult to obtain.
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WEBMAIL FOR ISPS
During the second half of 1998, we used our expertise in outsourcing email
for Web sites to develop a proprietary Webmail service for the ISP marketplace.
In February 1999, we launched our service with Prodigy and have entered into
contracts to launch with GTE and Cable & Wireless. Additionally, we entered into
an agreement with RemarQ, an outsourcer of newsreader services to approximately
900 ISPs. RemarQ will seek to distribute our Webmail service to their ISP
customers in return for a share of the revenue generated.
According to ELECTRONIC MAIL & MESSAGING SYSTEMS, there were approximately
42 million emailboxes provided by ISPs worldwide at the end of 1998. We believe
that our Webmail service significantly enhances ISP email services by providing
their email users with universal email access.
ISP partners can offer their users Webmail without the cost of developing or
maintaining technology, infrastructure or customer support. As with our Web site
partners, ISPs seek to increase user affinity and generate additional revenues.
Additionally, ISPs may benefit from lower network costs. With Web access to
their ISP email accounts, users can more easily access their ISP email during
the work day. This may help ISPs lower network costs by shifting some user
demand away from peak evening times, when users are at home, resulting in a more
even distribution of usage throughout the day.
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<PAGE>
The following table sets forth our Web site and ISP partners and the Web
site addresses at which members can access our services.
<TABLE>
<CAPTION>
PARTNER ADDRESS DESCRIPTION
- ----------------------------- ----------------------------- -----------------------------
BUSINESS
<S> <C> <C>
CNN www.cnn.com World news
Lexis-Nexis www.lexis.com/xchange Legal content
Martindale-Hubbell www.martindale.com Legal content
SmartResume www.smartresume.net Career services
Standard & Poor's www.personalwealth.com Financial information
TECHNOLOGY PUBLISHERS
CMP Media www.techweb.com Technology
CNET www.cnet.com Technology content and
services
IDG www.idg.net International technology
content
MEDIA
Barbour/Langley www.cops.com COPS television show
Cox Interactive Media to be launched Regional content
Homework Central www.homeworkcentral.com Academic research
NBC to be launched National and affiliate T.V.
Paramount Entertainment www.startrek.com Online home of StarTrek
Rolling Stone yourturn.rollingstone.com Music industry content
Time Warner (Pathfinder) www.pathfinder.com General interest
E-COMMERCE
Alloy Online www.alloyonline.com Teen shopping catalog
Call Sciences www.istc.org International student travel
Club VDO www.vdo.net/clubvdo Streaming video
INTERNATIONAL
Lycos/Bertelsmann www.lycos.co.uk, British, Dutch, French,
www.lycos.nl, German, Italian and
www.lycos.fr, www.lycos.de, Spanish Portal sites
www.lycos.it, www.lycos.es
Futebol www.futeboltotal.com Brazilian soccer
Basis Technologies www.nichibei.net Japanese Webmail
Southam/Hollinger Digital www.canada.com Canadian portal
Southam/Daily Telegraph www.ukmax.com British newspaper
INTERNET
AltaVista www.altavista.com Portal
GeoCities to be launched Personal homepages
InfoSpace.com www.infospace.com Directory services
RemarQ www.remarq.com Newsgroup service
Snap www.snap.com Portal
INTERNET SERVICE PROVIDERS
GTE www.gte.net (Webmail in Internet service provider
service; ISP service to be
launched)
Prodigy www.prodigy.com Internet service provider
Cable & Wireless to be launched Internet service provider
SPORTS
CBS SportsLine www.sportsline.com Sports content
CNN/SI www.cnnsi.com Sports content
Denver Broncos www.denverbroncos.com Team site
FANSonly.com www.fansonly.com, College sports content
www.calbears.com,
www.goducks.com
NHL www.nhl.com Professional hockey
Philadelphia Eagles www.eaglesnet.com Team site
</TABLE>
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<PAGE>
PARTNER ECONOMICS
While each Web site and ISP partner contract is different, contracts
typically run one to two years in length. In exchange for assuming all costs
associated with providing the email service, we generally retain at least 50% of
any advertising and subscription revenues attributable to our service. Under
some of our revenue-sharing arrangements, our partners are entitled to receive
guaranteed minimum amounts, most often based upon the number of member
registrations processed during the applicable pay period. In addition, several
contracts with specific promotional commitments from our partner require us to
pay upfront or scheduled fees. More recently we have entered into contracts
where we collect a fee for providing our service. We currently have three such
contracts.
We generally manage and sell the advertising on the Web sites. Under some of
our contracts, our partners assume responsibility for managing advertising sales
and pay us a percentage of the advertising revenues. A number of our partners do
not permit us to place advertisements in our email service at their site unless
we also place those advertisements throughout our network, which prevents us
from specifically targeting members who use those particular sites.
Members are generally given a choice of domain names when registering for
our service at a partner site. Typically, the default address selection is at a
domain that is owned by the partner and the other selections are owned by us. As
of February 1999, we estimate that approximately 23% of our total member base,
including members that have signed up at our own Web sites, have email addresses
at partner-owned domains. Upon expiration, a small number of contracts obligate
us to relinquish existing members with addresses at partner-owned domains, but
most require us to continue providing service to those members until the partner
elects to designate an alternative provider or provide service itself. By
contrast, we generally retain the member accounts with addresses at domains
owned by us. Thus, we can continue our efforts to generate revenues from these
retained accounts even if our partners choose not to extend or renew their
contracts with us. After their contract ends, many of our partners will have the
option to maintain a way for members who registered for our service to continue
signing in at their site.
MAIL.COM BRANDED EMAIL
In addition to offering Webmail services through our partners, members can
sign up directly at our own Web sites. Since November 1996, members have
accessed www.iName.com to sign up for service. iName is short for "Internet
Name" and was the name of our company until January 1999, when we changed our
name to Mail.com, Inc. Beginning in April 1999, members will sign up for service
at www.Mail.com. In addition, we offer email service through other Web sites
owned by us, including www.USA.com.
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REVENUE
We seek to generate revenues from multiple sources, including advertising,
direct response marketing, electronic commerce, subscription services and email
service outsourcing fees.
ADVERTISING SALES
Most of our revenues are generated from advertising sales. Members view
multiple Web pages as they read and write messages and perform other email
functions. Every page viewed during an email session has the capability to carry
one or more advertisements. These may be in the form of a banner, typically
across the top of each page, or smaller rectangular buttons and portals,
typically located in the left margin of the Web pages. We currently do not
deliver Web-based advertisements to our email forwarding and POP3 service
members. We sell to advertisers, direct marketers and their agencies through our
own sales force. Advertisers pay us based upon a variety of delivery
measurements, including cost per impression, cost per click-through, cost per
response and cost per buy. We believe that our Webmail service has several
benefits as an advertising vehicle including:
- HIGH VALUE, LOW COST CONTENT--The content members view on our Web pages
has high value to them because much of it is created by their friends,
family and colleagues. Also, unlike many other online publishers and
traditional media, we incur no cost for this content.
- DEMOGRAPHIC COLLECTION CAPABILITY--When members sign up for email accounts
we request, but do not verify, demographic data such as:
<TABLE>
<S> <C> <C> <C>
Zip code or postal code Date of birth Income range
Gender Occupation Street address
</TABLE>
- EFFECTIVE TARGETING--Since members must log in and thus identify
themselves in order to use the service, we can direct advertising to
individual members on every page they view after signing in. This enables
us to target advertising to individual members based on the demographic
data we have collected. As our member base grows, we can more finely
target using more demographic variables and still have target groups that
are large enough to be valuable to our advertisers.
- NETWORK SALES--Since our advertising opportunities are generated by
members across many partner Web sites as well as our own Web sites, we can
sell this space as an advertising network. Our advertising network
includes several recognizable brand name sites that advertisers recognize
and trust. Our advertisers can purchase targeted advertising directed to
members across our advertising network by making a single purchase of
advertising space from Mail.com.
Since July 1, 1998 approximately 100 companies have advertised on our
network. Selected advertisers from 1998 included:
<TABLE>
<S> <C> <C> <C> <C> <C>
BonusMail GoTo.com GTE MiningCo.com N2K/Music Boulevard
CMP GMER Infobeat MSN.com Spree.com
First USA H&RBlock iVillage Netscape Uproar
</TABLE>
DIRECT MARKETING
Under our BARGAIN HUNTER program, members can identify categories of
products and services of interest to them and request that notices be sent to
their emailbox about special opportunities, information and offers from
companies in those categories. Current categories include: technology, hardware,
software, entertainment, sports, shopping, finance, auto, family/kids and home.
We send messages and special offers on behalf of our advertisers, who pay for
one-time access to the list. Our mailing list is an "opt-in" list in that
members must affirmatively check a box to indicate interest. These email
"opt-in" lists generally command higher advertising rates than "opt-out" lists.
Revenues from opt-in lists are a small but growing part of our overall revenues.
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ELECTRONIC COMMERCE
To date, our e-commerce activities have focused on facilitating transactions
for third party e-commerce sites. Examples include the promotion of CD sales for
N2K/Music Boulevard, the promotion of video tape sales for BigStar, and the
promotion of affinity credit cards for First USA. Our e-commerce partners pay
up-front fees to secure exclusive promotional rights within their product
category on the Mail.com network. They also may pay acquisition fees on a per
customer basis or commissions on the sale of products or services. The
agreements we have entered into so far typically run from six months to three
years in length.
We believe that over time we may choose to sell products other than email
services directly to our members. We believe that e-commerce is a natural
adjunct to our service. Through February 1999, approximately 40,000 members have
provided us credit card information for subscription services. We expect this
number to grow as we offer more subscription products and services to a larger
membership base. Once we have collected a member's credit card information and
billing address, subsequent purchases should be greatly simplified. A portion of
the proceeds from this offering may be used to expand our staff to manage
in-house and third party e-commerce opportunities.
SUBSCRIPTION SERVICES
While the majority of our members sign up for free service, we also generate
revenues from upgraded email services. Until March 10, 1999, we charged $14.95,
$23.95, $36.95 and $49.95 for one-year, two-year, five-year and lifetime
subscriptions to our premium names and, we charged $23.95, $37.95 $59.95, and
$79.95 for one-year, two-year, five-year and lifetime subscriptions to our POP3
service. Commencing March 10, 1999, we changed our rates to $2.95 per month, or
$29.95 for a one-year subscription to our premium names and $3.95 per month, or
$39.95 for a one-year subscription to our POP3 service.
Historically, we offered members a free one month trial for premium
services, without collecting credit card information in advance. At the end of
the trial period, we had great difficulty collecting the necessary billing
information, and as a result a substantial majority of premium members did not
pay for their services. In addition, for those members who did provide credit
card information, we experienced a high fraud rate because of limitations on our
billing technology. We are currently installing the Portal billing system and
have begun requiring credit card information at the time a member signs up for a
subscription service. We believe our new billing system will improve our
tracking, reporting, and fraud identification abilities, as well as allow us to
terminate unpaid premium member services. See "Risk Factors--We must improve our
billing, management information and other systems."
OUTSOURCING FEES
We believe that organizations, particularly small businesses and schools,
will increasingly seek to outsource their email requirements. We plan to
position Mail.com to take advantage of these future outsourcing opportunities.
We believe that we will have the scale to provide these organizations with
better service at a lower cost than they could provide themselves. We do,
however, expect that it will be more difficult to enter into outsourcing
agreements with schools and small businesses than it has been with Web sites.
This is because schools and small businesses may already have established
internal networks on which they are dependent and may have higher security
concerns.
MARKETING
We market to members, partners and advertisers. Our primary marketing
objectives are to drive new signups, promote higher usage, build our brand,
recruit new partners and support advertising sales. We have marketed to
potential and existing members primarily through our partner Web sites. At our
partner Web sites we use a combination of buttons, links, sign-up portals and
banners to promote our email
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<PAGE>
service. We use welcome emails and regular communications with our members to
promote new features, special offers and contests and provide a mechanism for
customer feedback.
An important brand-building vehicle, the "Powered by Mail.com" logo, is
displayed on the Webmail interface across all our partner Web sites. We also
intend to use Web-based and traditional advertising to build the Mail.com brand
and to acquire new members.
We use business-to-business print and online marketing to help attract new
Web site and ISP partners and retain existing relationships. We also plan to
direct market to ISPs, small businesses and educational institutions using both
online and traditional methods of direct marketing, such as telemarketing and
mailings, to support our sales efforts.
We engage in trade advertising and participate in trade shows to attract new
advertisers. In addition, we use targeted sales materials and direct marketing
efforts to promote our network to potential advertisers.
CUSTOMER SUPPORT
Our members are very valuable to us and to our partners. Our goal is to
provide quality customer support through our online support area and through a
dedicated customer support team. During the month of February 1999, the average
response time for all non-billing inquiries was less than two hours. We believe
this positions us as a leader in Internet customer support. Only approximately
7% of Web sites surveyed by Jupiter Communications in February 1999 were able to
respond to customer queries within 24 hours with a personalized, signed message.
ONLINE SUPPORT
We have created and frequently update an online searchable knowledge base
with over 400 Web pages that allows members to find the answers to many of their
questions about our services. Members can find answers by viewing our frequently
asked questions or through the use of our full text search function. We have
also developed a facility to enable members to help themselves with requests for
forgotten passwords. We believe that approximately 80% of our members who seek
our help are able to find answers using our online support area and without
having to contact our customer service department.
CUSTOMER SUPPORT TEAM
Our customer service department is available by email or telephone 24 hours
a day, seven days a week and is staffed by experienced technical support
engineers and customer service representatives. We do not currently offer a toll
free number for customer support. Both phone and email interactions with
customers are randomly monitored to ensure consistent quality and accuracy. The
majority of customers who contact our customer service department use the
customer service request form on our Web site or send us an email. When members
submit a request electronically, they receive a confirmation email with a
tracking number. Our customized email-tracking system allows us to access a full
history of each customer service request, prioritize issues based on customer
status, classify issues based on the topic and route issues to customer service
representatives depending upon the particular type of issue.
TECHNOLOGY
Our Webmail technology has evolved rapidly since we commenced commercial
operations. Our hardware network has grown from one computer at the end of June
1996 to over 200 computers at the end of February 1999. These computers run an
extensive library of proprietary software we have developed to provide member
and partner services. Currently, we are focused on building an integrated
hardware and software platform that is reliable and can be expanded to support
tens of millions of members. We cannot be sure that our technology will operate
adequately at these levels.
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<PAGE>
HARDWARE NETWORK
Our hardware network is designed to provide high availability and
performance and to accommodate rapid growth of our member base. The six primary
elements of our hardware infrastructure are:
- Mail transfer machines: Redundant banks of computers receive, transfer and
send email on behalf of our members.
- Web page servers: Redundant banks of computers generate customized Webmail
pages for each member and partner.
- Database machines: Member account data is stored in disk storage arrays.
The data is managed using database software.
- Email storage: Members' email messages are stored separately from their
account data in disk storage arrays.
- Bill presentment servers: Redundant computers run the secure on-line
billing system.
- Data network: Our computer network uses high speed routers and switches
and is connected to the Internet through high capacity links from BBN
Planet and UUNET.
For our core infrastructure, we use industrial grade hardware from leading
manufacturers. Generally, our hardware infrastructure is built using redundant
components. However, certain components, including the database and email
storage machines, are not redundant. A failure of any of these components could
disrupt our service until a replacement component is received and installed. Our
member account data is saved to tape and stored off site on a daily basis. Our
member emails are stored on redundant hard drives within our email storage
machines in case a hard drive should fail. However, we cannot be sure that we
will be able to restore member data in the event of a hardware failure or that a
restoration can be done in a timely basis. See "Risk Factors--Our network
infrastructure may fail and interrupt our service."
SOFTWARE
No commercial software solution is available to adequately meet the demands
of our large member base and diverse partner network. As a result, we have
developed a substantial amount of software internally and will attempt to
develop additional software. Where available, we utilize components from
off-the-shelf software suppliers such as Oracle. Examples of our software
related developments include:
- Webmail technology which offers improved response times to members and
gives us the ability to deploy new features in less time.
- A customizable Webmail interface that integrates with the technology and
branding of our partners' Web sites. This allows members a more seamless
experience in signing in and navigating.
- A design for secure email. We have applied for a related patent.
DATA CENTER
Our computers are located in Telehouse International's commercial data
center housed in the building adjacent to our headquarters in lower Manhattan.
Telehouse provides 24-hour security, fire protection, computer-grade air
handling and backup power sources. We intend to establish a second data center
outside of New York City. When completed, this data center will provide
additional capacity and will serve as a backup site in the event of an emergency
at our primary data center.
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<PAGE>
OPERATIONS
Our operations group monitors our sites 24 hours a day, seven days a week.
Systems operators use automated monitoring tools to continuously test site
performance and repeatedly perform manual checks of major functions.
UNSOLICITED BULK EMAIL (SPAM)
Unsolicited bulk email, or spam as it is often referred to is a significant
problem for any provider of email services. To address this chronic problem, we
have developed proprietary software and have implemented internal procedures for
detecting and terminating accounts engaged in this activity. We have full time
staff dedicated to the detection and reduction of spam.
SECURITY
While no computer system is impenetrable, our system is designed to guard
against intruders who might seek to either damage or slow our service, or gain
access to our users' accounts or information. We have also implemented automated
monitors that are designed to provide an early warning in the event that certain
types of attempts are made to breach our systems.
COMPETITION
We compete for members, partners and advertisers.
Members typically receive an emailbox from their employer, school or an ISP
such as AOL, @Home or Microsoft's MSN network. In addition, they can subscribe
to email services at most of the major Web sites. The leading sites offering
email services include Microsoft's MSN network, which claims to have 35 million
Web-based emailboxes at its Hotmail site, Yahoo!, Excite, Disney's GO Network,
which includes InfoSeek, and the Lycos Network. Alternatively, members can sign
up for email services through Web sites that have partnered with our outsourcing
competitors. For example, Netscape offers email at its Web site outsourced from
USA.net. Microsoft and Netscape have modified their browsers to promote their
email offerings to users, and Compaq and other major PC manufacturers now
include keyboard buttons linking users directly to their email offerings. Users
that do not have Internet access can also receive free email services from Juno
Online. Our success in attracting members over these competitors is highly
dependent on our partners' level of visitor traffic and their commitment to
promoting our email service.
We compete for Web site and ISP partners with USA.net, Lycos's WhoWhere
subsidiary, Bigfoot, CommTouch and Critical Path. With respect to the
outsourcing services we plan to market to business customers, schools and other
organizations, we expect to compete with AT&T Mail, MCI Mail and Fabrik and
major ISPs such as Netcom. In addition, companies such as Software.com,
Microsoft, Netscape, Lotus, Oracle and Sun Microsystems are currently offering
email software products that would permit potential partners to provide their
own email services, as opposed to through an outsourcer. Success in attracting
new partners and outsourcing customers is dependent on scale, ability to rapidly
deploy services, partner portfolio, and pricing structure. Some potential
partners and outsourcing customers may elect not to outsource for other
strategic reasons such as a need for direct control over the user experience or
a desire to integrate their email service with other service offerings.
We compete for Internet advertising revenues with large Web publishers and
Web portals, such as America Online, Excite, Lycos, Microsoft, Infoseek and
Yahoo!. Further, we compete with a variety of Internet advertising networks,
including DoubleClick and 24/7 Media. We also encounter competition from a
number of other sources, including advertising agencies and other companies that
facilitate Internet advertising. We also compete with traditional advertising
media, such as print, radio, television and outdoor advertising for a share of
advertisers' total advertising budgets.
