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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26371
MAIL.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 13-3787073
(STATE OR OTHER JURISDICTION) (I.R.S. EMPLOYER IDENTIFICATION OF
INCORPORATION OR ORGANIZATION)
11 BROADWAY, NEW YORK, NY 10004
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 425-4200
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Common stock outstanding at October 31, 2000: Class A common stock
$0.01 par value 51,642,222 shares, and Class B common stock $0.01 par value
10,000,000 shares.
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MAIL.COM, INC.
SEPTEMBER 30, 2000
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
PART I: FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999........................................................................... 2
Unaudited Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and 1999..................................... 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999............................................... 4
Notes to Unaudited Interim Condensed Consolidated Financial Statements...................... 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 25
Item 3: Qualitative and Quantitative Disclosure about Market Risk................................... 31
PART II: OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds................................................... 50
Item 6: Exhibits and Reports on Form 8-K............................................................ 51
Item 7: Signatures.................................................................................. 52
</TABLE>
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MAIL.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 11,955 $ 36,870
Marketable securities............................................................. 53,278 7,006
Accounts receivable, net of allowance for doubtful accounts of
$1,048 and $197 as of September 30, 2000 and December 31, 1999, respectively... 13,681 4,138
Prepaid expenses and other current assets......................................... 5,529 1,940
Receivable from sale leaseback.................................................... 301 183
----------- -----------
Total current assets........................................................ 84,744 50,137
Property and equipment, net.......................................................... 49,406 28,935
Domain assets, net................................................................... 7,642 7,934
Partner advances, net................................................................ 6,165 16,809
Investments.......................................................................... 21,960 2,962
Goodwill and other intangible assets, net............................................ 236,706 28,964
Restricted investments............................................................... 1,695 1,000
Debt issuance costs, net............................................................. 3,278 --
Other ............................................................................ 3,553 526
----------- -----------
Total assets................................................................ $ 415,149 $ 137,267
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 16,749 $ 7,546
Accrued expenses.................................................................. 27,783 11,735
Current portion of notes payable.................................................. 1,914 --
Current portion of capital lease obligations...................................... 9,628 5,483
Current portion of domain asset purchase obligations.............................. 695 400
Deferred revenue, current portion................................................. 1,615 610
Other current liabilities......................................................... 1,084 2,562
----------- -----------
Total current liabilities................................................... 59,468 28,336
Capital lease obligations, less current portion...................................... 14,320 12,016
Domain asset purchase obligation, less current portion............................... 103 176
Deferred revenue, less current portion............................................... 943 725
Notes payable, less current portion.................................................. 513 --
Convertible notes payable............................................................ 100,000 --
----------- -----------
Total liabilities........................................................... 175,347 41,253
Minority interest.................................................................... 15,065 --
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; 130,000,000 shares authorized:
Class A--120,000,000 shares authorized; 51,616,196 and
35,218,461 shares issued and outstanding at September 30, 2000
and December 31,1999, respectively............................................. 516 352
Class B--10,000,000 shares authorized, issued and outstanding
at September 30, 2000 and December 31, 1999 with an aggregate
liquidation preference of $1,000............................................... 100 100
Additional paid-in capital........................................................... 446,098 174,315
Deferred compensation................................................................ (582) (1,117)
Accumulated other comprehensive loss................................................. (63) --
Accumulated deficit.................................................................. (221,332) (77,636)
----------- -----------
Total stockholders' equity.................................................. 224,737 96,014
----------- -----------
Total liabilities and stockholders' equity.................................. $ 415,149 $ 137,267
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
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MAIL.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Messaging..................................... $ 15,078 $ 3,350 $ 38,621 $ 6,593
Domain development (WORLD.com)................ 3,460 -- 4,891 --
-------------- -------------- --------------- ---------------
Total revenues.......................... 18,538 3,350 43,512 6,593
-------------- -------------- --------------- ---------------
Operating expenses:
Cost of revenues:
Messaging.................................. 13,945 4,199 36,222 7,720
Domain development (WORLD.com)............. 2,630 -- 4,108 --
-------------- -------------- --------------- ---------------
Total cost of revenues.................. 16,575 4,199 40,330 7,720
Sales and marketing.............................. 18,385 9,587 50,218 17,083
General and administrative....................... 13,586 3,208 31,982 7,207
Product development.............................. 4,724 1,921 13,856 4,643
Amortization of goodwill and other
intangible assets............................. 17,779 725 42,346 725
Write-off of acquired in-process