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<PAGE>
The level of competition is likely to increase as current competitors
increase the sophistication of their offerings and as new participants enter the
market. In the future, as we expand our service offerings, we expect to
encounter increased competition in the development and delivery of these
services. Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. Some of our
competitors have the ability to bundle a variety of Web-based services such as
Internet access, browser software, homepage design, hosting and calendars in
addition to email services. The ability of these competitors to offer a suite of
services may give them an advantage over us. Smaller companies may enter into
strategic or commercial relationships with larger, more established and well
financed companies. For example, Hotmail was acquired by Microsoft, and WhoWhere
was recently acquired by Lycos. Further, some of our competitors may offer
services at or below cost. In addition, new technologies and the expansion of
existing technologies may increase competitive pressures on us. We cannot be
sure that we will be able to compete successfully against our current or future
competitors or that competition will not have a material adverse effect on our
business, results of operations and financial condition. See "Risk
Factors--Several of our competitors have substantially greater resources, longer
operating histories, larger customer bases and broader product offerings."
INTELLECTUAL PROPERTY
Our intellectual property is among our most valued assets. We protect our
intellectual property, technology and trade secrets primarily through
copyrights, trademarks, trade secret laws, restrictions on disclosure and other
methods. Parties with whom we discuss, or to whom we show, proprietary aspects
of our technology, including employees and consultants, are required to sign
confidentiality and non-disclosure agreements. If we fail to protect our
intellectual property effectively, our business, operating results and financial
condition may suffer. In addition, litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others.
We have developed our own proprietary technology to facilitate our Internet
mail system and the components of our partner communications and advertising
network. We restrict access to and distribution of our technology. We do not
presently license our technology to third parties, except for limited exceptions
where these parties are required to sign confidentiality agreements.
Notwithstanding these protections, there is a risk that a third party could copy
or otherwise obtain and use our technology or trade secrets without
authorization. In addition, others may independently develop substantially
equivalent technology. The precautions we take may not prevent misappropriation
or infringement of our technology.
We jointly own our network member database with our respective partners.
This database includes contact and demographic information submitted by our
members when they signup for email service. Any third parties receiving member
contact and demographic information are required to sign confidentiality,
non-disclosure and use restriction agreements, committing them to adhere to our
privacy policy and prohibiting them from using the contact and demographic
information in any way except as we expressly specify. In the absence of these
agreements, current law provides inadequate protection. As a result, we will
have difficulty protecting our rights if any of the information contained in our
member database is pirated or obtained by an unauthorized party.
In July 1998 we submitted a provisional application to the U.S. Patent and
Trademark Office for a secure email system. We conduct an ongoing review of all
of our proprietary technology to determine whether other aspects of our
technology should be patented. We have a registered trademark for iName, our
predecessor company name. In January 1999, we filed a trademark application with
the U.S. Patent and Trademark Office for Mail.com.
We own or have the rights to approximately 1,200 Internet domain names,
approximately 600 of which we currently use to provide email addresses to our
members. All of our domain names are registered with
50
<PAGE>
Network Solutions, Inc. pursuant to a registration agreement which is renewed
annually for a fee of $35.00 per domain name. We try to review all domain names
to ensure that they are not subject to claims of ownership and other legal
challenges by holders of any trademarks. Our domain names have been in the past,
and we expect will be in the future, challenged by third parties. We will seek
to protect by all appropriate means our rights to our domain names.
We incorporate certain licensed, third-party technology in some of our
services. In these license agreements, the licensors have generally agreed to
defend, indemnify and hold us harmless with respect to any claim by a third
party that the licensed software infringes any patent or other proprietary
right. The outcome of any litigation between such licensors and a third party or
between us and a third party may lead to our having to pay royalties for which
we are not indemnified or for which such indemnification is insufficient, or we
may not be able to obtain any additional license on commercially reasonable
terms if at all. In the future, we may seek to license additional technology to
incorporate in our services. The loss of or inability to obtain or maintain any
necessary technology licenses could result in delays in introduction of new
services or curtailment of existing services, which could have a material
adverse effect on our business, results of operations and financial condition.
To the extent that we license any of our content from third parties, our
exposure to copyright infringement actions may increase because we must rely
upon these third parties for information as to the origin and ownership of the
licensed content. We generally obtain representations as to the origins and
ownership of any licensed content and indemnification to cover breaches of any
representations. However, such representations may be inaccurate or such
indemnification insufficient to provide adequate compensation for any breach of
such representations.
We cannot assure you that infringement or other claims will not be asserted
or prosecuted against us in the future or that any future assertions or
prosecutions will not materially adversely affect our business, results of
operations and financial condition. It is also possible that claims could be
asserted against us because of the content of emails sent over our system. Any
such claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel or require us to
develop non-infringing technology or enter into royalty or licensing agreements.
Any royalty or licensing agreements, if required, may not be available on terms
acceptable to us, if at all. In the event of a successful claim of infringement
against us and our failure or inability to develop non-infringing technology or
license the infringed or similar technology on a timely basis, our business,
results of operations and financial condition could be materially adversely
affected.
MAIL.COM EMPLOYEES
As of February 1, 1999 there were 96 personnel dedicated full-time to our
business. Of these personnel 42 persons worked in technology, product
development and Web production; 18 persons worked in sales, marketing and
business development; 13 persons worked in customer support; 18 persons worked
in operations and administration; and five persons are executives. We have never
had a work stoppage and no personnel are represented under collective bargain
agreements. We consider our employee relations to be good.
We believe that our future success will depend in part on our continued
ability to attract, integrate, retain and motivate highly qualified sales,
technical, and managerial personnel, and upon the continued service of our
senior management and key sales and technical personnel. To help us retain our
personnel, all of our full-time employees have received stock option grants. To
increase our geographic reach and ability to attract talented employees, we have
opened a technology office in Morristown, New Jersey and a sales office in San
Francisco, California. None of our personnel are bound by employment agreements
that prevent them from terminating their relationship at any time for any
reason.
Competition for qualified personnel is intense, and we may not be successful
in attracting, integrating, retaining and motivating a sufficient number of
qualified personnel to conduct our business in the future.
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<PAGE>
See "Risk Factors--Our rapid expansion is straining our existing resources, and
we may not be able to manage our growth effectively."
FACILITIES
Our headquarters are located in leased space at 11 Broadway in lower
Manhattan consisting of approximately 19,200 square feet. We have two and one
half years remaining on our original five-year lease which ends June 30, 2001.
We have a one-time option to terminate the lease in September 1999. We believe
there is enough vacant space available in our building and the neighboring area
for us to expand our operations as necessary.
We have an additional technology development team located in approximately
2,400 square feet of leased space in Morristown, New Jersey. We have a
three-year lease that ends on September 14, 2001 and we have the right to
terminate this lease anytime after the first year with three months notice.
In addition we have an advertising sales team in approximately 800 square
feet of leased space in San Francisco, California.
Our data center is housed in approximately 1,100 square feet of space leased
from Telehouse International, a commercial data center in lower Manhattan.
Telehouse provides 24 hour security, fire protection, computer-grade air
handling, and backup power facilities.
52
<PAGE>
MANAGEMENT
The following table sets forth the executive officers and directors of
Mail.com:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Gerald Gorman....................... 43 Chairman and Chief Executive Officer
Gary Millin......................... 29 President, Director
Lon Otremba......................... 41 Chief Operating Officer, Director
Charles Walden...................... 45 Executive Vice President, Technology, Director
Debra McClister..................... 44 Executive Vice President, Chief Financial Officer
William Donaldson................... 66 Director
Stephen Ketchum..................... 37 Director
Jack Kuehler........................ 65 Director
John Whitman........................ 54 Director
</TABLE>
The following table sets forth certain information regarding other key
employees of Mail.com:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Bob Helfant......................... 45 Senior Vice President, Special Projects
Michael Agesen...................... 36 Vice President, Business Development
Catherine Billon.................... 34 Vice President, Marketing and Partner Development
Ari Goldberger...................... 38 Vice President, Business Development
Jason Gorevic....................... 27 Vice President, Operations
Peter Hamlen........................ 29 Vice President, Software Development
Colin Jenkins....................... 35 Vice President, Systems
Mark Leigh.......................... 26 Vice President, Product Development
Courtney Nichols.................... 28 Vice President, Advertising Sales
Matthew Theodoseau.................. 36 Vice President, Database Technology
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
GERALD GORMAN--CEO, CHAIRMAN OF THE BOARD OF DIRECTORS
Mr. Gorman has served as our Chairman since founding the Company in December
1995 and as our Chief Executive Officer since February 1997. Prior to founding
Mail.com he spent 10 years in the Investment Banking Division of Donaldson,
Lufkin, & Jenrette where he founded and managed the Satellite Financing Group.
Mr. Gorman has also held management positions at General Electric Capital
Corporation from 1983 to 1985, and at Utah International from 1982 to 1983. Mr.
Gorman received his Bachelor of Mechanical Engineering degree from Melbourne
University and his M.B.A. from Columbia University.
GARY MILLIN--PRESIDENT, DIRECTOR
Mr. Millin has served as our President and as a member of our board of
directors since founding our Company in December 1995. Prior to founding
Mail.com, Mr. Millin spent three years at the venture capital firm Consumer
Venture Partners (CVP) from 1991 to 1994. Mr. Millin received his B.S. in
Economics from the Wharton School and his M.B.A. from Harvard Business School
where he was a Baker Scholar.
53
<PAGE>
LON OTREMBA--CHIEF OPERATING OFFICER, DIRECTOR
Mr. Otremba has served as our Chief Operating Officer and as a member of our
Board of Directors since October 1997. Prior to joining Mail.com, Mr. Otremba
served as Executive Vice President, Network Sales at CNET. Prior to joining
CNET, Mr. Otremba served as Associated Publisher of PC MAGAZINE from 1991 to
1993. He has also held management positions at CMP Media from 1987 to 1990,
Lebhar-Friedman from 1982 to 1987 and Procter & Gamble from 1980 to 1981. Mr.
Otremba received his B.A. in Economics from Michigan State University.
CHARLES WALDEN--EXECUTIVE VICE PRESIDENT, TECHNOLOGY
Mr. Walden has served as our Executive Vice President of Technology since
February 1998. Before joining Mail.com, Mr. Walden worked for Dialogic
Corporation from 1985 to 1997 in several capacities, including Director of
Software Development, Vice President Engineering and, during his last two years,
as Chief Technical Officer. Mr. Walden received his B.A. in Computer Science
from the University of Texas at Austin.
DEBRA MCCLISTER--EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Ms. McClister has served as our Chief Financial Officer since July 1998.
Prior to joining Mail.com, she held a variety of executive positions at Philips
Media, and most recently served as Chief Operating Officer of Philips Media
Software from 1996 to 1997. She was the Senior Vice President and Chief
Financial Officer for Philips Media, North America from 1995 to 1996 and prior
to that was Corporate Vice President and Controller for Philips Electronics,
North America from 1988 to 1995. Ms. McClister also worked in financial
management for Hitachi America. Ms. McClister received her B.S. in Commerce from
Rider University and is a Certified Public Accountant.
WILLIAM DONALDSON--DIRECTOR
Mr. Donaldson serves as Senior Advisor to Donaldson, Lufkin & Jenrette,
Inc., which he co-founded in 1959, serving as its Chief Executive Officer until
1973. From 1991 to 1995 he was Chairman and CEO of the New York Stock Exchange.
He founded the private investment firm Donaldson Enterprises in 1981 and served
as its Chairman until 1990. In 1975, Mr. Donaldson was named founding Dean and
Professor of Management at the Yale Management School and in 1973 he was
appointed U.S. Undersecretary of State and subsequently served as Counsel to
Vice President Nelson Rockefeller. Mr. Donaldson is a Director of Aetna, Inc.,
the Philip Morris Companies and Bright Horizons Family Solutions. He received
his B.A. from Yale University and his M.B.A. with distinction from the Harvard
Business School.
STEPHEN KETCHUM--DIRECTOR
Mr. Ketchum is a Senior Vice President of Donaldson, Lufkin, & Jenrette's
Telecommunications & Satellite Financing Group. Prior to joining Donaldson,
Lufkin, & Jenrette, Inc. in 1990, Mr. Ketchum was employed at Dean Witter
Reynolds. Mr. Ketchum serves on the board of Manufacturer's Services Limited, a
contract manufacturing company based in Boston. Mr. Ketchum received his B.A. in
finance and marketing from New England College and his M.B.A. from the Harvard
Business School.
JACK KUEHLER--DIRECTOR
Mr. Kuehler retired in August 1993 as Vice Chairman and a director of
International Business Machines Corporation, having held various positions since
joining IBM in 1958. Prior to his appointment as Vice Chairman of IBM in January
1993, Mr. Kuehler served as President from 1989 to 1993, as Vice Chairman from
1988 to 1989 and as Executive Vice President from 1987 to 1988. Mr. Kuehler is a
director of Aetna, Inc., In Focus Systems, Inc., Olin Corporation and The
Parsons Corporation. He is member of
54
<PAGE>
the National Academy of Engineering, a fellow of the Institute of Electrical and
Electronics Engineers, Inc. and a fellow of the American Academy of Arts and
Sciences.
JOHN WHITMAN--DIRECTOR
Mr. Whitman has been a Managing Partner of Sycamore Ventures since 1995.
Prior to joining Sycamore, Mr. Whitman was an advisor to several companies,
including the Ford Motor Company, AT&T Venture Corp., Coopers & Lybrand, the
United States Agency for International Development, and Prudential Securities
Inc. From 1987 through 1990, Mr. Whitman was Chairman and Chief Executive
Officer of Prudential-Bache Interfunding Inc. and from 1972 to 1987 he held
various positions at Citicorp and Citicorp Venture Capital, Ltd. Mr. Whitman
sits on the Boards of Directors of Comprehensive Automotive Recycling Services
Inc., Wilson Haas Beverages, MacDonald Communications Corp., and Global
Household Brands, and serves as a member of the merchant banking firm Cross
Border L.L.C. and as a member of the Investment Committee of Spartek Emerging
Opportunities of India Fund. Mr. Whitman received his B.A. from Yale University
and his M.B.A. from the Harvard Business School.
KEY EMPLOYEES
BOB HELFANT--SENIOR VICE PRESIDENT, SPECIAL PROJECTS
Mr. Helfant, our Senior Vice President of Special Projects, has been with us
since November 1996. In 1990, Mr. Helfant founded Laser Resources, Inc., a
multimedia CD-ROM distribution and publishing company which he managed until
1996. From 1986 to 1990, Mr. Helfant co-founded and managed Compact Disk
Products, a CD-ROM distribution and retail company. Mr. Helfant did
undergraduate work at SUNY-Oswego.
MICHAEL AGESEN--VICE PRESIDENT, BUSINESS DEVELOPMENT
Mr. Agesen, our Vice President of Business Development, has been with us
since November 1998. Prior to joining Mail.com, Mr. Agesen was Vice President of
Affiliate Development at Snap from 1997 to October 1998. Mr. Agesen was Vice
President of Licensing and Business Development at CNET from December 1995 until
1997. From 1992 to 1995, Mr. Agesen was Product Marketing Manager for AT&T
WorldNet and AT&T Consumer Interactive Services. Mr. Agesen received his B.A.
from the University of Virginia in 1986.
CATHERINE BILLON--VICE PRESIDENT, MARKETING AND PARTNER DEVELOPMENT
Ms. Billon, our Vice President of Marketing and Partner Development, has
been with us since October 1998. Prior to joining Mail.com, Ms. Billon was Vice
President of International Sales and Marketing at the Discovery Channel from
1993 to 1998. Ms. Billon worked in the consumer marketing group at TIME magazine
from 1989 to 1993. Ms. Billon worked at Columbia TriStar International Video
from 1988 to 1989 and at the National Geographic Society from 1985 to 1987. Ms.
Billon received her B.A. in International Relations from Brown University in
1985, and her M.B.A. from Columbia University in 1989.
ARI GOLDBERGER--VICE PRESIDENT, BUSINESS DEVELOPMENT
Mr. Goldberger, our Vice President of Business Development, has been with us
since June 1997. From 1992 to May 1997, Mr. Goldberger was associated with the
law firm of Pepper, Hamilton & Scheetz. Mr. Goldberger received his B.S. in
Economics from the Wharton School in 1984 and received his J.D. from Rutgers Law
School in 1992.
55
<PAGE>
JASON GOREVIC--VICE PRESIDENT, OPERATIONS
Mr. Gorevic, our Vice President of Operations, has been with us since April
1998. Prior to joining Mail.com, Mr. Gorevic was at Oxford Health Plans from
1993 until 1998, where he served in various marketing and operations positions
including Director of Service Strategy. Mr. Gorevic received his B.A. in
International Relations from the University of Pennsylvania in 1993.
PETER HAMLEN--VICE PRESIDENT, SOFTWARE DEVELOPMENT
Mr. Hamlen, our Vice President of Software Development, has been with us
since November 1996. Prior to joining Mail.com, Mr. Hamlen worked in various
software development roles at Home Box Office. Mr. Hamlen received his B.A. in
Physics from Amherst College in 1991.
COLIN JENKINS--VICE PRESIDENT, SYSTEMS
Mr. Jenkins, our Vice President of Systems, has been with us since October
1998. Prior to joining Mail.com, Mr. Jenkins was at Lehman Brothers from March
through October of 1998 where he served as Manager of Automation Development and
then became Manager of the Server Engineering Group for UNIX and NT. Mr. Jenkins
also worked for D.E. Shaw from 1996 to 1998, and for the law firm of Davis, Polk
and Wardwell from 1986 to 1987 as a Systems Administration Manager. He received
his B.S. in Computer Science from Purdue University in 1986.
MARK LEIGH--VICE PRESIDENT, PRODUCT DEVELOPMENT
Mr. Leigh, our Vice President of Product Development, has been with us since
1996. Prior to joining Mail.com, Mr. Leigh managed the development of software
products for SQL Technologies. Mr. Leigh graduated from the University of Cape
Town in 1993 with a Bachelor of Commerce degree, and received his Bachelor of
Commerce Honors postgraduate degree in Information Systems in 1994.
COURTNEY NICHOLS--VICE PRESIDENT, ADVERTISING SALES
Ms. Nichols, our Vice President of Advertising Sales, has been with us since
February 1998. Prior to joining Mail.com, Ms. Nichols was a Sales Manager for
CNET from January 1997 to January 1998. From 1995 to 1997, she served as
Director of Sales at Interactive Imaginations, now 24/7 Media. From 1993 to
1995, she served as liaison to General Motors' Board of Directors and worked in
GM's Treasurer's Office. Ms. Nichols received her B.A. from Davidson College in
1992.
MATTHEW THEODOSEAU--VICE PRESIDENT, DATABASE TECHNOLOGY
Mr. Theodoseau, our VP of Database Technology, has been with us since March
of 1998. Prior to joining Mail.com, Mr. Theodoseau was at Citibank where he was
Vice President of Operations and Technology from January through March 1998.
Prior to that, Mr. Theodoseau was Senior Database Administrator at International
Discount Telecommunications Corporation from 1996 through January 1998. Prior to
that, he worked, in various senior database administration positions at Time
Warner, USAA FSB, MBIA corporation, Merrill Lynch and New York Power Authority.