technology.................................... -- 900 7,650 900
-------------- -------------- --------------- ---------------
Total operating expenses................ 71,049 20,540 186,382 38,278
-------------- -------------- --------------- ---------------
Loss from operations.................... (52,511) (17,190) (142,870) (31,685)
-------------- -------------- --------------- ---------------
Other income (expense):
Interest income............................... 1,009 795 4,375 1,098
Interest expense.............................. (2,717) (177) (6,825) (355)
-------------- -------------- --------------- ---------------
Total other income (expense), net....... (1,708) 618 (2,450) 743
-------------- -------------- --------------- ---------------
Loss before minority interest................... (54,219) (16,572) (145,320) (30,942)
Minority interest................................ 964 -- 1,624 --
-------------- -------------- ---------------- ---------------
Net loss ........................................ (53,255) (16,572) (143,696) (30,942)
Cumulative dividends on settlement of
contingent obligations to preferred
stockholders.................................. -- -- -- 14,556
-------------- -------------- --------------- ---------------
Net loss attributable to common
stockholders.......................... $ (53,255) $ (16,572) $ (143,696) $ (45,498)
============== ============== =============== ===============
Basic and diluted net loss per common
share ........................................ $ (0.88) $ (0.38) $ (2.58) $ (1.69)
============= ============= ============== ==============
Weighted-average basic and diluted
shares outstanding............................ 60,287,727 43,594,410 55,681,116 26,891,270
============== ============== =============== ===============
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
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MAIL.COM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................................... $ (143,696) $ (30,942)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash charges related to partner agreements................................ 10,644 6,726
Depreciation and amortization................................................. 11,535 2,962
Amortization of goodwill and other intangible assets.......................... 42,347 725
Amortization of domain assets................................................. 1,419 563
Amortization of deferred compensation......................................... 350 350
Write off of Geocities contract............................................... -- 500
Provision for doubtful accounts............................................... 448 156
Amortization of debt issuance costs........................................... 485 --
Amortization of discount...................................................... (183) --
Write-off of acquired in-process technology................................... 7,650 --
Non-cash advertising.......................................................... (125) --
Issuance of common stock in lieu of compensation.............................. 1,800 --
Share of loss from equity investment.......................................... 72 --
Minority interest loss........................................................ (1,624) --
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable........................................................... (7,143) (1,854)
Purchases of marketable securities............................................ (114,189) --
Proceeds from sales of marketable securities.................................. 68,166 --
Prepaid expenses and other current assets..................................... (1,253) (1,067)
Other assets.................................................................. (2,080) (322)
Accounts payable, accrued expenses and other current liabilities.............. 7,404 13,916
Deferred revenue.............................................................. 1,223 38
------------ -----------
Net cash used in operating activities...................................... (116,750) (8,249)
------------ ------------
Cash flows from investing activities:
Purchases of domain assets....................................................... (627) (943)
Proceeds from sale leaseback..................................................... 1,265 3,917
Purchases of intangible assets................................................... (1,433) --
Purchases of investments......................................................... (2,900) (1,000)
Purchases of restricted investments.............................................. (695) (1,000)
Purchases of property and equipment.............................................. (10,564) (16,562)
Acquisitions, net of cash paid (acquired)........................................ 1,970 (3,175)
------------ ------------
Net cash used in investing activities...................................... (12,984) (18,763)
------------ -----------
Cash flows from financing activities:
Net proceeds from issuance of Class A, C and E preferred stock................... -- 15,165
Net proceeds from issuance of Class A common stock related to
initial public offering ...................................................... -- 49,876
Proceeds from issuance of Class A common stock in connection with the
exercise and purchase of warrants and options................................. 2,658 7,890
Issuance of shares for employee 401(k) plan...................................... 386 --
Proceeds from issuance of convertible notes, net................................. 96,050 --
Payments under capital lease obligations......................................... (5,535) (735)
Principal payments of notes payable.............................................. (4,537) --
Proceeds from sale of subsidiary interest........................................ 16,204 --
Payments under domain asset purchase obligations................................. (278) (129)
------------ -----------
Net cash provided by financing activities.................................. 104,948 72,067
------------ -----------
Effect of foreign exchange rate changes on cash and cash equivalents:
Foreign exchange.................................................................... (129) --
Net (decrease) increase in cash and cash equivalents................................ (24,915) 45,055
Cash and cash equivalents at beginning of the period................................ 36,870 8,414
------------ -----------
Cash and cash equivalents at the end of the period.................................. $ 11,955 $ 53,469
============ ===========
</TABLE>
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(CONTINUED)
MAIL.COM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Supplemental disclosure of non-cash information:
During the nine months ended September 30, 2000 and 1999, the Company
paid approximately $5.7 million and $355,000, respectively, for
interest.