Mr. Theodoseau received his B.S. from Mount Saint Mary College in 1989 and his
M.S. in Computer Science from Marist College in 1992.
DIRECTOR TERMS
Members of the board of directors, other than the members of the initial
board of directors, shall be elected at the annual meeting of stockholders and
shall hold office until his or her successor is elected and qualified or until
his or her earlier resignation or removal.
56
<PAGE>
BOARD COMMITTEES
The Compensation Committee is currently composed of three outside directors:
William Donaldson, Stephen Ketchum and John Whitman. Under shareholders'
agreements with the Class A and Class C shareholders, we are required to elect
at least two non-management directors to the three person Compensation
Committee.
The members of the Audit Committee of the board of directors will be
appointed prior to the closing of this offering and will review, act on and
report to the board of directors with respect to various auditing and accounting
matters, including the recommendation of Mail.com's auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of Mail.com's
independent auditors and the accounting practices of Mail.com.
DIRECTOR COMPENSATION
Other than reimbursing directors for customary and reasonable expenses of
attending board of directors or committee meetings, Mail.com does not currently
compensate its directors who are part of the management team. However, in 1997
and 1998, two outside, non-management directors were granted options as
compensation for their serving as board members. In 1997, Mr. Donaldson and Mr.
Kuehler were each granted options to purchase 100,000 shares of Class A common
stock at an exercise price of $1.00, vesting monthly for one year, from May 1997
through May 1998. In May 1998, these two directors were each granted options to
purchase 25,000 shares of Class A common stock at an exercise price of $3.50,
vesting monthly for one year, from May 1998 to May 1999. On March 1, 1999, four
outside, non-management directors were granted options for their service. Mr.
Kuehler and Mr. Donaldson were each granted options to purchase 20,000 shares of
Class A common stock at an exercise price of $5.00 per share, vesting on a
monthly basis for one year from May 1999 through May 2000. Mr. Ketchum and Mr.
Whitman were each granted options to purchase 10,000 shares of Class A common
stock at $5.00 per share, vesting on a monthly basis for one year from March
1999 through March 2000.
Each individual who first becomes a non-employee member of the board of
directors will automatically receive a grant of an option to purchase
shares of Class A common stock on the date such individual joins the board. In
addition, on the date of each annual stockholders' meeting beginning in 2000,
each non-employee member of the board will be granted an option to purchase
shares of common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mail.com's Compensation Committee is comprised of three outside,
non-management directors. All decisions relating to the compensation of
Mail.com's executive officers are made by the Compensation Committee and Gerald
Gorman.
EMPLOYMENT, SEVERANCE AND OTHER ARRANGEMENTS
Mail.com entered into an employment agreement with Gerald Gorman dated May
27, 1997. The agreement provided Mr. Gorman with a base salary of $200,000 per
year during his first year of employment. Subsequent to calendar year 1997, Mr.
Gorman's base salary and bonus amount may be adjusted on an annual basis at the
sole discretion of the Compensation Committee. Mr. Gorman's current annual base
salary is $200,000. Additionally, the agreement provides that for two years
after Mr. Gorman leaves our employ, he will not work for a competitor or
disclose any of our confidential information.
Mail.com entered into an employment agreement with Gary Millin, dated March
21, 1996. The agreement provided Mr. Millin with a base salary of $100,000
during his first year of employment. Subsequent to calendar year 1996, Mr.
Millin's base salary and bonus amount may be adjusted in the sole discretion of
Gerald Gorman and the Compensation Committee. Mr. Millin's current annual base
salary is
57
<PAGE>
$130,000. Additionally, the agreement provides that for two years after Mr.
Millin leaves our employ, he will not work for a competitor or disclose any of
our confidential information.
Mail.com entered into an employment agreement with Lon Otremba, dated
September 24, 1997, pursuant to which he became our Chief Operating Officer. The
agreement provides that for calendar years 1997 and 1998, Mr. Otremba will
receive an annual base salary of $180,000 and a guaranteed bonus of 11.1% of
base salary through the end of 1998. After 1998, the bonus is up to 30% of base
salary. Pursuant to the agreement, Mr. Otremba's annual salary increased to
$200,000 for 1999 upon Mail.com's achievement of certain objectives. Under the
agreement, Mr. Otremba was granted an initial option of acquiring 473,200 shares
of our Class A common stock, which vest quarterly over the first three years of
his employment and are exercisable at the price of $2.00 per share. The
agreement also provided for the grant of additional contingent options, which
are linked to advertising revenues recognized by Mail.com through 1997 and 1998,
granting Mr. Otremba the right to purchase up to 473,200 shares of our Class A
common stock at $2.00 per share. These additional options vest quarterly over
three years from the date of grant. Additionally, the agreement provides that
for two years after Mr. Otremba leaves our employ, he will not work for a
competitor or disclose any of our confidential information.
Mail.com has entered into an employment agreement with Debra McClister,
dated June 29, 1998. The agreement provides that Ms. McClister will receive an
annual base salary of $180,000 which will be reviewed each year, and an annual
bonus between 15%-45% of base annual salary. Pursuant to the agreement, Ms.
McClister was granted an option to purchase 200,000 shares of our Class A common
stock upon the commencement of her employment and was granted an additional
option to purchase 40,000 shares on September 14, 1998 for achievement of
certain objectives. Under the agreement, Ms. McClister waived her salary until
October 19, 1998 in return for receiving an option to purchase 90,000 shares of
our Class A common stock, which were granted at an exercise price of $3.50 per
share and vest over 4 years. The agreement also provides that in the event that
Mail.com is sold to a third party, Ms. McClister's options will be converted
into options to acquire the purchaser's stock, which will be at equivalent value
and have the same remaining vesting period. In the event that Ms. McClister's
position at Mail.com is eliminated, replaced or taken over by the purchaser in
connection with an acquisition, merger or transfer of a majority interest, we
will attempt to offer Ms. McClister a comparable senior management position with
the same compensation, commuting and travel requirements. In the event that such
a position is not offered to Ms. McClister, she will be entitled to a severance
package comprised of (i) six months base salary, (ii) annual bonus pro rated for
the portion of the year worked and (iii) immediate vesting of 50% of her
remaining unvested options. Additionally, the agreement provides that for two
years after Ms. McClister leaves our employ, she will not work for a competitor
or disclose any of our confidential information.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation awarded to, earned by, or paid for services rendered to the Company
in all capacities during the year ended December 31, 1998, by the Company's
Chief Executive Officer and each of the other executive officers of the Company
whose salary and bonus exceeded $100,000 in 1998 (collectively, the "Named
Executive Officers"). No executive who would otherwise have been included in
such table on the basis of salary and bonus earned for 1998 has resigned or
otherwise terminated employment during 1998.
58
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY OPTIONS(1)
- --------------------------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
Gerald Gorman,......................................................................... $ 207,017 23,800
Chairman and Chief Executive Officer
Gary Millin,........................................................................... 130,000 29,349
President
Lon Otremba,........................................................................... 180,000 420,171
Chief Operating Officer
Charles Walden,........................................................................ 0 680,200
Executive Vice President, Technology
Debra L. McClister,.................................................................... 37,385 340,615
Executive Vice President and Chief Financial Officer
</TABLE>
- ------------------------
(1) Includes annual bonus compensation earned in respect of the year ended
December 31, 1998 and foregone at the election of the Named Executive
officers and instead paid in the form of stock options as follows: Mr.
Gorman, 20,000 options; Mr. Millin, 20,349 options; Mr. Otremba, 15,996
options; and Ms. McClister, 10,615 options. Mr. Walden waived cash salary
and bonus for his first year of employment with the Company and in return
received an option grant on January 1, 1998 in respect of 285,000 shares and
a second option grant on February 16, 1998 in respect of 395,200 shares,
each of which were granted at the fair market value of common stock at the
date of grant.
59
<PAGE>
OPTION GRANTS IN FISCAL YEAR
The following table sets forth certain information regarding stock options
granted to the Named Executive Officers during the year ended December 31, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE MARKET OPTION TERMS(1)
OPTIONS TO EMPLOYEES IN PRICE PER PRICE PER EXPIRATION ------------------------
NAME GRANTED (#) FISCAL YEAR (%) SHARE SHARE DATE 0% 5%
- ------------------------- ----------- --------------- ----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald Gorman............ 3,800 0.1% $ 3.50 $ 3.50 1/31/08 $ -- $ 8,360
Gary Millin.............. 9,000 0.3% 3.50 3.50 1/31/08 -- 19,800
Lon Otremba.............. 1,200 0.0% 3.50 3.50 1/31/08 -- 2,640
10,114 0.3% 2.00 3.50 6/28/08 15,172 37,421
18,590(2) 0.6% 2.00 3.50 7/30/08 27,885 68,783
46,312(2) 1.6% 2.00 3.50 8/30/08 69,467 171,354
82,161(2) 2.8% 2.00 5.00 9/29/08 246,483 504,468
208,446(2) 7.0% 2.00 5.00 10/30/08 625,337 1,279,858
24,402(2) 0.8% 2.00 5.00 11/29/08 73,205 149,828
12,950(2) 0.4% 2.00 5.00 12/30/08 38,850 79,513
Charles Walden........... 285,000(3) 9.6% 2.00 2.00 12/31/08 -- 359,100
395,200(4) 13.3% 3.50 3.50 2/15/08 -- 869,440
Debra L. McClister....... 290,000 9.7% 3.50 3.50 6/27/08 -- 638,000
40,000 1.3% 3.50 3.50 9/13/08 -- 88,000
<CAPTION>
NAME 10%
- ------------------------- ------------
<S> <C>
Gerald Gorman............ $ 21,204
Gary Millin.............. 50,220
Lon Otremba.............. 6,696
71,607
131,617
327,888
901,306
2,286,652
267,689
142,061
Charles Walden........... 909,150
2,205,216
Debra L. McClister....... 1,618,200
223,200
</TABLE>
- ------------------------
Unless otherwise noted all options vest quarterly over four years.
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted based upon the
fair market value on the date of grant. These assumptions are not intended
to forecast future appreciation of our stock price. The amounts reflected in
the table may not necessarily be achieved.
(2) Options vest in equal installments over 12 calendar quarters.
(3) Options vest in equal installments over 13 calendar quarters.
(4) Options vest biweekly in equal installments over 52 weeks.
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<PAGE>
FISCAL YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
number and year-end value of exercisable and unexercisable options for the year
ended December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998(1) DECEMBER 31, 1998(1)
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------- ----------- ------------- ------------ -------------
Gerald Gorman............................................ 363,450 162,850 $ 1,682,675 $ 779,275
Gary Millin.............................................. 387,500 160,500 1,661,500 709,500
Lon Otremba.............................................. 273,037 664,418 818,661 1,988,304
Charles Walden........................................... 262,492 417,708 525,276 922,524
Debra L. McClister....................................... 38,750 291,250 58,125 436,875
</TABLE>
- ------------------------
(1) All amounts reflected were determined using a December 31, 1998 market price
of $5 per share.
EMPLOYEE BENEFIT PLANS
Mail.com's board of directors adopted the Mail.com, Inc. 1996 Stock Option
Plan on March 16, 1996, and the Mail.com, Inc. 1997 Stock Option Plan on May 1,
1997 and the Mail.com, Inc. 1998 Stock Option Plan on October 5, 1998, each
subject to shareholder approval. The principal provisions of the plans are
summarized below. This summary, however, does not purport to be complete and is
qualified in its entirety by reference to the provisions of each of the plans.
PURPOSE
The purpose of the plans is to grant incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended and
nonqualified stock options as a means to provide an incentive to our selected
directors, officers and employees to acquire a proprietary interest in Mail.com,
to continue in their positions with us and to increase their efforts on our
behalf.
ADMINISTRATION
The plans are administered by the board or a committee appointed by the
board. Under the plans, the plan administrator has the authority to, among other
things: (i) select the eligible persons to whom options will be granted, (ii)
determine the size, type and the terms of each option granted, (iii) adopt,
amend and rescind rules and regulations for the administration of the plans, and
(iv) decide all questions and settle all controversies and disputes of general
applicability that may arise in connection with the plans.
SHARES AVAILABLE FOR ISSUANCE
A maximum of 1,000,000, 3,500,000 and 1,500,000 shares of Mail.com's Class A
common stock, par value $.01 is available for issuance under the 1996 plan, the
1997 plan and the 1998 plan, respectively, provided that the maximum number of
shares with respect to which options may be granted to any individual within a
calendar year under each of the plans is 1,000,000. In the event of any changes
in the number or kind of outstanding shares of stock by reason of merger,
consolidation, recapitalization, reclassification, split, reverse split,
combination of shares or otherwise, the plan administrator may make equitable
adjustments to the price and other terms of any option theretofore granted or
which may be granted under the plans.
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<PAGE>
OPTIONS
Each option granted under the plans will be evidenced by an agreement that
sets forth the terms and conditions of the grant. The exercise price of an
option granted under any of the plans shall not be less than 100% of the fair
market value of the stock at the time of grant (110% in the case of an incentive
stock option granted to any person owning stock or other capital stock in
Mail.com possessing more than 10% of the total combined voting power of all
classes of capital stock of Mail.com, a ten percent stockholder. Each option
granted under the plans will be exercisable at the times and in the amounts
determined by the plan administrator at the time of grant. In addition, the plan
administrator, in its discretion, may accelerate the exercisability of any
option outstanding under any of the plans. The exercise price of an option is
payable in cash unless otherwise approved by the plan administrator.
Options granted under the plans are not transferable except by will or the
laws of descent and distribution and are only exercisable by the grantee during
such grantee's lifetime. Each option shall terminate at the time determined by
the plan administrator provided that the term may not exceed ten years from the
date of grant (five years in the case of an incentive stock option granted to a
ten percent stockholder). However, the plan administrator may, subject to the
limitations of the plans, modify, extend or renew outstanding options granted
under the plans, or accept the surrender of outstanding unexercised options and
authorize the grant of substitute options.
AMENDMENTS AND TERMINATION
The plans will terminate on the earliest of (i) March 15, 2006 for the 1996
plan, on April 23, 2007 for the 1997 plan and October 4, 2008 for the 1998 plan,
(ii) the date when all shares of stock reserved for issuance under each plan
have been acquired through the exercise of options granted under each plan or
(iii) such earlier date as may be determined by the plan administrator. Subject
to certain limitations, the plan administrator may amend each plan, correct any
defect, supply any omission or reconcile any inconsistency in the plans. No such
modification of an option shall alter or adversely impair any rights or
obligations under any option previously granted under the plans, except with the
consent of the grantee.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is generally a summary of the principal United
States federal income tax consequences under current federal income tax laws
relating to grants or awards to employees under the plans. This summary is not
intended to be exhaustive and, among other things, does not describe state,
local or foreign income and other tax consequences.
A grantee will not recognize any taxable income upon the grant of a
non-qualified option and Mail.com will not be entitled to a tax deduction with
respect to such grant. Generally, upon exercise of a non-qualified option, the
excess of the fair market value of stock on the date of exercise over the
exercise price will be taxable as ordinary income to the grantee. If Mail.com
complies with applicable withholding requirements, we will be entitled to a tax
deduction in the same amount and at the same time as the grantee recognizes
ordinary income subject to any deduction limitation under Section 162(m) of the
Internal Revenue Code of 1986. The subsequent disposition of shares acquired
upon the exercise of a nonqualified stock option will ordinarily result in
capital gain or loss.
Subject to the discussion below, a grantee will not recognize taxable income
at the time of grant or exercise of an incentive stock option and we will not be
entitled to a tax deduction with respect to such grant or exercise. However, the
exercise of an incentive stock option may result in an alternative minimum tax
liability for the grantee.
Generally, if a grantee has held shares acquired upon the exercise of an
incentive stock option for at least one year after the date of exercise and for
at least two years after the date of grant of the incentive stock option, upon
disposition of the shares by the grantee, the difference, if any, between the
sales price of
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<PAGE>
the shares and the exercise price will be treated as long-term capital gain or
loss to the grantee. Generally, upon a sale or other disposition of shares
acquired upon the exercise of an incentive stock option within one year after
the date of exercise or within two years after the date of grant of the
incentive stock option (a "disqualifying disposition"), any excess of the fair
market value of the shares at the time of exercise of the option over the
exercise price of such option will constitute ordinary income to the grantee.
Any excess of the amount realized by the holder on the disqualifying disposition
over the fair market value of the shares on the date of exercise will generally
be capital gain. Subject to any deduction limitation under Section 162(m) of the
Internal Revenue Code of 1986, Mail.com will be entitled to a deduction equal to
the amount of such ordinary income recognized by the holder.
If a nonqualified option is exercised through the use of shares previously
owned by the holder, such exercise generally will not be considered a taxable
disposition of the previously owned shares and thus no gain or loss will be
recognized with respect to such shares upon such exercise. However, if the
option is an incentive stock option, and the previously owned shares were
acquired on the exercise of an incentive stock option and the holding period
requirement for those shares is not satisfied at the time they are used to
exercise the option, such use will constitute a disqualifying disposition of the
previously owned shares resulting in the recognition of ordinary income in the
amount described above.
1999 STOCK INCENTIVE PLAN
Mail.com intends to adopt the Mail.com, Inc. 1999 Stock Option Plan (the
"1999 Plan"), which is intended to serve as the successor equity incentive
program to the Company's existing Mail.com, Inc. 1998 Stock Option Plan (the
"Predecessor Plan"). The 1999 Plan will become effective upon its adoption by
the Board of Directors and ratification by the stockholders. shares of
common stock will initially be authorized for issuance under the 1999 Plan. This
initial share reserve will be comprised of (1) the shares which remain available
for issuance under the Predecessor Plan on the effective date of the 1999 Plan,
including the shares subject to outstanding options thereunder, plus (2) an
additional increase of shares. In addition, the share reserve will
automatically be increased on the first trading day of January each calendar
year, beginning in January 2000, by a number of shares equal to % of the total
number of shares of common stock outstanding on the last trading day of the
immediately preceding calendar year, but no such annual increase will exceed
shares. However, in no event may any one participant in the 1999 Plan
receive option grants or direct stock issuances for more than shares
in the aggregate per calendar year.
Outstanding options under the Predecessor Plan will be incorporated into the
1999 Plan upon the date of this Offering, and no further option grants will be
made under the Predecessor Plan. The incorporated options will continue to be
governed by their existing terms, unless the plan administrator elects to extend
one or more features of the 1999 Plan to those options.
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<PAGE>
CERTAIN TRANSACTIONS
CLASS A PREFERRED FINANCING
On May 27, 1997 and December 17, 1997, we issued an aggregate of 3,460,000
shares of Class A preferred stock at $1.00 per share. Among the purchasers were
Gerald Gorman, the Chairman of the Board of Directors and Chief Executive
Officer of Mail.com (400,000 shares), and William Donaldson (100,000 shares),
Stephen Ketchum (225,000 shares) and Jack Kuehler (100,000 shares), each a
director of Mail.com.
CLASS A PREFERRED STOCK ISSUANCE OBLIGATION SETTLEMENT
Prior to being amended, the Class A Preferred Stock Purchase Agreement dated
May 27, 1997, the Purchase and Sale Agreement dated December 17, 1997 and the
Purchase and Sale Agreement dated January 5, 1998 obligated us to issue
additional shares of Class A preferred stock to the purchasers in the event the
shares of Class A preferred stock did not meet certain liquidity performance
obligations.
As amended, these agreements provide that if we consummate an initial public
offering on or before July 31, 1999, then we will issue an aggregate of 968,800
shares of Class A common stock to be divided on a pro rata basis among the
purchasers. This amendment eliminates the liquidity performance obligations
described above. As a result of the Class A preferred stock issuance obligation
settlement, the following investors received an issuance of shares in the
following amounts: Gerald Gorman, Chairman of the Board of Directors and Chief
Executive Officer of Mail.com (112,000 shares), William Donaldson (28,000
shares), Stephen Ketchum (63,000 shares) and Jack Kuehler (28,000 shares).
CLASS C PREFERRED FINANCING
On July 31, 1998 and August 31, 1998, we issued an aggregate of 3,776,558
shares of Class C preferred stock at $3.46 per share, and detachable warrants at
$0.12857 per warrant to purchase an aggregate of 1,321,795 shares of Class C
preferred stock at an exercise price equal to the Class C conversion price as
defined in our amended and restated certificate of incorporation. Among the
purchasers were John Whitman, a director of Mail.com (7,200 shares, 2,520
warrants) and The Whitman Children Irrevocable Trust (7,200 shares, 2,520
warrants). Also, Citi Growth Fund II, Offshore L.P. and CG Asian-American Fund
L.P., limited partnerships indirectly controlled by entities in which Mr.
Whitman holds a minority interest, purchased 1,099,200 shares and 384,720
warrants in the aggregate.
CLASS C PREFERRED STOCK ISSUANCE OBLIGATION SETTLEMENT
Prior to being amended, our certificate of incorporation provided for a
reduction in the conversion price of the Class C preferred stock if certain
liquidity performance obligations were not met.
As amended, the certificate provides that if we consummate an initial public
offering on or before July 31, 1999, then the holders of Class C preferred
shares will receive a one time reduction in the Class C conversion price from
$3.50 per share to $2.80. This amendment eliminates the liquidity performance
obligation described above and permits the Class C holders to receive an
additional 944,139 shares of Class A common stock upon conversion of their
preferred shares. Also, in connection with the reduction in the Class C
conversion price, warrants to purchase 1,321,795 shares of Class C preferred
stock are to be cancelled and returned to Mail.com.
CLASS E PREFERRED FINANCING
On March 10, 1999, we issued an aggregate of 3,200,000 shares of Class E
preferred stock at $5.00 per share. Among the purchasers were John R. Whitman, a
Director of Mail.com (3,000 shares), and The Whitman Children Irrevocable Trust
(1,000 shares), Gerald Gorman, the Chairman and Chief Executive Officer of
Mail.com (35,000 shares), Stephen Ketchum, a director of Mail.com (10,000
shares), and Debra McClister, the Chief Financial Officer of Mail.com (40,000
shares). Also, Citi Growth Fund II, Offshore
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<PAGE>
L.P. and CG Asian-American Fund L.P., limited partnerships indirectly controlled
by entities in which Mr. Whitman holds a minority interest, purchased 76,880
shares in the aggregate.
CLASS E PREFERRED STOCK ADDITIONAL ISSUANCE
Our agreement with the purchasers of Class E preferred stock obligates us to
issue an aggregate of 114,147 shares of Class A common stock to be divided on a
pro rata basis upon consummation of an initial public offering by July 31, 1999.
AGREEMENTS WITH SHAREHOLDERS
Holders of our Class A common stock who were formerly holders of our Class
A, Class C and Class E preferred stock and purchased their preferred stock in
the offerings described above are parties to stock purchase and investor
agreements with us and other shareholders that entitle them to a number of
rights, including the following:
- REGISTRATION RIGHTS. We have granted registration rights to certain
holders of our Class A common stock who were formerly holders of our Class
A, Class C and Class E preferred stock. These registration rights allow
those shareholders, under certain circumstances, to demand that we file a
registration statement covering their Class A common shares. In addition,
those holders have the right to have their shares of Class A common stock
included in certain registration statements we file for our own account or
the account of other shareholders, subject to customary conditions such as
underwriter cut-backs.
- RIGHT TO NOMINATE A MEMBER OF THE BOARD OF DIRECTORS. Subject to minimum
ownership levels and other conditions, holders of our Class A common stock
who previously held our Class A, Class C and Class E preferred stock,
voting as separate groups, have the right to nominate one director each to
our Board of Directors. In the event that such groups fail to maintain
minimum ownership levels, certain groups will have the right to have an
observer attend all Board of Directors meetings in a nonvoting capacity.
We have granted U.S. Information Technology Financing, L.P. and the
Encompass Group, Inc. the right to jointly appoint one observer to attend
all Board of Directors meetings in a nonvoting capacity.
- CONTROLLING STOCKHOLDER AGREEMENT NOT TO SELL HIS SHARES OF CLASS B COMMON
STOCK. Gerald Gorman, our controlling stockholder, has agreed not to sell
his shares of Class B common stock until the holders of our Class A common
stock who formerly held Class A, Class C and Class E preferred stock have
had an opportunity to sell their shares of Class A common stock at
specified prices.
- RIGHT TO PARTICIPATE IN PROPOSED SALE OF STOCK BY CONTROLLING
STOCKHOLDER. Subject to certain exceptions, Mr. Gerald Gorman, our
controlling stockholder, has granted the holders of our Class A common
stock who formerly held Class A, Class C and Class E preferred stock, the
right to sell their shares of Class A common stock along with Mr. Gorman's
shares, in any transaction in which Mr. Gorman proposes to transfer his
shares of our stock to a third party, at the same price and upon the same
terms and conditions as Mr. Gorman.
- RIGHT OF CONTROLLING STOCKHOLDER TO COMPEL CERTAIN SHAREHOLDERS TO SELL
THEIR SHARES OF OUR STOCK. Subject to certain exceptions and conditions,
Mr. Gorman, our controlling stockholder, has the right to require the
holders of our Class A common stock who formerly held Class A, Class C and
Class E preferred stock to sell their shares of Class A common stock to a
third party to whom Mr. Gorman proposes to sell his common stock, at the
same price as and in the same proportion at which Mr. Gorman is selling
his common stock.
- RIGHTS TO INFORMATION AND INSPECTION. Subject to certain conditions, we
have agreed to provide to selected holders of Class A common stock who
formerly held shares of our Class A, Class C or Class E preferred stock
certain financial information and the rights to inspect our books and
records.
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<PAGE>
SPECIAL ARRANGEMENT WITH CNET, SNAP AND NBC
In 1998, we entered into a partner agreement with CNET, Inc. which was
amended shortly thereafter to include the newly formed Snap. Under this
agreement we were obligated to issue options for purchase of our Class A common
stock upon achievement of a member registration target. On November 6, 1998, our
partners achieved their target and became entitled to the options. Snap has
assigned its rights to its options to NBC.
In March 1999, to satisfy our obligations with respect to the options
described above, we issued warrants to CNET and NBC for purchase of 990,000 and
510,000 shares, respectively, of our Class A common stock at a purchase price
equal to the lower of $5.00 or the price per share in an initial public offering
of our stock. CNET and NBC have exercised their warrants, and funds for the
payment of the exercise price have been deposited into escrow. Upon consummation
of this offering, funds sufficient to pay the exercise price will be released to
us, and we will issue the shares to CNET and NBC.
Pursuant to an Investors' Rights Agreement dated March 1, 1999 by and among
Mail.com, CNET and NBC, we have granted to both of CNET and NBC certain
registration rights. Also pursuant to the agreement between CNET and Mail.com,
we granted CNET the right to nominate a director to our Board of Directors.
GEOCITIES
Under our partner agreement with GeoCities, GeoCities received 1,000,000
shares of Class A common stock at $3.50 per share upon the commencement of the
contract in consideration of the advertising, subscription and customer
acquisition opportunities. In addition to our obligation to share revenue
generated from the partnership with GeoCities, we are required to pay GeoCities
$1.5 million in three installments, the first of which was paid in December
1998.
Also, under the terms of the Agreement and subject to certain conditions,
GeoCities has the right to have a representative attend all meetings of our
board of directors and to receive information that we provide to other board
members. GeoCities has designated David Bohnett, its Chairman of the board of
directors, as its representative. If and when GeoCities' ownership in our
capital stock equals or exceeds 2,000,000 shares, GeoCities will have the right
to have one of its representatives elected to our Board of Directors. Mr. Gorman
has agreed to vote for GeoCities' representative if GeoCities acquires the right
to nominate a representative to the Board of Directors.
LYCOS
In October 1997, we entered into a partner agreement with Lycos. As part of
this agreement, we granted Lycos an option to purchase 2,000,000 Class A
preferred shares at an exercise price of $2.00 per share, the fair market value
at the date of grant. We recorded compensation expense of $52,000 in 1997, based
upon the fair market value of the preferred stock. In March 1998, Lycos
exercised its option in accordance with this agreement, and we received 100,062
shares of Lycos stock, valued at $39.98 per share. We subsequently sold the
Lycos stock for approximately $4.4 million.
EMPLOYMENT RELATED AGREEMENTS
For information regarding the grant of stock options to executive officers
and directors, see "Management--Director Compensation," "--Executive
Compensation," "--Employee Benefit Plans" and "Principal Stockholders."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 10, 1999 and as adjusted to
reflect the sale of the shares of common stock offered hereby by: (1) each
person who we know owns beneficially more than 5% of our common stock, (2) each
of our directors, including our Chief Executive Officer, (3) our three most
highly compensated executive officers, other than our Chief Executive Officer,
who were serving as executive officers at the end of 1998 and (4) all of our
executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS PERCENTAGE OF CLASS A COMMON
A COMMON STOCK BENEFICIALLY OWNED(2),(3) PERCENTAGE OF
STOCK STOCK -------------------------------- TOTAL VOTING
BENEFICIALLY AFTER POWER AFTER
NAME OF BENEFICIAL OWNER OWNED(1) BEFORE OFFERING OFFERING THE OFFERING
- --------------------------------------------------- -------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Gerald Gorman...................................... 12,030,688( (5) 35.9% (6)
Lycos, Inc......................................... 2,000,000 6.0
500 Old Connecticut Path
Framingham, MA 01701-4576
Gary Millin(7)..................................... 1,651,188 4.9
John Whitman....................................... 1,475,767(8) 4.5
Lon Otremba(9)..................................... 565,282 1.7
Charles Walden(10)................................. 352,815 1.1
Stephen Ketchum.................................... 298,357 * *
William Donaldson(11).............................. 248,833 * *
Jack Kuehler(12)................................... 248,833 * *
Debra McClister(13)................................ 100,803 * *
All directors and executive officers as a group.... 16,972,566 48.6
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) For purposes of this table, a person, entity or group is deemed to have
"beneficial ownership" of any shares of Class A common stock which such
person, entity or group has the right to acquire within 60 days after the
date of this prospectus and any shares of Class A common stock issuable upon
conversion, exchange or exercise of all convertible securities, options or
warrants held by such person, entity or group. Unless otherwise noted below,
the persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable.
(2) For purposes of calculating the percentage of outstanding shares held by
each person named above, any shares which such person has the right to
acquire within 60 days after the date of the Prospectus are deemed to be
outstanding, but not for the purpose of calculating the percentage ownership
of any other person.
(3) The number of shares of Class A common stock for purpose of calculating the
percentages reflects the conversion of all outstanding securities, options
or warrants convertible into shares of Class A common stock, including
conversion of 968,800 shares of Class A preferred stock issued in lieu of
the Class A preferred performance ratchet, 944,139 shares of Class C
preferred stock issued in lieu of the Class C
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<PAGE>
preferred stock liquidity ratchet and 114,147 shares of Class E preferred
stock issued pursuant to the Class E preferred liquidity ratchet. See
"Certain Transactions".
(4) Assumes conversion of 10,000,000 shares of Class B common stock, on a one
for one basis, into Class A common stock.
(5) Represents 409,938 shares issuable upon exercise of options exercisable
within 60 days of [March , 1999.]
(6) Reflects 10,000,000 shares of Class B common stock, each share of which
entitles Mr. Gorman to ten votes.
(7) Represents 431,537 shares issuable upon exercise of options exercisable
within 60 days of [March , 1999.]
(8) Represents 120,833 shares issuable upon exercise of options exercisable
within 60 days of [March , 1999.]
(9) Represents 379,493 shares issuable upon exercise of options exercisable
within 60 days of [March , 1999.]
(10) Represents 352,815 shares issuable upon exercise of options exercisable
within 60 days of [March , 1999.]
(11) Represents 69,990 shares issuable upon exercise of options exercisable
within 60 days of [March , 1999.]
(12) Represents 120,833 shares issuable upon exercise of options exercisable
within 60 days of [March , 1999.]
(13) In addition to the shares owned by Mr. Whitman directly, includes 10,036
shares owned by The Whitman Children Irrevocable Trust, 726,813 shares
owned by Citi Growth Fund II Offshore, L.P. and 726,813 shares owned by CG
Asian-American Fund, L.P. Mr. Whitman disclaims beneficial ownership of the
shares owned of record by the Whitman Children Irrevocable Trust. Mr.
Whitman holds a minority interest in limited partnerships that indirectly
control the voting power of the shares held by Citi Growth Fund II
Offshore, L.P. and CG Asian-American Fund, L.P., and disclaims his
beneficial interest in the shares held by these entities except to the
extent of his pecuniary interest therein.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of our capital stock and certain provisions of our
amended and restated certificate of incorporation and our bylaws is not complete
and may not contain all the information you should consider before investing in
the Class A common stock. You should read carefully our amended and restated
certificate of incorporation and our bylaws, which are included as exhibits to
the registration statement of which this prospectus is a part.
We are authorized to issue up to 120,000,000 shares of Class A common stock,
par value $.01 per share, 10,000,000 shares of Class B common stock, par value
$.01 per share, and 60,000,000 shares of preferred stock, par value $.01 per
share.
The following description of our capital stock assumes the conversion of all
currently outstanding preferred stock upon consummation of this offering.
COMMON STOCK
As of March 10, 1999, we had 6.4 million shares of Class A common stock
outstanding held of record by 19 stockholders and 10,000,000 shares of Class B
common stock outstanding held entirely by Gerald Gorman, the Chairman of the
Board of Directors and our Chief Executive Officer. Based upon the number of
shares outstanding as of that date and giving effect to the issuance of an
aggregate of shares of Class A common stock to reflect (1) the offering,
(2) the conversion of all outstanding preferred stock, (3) the settlement of our
contingent obligations to issue additional equity to our preferred stockholders
and (4) the exercise of the CNET and NBC warrants, there will be approximately
shares of Class A common stock outstanding upon the closing of this
offering.
All of the issued and outstanding shares of Class A common stock and the
shares of Class A common stock to be issued following this offering are or will
be fully paid and nonassessable. Except as described below, the issued and
outstanding shares of Class A common stock and Class B common stock will
generally have identical rights. In addition, under our amended and restated
certificate of incorporation, holders of Class A common stock have no preemptive
or other subscription rights to purchase our shares of stock of the Company, nor
are they entitled to the benefits of any redemption or sinking fund provisions.
VOTING RIGHTS
The holders of Class A common stock are entitled to one vote per share on
all matters to be voted on by stockholder generally, including the election of
directors. The holder of Class B common stock is entitled to ten votes per share
on all matters to be voted on by stockholder generally, including the election
of directors. In addition to any class vote that may be required under law or
our amended and restated certificate of incorporation, all classes of capital
stock entitled to vote generally on any matter shall vote together as a single
class. There are no cumulative voting rights. Accordingly, holders of a majority
of the total votes entitled to vote in an election of directors will be able to
elect all of the directors standing for election. See "Risk Factors--Gerald
Gorman will continue to control Mail.com after this offering and be able to
prevent a change of control."
LIQUIDATION PREFERENCES
If we are liquidated, dissolved or wound up, the holders of Class A common
stock and Class B common stock will be entitled to receive distributions only
after satisfaction of all liabilities and the prior rights of any outstanding
class of preferred stock. If we are liquidated, dissolved or wound up, our
assets legally available after satisfaction of all of our liabilities shall be
distributed to the holders of Class A common stock and Class B common stock pro
rata based on the respective numbers of shares of Class A common stock held by
these holders or issuable upon conversion of Class B common stock held by such
holders.
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CONVERSION RIGHTS/MANDATORY CONVERSION
Holders of Class A common stock have no conversion rights. Holders of Class
B common stock may convert each share into one share of Class A common stock. In
addition, each share of Class B common stock will automatically convert into one
share of Class A common stock upon a sale or other transfer by Gerald Gorman to
any person or entity other than entities controlled by Mr. Gorman.
DIVIDENDS
The holders of both classes of common stock are entitled to receive equal
non-cumulative dividends when and as declared from time to time by the board of
directors, subject to any preferential dividend rights of any outstanding
preferred stock.
PREFERRED STOCK
Pursuant to our amended and restated certificate of incorporation, the board
of directors is authorized, without further stockholder approval, to issue
60,000,000 authorized but unissued shares of preferred stock in one or more
classes or series. The board also has the authority to fix or alter the
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such class or series, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences. Preferred stock could thus be issued quickly with terms that could
delay or prevent a change in control of the Company or make removal of
management more difficult. Additionally, the issuance of preferred stock may
decrease the market price of the Class A common stock and may adversely affect
the voting and other rights of the holders of Class A common stock. As of the
closing of this offering, we will not have any preferred stock outstanding. We
currently have no plans to create or issue any shares of any new class or series
of preferred stock.
WARRANTS/OPTIONS
Pursuant to an engagement letter dated March 2, 1998 between PaineWebber
Incorporated and us and entered into in connection with the private placement of
the Class C preferred stock, we issued to PaineWebber Incorporated warrants to
purchase 143,484 shares of Class A common stock and we issued to a former
employee of PaineWebber Incorporated warrants to purchase 35,872 shares of Class
A common stock. These warrants are exercisable at an exercise price of $3.50 per
share and expire July 31, 2003. The warrants are entitled to anti-dilution
adjustment in the event of stock splits, stock dividends, stock distributions or
combinations.
Pursuant to an agreement among CNET, Snap (subsequently assigned to NBC) and
us dated May 13, 1998, we issued as of March 1, 1999, warrants to purchase
990,000 shares of Class A common stock to CNET, and warrants to purchase 510,000
shares of Class A common stock to NBC. CNET, and NBC have each exercised these
warrants in full and have deposited the aggregate exercise price in escrow. The
warrant exercise price is the lesser of $5.00 per share and the initial public
offering price in this offering. The issuance of the shares of Class A common
stock to CNET, and NBC as a result of the exercise of these warrants and the
payment of the exercise price to us is subject to the consummation of the
offering.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND MAIL.COM'S
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS
Mail.com is subject to the provisions of Section 203 of the Delaware General
Corporation Law (as amended from time to time, the "DGCL"). Subject to certain
exceptions, Section 203 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
such status with the approval of the board of directors or unless asset sales
and other transactions resulting in a financial benefit to the interested
70
<PAGE>
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of the corporation's voting stock. This statute could
prohibit or delay the accomplishment of mergers or other takeover or change in
control attempts with respect to Mail.com and, accordingly, may discourage
attempts to acquire Mail.com.
In addition, certain provisions of the amended and restated certificate and
bylaws, which provisions will be in effect upon the closing of the offering and
are summarized in the following paragraphs, may be deemed to have an
anti-takeover effect and may delay, defer or prevent a lender offer or takeover
attempt that a stockholder might consider in its best interest, including those
attempts that might result in a premium over the market price for the shares
held by stockholders.