Non-cash investing activities:
During the nine months ended September 30, 2000, the Company issued
1,907,380 shares of its Class A common stock in connection with certain
investments. These transactions resulted in a non-cash investing
activities of $16.0 million (see Note 3). During the nine months ended
September 30, 1999, the Company purchased an equity interest in an
Internet company by issuing 80,083 shares of Class A common stock. This
resulted in a non-cash investing activity of $2.0 million.
During the nine months ended September 30, 2000, the Company issued
12,579,770 shares of its Class A common stock in connection with
certain acquisitions. These transactions resulted in non-cash investing
activities of $218.8 million. (see Note 2)
During the nine months ended September 30, 2000, the Company made an
additional investment in an Internet company by issuing 255,049 shares
of Class A common stock. This transaction resulted in a non-cash
financing activity of approximately $1.5 million. (see Note 3)
During the nine months ended September 30, 1999, the Company issued
3,130,324 shares of its Class A common stock in connection with some of
its Mail.com partner agreements. These transactions resulted in a
non-cash investing activity of approximately $21 million.
During the nine months ended September 30, 1999, the Company purchased
domain assets with 355,000 shares of its Class A common stock. This
resulted in a non-cash investing activity of $2.6 million.
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 $11.4 million and $11.5 million for the nine
months ended September 30, 2000 and 1999, respectively.
The Company is obligated under various agreements to purchase domain
assets. These obligations resulted in non-cash financing activities
aggregating $500,000 and $195,000 for the nine months ended September
30, 2000 and 1999, respectively.
See accompanying notes to unaudited condensed consolidated financial statements.
5
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MAIL.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(A) SUMMARY OF OPERATIONS
Mail.com, Inc. (the "Company" or "Mail.com"), is a global provider of Internet
messaging services. The Company offers its services to both the consumer and
business markets. The Company's basic consumer email services are free to
members. The Company generates revenues from these e-mail services primarily
from advertising related sales, including direct marketing and e-commerce
promotions. The Company also generates revenues in this market from subscription
services, such as a service that allows members to purchase increased storage
capacity for their emails. The Company generates revenues in the business market
from email service fees related to its email system connection services, email
monitoring services, outsourced mailbox fees from facsimile transmission
services, (including desktop to fax, enhanced fax and broadcast fax services);
and from licensing and service fees related to its collaboration software and
services (including group calendaring, document sharing and project management.
In March 2000, Mail.com formed WORLD.com to develop the Company's extensive
portfolio of domain names into major Web properties, such as Asia.com and
India.com, which will serve the worldwide business-to-business and
business-to-consumer marketplace. World.com through its subsidiaries generates
revenues primarily from sales of information technology products, system
integration and website development for other companies, advertising related
sales as well as commissions earned from booking travel arrangements.
(B) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim condensed consolidated financial statements as of September 30, 2000
and for the three and nine-month periods ended September 30, 2000 and 1999 have
been prepared by the Company and are unaudited. In the opinion of management,
the unaudited interim condensed consolidated financial statements have been
prepared on the same basis as the annual consolidated financial statements and
reflect all adjustments, which include only normal recurring adjustments,
necessary to present fairly the financial position of Mail.com as of September
30, 2000 and the results of operations for the three and nine months ended
September 30, 2000 and 1999, and cash flows for the nine months ended September
30, 2000 and 1999. The results of operations for any interim period are not
necessarily indicative of the results of operations for any other future interim
period or for a full fiscal year. The consolidated balance sheet at December 31,
1999 has been derived from audited consolidated financial statements at that
date.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. It is suggested that these unaudited interim
consolidated financial statements be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
December 31, 1999 as included in the Company's Form 10-K filed with the
Securities and Exchange Commission in March 2000.
(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) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of Mail.com
and its subsidiaries from the dates of acquisition. WORLD.com, a wholly owned
subsidiary, along with Mail.com, owns 92% of Asia.com (see Note 2) and 89% of
India.com. The interest of shareholders other than those of Mail.com is recorded
as minority interest in the accompanying
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condensed consolidated statements of operations and condensed consolidated
balance sheets. All intercompany balances and transactions have been eliminated
in consolidation.
(E) 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
have been estimated to be five years. Domain assets are recorded at cost. Domain
assets acquired in exchange for future payment obligations are recorded at the
net present value of such payments using a discount rate of 8.5%. The associated
payment obligation is also recorded at the net present value of the payment
obligations. Payment terms vary from two to seven years. Amortization of domain
assets is charged to cost of revenues if currently being used or available for
sale, and to sales and marketing if designated for new business development. 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.