BOARD OF DIRECTORS VACANCIES. The certificate authorizes the board of
directors to fill vacant directorships or 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
vacancies created by such removal with its own nominees.
SPECIAL MEETINGS OF STOCKHOLDERS. The certificate provides that special
meetings of stockholders of Mail.com may be called only by the Chairman or
either Co-Chairman, as the case may be, the Vice Chairman, if any, or a majority
of the board of directors.
AUTHORIZED BUT UNISSUED SHARES. The authorized unissued shares of common
stock and preferred stock are available for future issuance without stockholder
approval, subject to certain limitations imposed by the Nasdaq National Market.
These additional shares may be utilized for a variety of corporate purposes,
including future public offerings to raise additional capital, corporate
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 Mail.com by means of a
proxy contest, tender offer, merger or otherwise.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation, or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our amended and restated certificate of incorporation includes a provision
that eliminates the personal liability of its directors and executive officers
for monetary damages for breach of fiduciary duty as a director or executive
officer, except for liability:
- for any breach of the director's or executive officer's duty of loyalty to
Mail.com or its stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
- we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, subject to certain very limited exceptions;
71
<PAGE>
- we may indemnify our other employees and agents to the same extent that we
indemnified our officers and directors, unless otherwise required by law,
our amended and restated certificate of incorporation, our bylaws or
agreements; and
- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware Law, subject to certain very limited exceptions.
Mail.com has entered into Indemnity Agreements with each of our directors
and executive officers to give them additional contractual assurances regarding
the scope of the indemnification described above and to provide additional
procedural protections. In addition, we have obtained directors' and officers'
insurance providing indemnification for our directors, officers and certain
employees for certain liabilities. We believe that these indemnification
provisions and agreements are necessary to attract and retain qualified
directors and officers.
The limitation of liability and indemnification provisions in our amended
and restated certificate of incorporation and bylaws may discourage stockholders
from bringing a lawsuit against directors for breach of their fiduciary duty.
They may also have the effect of reducing the likelihood or derivative
litigation against directors and officers, even though such an action, if
successful, might otherwise benefit us and our stockholders. Furthermore, a
stockholder's investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers pursuant to
these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees regarding that for which indemnification is
sought, nor are we aware of any threatened litigation that may result in claims
for indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company, New York, New York.
LISTING
We will apply to have our Class A common stock included for quotation on the
Nasdaq National Market under the trading symbol "MLCM."
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our Class A
common stock, and no predictions can be made regarding the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. As described below, only a limited
number of shares will be available for sale shortly after this offering due to
certain contractual and legal restrictions on resale. Nevertheless, sales of
substantial amounts of our Class A common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price.
Upon completion of this offering, we will have shares of Class A
common stock outstanding (assuming no exercise of the underwriters'
over-allotment option). As of , 1999, we had granted stock options
to certain employees and directors for the purchase of an aggregate of
shares of Class A common stock. The shares of Class A common stock being
sold hereby will be freely tradable (other than by our "affiliates" as such term
is defined in the Securities Act) without restriction or registration under the
Securities Act. All remaining shares were issued and sold by us in private
transactions are restricted shares under Rule 144 and are eligible for public
sale only if registered under the Securities Act or sold in accordance with
Rules 144, 144(k) or 701 thereunder.
Certain of our shareholders, who own in the aggregate shares of
Class A common stock, have agreed they will not sell any Class A common stock
owned by them without the prior written consent of the representatives of the
underwriters for a period of 180 days from the effective date of the
Registration Statement of which this prospectus is a part (the "Lockup Period").
Following the expiration of the lockup period, approximately shares of
Class A common stock, including shares issuable upon the exercise of certain
options, will be available for sale in the public market subject to compliance
with Rules 144, 144(k) or 701. See "Underwriting."
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from us by our employees,
directors, officers, consultants or advisers prior to the closing of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Securities and
Exchange Commission has indicated that Rule 701 will apply to stock options
granted by us before this offering, along with the shares acquired upon exercise
of such options. Securities issued in reliance on Rule 701 are deemed to be
restricted shares and, beginning 90 days after the date of this prospectus
(unless subject to the contractual restrictions described above), may be sold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its two-year
minimum holding period requirements.
In general, under Rule 144, as currently in effect, 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 (1) 1% of the then
outstanding shares of common stock (approximately shares immediately after the
offering) or (2) the average weekly trading volume in the common stock during
the four calendar weeks preceding the date on which notice of such sale is
filed, subject to certain restrictions. In addition, a person who is not deemed
to have been an affiliate of Mail.com 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 would be entitled to sell such shares under Rule 144(k) without regard
to the requirements described above. To the extent that shares were acquired
from an affiliate of Mail.com, such person's holding period for the purpose of
effecting a sale under Rule 144 commences on the date of transfer from the
affiliate.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person deemed to be our affiliate, or a person
holding restricted shares who beneficially owns shares that were not acquired
from us or our affiliate within the previous two years, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding
73
<PAGE>
shares of Class A common stock (approximately shares immediately after this
offering, assuming no exercise of the Underwriters' over-allotment option) or
the average weekly trading volume of the Class A common stock during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission (the "Commission"). Sales under Rule 144 are
subject to certain requirements relating to manner of sale, notice and
availability of current public information about us. However, a person (or
persons whose shares are aggregated) who is not deemed to have been our
affiliate at any time during the 90 days immediately preceding the sale and who
beneficially owns Restricted Shares is entitled to sell such shares under Rule
144(k) without regard to the limitations described above; provided that at least
three years have elapsed since the later of the date the shares were acquired
from us or from our affiliate. The foregoing is a summary of Rule 144 and is not
intended to be a complete description of it.
We intend to file a registration statement under the Securities Act covering
approximately shares of Class A common stock reserved for issuance under
the 1999 Stock Plan. This registration statement is expected to be filed soon
after the date of this prospectus and will automatically become effective upon
filing. Accordingly, shares registered under such registration statement will be
available for sale in the open market, unless such shares are subject to vesting
restrictions with us or the contractual restrictions described above.
In addition, after this offering, the holders of approximately shares
of Class A common stock will be entitled to certain rights to cause us to
register the sale of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act (except for shares
purchased by our affiliates) immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."
74
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and Mail.com has agreed to sell to such underwriter, the number of
shares set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Salomon Smith Barney Inc..........................................................
PaineWebber Incorporated..........................................................
-----------
Total.............................................................................
-----------
-----------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc. and PaineWebber
Incorporated are acting as representatives, propose to offer some of the shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the shares to certain dealers at the public
offering price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share on sales to certain other dealers. If all of the shares are
not sold at the initial offering price, the representatives may change the
public offering price and the other selling terms. The representatives have
advised us that the underwriters do not intend to confirm any sales to any
accounts over which they exercise discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to additional shares of
Class A common stock at the public offering price less the underwriting
discount. The underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with this offering. To the
extent such option is exercised, each underwriter will be obligated, subject to
certain conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
At our request, the underwriters have reserved up to shares of
the Class A common stock for sale, at the initial public offering price, to
employees, directors and other persons associated with Mail.com. The number of
shares of Class A common stock available for sale to the general public in the
offering will be reduced to the extent such persons purchase such reserved
shares.
Our officers and directors, and certain other stockholders of Mail.com have
agreed that, for a period of 180 days from the date of this prospectus, they
will not, without the prior written consent of Salomon Smith Barney Inc.,
dispose of or hedge any common stock of Mail.com or any securities convertible
into or exchangeable for Class A common stock. Salomon Smith Barney Inc. in its
sole discretion may release any of the securities subject to these lock-up
agreements at any time without notice.
Prior to this offering, there has been no public market for the Class A
common stock. Consequently, the initial public offering price for the shares was
determined by negotiations between us and the representatives. Among the factors
considered in determining the initial public offering price were our record of
operations, its current financial condition, its future prospects, its markets,
the economic conditions in and future prospects for the industry in which we
compete, our management, and currently prevailing general conditions in the
equity securities markets, including current market valuations of publicly
traded companies considered comparable to Mail.com. We cannot assure you,
however, that the
75
<PAGE>
prices at which the shares will sell in the public market after this offering
will not be lower than the price at which they are sold by the underwriters or
that an active trading market in the Class A common stock will develop and
continue after this offering.
We will apply to have the Class A common stock included for quotation on the
Nasdaq National Market under the symbol "MLCM".
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by Mail.com 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 Class A common stock.
<TABLE>
<CAPTION>
PAID BY MAIL.COM
-------------------------
<S> <C> <C>
FULL
NO EXERCISE EXERCISE
----------- ------------
Per share.......................................................... $ $
Total.............................................................. $ $
----------- ------------
----------- ------------
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of Class A common stock in excess of the number of shares to be purchased
by the underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the Class A common stock in
the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of Class A common stock made for the purpose of preventing or
retarding a decline in the market price of the Class A common stock while the
offering is in progress. Penalty bids permit the underwriters to reclaim a
selling concession from a syndicate member when Salomon Smith Barney Inc., in
covering syndicate short positions or making stabilizing purchases, repurchases
shares originally sold by that syndicate member. These activities may cause the
price of the Class A common stock to be higher than the price that otherwise
would exist in the open market in the absence of such transactions. These
transactions may be effected on the Nasdaq National Market or in the
over-the-counter market, or otherwise and, if commenced, may be discontinued at
any time.
The representatives have performed certain investment banking and advisory
services for us from time to time for which they have received customary fees
and expenses. Among other services, the representatives acted as our placement
agents in connection with the private placement of Series E preferred stock in
March 1999, and PaineWebber Incorporated acted as private placement agent in
connection with the private placement of Series C preferred stock in July and
August of 1998. The representatives may, from time to time, engage in
transactions with and perform services for us in the ordinary course of our
business.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
LEGAL MATTERS
The validity of the shares of Class A common stock offered hereby will be
passed upon for the Company by Winthrop, Stimson, Putnam & Roberts, New York,
New York. Certain legal matters in connection with this offering will be passed
upon for the underwriters by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The financial statements of Mail.com, Inc. as of December 31, 1997 and 1998
and for each of the years in the three year period ended December 31, 1998
included in this prospectus have been so included in
76
<PAGE>
reliance on the report of KPMG LLP, independent accountants, appearing elsewhere
herein, upon authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 with respect
to the Class A common stock offered hereby. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are part
of the registration statement. For further information with respect to Mail.com
and the Class A common stock, reference is made to the registration statement
and the exhibits and schedules thereto. You may read and copy any document we
file at the SEC's public reference rooms in Washington, DC, New York, New York
and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings will also be
available to the public from the SEC's Web site at http://www.sec.gov.
77
<PAGE>
MAIL.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Balance Sheets as of December 31, 1997 and 1998............................................................ F-3
Statements of Operations for the years ended December 31, 1996, 1997 and 1998.............................. F-4
Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998.................... F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998.............................. F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mail.com, Inc.:
We have audited the accompanying balance sheets of Mail.com, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three-year 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 Mail.com, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
February 25, 1999
F-2
<PAGE>
MAIL.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, (SEE NOTE 1 (B))
---------------------- DECEMBER 31, 1998
1997 1998 (UNAUDITED)
---------- ---------- -----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 909,718 $8,414,352 $31,014,352
Accounts receivable, net of allowance for doubtful accounts of
$92,401.............................................................. -- 702,065 702,065
Prepaid expenses and other current assets.............................. 36,676 222,577 222,577
Receivable from sale leaseback......................................... -- 631,003 631,003
---------- ---------- -----------------
Total current assets................................................. 946,394 9,969,997 32,569,997
---------- ---------- -----------------
Property and equipment, net.............................................. 928,028 4,341,107 4,341,107
Domain assets, net....................................................... 651,468 1,010,416 1,010,416
Partner advances......................................................... -- 4,714,821 4,714,821
Investment in affiliated companies....................................... 100,000 250,000 250,000
Other.................................................................... 19,964 58,147 58,147
---------- ---------- -----------------
Total assets......................................................... $2,645,854 $20,344,488 $42,944,488
---------- ---------- -----------------
---------- ---------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................................... $ 66,725 $1,753,582 $ 1,753,582
Accrued expenses....................................................... 320,930 1,181,613 1,181,613
Accrued payroll and other related costs................................ 140,047 486,981 486,981
Current portion of capital lease obligations........................... 240,513 479,461 479,461
Current portion of domain asset purchase obligations................... 62,654 168,582 168,582
Due to officer......................................................... 200,000 -- --
Deferred revenue....................................................... 106,488 823,908 823,908
---------- ---------- -----------------
Total current liabilities............................................ 1,137,357 4,894,127 4,894,127
---------- ---------- -----------------
Capital lease obligations, less current portion.......................... 568,728 1,437,731 1,437,731
Domain asset purchase obligation, less current portion................... 150,155 216,886 216,886
Deferred revenue......................................................... 222,699 1,080,737 1,080,737
Redeemable convertible preferred stock, $0.01 par value; Class
C--12,000,000 shares authorized; 3,776,558 shares issued and
outstanding at December 31, 1998, with an aggregate liquidation
preference of $13,047,650; no shares issued and outstanding pro forma
(unaudited)............................................................ -- 13,047,650 --
---------- ---------- -----------------
Stockholder's equity (deficit):
Convertible preferred stock, $0.01 par value; 60,000,000 shares
authorized:
Class A--12,000,000 shares authorized; 4,185,000 and 6,185,000 shares
issued and outstanding at December 31, 1997 and 1998, respectively,
with an aggregate liquidation preference of $2,932,580 and $7,647,580
at December 31, 1997 and 1998, respectively; no shares issued and
outstanding pro forma (unaudited).................................... 41,850 61,850 --
Class D--10,000,000 shares authorized; no shares issued and
outstanding.......................................................... -- -- --
Class E--10,000,000 shares authorized; no shares issued and
outstanding.......................................................... -- -- --
Common stock, $0.01 par value; 130,000,000 shares authorized:
Class A--120,000,000 shares authorized; 4,097,500 and 5,931,405 shares
issued and outstanding at December 31, 1997 and 1998, respectively;
22,620,049 issued and outstanding pro forma (unaudited).............. 40,975 59,314 226,200
Class B--10,000,000 shares authorized, issued and outstanding at
December 31, 1997 and 1998; with an aggregate liquidation preference
of $1,000,000........................................................ 100,000 100,000 100,000
Additional paid in capital............................................... 4,652,168 16,502,440 62,179,791
Stock subscriptions receivable........................................... (727,613) (500) (500)
Accumulated deficit...................................................... (3,540,465) (17,055,747) (27,190,484)
---------- ---------- -----------------
Total stockholders' equity (deficit)................................. 566,915 (332,643) 35,315,007
---------- ---------- -----------------
Commitments and contingencies
Total liabilities and stockholders' equity (deficit)................. $2,645,854 $20,344,488 $42,944,488
---------- ---------- -----------------
---------- ---------- -----------------
</TABLE>
F-3
<PAGE>
MAIL.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Revenues.............................................. $ 19,015 $ 173,234 $ 1,494,762
---------- ---------- -----------
Operating expenses:
Cost of revenues.................................... 187,890 1,081,848 2,890,582
Sales and marketing................................. 65,096 930,420 7,669,877
General and administrative.......................... 221,932 862,028 3,482,097
Product development................................. 93,698 296,140 1,573,465
---------- ---------- -----------
Total operating expenses.......................... 568,616 3,170,436 15,616,021
---------- ---------- -----------
Loss from operations.............................. (549,601) (2,997,202) (14,121,259)
---------- ---------- -----------
Other income (expense):
Gain on sale of investment.......................... -- -- 438,000
Interest income..................................... 6,869 36,264 277,164
Interest expense.................................... (1,980) (34,815) (109,187)
---------- ---------- -----------
Total other income, net........................... 4,889 1,449 605,977
---------- ---------- -----------
Net loss.............................................. $ (544,712) $(2,995,753) $(13,515,282)
---------- ---------- -----------
---------- ---------- -----------
Basic and diluted net loss per share.................. $ (0.04) $ (0.21) $ (0.93)
---------- ---------- -----------
---------- ---------- -----------
Weighted-average basic and diluted shares
outstanding......................................... 13,725,278 14,097,500 14,607,915
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-4
<PAGE>
MAIL.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS A PREFERRED CLASS A COMMON STOCK CLASS B COMMON STOCK
STOCK
---------------------- ---------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995......................... -- $ -- -- $ -- $
Issuance of Class A common stock to founders......... -- -- 2,422,500 24,225 -- --
Issuance of Class B common stock to founder.......... -- -- -- -- 10,000,000 100,000
Issuance of Class A preferred stock to founders...... 100,000 1,000 -- -- -- --
Domain assets purchased in exchange for Class A
preferred stock.................................... 225,000 2,250 -- -- -- --
Domain assets purchased in exchange for Class A
common stock....................................... -- -- 1,675,000 16,750 --
Issuance of Class A preferred stock for cash......... 400,000 4,000 -- -- -- --
Net loss............................................. -- -- -- -- -- --
--------- ----------- --------- ----------- --------- ---------
Balance at December 31, 1996......................... 725,000 7,250 4,097,500 40,975 10,000,000 100,000
Payment of founder's Class B common stock
subscription receivable............................ -- -- -- -- -- --
Issuance of Class A preferred stock in exchange for
asset.............................................. 100,000 1,000 -- -- -- --
Issuance of Class A preferred stock, net of $54,640
issuance costs..................................... 3,290,000 32,900 -- -- -- --
Issuance of Class A preferred stock in exchange for
services........................................... 70,000 700 -- -- -- --
Issuance of options in connection with partner
agreement.......................................... -- -- -- -- -- --
Net loss............................................. -- -- -- -- -- --
--------- ----------- --------- ----------- --------- ---------
Balance at December 31, 1997......................... 4,185,000 41,850 4,097,500 40,975 10,000,000 100,000
Issuance of Class A common stock to vendor........... -- -- 2,744 27 -- --
Issuance of Class A common stock in connection with
partner agreements................................. -- -- 1,831,161 18,312 -- --
Proceeds from stock subscriptions receivable......... -- -- -- -- -- --
Issuance of Class A preferred stock as a result of
options exercised, net of $226,696 issuance
costs.............................................. 2,000,000 20,000 -- -- -- --
Issuance of warants in connection with Class C
redeemable convertible preferred stock............. -- -- -- -- -- --
Offering costs in connection with Class C redeemable
convertible preferred stock........................ -- -- -- -- -- --
Issuance of stock options to officer................. -- -- -- -- -- --
Issuance of stock options to partner................. -- -- -- -- -- --
Net loss............................................. -- -- -- -- -- --
--------- ----------- --------- ----------- --------- ---------
Balance at December 31, 1998......................... 6,185,000 $ 61,850 5,931,405 $ 59,314 10,000,000 $ 100,000
--------- ----------- --------- ----------- --------- ---------
--------- ----------- --------- ----------- --------- ---------
<CAPTION>
TOTAL
ADDITIONAL STOCK STOCKHOLDERS'
PAID-IN SUBSCRIPTIONS ACCUMULATED EQUITY
CAPITAL RECEIVABLE DEFICIT (DEFICIT)
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995......................... $ -- $ -- $ -- $ --
Issuance of Class A common stock to founders......... (12,112) (12,113) -- --
Issuance of Class B common stock to founder.......... 900,000 (450,000) -- 550,000
Issuance of Class A preferred stock to founders...... (500) (500) -- --
Domain assets purchased in exchange for Class A
preferred stock.................................... 20,330 -- -- 22,580
Domain assets purchased in exchange for Class A
common stock....................................... 160,670 177,420
Issuance of Class A preferred stock for cash......... 161,000 -- -- 165,000
Net loss............................................. -- -- (544,712) (544,712)
---------- ------------ ------------ -------------
Balance at December 31, 1996......................... 1,229,388 (462,613) (544,712) 370,288
Payment of founder's Class B common stock
subscription receivable............................ -- 450,000 -- 450,000
Issuance of Class A preferred stock in exchange for
asset.............................................. 99,000 -- -- 100,000
Issuance of Class A preferred stock, net of $54,640
issuance costs..................................... 3,202,480 (715,000) -- 2,520,380
Issuance of Class A preferred stock in exchange for
services........................................... 69,300 -- -- 70,000
Issuance of options in connection with partner
agreement.......................................... 52,000 -- -- 52,000
Net loss............................................. -- -- (2,995,753) (2,995,753)
---------- ------------ ------------ -------------
Balance at December 31, 1997......................... 4,652,168 (727,613) (3,540,465) 566,915
Issuance of Class A common stock to vendor........... 5,461 -- -- 5,488
Issuance of Class A common stock in connection with
partner agreements................................. 7,178,105 -- -- 7,196,417
Proceeds from stock subscriptions receivable......... -- 727,113 -- 727,113
Issuance of Class A preferred stock as a result of
options exercised, net of $226,696 issuance
costs.............................................. 3,753,304 -- -- 3,773,304
Issuance of warants in connection with Class C
redeemable convertible preferred stock............. 169,943 -- -- 169,943
Offering costs in connection with Class C redeemable
convertible preferred stock........................ (723,900) - - (723,900)
Issuance of stock options to officer................. 1,096,399 -- -- 1,096,399
Issuance of stock options to partner................. 370,960 -- -- 370,960
Net loss............................................. -- -- (13,515,282) (13,515,282)
---------- ------------ ------------ -------------
Balance at December 31, 1998......................... $16,502,440 $ (500) ($17,055,747) $ (332,643)
---------- ------------ ------------ -------------
---------- ------------ ------------ -------------
</TABLE>
F-5
<PAGE>
MAIL.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
--------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................... $(544,712) $(2,995,753) $(13,515,282)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash charges related to partner agreements........................... -- -- 2,982,083
Non-cash compensation.................................................... -- 122,000 1,616,978
Depreciation and amortization............................................ 15,826 162,449 897,340
Amortization of domain assets............................................ 25,351 126,340 206,426
Write-off of property and equipment...................................... -- 84,000 --
Provision for doubtful accounts.......................................... -- -- 92,401
Changes in operating assets and liabilities:
Accounts receivable.................................................... -- -- (794,466)
Prepaid expenses and other current assets.............................. (34,309) (10,887) (185,901)
Partner advances....................................................... -- -- (500,000)
Other assets........................................................... 1,378 (8,727) (35,987)
Accounts payable....................................................... -- 66,725 1,686,857
Accrued expenses....................................................... 62,316 258,614 860,683
Accrued payroll and other related costs................................ 28,436 111,611 346,934
Deferred revenue....................................................... 6,289 322,898 1,575,458
--------- ---------- -----------
Net cash used in operating activities................................ (439,425) (1,760,730) (4,766,476)
--------- ---------- -----------
Cash flows from investing activities:
Purchases of domain assets............................................... (60,133) (334,312) (384,791)
Loan-related party....................................................... (50,788) -- --
Repayment of loan-related party.......................................... 20,000 30,788 --
Proceeds from sale leaseback............................................. 37,534 709,874 642,847
Purchases of property and equipment...................................... (81,237) (895,689) (4,187,607)
--------- ---------- -----------
Net cash used in investing activities................................ (134,624) (489,339) (3,929,551)
--------- ---------- -----------
Cash flows from financing activities:
Net proceeds from issuance of Class A and C preferred stock.............. 165,000 2,520,380 16,682,379
Net proceeds from issuance of Class A and B common stock................. 550,000 450,000 12,113
Payments under capital lease obligations................................. (12,674) (138,870) (283,711)
Due to officer........................................................... -- 200,000 (200,000)
Payments under domain asset purchase obligations......................... -- -- (10,120)
--------- ---------- -----------
Net cash provided by financing activities............................ 702,326 3,031,510 16,200,661
--------- ---------- -----------
Net increase in cash and cash equivalents............................ 128,277 781,441 7,504,634
Cash and cash equivalents at beginning of the period..................... -- 128,277 909,718
--------- ---------- -----------
Cash and cash equivalents at the end of the period....................... $ 128,277 $ 909,718 $ 8,414,352
--------- ---------- -----------
--------- ---------- -----------
Supplemental disclosure of non-cash information:
During the years ended December 31, 1996, 1997 and 1998, the Company paid approximately $2,000, $35,000 and
$85,000, respectively, for interest.