(F) REVENUE RECOGNITION
The Company generates revenues in the business market by providing businesses
with Internet email services, facsimile transmission services and collaboration
software and services. These services include email to fax, fax to email,
enhanced fax, and broadcast fax; email system connection services, email hosting
services and email monitoring services, (including virus scanning, attachment
control, spam control, legal disclaimers and other legends affixed to outgoing
emails and real time Web-based reporting); and collaboration software and
services such as group calendar, document sharing and project management. Most
of these services are billed on a usage or per seat basis. Revenue from business
fax and email services is recognized as the services are performed. Facsimile
license revenue is recognized over the average estimated customer life of 3
years. The Company also licenses software under noncancellable license
agreements. License fee revenues are recognized when a noncancellable license
fee is in force, the product has been delivered and accepted, the license fee is
fixed, vendor specific objective evidence exists for the undelivered element and
collectibility is reasonable assured. Maintenance and support revenues are
recognized ratably over the term of the related agreements. The Company also may
host the software if requested by the customer. The customer has the option to
decide who hosts the application. If the Company provides the hosting, revenue
from hosting is ratably recognized over the hosting priod.
The Company's advertising 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.
The Company sells advertising space through a combination of advertisements that
are sold on either a cost per thousand ("CPM") basis whereby the advertiser pays
an agreed upon amount for each thousand advertisements or on a cost per action
basis whereby revenue is generated 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, revenue
is recognized ratably as advertisements or impressions are delivered. In a cost
per action contract, revenue is recognized as members "click" or otherwise
respond to the advertisement. In instances where revenue is the result of a
purchase by a member, the Company's commission is recognized after the item is
purchased based upon notification from the vendor.
The Company also delivers advertisements to its members through our Special
Delivery permission-marketing program. Under this program, members can identify
categories of products and services of interest to them and request that notices
be sent to their e-mailbox about special opportunities, information and offers
from companies in those categories. The Company recognizes revenue as mailings
are delivered.
The Company also generates advertising related revenues by facilitating
transactions for third party e-commerce sites. The Company's e-commerce partners
may pay acquisition fees on a per customer basis or commissions on the sale of
products or services. The Company recognizes this revenue based upon
notification by the third party e-commerce site.
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On some occasions, the Company receives upfront "placement" fees from
advertising related to direct marketing and e-commerce promotions. These
arrangements give the customer the exclusive right to use the Company's network
to promote goods or services within their category. These exclusive arrangements
generally last one year. The Company records placement fees as deferred
revenues, and ratably recognizes the revenues over the term of the agreement.
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 barter revenue is recognized. If the advertising impressions
are received from the customer prior to the Company delivering the advertising
impressions a liability is recorded, and if the Company delivers the advertising
impressions to the other companies' Web sites prior to receiving the advertising
impressions a prepaid expense is recorded. At September 30, 2000 and December
31, 1999, the Company has recorded a liability of approximately $0, and $27,000,
respectively, for barter advertising to be delivered. Barter revenue, which is a
component of advertising revenue, amounted to $707,000 and $107,000 for the
three months ended September 30, 2000 and 1999 and $1.0 million and $361,000 for
the nine months ended September 30, 2000 and 1999, respectively. For the three
and nine month periods ended September 30, 2000 and 1999, barter expenses, which
are a component of cost of revenues, were approximately $707,000 and $91,000,
and $989,000 and $303,000, respectively.
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. Commencing March 10, 1999, the Company no longer offered
lifetime memberships and only offers monthly and annual subscriptions. The
eight-year amortization period for lifetime subscriptions is based on the
weighted-average expected usage period of a lifetime member. The Company offers
30-day trial periods for certain subscription services. The Company only
recognizes revenue after the 30-day trial period. 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 accordance with the terms of the
applicable Mail.com Partner agreements. The Company provides an allowance for
credit card chargebacks and refunds on its subscription services based upon
historical experience. The Company provides pro rated refunds and chargebacks to
subscription members who elect to discontinue their service. The actual amount
of refunds and chargebacks approximated management's expectations for all
periods presented.
Domain development revenues include revenues generated by World.com and consist
primarily of sales of information technology products. Revenue is recognized at
the time of the sale. Revenues are also generated from system integration and
website development for other companies, advertising and commissions for booking
travel arrangements. Revenues are recognized using the percentage of completion
method for system integration projects. Advertising revenue is recognized as the
advertisements are run and commission revenue is recognized on a net basis as
the travel services are performed.