Non-cash investing activities:
During the year ended December 31, 1996, the Company purchased domain assets in exchange for the issuance
of Class A preferred and common stock. The transaction resulted in a non-cash investing activity of
$200,000.
During the year ended December 31, 1996, the Company issued 100,000 shares of Class A preferred stock in
exchange for stock. The transaction resulted in a non-cash investing activity of $100,000.
During the year ending December 31, 1998, the Company issued 1,831,161 shares of its common stock in
connection with some of its Mail.com partner agreements. These transactions resulted in a non-cash
investing activity of approximately $7,369,000.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment. These capital lease obligations
resulted in non-cash financing activities aggregating $211,200, $749,585 and $1,391,662 for the years
ended December 31, 1996, 1997, and 1998, respectively.
The Company is obligated under various agreements to purchase domain assets. These obligations resulted
in non-cash financing activities aggregating $226,585 and $169,003 for the years ended December 31, 1997
and 1998, respectively.
</TABLE>
F-6
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(A) SUMMARY OF OPERATIONS
Mail.com, Inc. (the "Company" or "Mail.com"), formerly known as iName, Inc.,
is a provider of free and pay email services and functions to Web users. The
Company provides Web users with its email messaging services primarily through
its own Web sites and its network of third-party Web site partners ("Mail.com
Partners"). The Company generates revenues primarily from advertising, direct
response marketing and e-commerce offerings and from premium services offered on
a subscription basis. The Company has assembled a portfolio of approximately
1,200 domain names.
In addition to providing email services, Mail.com provides domain name
trading services through its Best Domains Web site. Best Domains is a trading
site for domain names on the Internet.
The Company was incorporated in the State of Delaware on August 1, 1994
(inception), however, the business commenced operations in 1996 and launched its
first commercial email service in November 1996. The Company's financial
statements as of December 31, 1994 and 1995 and for the period from August 1,
1994 through December 31, 1995 reflect immaterial transactions; accordingly,
such activities have been included in the 1996 financial statements to
facilitate presentation.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of Web-based email and email
advertising. The Company's future success will be dependent upon its ability to
create and deliver an effective and competitive email product, the acceptance of
the Internet and Web-based email as a medium for advertising, and the Company's
ability to develop and provide new services that meet members' changing
requirements, including the effective use of leading technologies, to continue
to enhance its current services, and to influence and respond to emerging
industry standards and other technological changes on a timely and
cost-effective basis.
(B) INITIAL PUBLIC OFFERING AND PRO FORMA BALANCE SHEET--UNAUDITED
In March 1999, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission ("SEC") that
would permit the Company to sell shares of its Class A common stock in
connection with a proposed initial public offering ("IPO").
The accompanying pro forma balance sheet as of December 31, 1998 gives
effect to (i) the issuance of 3.2 million shares of Class E convertible
preferred stock at $5 per share on March 10, 1999 for net cash proceeds of
approximately $15.1 million; (ii) the issuance, at the closing of the offering,
of an aggregate of 1.5 million shares of Class A common stock to CNET and NBC
upon the exercise of $5 per warrant for net proceeds of approximately $7.5
million; (iii) the automatic conversion of all outstanding shares of convertible
preferred stock into 13,161,558 shares of Class A common stock upon the closing
of this offering; and (iv) the issuance of 2,027,086 shares of Class A common
stock at the closing of the offering, in full settlement of the Company's
contingent obligations to issue additional equity securities. Such issuances of
Class A common shares at the closing of this offering will be recorded as a
non-cash dividend to the Company's preferred stockholders. For purposes of the
pro forma balance sheet, the amount of the dividend is based on a value of $5
per common share, which is the price paid in the Company's recent
F-7
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
private placement (see (i) above). The actual amount of the dividend will be
determined using the initial public offering price upon consummation of the
offering.
(C) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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.
(D) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities, with original maturities
of three months or less when acquired, to be cash equivalents. Cash equivalents
at December 31, 1997 and 1998 were approximately $773,000 and $7,727,000,
respectively.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(F) DOMAIN ASSETS AND REGISTRATION FEES
A domain name is the part of an email address that comes after the @ sign
(for example, if [email protected] is the email address then "mail.com" is the
domain name). Domain assets represent the purchase of domain names and are
amortized using the straight-line method over their economic useful lives, which
has been estimated to be five years. Domain assets are stated at cost. Domain
assets acquired in exchange for future payment obligations are stated at the net
present value of such payments. Amortization of domain assets is charged to cost
of revenues. The Company's policy is to evaluate its domain assets prior to
paying its annual registration renewal fees. Any impairment is charged to cost
of revenues. Retirements, sales and disposals of domain assets are recorded by
removing the cost and accumulated amortization with the resulting amount charged
to cost of revenues.
The Company pays domain name registration fees in advance to InterNIC, a
cooperative activity between the US government and Network Solutions, Inc.,
which is the national registry for domain names in the US. Payment of these fees
ensures legal ownership and registration of domain names. The initial
registration period is for a two year period with subsequent one year renewal
periods. These costs are deferred and amortized over the related registration
period.
F-8
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) IMPAIRMENT OF LONG-LIVED ASSETS
Periodically, management determines whether any property and equipment or
any other assets have been impaired based on the criteria established in SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of." During 1997, the Company made an adjustment of
$84,000 to reduce the carrying value of a computer system deemed to be impaired.
(H) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in results of operations in the period that
the tax change occurs. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
(I) REVENUE RECOGNITION
The Company's revenues are derived principally from the sale of banner
advertisements. Other advertising revenue sources include up-front placement
fees and promotions. The Company's advertising products currently consist of
banner advertisements that appear on pages within the Company's properties,
promotional sponsorships that are typically focused on a particular event and
merchant buttons on targeted advertising inventory encouraging users to complete
a transaction. Advertising was a new source of revenue in 1998. Previously, the
main source of revenue was subscription services. For the year ended December
31, 1998 revenue from advertising approximated $1,117,000. Advertising revenue
is recognized as impressions are delivered providing collection is probable.
Up-front placement fees represent funds received upon commencement of the
contract. Such fees are recorded as deferred revenues and amortized ratably to
revenue over the term of the contract.
The Company trades advertisements on its Web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or received,
whichever is more determinable in the circumstances. Revenue from barter
transactions is recognized as income when advertisements are delivered on the
Company's Web properties. Barter expense is recognized when the Company's
advertisements are run on other companies' Web sites, which is typically in the
same period when the barter revenue is recognized. Barter revenues and expenses
were approximately $162,000 and $233,000, respectively, during 1998.
Subscription services are deferred and recognized ratably over the term of
the subscription periods of one, two and five years as well as eight years for
its lifetime subscriptions. Deferred revenues principally consist of
subscription fees received from members for use of the Company's premium email
services. The Company is obligated to provide any enhancements or upgrades it
develops and other support in
F-9
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accordance with the terms of the applicable Mail.com Partner agreements. For the
years ended December 31, 1996, 1997 and 1998, revenues from email subscriptions
were approximately $2,000, $61,000, and $286,000, respectively.
Revenues from the sale of domain names are recognized at the time when the
ownership of the domain name is transferred provided that no significant Company
obligation remains and collection of the resulting receivable is probable. For
the years ended December 31, 1996, 1997, and 1998, revenues from the sale of
domain names and other related services were approximately $17,000, $112,000,
and $92,000, respectively.
(J) PRODUCT DEVELOPMENT COSTS
Product development costs consist principally of salaries and related costs,
which are charged to expense as incurred.
(K) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs. Sales and marketing
costs include expenses related to customer acquisitions of approximately
$631,000 and $1,709,000 in cash and approximately $-0- and $2,982,000 in common
stock issuances during 1997 and 1998, respectively.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $2,000, $8,000, and $300,000 for the years ending December 31,
1996, 1997, and 1998, respectively.
(L) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash and cash equivalents and accounts
receivable. At December 31, 1997 and 1998, the fair value of these instruments
approximated their financial statement carrying amount because of the short-term
maturity of these instruments. Substantially all of the Company's cash
equivalents were invested in money market accounts. The Company has not
experienced any significant credit loss to date. One advertiser accounted for
31% of our revenue and 36% of accounts receivable in 1998. Revenues from the
Company's five largest advertisers accounted for an aggregate of 44% of our
revenues in 1998. No single customer exceeded 10% of either revenue or accounts
receivable in either 1997 or 1996.
(M) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in accordance
with Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of Accounting Principle Board ("APB") Opinion No. 25 and provide pro
forma net earnings (loss) disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been
F-10
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(N) BASIC AND DILUTED NET LOSS PER SHARE
Loss per share is presented in accordance with the provisions of SFAS No.
128. "Earnings Per Share", and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98. SFAS No. 128 replaced the presentation of primary
and fully diluted earnings (loss) per share (EPS), with a presentation of basic
EPS and diluted EPS. Under SFAS No. 128, basic EPS excludes dilution for common
stock equivalents and is computed by dividing income or loss available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock and resulted in the issuance of common stock. Diluted net loss
per share is equal to basic loss per share since all common stock equivalents
are anti-dilutive for each of the periods presented.
Diluted net loss per common share for the years ended December 31, 1996,
1997 and 1998, does not include the effects of employee options to purchase
2,195,770, 3,933,492 and 6,676,609 shares of common stock, respectively, 0, 0
and 1,699,356 common stock warrants, respectively, 4,185,000, 6,185,000 and
13,161,558 shares of convertible preferred stock on an "as if" converted basis,
respectively, and 0, 0 and 2,026,947 shares of Class A, C and E convertible
preferred stock issued upon the revised provisions of such agreements as the
effect of their inclusion is anti-dilutive during each period.
(O) STOCK SPLIT
Effective September 30, 1998, the Company authorized and implemented a
2-for-1 stock split of all preferred and common stock. Accordingly, all share
and per share amounts in the accompanying financial statements have been
retroactively restated to effect the stock split.
(P) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accounts issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1")." SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company does not expect the adoption
of SOP 98-1 to have a material effect on its capitalization policy.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in 1998. SFAS No.
130 requires the Company to report in its financial statements, in addition to
its net income (loss), comprehensive income (loss), which includes all changes
in equity during a period from non-owner sources including, as applicable,
foreign currency items, minimum pension liability adjustments and unrealized
gains and losses on certain investments in debt and equity securities. There
were no differences between the Company's comprehensive loss and its net loss as
reported.
F-11
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public enterprises report information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic area and major customers. The Company has determined that it does not
have any separately reportable segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement is not expected to effect the Company, as the Company currently
does not have any derivative instruments or hedging activities.
(2) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases, are stated
at cost and are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1997 1998
------------ ------------
Computer equipment and software, including amounts related to
capital leases of $960,785 and $2,352,447, respectively......... $ 1,091,579 $ 5,174,889
Furniture and fixtures............................................ 14,724 38,769
Leasehold improvement............................................. -- 24,050
------------ ------------
1,106,303 5,237,708
Less accumulated depreciation and amortization, including amounts
related to capital leases of $159,517 and $484,841,
respectively.................................................... 178,275 896,601
------------ ------------
Total......................................................... $ 928,028 $ 4,341,107
------------ ------------
------------ ------------
</TABLE>
Domain assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1998
---------- ------------
Domain names........................................................ $ 755,565 $ 1,314,908
Less accumulated amortization....................................... 104,097 304,492
---------- ------------
Domain assets, net.............................................. $ 651,468 $ 1,010,416
---------- ------------
---------- ------------
</TABLE>
In connection with acquisition of domain assets, the Company has entered
into various domain asset purchase agreements. Payments are due as follows:
approximately $169,000 in 1999, $116,000 in 2000, $17,000 in 2001, $21,000 in
2002, $16,000 in 2003, $21,000 in 2004 and $25,000 in 2005.
F-12
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(2) BALANCE SHEET COMPONENTS (CONTINUED)
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1998
---------- ------------
Partner payments due................................................ $ 27,979 $ 721,587
Professional fees................................................... 138,066 128,118
Sales commissions................................................... -- 20,500
Travel and entertainment............................................ 30,000 77,825
Other............................................................... 124,885 233,583
---------- ------------
Total........................................................... $ 320,930 $ 1,181,613
---------- ------------
---------- ------------
</TABLE>
(3) PARTNER AGREEMENTS
Throughout 1998, the Company entered into many new Mail.com Partner
agreements. Included in these agreements are some percentage of revenue sharing
agreements, miscellaneous fees and other customer acquisition costs with
Mail.com Partners. The revenue sharing agreements vary for each party but
typically are based on selected revenues, as defined, or on a per sign-up basis.
As of December 31, 1998, the Company owes approximately $722,000 to various
Mail.com Partners under such agreements. Such amounts are included in accrued
expenses in the balance sheet.
The Company has issued stock to some of its Mail.com Partners and
capitalizes such issuances when the measurement date for such stock grants is
fixed and there is a sufficient disincentive to breach the contract in
accordance with Emerging Issues Task Force Abstract No. 96-18, "Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Such amounts are amortized ratably
over the length of the contract commencing on the site launch date.
In August 1998, the Company entered into a two year agreement with CNN. In
consideration of the advertising, subscription and customer acquisition
opportunities, CNN received 253,532 shares of Class A common stock upon the
commencement of the contract at $3.50 per share, the fair market value of
Mail.com's common stock on the date of grant, or $887,362. CNN also has the
right to receive a portion of the Company's selected revenues under the
agreement, as defined. The value of the stock issuance has been recorded in the
1998 balance sheet as partner advances and is amortized ratably to amortization
expense over the contract term. The launch of the services coincided with the
contract date. The Company recorded approximately $173,000 of amortization
expense in 1998 for this agreement.
In September 1998, the Company entered into a minimum two year agreement
with GeoCities with an automatic one year renewal at the Company's option if
GeoCities has not delivered a specified number of sign-ups and two additional
one year renewals subject to approval by both parties. In consideration of the
advertising, subscription and customer acquisition opportunities, GeoCities
received 1,000,000 shares of Class A common stock upon the commencement of the
contract at $3.50 per share, the fair market value of Mail.com's common stock on
the date of grant, or $3,500,000. The Company is also required to pay GeoCities
$1.5 million in three installments, the first of which was paid in December
1998. GeoCities also
F-13
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(3) PARTNER AGREEMENTS (CONTINUED)
has the right to receive a portion of the Company's selected revenues under the
agreement, as defined. The value of the stock issuance and cash payments have
been recorded in the 1998 balance sheet as partner advances and will be
amortized ratably to amortization expense over the contract term commencing upon
the launch of the services which is expected to be April 1999. Yahoo! recently
announced its agreement to acquire GeoCities. The acquisition is expected to
close by May 1999. If GeoCities were to breach the contract prior to the launch
date, all of the shares issued in connection with this agreement would be
returned to the Company. If GeoCities were to breach the contract after the
launch date, a pro rata portion of the shares issued would be returned to the
Company based upon GeoCities performance until such breach.
The Company issued an additional 577,629 shares of its common stock at
varying prices in 1998 in connection with certain strategic partnership
agreements. When stock issuances are either contingent upon the achievement of
certain targets or the measurement date is not fixed, the Company expenses the
issuance of such stock at the time such stock is issued or the targets are
achieved at the then fair market value of the Company's stock. Such amounts
aggregated approximately $2,809,000 for the year ended December 31, 1998 and are
included in sales and marketing expenses in the 1998 statement of operations.
The Company's partnership agreement with Lycos expired on October 8, 1998,
shortly after Lycos acquired WhoWhere, a competitor which provides personal
homepage and Webmail services. Compaq, which owns the AltaVista Web site,
recently entered into a strategic relationship with Microsoft. As part of that
relationship, AltaVista agreed to offer Microsoft's Hotmail Webmail service
starting in July 1999, when the Company's contract with AltaVista expires. While
the Company will continue to own the right to serve the majority of the affected
members after the expiration of these contracts, it cannot be sure that these
members will continue to use its service as actively as the members have in the
past, if at all.
The following are contracts that require substantial minimum payments and/or
payments in the form of stock contingent upon the occurrence of certain events.
The issuance of such shares of Class A common stock will be accounted for at its
fair market value on the date of issuance:
- AltaVista has the option of receiving $1.00 in cash plus 0.25 shares of
our Class A common stock for each confirmed member registration at
their Web site through June 30, 1990.
- The Company will issue to CNET, Snap and NBC an aggregate of 1.25
shares of our Class A common stock for each member who registers at
their sites through December 31, 1999, up to a maximum of two million
members. The Company will also issue 0.5 shares of our Class A common
stock for each subsequent registration until December 31, 2000, subject
to a maximum of four million members (including members who registered
prior to December 31, 1999). The Company has guaranteed NBC a minimum
of 210,000 shares of Class A common stock if they launch the Company's
services.
- The Company issued to RemarQ 30,000 shares of the Company's Class A
common stock upon execution of the agreement and RemarQ can receive
40,000 shares of Class A common stock for every 25,000 active members
that they generate during the 7 1/2 month term of the contract, up to a
total of 100,000 active members.
F-14
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(3) PARTNER AGREEMENTS (CONTINUED)
Certain Mail.com Partner agreements require minimum cash and/or equity
payments which aggregated $3.7 million of which $2.2 million is due in 1999 and
$1.5 million is due in 2000. Additional amounts become payable to certain
Mail.com Partners upon achieving varying subscriber levels.
(4) INVESTMENT IN AFFILIATED COMPANIES
The Company has a minor investment in two of its Mail.com Partners, a white
page directory Web site and an Internet Service Provider. The investments are
accounted for on the cost basis as the Company owns less than 20% of each
company's stock and are stated at the lower of cost or market value.
(5) LEASES
The Company sold certain assets for approximately $710,000 and $643,000 in
1997 and 1998, respectively. The assets were leased back from the purchaser over
4-5 years. The Company recognized a $8,000 loss in 1998 in connection with the
sale-leaseback. The Company leases facilities and certain equipment under
agreements accounted for as operating leases. These leases generally require the
Company to pay all executory costs such as maintenance and insurance. Rental
expense for operating leases for the years ending December 31, 1996, 1997, and
1998 were approximately $21,000, $70,900, and $380,100, respectively.
The Company's lease obligations are collateralized by certain assets at
December 31, 1998. Future minimum lease payments under non-cancelable operating
leases (with initial or remaining lease terms in excess of one year) and future
minimum capital lease payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- -------------------------------------------------------------- ------------- ---------------
<S> <C> <C>
1999.......................................................... $ 714,952 $ 626,974
2000.......................................................... 659,274 625,471
2001.......................................................... 522,164 337,920
2002.......................................................... 378,783 3,203
2003.......................................................... 327,927
Later years through 2005...................................... 15,227
------------- ---------------
Total minimum lease payments.............................. 2,618,327 $ 1,593,568
---------------
---------------
Less estimated executory costs................................ 67,857
-------------
Net minimum lease payments................................ 2,550,470
Less amount representing interest (at a weighted-average
interest rate of 11.5%)..................................... 633,278
-------------
Present value of net minimum capital lease payments........... 1,917,192
Less current portion of obligations under capital leases...... 479,461
-------------
Obligations under capital leases, excluding current portion... $ 1,437,731
-------------
-------------
</TABLE>
F-15
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(6) CAPITAL STOCK
AUTHORIZED SHARES
During 1997, the Company amended and restated its certificate of
incorporation. As a result, the total number of shares which the Company was
authorized to issue was 54,000,000 shares: 32,000,000 of these shares were Class
A Common Stock, 10,000,000 shares were Class B Common Stock and 12,000,000
shares were Class A Preferred Stock, all classes having a par value of $0.01.
On October 1, 1998, the Company amended and restated its certificate of
incorporation, to increase the number of authorized shares to 104,000,000,
consisting of 60,000,000 and 10,000,000 shares of Class A and Class B Common
Stock, respectively; and 12,000,000, 12,000,000 and 10,000,000 shares of Class
A, C, and D Preferred Stock respectively; (collectively "Preferred Stock"), all
classes with a par value of $0.01 per share.
In March 1999, the Company amended and restated its certificate of
incorporation; to increase the number of authorized shares to 180,000,000
consisting of 110,000,000 and 10,000,000 shares of Class A and Class B common
stock, respectively; and 12,000,000, 12,000,000, 10,000,000 and 10,000,000
shares of Class A, C, D and E Preferred Stock respectively; and 16,000,000
undesignated Preferred shares (collectively "Preferred Stock"), all classes with
a par value of $0.01 per share.
COMMON STOCK
During 1996, the Company issued 2,422,500 shares of Class A common stock (at
$0.005 per share) and 10,000,000 shares of Class B common stock (at $0.10 per
share) to its founders in exchange for $1,012,113; comprised of $550,000 in cash
and $462,113 in stock subscriptions receivable of which $450,000 was paid during
1997 and $12,113 was paid in 1998. Also during 1996, the Company issued
1,675,000 shares of Class A common stock (at approximately $0.10 per share) in
connection with a domain asset purchase agreement. During 1998, Mail.com issued
1,831,161 shares of its Class A common stock to various Mail.com Partners (see
note 3).
CONVERTIBLE PREFERRED STOCK
CLASS A PREFERRED STOCK
In May 1997, the Company completed a private placement of 3,460,000 shares
of Class A Preferred Stock at $1.00 per share for an aggregate price of
approximately $3,460,000, of which $2,575,000 was received in cash, $715,000 in
stock subscriptions receivable (all of which was paid during the first quarter
of 1998) and $170,000 was contributed in the form of equity securities and
services. The sale of securities was done in three stages. Proceeds were held in
escrow and released upon meeting certain milestones, namely: 1) $50,000 of
receipts in subscription revenue, and 2) $50,000 of receipts in banner
advertising, email and other revenues (excluding subscriptions). These
milestones were met during 1997 and all proceeds were released from escrow prior
to the end of 1997.
Each share of Class A preferred stock shall automatically be converted into
one share of Class A common stock immediately upon an underwritten initial
public offering equal to or greater than $20,000,000 of company stock at an
offering price of $5 per share or greater (adjusted to reflect subsequent stock
splits, combinations, stock dividends, and recapitalizations).
F-16
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(6) CAPITAL STOCK (CONTINUED)
At the earlier of 30 months or the sale of all or substantially all of the
assets or stock of the Company, each purchaser shall be issued additional Class
A preferred stock, without paying additional consideration, so that, after
giving effect to such issuance, the effective price of all issued shares shall
be reduced as follows: the adjusted share price shall be the greater of 1)
$0.50; or 2) 10% of the highest price per share offered to the purchasers in any
public or private sale to a third party, in which the purchasers declined an
opportunity to sell their shares; or 3) 10% of the price per share in a Company
sale. However in no event shall the adjusted share price exceed $1.00 per share.
During March 1999, with the consent of the Class A preferred shareholders,
the Company agreed to eliminate the Class A contingent additional stock issuance
obligation described above in exchange for giving the existing Class A preferred
shareholders 968,800 shares of Class A preferred shares, provided the Company
completes an IPO before July 31, 1999, provided the IPO price is greater than $5
per share, Class A preferred shares will automatically convert into the same
number of Class A common stock upon the closing of the IPO.
REDEEMABLE CLASS C PREFERRED STOCK
In July and August 1998, a private placement of 3,776,558 of Class C
preferred shares with detachable warrants at a combined offering price of $3.50
per share ($3.455 per preferred C share and $0.12857 per warrant with each share
having 0.35 warrants) was completed for approximately $13,218,000. Such stock is
redeemable at the option of the holders in three equal annual installments
commencing five years from the date of purchase.
All of the preferred shares will automatically convert into one share of
Class A common stock in the event the Company closes a firm commitment for an
underwritten initial public offering with gross proceeds of at least $20,000,000
at an offering price per share of at least 200% of the then applicable
conversion price (adjusted for splits, dividends, etc.).
In the event that the Company does not provide the Class C preferred
shareholders with an offer to purchase their shares for a cash price equal to or
greater than 3.0 times the combined offering price within 24 months of the date
of purchase (such period to be extended to 30 months in the event the Company
has completed a qualified offering within 24 months from the date of purchase)
the stock price will be reduced ratably to a floor of $2.00 per share through
the issuance of additional shares.
During March 1999, with the consent of the Class C preferred shareholders,
the Company agreed to revise the Class C conversion price from $3.50 to $2.80 in
exchange for eliminating the Class C additional contingent stock issuance
obligation provisions described above. This revision will equate to an
additional 944,139 shares of Class C preferred stock being issued to the Class C
preferred shareholders upon the closing of the IPO. Such preferred shares will
be issued, and automatically convert into the same number of Class A common
stock upon the closing of the IPO.
CONVERSION
If the IPO is consummated under the terms currently anticipated, upon the
closing 6,185,000 and 3,776,558 shares of Class A and C convertible preferred
stock, respectively, representing all of the
F-17
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(6) CAPITAL STOCK (CONTINUED)
outstanding shares of the convertible preferred stock, shall automatically
convert into 9,961,558 shares of Class A common stock. In addition, the 3.2
million Class E Preferred shares will automatically convert into the same number
of Class A common stock upon closing of the IPO. Further, the Class A, C and E
preferred shares additional contingent stock issuance obligation provisions
provide for the issuance of 968,800, 944,000 and 114,147, preferred shares
respectively, which will all be issued, and automatically convert into the same
number of Class A common stock upon the closing of the IPO.
WARRANTS
As part of the Private Placement of Class C preferred shares in July and
August 1998, 1,321,778 detachable warrants were also issued for proceeds of
$169,941 at a value of $0.12857 per warrant. The Company has the right to
repurchase the warrants, or a portion of the warrants, at a price of $0.005 per
warrant if: 1) the holders of Class C preferred Stock are offered an opportunity
to sell their stock at a price of $10.50 per share or greater within 24 months
after the closing date, or 30 months after the closing date if the Company has
completed a qualified offering; or 2) the Company has net revenues, as defined,
during the 12 month period beginning the month after closing date in an amount
equal to or greater than $35,000,000. If net revenues during that period are
greater than $25,000,000 but less than $35,000,000, the Company will be entitled
to repurchase a pro-rata portion of the warrants. The warrants may be exercised
in the event that they are not repurchased within the 24 or 30 month period, or
immediately before a merger, consolidation, sale of all or most of the assets of
the Company, or a liquidation or dissolution of the Company. In connection with
the March 1999 Class C additional contingent stock issuance obligation described
above, all such warrants shall be cancelled upon the closing of the IPO.
In addition, warrants were also issued in July and August 1998 to purchase
179,356 shares of Class A common stock at an exercise price of $3.50 per share.
The terms of these warrants are substantially identical to the terms of the
warrants issued with the Class C preferred stock, except for the additional
contingent stock issuance obligation and warrant provisions, anti-dilution
provisions, registration rights and cashless exercise. These warrants are
exercisable for a period of five years.
CLASS D PREFERRED STOCK
In July 1998, the Company authorized 10,000,000 shares Class D preferred
stock (after giving effect to the October 2, 1998, 2-for 1 stock split),
however, no shares have been issued to date.
CLASS E PREFERRED STOCK
In March 1999, the Company completed a private placement of 3.2 million
shares of Class E preferred stock at $5.00 per shares for net proceeds of
$15,100,000. These shares will automatically convert to an equivalent number of
Class A common shares upon the closing of the IPO. These shares also include a
additional contingent stock issuance obligation provision similar to the Class A
and C preferred share obligation whereby the Class E shareholders will receive
an additional 114,147 shares of Class E preferred shares which will
automatically convert to Class A common stock upon the closing of the IPO.
F-18
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(6) CAPITAL STOCK (CONTINUED)
UNDESIGNATED PREFERRED SHARES
The Company is authorized, without further stockholder approval, to issue
authorized but unissued shares of preferred stock in one or more classes or
series. 16,000,000 authorized shares of undesignated preferred stock were
available for creation and issuance in this manner.
VOTING RIGHTS
Each share of Class A common stock and Class A and C preferred stock shall
have one vote per share. Each share of Class B common stock shall have ten votes
per share.
LIQUIDATION PREFERENCE
In the event of any liquidation or winding up of the Company, holders of the
Class A and C preferred stock and the Class B common stock will be entitled, on
a pro rata basis, in preference to the holders of the Class A common stock, an
amount equal to the applicable purchase price per share plus any accrued but
unpaid dividends.
F-19
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(6) CAPITAL STOCK (CONTINUED)
The following summarizes the Company's preferred stock liquidation
preferences:
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED
STOCK STOCK COMMON STOCK
CLASS C CLASS A CLASS B
-------------- -------------- --------------
<S> <C> <C> <C>
Number of shares................................................. -- 400,000 10,000,000
Price per share.................................................. -- $ 0.41 $ 0.10
-------------- -------------- --------------
Total consideration.............................................. -- $ 165,000 1,000,000
Issuance of stock in exchange of domain asset.................... -- 22,580 --
Subscription receivable.......................................... -- -- (450,000)
Liquidation value at December 31, 1996........................... -- 187,580 550,000
-------------- -------------- --------------
Number of shares................................................. -- 3,290,000 --
Price per share.................................................. -- $1.00 --
-------------- -------------- --------------
Total consideration(1)........................................... -- $ 3,290,000 --
Subscription receivable.......................................... -- (715,000) 450,000
Issuance of preferred stock in exchange for asset................ -- 100,000 --
Issuance of stock for services................................... -- 70,000 --
-------------- -------------- --------------
Liquidation value at December 31, 1997........................... -- 2,932,580 1,000,000
-------------- -------------- --------------
Number of shares................................................. 3,776,558 2,000,000 --
Price per share.................................................. $3.45 $2.00 --
-------------- -------------- --------------
Total consideration(2)........................................... $ 13,047,650 $ 4,000,000 --
Subscription receivable.......................................... -- 715,000 --
-------------- -------------- --------------
Liquidation value at December, 1998.............................. $ 13,047,650 $ 7,647,580 $ 1,000,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- ------------------------
1. Excludes issuance costs of $54,640
2. Excludes issuance costs of $226,696 and $723,900 respectively
(7) CNET/SNAP STOCK OPTION
In 1998, the Company entered into a partner agreement with CNET, Inc. which
was amended shortly thereafter to include the newly formed Snap, LLC. During
March 1999, Snap assigned their rights to NBC. As part of this agreement, on
November 6, 1998, when 250,000 users completed subscriptions for the Email.com
service, a stock option for 1,500,000 Class A preferred shares was granted at an
exercise price of the lesser of $5.00 per share (the fair market value at the
date of grant) or the IPO price. This option expires on the earlier of (a)
December 31, 1999 or (b) the closing of a firm commitment, underwritten initial
public offering of common stock by Mail.com. The Company recorded a non-cash
charge of approximately $371,000, based upon the fair market value of the stock
option, using a Black Scholes option pricing model. Such amount is included in
sales and marketing in the 1998 statement of operations. In March 1999, CNET and
NBC exercised their options in accordance with this agreement by placing the
F-20
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(7) CNET/SNAP STOCK OPTION (CONTINUED)
proceeds of approximately $7.5 million in an escrow account. Upon the closing of
the IPO, funds from the exercise of the warrant in accordance with the agreement
will be disbursed to the Company and the shares of the Class A common stock
relating to the warrant will be issued to CNET and NBC.
(8) LYCOS STOCK OPTION
In October 1997, the Company entered into a partner agreement with Lycos,
Inc. As part of this agreement, a stock option for 2,000,000 Class A Preferred
shares was granted at an exercise price of $2.00 per share, the fair market
value at the date of grant. The Company recorded a non-cash charge of $52,000,
based upon the fair market value of the stock option, using a Black Scholes
option pricing model. In March 1998, Lycos exercised its option in accordance
with this agreement whereby the Company received 100,062 shares of Lycos stock
valued at $39.98 per share on the closing date, which the Company sold over the
next week for proceeds totaling approximately $4.4 million. The Company
recognized a gain of approximately $438,000 on such sale.
(9) STOCK OPTIONS
During 1996, the Company established the 1996 Stock Option Plan. Under the
Plan, the Board of Directors may issue incentive stock options or nonqualified
stock options to purchase up to 1,000,000 common shares.
In 1997, the 1997 Stock Option Plan was approved by the Board of Directors
and Shareholders and provided for the issuance of 3,500,000 options, including
both incentive stock and nonqualified stock options.
During 1998, the Board of Directors, approved the 1998 Stock Option Plan
providing for the issuance of 1,500,000 options, including both incentive stock
and nonqualified stock options. Most options are granted at fair market value,
except as noted below, and are for periods not to exceed 10 years.
During 1998, 402,975 options were issued to a key executive at an exercise
price of $2 per share, such options were contingent upon the Company achieving
specified advertising revenue targets. This resulted in compensation expense of
approximately $1,100,000 which is included in sales and marketing expenses.
The Company applies APB No. 25 and related interpretations in accounting for
its stock options issued to employees. Under APB 25, because the exercise price
of the Company's employee stock options equals the fair value of the underlying
common stock on the date of grant, no compensation cost has been recognized for
its stock option grants to employees and directors. Had compensation cost for
the Company's stock option grants been determined based on the fair value at the
grant date for awards
F-21
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(9) STOCK OPTIONS (CONTINUED)
consistent with the method of SFAS No. 123, the Company's net loss would have
increased the pro forma amounts for each year indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
----------- ------------- --------------
Net loss:
As reported..................................... $ (544,712) $ (2,995,753) $ (13,515,282)
----------- ------------- --------------
----------- ------------- --------------
Pro forma....................................... $ (704,594) $ (3,594,618) $ (14,823,443)
----------- ------------- --------------
----------- ------------- --------------
Net loss per share:
As reported..................................... $ (0.04) $ (0.21) $ (0.93)
----------- ------------- --------------
----------- ------------- --------------
Pro forma....................................... $ (0.05) $ (0.25) $ (1.01)
----------- ------------- --------------
----------- ------------- --------------
</TABLE>
The resulting effect on the pro forma net loss disclosed for the year ended
December 31, 1996, 1997 and 1998 is not likely to be representative of the
effects on the net loss on a pro forma basis in future years, because the pro
forma results include the impact of only one and two years respectively, of
grants and related vesting, while subsequent years will include additional
grants and vesting.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes method option-pricing model with the following weighted
average assumptions used for grants in 1996, 1997 and 1998: dividend yield of
zero (0%) percent, risk-free interest rate ranging from 5.81% to 6.89% and
expected life of 10 years. As permitted under the provisions of SFAS No. 123 and
based on the historical lack of a public marker for the company's stock, no
factor for volatility has been reflected in the option pricing calculation.
A summary of stock option activity and weighted average exercise prices is
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year............ -- -- 2,195,770 $ 0.27 3,933,492 $ 0.93
---------- ---------- ----------
Options granted..................................... 2,195,770 $ 0.27 2,144,930 $ 1.50 2,571,730 $ 3.38
Options canceled.................................... -- -- (407,208) $ 0.29 (231,587) $ 1.10
---------- ---------- ----------
Options outstanding at end of year.................. 2,195,770 $ 0.27 3,933,492 $ 0.93 6,273,635 $ 1.75
---------- ---------- ----------
---------- ---------- ----------
Options exercisable at year end..................... 1,429,976 2,108,028 3,230,469
Weighted average fair value of options granted
during the year................................... $ 0.12 $ 0.81 $ 1.59
</TABLE>
F-22
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(9) STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------------------------------
RANGE OF AVERAGE WEIGHTED WEIGHTED
EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- ------------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
0$.10-$0.20... 920,255 7.55 $ 0.11 650,255 $ 0.11
0 $.50......... 906,440 7.95 $ 0.50 779,721 $ 0.50
1 $.00......... 894,557 8.25 $ 1.00 617,057 $ 1.00
2 $.00......... 1,455,653 8.95 $ 2.00 810,755 $ 2.00
3 $.50......... 1,826,730 9.36 $ 3.50 372,087 $ 3.50
5 $.00......... 270,000 9.85 $ 5.00 594 $ 5.00
----------- ----------
6,273,635 3,230,469
----------- ----------
----------- ----------
</TABLE>
(10) INCOME TAXES
There is no provision for federal, state or local income taxes for all
periods presented, since the Company has incurred losses since inception. At
December 31, 1998, the Company had approximately $13.7 million of federal net
operating loss carryforwards available to offset future taxable income, such
carryforwards expire in various years through 2018. The Company has recorded a
full valuation allowance against its deferred tax assets since management
believes that, after considering all the available objective evidence, it is not
more likely than not that these assets will be realized. The tax effect of
temporary differences that give rise to significant portions of federal deferred
tax assets principally consists of the Company's net operating loss
carryforward.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), the utilization of net operating loss carryforwards may be limited
under the change in stock ownership rules of the Code. The Company has not yet
determined whether an ownership change has occurred.
F-23
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(10) INCOME TAXES (CONTINUED)
The effects of temporary differences and tax loss carryforwards that give
rise to significant portions of federal deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1998 are presented below.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1997 1998
------------- -------------
Deferred tax assets:
Net operating loss carryforwards................................ $ 1,490,625 $ 6,292,415
Deferred revenues............................................... 102,442 978,578
Accounts receivable principally due to allowance for doubtful
accounts...................................................... -- 42,504
Non-cash compensation........................................... -- 504,344
Other........................................................... 38,640 61,640
------------- -------------
Gross deferred tax assets................................... 1,631,707 7,879,481
Less: valuation allowance................................... (1,625,551) (7,828,918)
------------- -------------
Net deferred tax assets................................... 6,156 50,563
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation.............................................. (6,156) (50,563)
------------- -------------
Gross deferred tax liabilities.................................. (6,156) (50,563)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
(11) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS DEDUCTIONS/ BALANCE AT END
OF YEAR AND EXPENSES WRITE-OFFS OF YEAR
------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Allowance for doubtful accounts....................... $ -- $ -- $ -- $ --
----- ------- ----- -------
----- ------- ----- -------
For the year ended December 31, 1997:
Allowance for doubtful accounts....................... $ -- $ -- $ -- $ --
----- ------- ----- -------
----- ------- ----- -------
For the year ended December 31, 1998:
Allowance for doubtful accounts....................... $ -- $ 92,401 $ 0 $ 92,401
----- ------- ----- -------
----- ------- ----- -------
</TABLE>
(12) SUBSEQUENT EVENTS--UNAUDITED
The Company entered into various agreements in the first quarter of 1999.
Such agreements range in duration and purpose (i.e., domain asset purchase,
Mail.com Partner agreements). The Company issued 225,000 Class A common shares
at $5 per share, totalling $1,125,000, for the purchase of certain domain
F-24
<PAGE>
MAIL.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(12) SUBSEQUENT EVENTS--UNAUDITED (CONTINUED)
assets. One of the Mail.com Partner agreements calls for a minimum payment of
approximately $2.1 million over the life of the agreement (one year and nine
months). The Company issued 278,716 shares of Class A common stock through
February 1999 to CNET/Snap in connection with its Mail.com Partner agreement.
During the first quarter of 1999, the Company issued 149,750 options to
employees at $5 per share, the fair market value of the Company's common stock
on the date of grant; and 257,661 shares of Class A common shares valued at $5
per share.
F-25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
MAIL.COM, INC.
COMMON STOCK
[LOGO]
------------------
P R O S P E C T U S
, 1 9 9 9
------------------
SALOMON SMITH BARNEY
PAINEWEBBER INCORPORATED
---------------
WIT CAPITAL CORPORATION
DLJDIRECT Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the registrant in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions. All
amounts are estimated except the Securities and Exchange Commission registration
fee, the National Association of Securities Dealers, Inc. filing fee and the
Nasdaq National Markets listing fee.
<TABLE>
<CAPTION>
PAYABLE BY
REGISTRANT
-----------
<S> <C>
SEC registration fee.................................................................................. $ 15,985
National Association of Securities Dealers, Inc. filing fee........................................... 6,250
Nasdaq National Markets Listing Fee................................................................... 95,000
Accounting fees and expenses.......................................................................... *
Legal fees and expenses............................................................................... *
Printing and engraving expenses....................................................................... *
Blue Sky fees and expenses............................................................................ *
Registrar and Transfer Agent's fees................................................................... *
Miscellaneous fees and expenses....................................................................... *
-----------
Total................................................................................................. $ *
-----------
-----------
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant's amended and restated certificate of incorporation in effect
as of the date hereof provides that, except to the extent prohibited by the
Delaware General Corporation Law, as amended (the "DGCL"), the registrant's
directors shall not be personally liable to the registrant or its stockholders
for monetary damages for any breach of fiduciary duty as directors of the
registrant. Under the DGCL, the directors have a fiduciary duty to the
registrant which is not eliminated by this provision of the certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by the DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the Federal securities laws or state or Federal environmental laws. The
registrant owns liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The certificate eliminates the personal liability
of directors
II-1
<PAGE>
to the fullest extent permitted by Section 102(b)(7) of the DGCL and provides
that the registrant may fully indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative) by
reason of the fact that such person is or was a director or officer of the
registrant, or is or was serving at the request of the registrant as a director
or officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the certificate. The registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
COMMON STOCK AND PREFERRED STOCK. The registrant from time to time has
issued both common and preferred stock to investors, consultants and other third
parties in connection with business transactions in reliance upon exemption from
registration pursuant to Section 4(2) or Rule 701 of the Securities Act of 1933.
In March 1996, the registrant sold a total of 10,000,000 shares of Class B
common stock for $1,000,000 to Gerald Gorman, one of our founders. Concurrently,
the registrant sold 2,422,500 shares of Class A common stock in the aggregate
for $12,113 to Gerald Gorman, Gary Millin, our President, Anthony Millin, Jean
Brodsky and Bob Helfant, our Senior Vice President.
In June 1996, the registrant sold 1,675,000 shares of Class A common stock
and 225,000 shares of Class A preferred stock to Eric Woodward and David
Milligan, in the name of Vanity Mail, for $200,000, in consideration for the
purchase of various domain names and the Vanity Mail Web site.
In October 1997, the registrant sold 400,000 shares of Class A preferred
stock to InfoSpace.com for $165,000 at $0.41 per share.
On May 27, 1997 and December 17, 1997 the registrant sold an aggregate of
3,460,000 shares of Class A preferred stock at $1.00 per share of which
$2,575,000 was received in cash, $715,000 in stock subscriptions and $170,000 in
contributions in the form of equity securities and shares to Gerald Gorman, the
Chairman and Chief Executive Officer of the registrant and William Donaldson,
Stephen Ketchum, and Jack Kuehler, each a director of the registrant.
In May 1997, the registrant granted options to purchase 20,000 shares of
Class A common stock at an exercise price of $1.00 per share to Barry Layne,
which purchase price was paid by performance of services.
In October 1997, the registrant entered into a partner agreement with Lycos,
Inc. As part of this agreement, a stock option for 2,000,000 Class A preferred
shares was granted at an exercise price of $2.00 per share, the fair market
value at the date of grant. The registrant recorded compensation expense of
$52,000, based upon the fair market value of the stock option. In March 1998,
Lycos exercised its option in accordance with this agreement whereby the
registrant received 100,062 shares of Lycos stock valued at $39.98 per share on
the closing date, which the registrant sold over the next week for proceeds
totaling approximately $4.4 million.
In January 1998, the registrant sold 2,744 shares of Class A common stock
for $2.00 per share to Mr. F. Connolly.
On July 31, 1998 and August 31, 1998, the registrant sold an aggregate of
3,776,558 shares of Class C preferred stock at $3.50 per share, and detachable
warrants at $0.25714 per warrant to purchase an aggregate of 1,321,795 shares of
Class C preferred stock at a price equal to the Class C conversion price, as set
forth in the articles of incorporation of the registrant, for a price of
$13,218,000. Purchasers of Class C
II-2
<PAGE>
preferred stock in this offering included John R. Whitman, a director of the
registrant and The Whitman Children Irrevocable Trust.
In August 1998, the registrant issued 253,532 shares of Class A common stock
valued at $3.50 per share to CNN in performance of obligations pursuant to our
contract dated August 10, 1998.
In June and September of 1998, the registrant issued 52,725 shares of Class
A common stock valued at $3.50 and $5.00 per share to AltaVista for shared
advertising revenues, pursuant to the contract dated July 1, 1998 in performance
of the registrant's obligations.
In September 1998, the registrant issued 1,000,000 shares of Class A common
stock to GeoCities valued at $3.50 per share pursuant to a contract dated
September 10, 1998.
Beginning September 1998, the registrant has issued 300,802 shares of Class
A common stock valued at $5.00 per share to CNET. Additionally, the registrant
issued 451,763 shares of Class A common stock to Snap valued at $5.00 per share.
Both of these issuances were made in performance of the registrant's obligations
under contracts dated May 13, 1998 as amended.
In December 1998, the registrant issued 30,000 shares of Class A preferred
stock valued at $5.00 per share to RemarQ pursuant to our contract dated January
1, 1999.
In January 1999, the registrant issued 225,000 shares of Class A common
stock valued at $5.00 per share to Lansoft pursuant to our contract January 26,
1999.
On March 10, 1999, Mail.com sold an aggregate of 3,200,000 shares of Class E
preferred stock of the registrant at $5.00 per share. The $16 million purchase
price was paid in cash. Purchasers of Class E preferred stock in this offering
include John R. Whitman, a director of the registrant, and The Whitman Children
Irrevocable Trust, Gerald Gorman, the Chairman and Chief Executive Officer of
the registrant, Stephen Ketchum, a director of the registrant, Debra L.
McClister, the Chief Financial Officer of the registrant and Lon Otremba, Chief
Operating Officer of the registrant.
WARRANTS. The registrant from time to time has granted warrants to
investors, consultants and other third parties in connection with business
transactions in reliance upon exemption from registration pursuant to Section
4(2) of the Securities Act of 1933.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
January 1, 1996 to December 31, 1996....................................................... -- --
January 1, 1997 to December 31, 1997....................................................... 2,020,000 $ 1.99
January 1, 1998 to December 31, 1998....................................................... 1,699,356 $ 4.79
January 1, 1999 to March 10, 1999.......................................................... -- --
</TABLE>
OPTIONS. The registrant from time to time has granted stock options to
employees and directors in reliance upon exemption from registration pursuant to
either (i) Section 4(2) of the Securities Act of 1933, as amended, or (ii) Rule
701 promulgated under the Securities Act of 1933, as amended.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
January 1, 1996 to December 31, 1996....................................................... 2,195,770 $ 0.27
January 1, 1997 to December 31, 1997....................................................... 2,144,930 $ 1.50
January 1, 1998 to December 31, 1998....................................................... 2,974,705 $ 3.19
January 1, 1999 to March 10, 1999.......................................................... 149,750 $ 5.00
</TABLE>
II-3
<PAGE>
The above securities were offered and sold by the registrant in reliance
upon exemptions from registration pursuant to either (i) Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving any public
offering, or (ii) Rule 701 promulgated under the Securities Act of 1933, as
amended. No underwriters were involved in connection with the sales of
securities referred to in this Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation.
3.2* Bylaws.
4.1* Specimen common stock certificate.
5.1* Opinion of Winthrop, Stimson, Putnam & Roberts re: validity of the securities.
10.1* Employment Agreement between Mail.com and Gary Millin.
10.2* Employment Agreement between Mail.com and Lon Otremba.
10.3* Employment Agreement between Mail.com and Debra McClister.
10.4* Stock Purchase Agreement between Mail.com and Charles Walden.
10.5* 1996 Employee Stock Option Plan.
10.6* 1997 Employee Stock Option Plan.
10.7* 1998 Employee Stock Option Plan.
10.8* 1999 Employee Stock Option Plan.
10.9* Lease between Mail.com and Braun Management and six amendments thereto, with the most
recent dated May 21, 1998.
10.10* Lease between Mail.com and Spitfire Marketing Systems Inc. dated August 14, 1998.
10.11* Space License Agreement and two amendments thereto between Mail.com and Telehouse
International Corporation of America, Inc.
10.12* Lease between Mail.com and 55 Madison Associates dated September 15, 1998.
10.13* Class A Preferred Stock Purchase Agreement dated May 27, 1997.
10.14* Class C Preferred Stock Purchase Agreement dated July 31, 1998.
10.15* Waiver, Consent and Amendment to Class A Preferred Stock Purchase Agreement and
Investors' Rights Agreement, dated July 31, 1998.
10.16* Accession Agreement among Mail.com and Primus Capital Fund IV Limited Partnership and
the Primus Executive Fund Limited Partnership dated August 31, 1998.
10.17* Letter Agreement among Gerald Gorman, Primus Capital Fund Limited Partnership and the
Primus Executive Fund Limited Partnership dated August 31, 1998.
10.18* Class E Preferred Stock Purchase Agreement dated March 10, 1999.
10.19* Class E Preferred Stock Investors' Rights Agreement dated March 10, 1999.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.20* Investors' Rights Agreement between GeoCities, Inc. and Mail.com, Inc. dated
September 10, 1998.
10.21* Agreement between GeoCities, Inc. and Mail.com, Inc. dated September 10, 1998.
10.22* Observer Rights Agreement among the Company, Primus, et. al., and Sycamore Ventures
dated August 31, 1998.
10.23* Investors' Rights Agreement between NBC Multimedia, Inc., CNET, Inc. and Mail.com,
Inc. dated March 1, 1999.
11.1 Statement re: Computation of Basic and Diluted Net Loss Per Share.
23.1 Consent of KPMG LLP.
23.2* Consent of Winthrop, Stimson, Putnam & Roberts (included in Exhibit 5.1).
24.1 Powers of Attorney (See Signature Page on Page II-7).
27.1 Financial Data Schedule.
</TABLE>
* To be supplied by amendment.
- ------------------------
(b) Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424 (b)(1) or
(4), or 497(h) under the Securities Act of 1933, shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in The City of New York,
State of New York, on this 12th day of March, 1999.
MAIL.COM, INC.
By: /s/ GARY MILLIN
-----------------------------------------
Name: Gary Millin
Title: President
II-6
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and/or officers of Mail.com, Inc., (the
"Company") hereby severally constitute and appoint Gerald Gorman, Chairman and
Chief Executive Officer, and Gary Millin, President and each of them
individually, with full powers of substitution and resubstitution, our true and
lawful attorneys, with full powers to them and each of them to sign for us, in
our names and in the capacities indicated below, the Registration Statement on
Form S-1 filed with the Securities and Exchange Commission, and any and all
amendments to said Registration Statement (including post-effective amendments),
and any registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, in connection with the registration under
the Securities Act of 1933, as amended, of equity securities of the Company, and
to file or cause to be filed the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them might
or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitute or substitutes, shall do or
cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities indicated on March 12th, 1999:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ GERALD GORMAN Chairman & Chief Executive
- ------------------------------ Officer, Director March 12, 1999
Gerald Gorman
/s/ GARY MILLIN President, Director
- ------------------------------ March 12, 1999
Gary Millin
/s/ LON OTREMBA Chief Operating Officer,
- ------------------------------ Director March 12, 1999
Lon Otremba
/s/ DEBRA L. MCCLISTER Executive Vice President &
- ------------------------------ Chief Financial Officer March 12, 1999
Debra L. McClister
/s/ CHARLES WALDEN Executive Vice President,
- ------------------------------ Technology, Director March 12, 1999
Charles Walden
/s/ WILLIAM J. DONALDSON Director
- ------------------------------ March 12, 1999
William J. Donaldson
II-7
<PAGE>
Exhibit 11.1
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Basic:
Net loss................... ($544,712) ($2,995,753) ($13,515,282)
------------ ------------ ------------
------------ ------------ ------------
Basic weighted average
shares outstanding......... 13,725,278 14,097,500 14,607,915
------------ ------------ ------------
------------ ------------ ------------
Basic net loss per
common share............... ($0.04) ($0.21) ($0.93)
------------ ------------ ------------
------------ ------------ ------------
Diluted:
Net loss................... ($544,712) ($2,995,753) ($13,515,282)
------------ ------------ ------------
------------ ------------ ------------
Diluted weighted average
shares outstanding......... 13,725,278 14,097,500 14,607,915
------------ ------------ ------------
------------ ------------ ------------
Diluted net loss per
common shares.............. ($0.04) ($0.21) ($0.93)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Mail.com, Inc.:
We consent of the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
New York, New York
March 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 8,414,352 909,718
<SECURITIES> 0 0
<RECEIVABLES> 794,466 0
<ALLOWANCES> 92,401 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,969,997 946,394
<PP&E> 5,237,708 1,106,303
<DEPRECIATION> 896,601 178,275
<TOTAL-ASSETS> 20,344,488 2,645,854
<CURRENT-LIABILITIES> 4,894,127 1,137,357
<BONDS> 0 1,137,357
13,047,650 0
61,850 41,850
<COMMON> 159,314 140,975
<OTHER-SE> (332,643) 566,915
<TOTAL-LIABILITY-AND-EQUITY> 20,344,488 3,645,854
<SALES> 0 0
<TOTAL-REVENUES> 1,494,762 173,234
<CGS> 0 0
<TOTAL-COSTS> 15,725,208 3,205,251
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 92,401 0
<INTEREST-EXPENSE> 109,187 34,815
<INCOME-PRETAX> (13,515,282) (2,995,753)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (13,515,282) (2,995,753)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,515,282) (2,995,753)
<EPS-PRIMARY> (0.93) (0.21)
<EPS-DILUTED> (0.93) (0.21)
</TABLE>