Deferred revenue represents advertising revenues that has been received in
advance of the advertisements running on the Company's advertising network.
No single customer exceeded 10% of either total revenue or accounts receivable
as of and for the nine months ended September 30, 2000. One customer accounted
for 10% of the Company's total revenue and 9% of the accounts receivable for the
nine months ended and as of September 30, 1999. Revenues from the Company's five
largest customers accounted for an aggregate of 8% and 36% of the Company's
total revenues for the nine months ended September 30, 2000 and 1999,
respectively.
(G) 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. Under SFAS No. 128, basic Earnings per Share ("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
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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.
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(H) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. During June 1999, SFAS No. 137 was issued which delayed the
effective date of SFAS No. 133. SFAS No. 137 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to affect the Company, as it does not have any derivative
instruments or hedging activities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition In Financial Statements" ("SAB No. 101") which summarizes certain of
the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company has adopted the
accounting provisions of SAB No. 101 as of April 1, 2000.
In March 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which
provides guidance on when to capitalize versus expense costs incurred to develop
a web site. The Company has elected early adoption of this EITF and has
implemented the provisions as of April 1, 2000.
(2) ACQUISITIONS
NETMOVES
On February 8, 2000, Mail.com acquired NetMoves Corporation ("NetMoves") for
approximately $168.3 million including acquisition costs. Pursuant to the
merger, NetMoves stockholders received 0.385336 of a share of Mail.com Class A
common stock for each issued and outstanding share of NetMoves common stock. The
consideration payable by Mail.com in connection with the acquisition of NetMoves
consisted of the following:
6,343,904 shares of Mail.com Class A common stock valued at
approximately $145.7 million based upon the average trading price
before and after the date the agreement was signed and announced
(December 13, 1999) at $22.96 per share;
The assumption by Mail.com of options to purchase shares of NetMoves'
common stock, par value of $.01 per share, exchanged for options to
purchase approximately 1.0 million shares of Mail.com Class A common
stock. The options were valued at approximately $19.4 million based on
the Black-Scholes pricing model. Such options have an aggregate
exercise price of approximately $6.6 million.
The assumption by Mail.com of warrants to purchase shares of NetMoves'
common stock, par value of $.01 per share, exchanged for warrants to
purchase approximately 58,000 shares of Mail.com Class A common stock.
The warrants were valued at approximately $1.1 million based on the
Black-Scholes pricing model. Such warrants have an aggregate exercise
price of approximately $496,000; and
Acquisition costs of approximately $2.1 million related to the merger.
The acquisition has been accounted for using the purchase method of accounting.
Mail.com has allocated a portion of the purchase price to the fair market value
of the acquired assets and assumed liabilities of NetMoves as of February 8,
2000. The excess of the purchase price over the fair market value of the
acquired assets and assumed liabilities of NetMoves has been allocated to
goodwill ($147.1 million), and assembled employee workforce ($3.1 million) and
technology ($5.5 million). Goodwill is being amortized over a period of 5 years,
the expected estimated period of benefit and assembled employee workforce are
being amortized over a period of 3 years, the expected estimated period of
benefit.
In performing the purchase price allocation, Mail.com considered, among other
factors, the attrition rate of the active users of the technology at the date of
acquisition and the research and development projects in-process at the date of
acquisition. With regard to the in-process research and development projects,
Mail.com considered, among other factors, the stage of development of each
project at the time of acquisition, the importance of each project to the
overall development plan, and the projected incremental
10
<PAGE> 12
cash flows from the projects when completed and any associated risks. Associated
risks included the inherent difficulties and uncertainties in completing each
project and thereby achieving technological feasibility and risks related to the
impact of potential changes in future target markets.
Approximately $7.7 million of the purchase price of NetMoves was allocated to
in-process technology based upon an independent appraisal which determined that
the new versions of the various fax technologies acquired from NetMoves had not
been developed into the platform required by Mail.com as of the acquisition
date. The fair value of purchased existing and in-process technologies was
determined by management using a risk-adjusted income valuation approach. As a
result, Mail.com is required to expend significant capital expenditures to
successfully integrate and develop the new versions of various fax technologies,
for which there is considerable risk that such technologies will not be
successfully developed, and if such technologies are not successfully developed,
there will be no alternative use for the technologies. The various fax
technologies are enabling technologies for fax communications and include
message management and reporting. Accordingly, on the date of acquisition,
Mail.com's statements of operations reflected a write-off of the amount of the
purchase price allocated to in-process technology of approximately $7.7 million.
Mail.com intends to incur in excess of approximately $12.0 million related
primarily to salaries, to develop the in-process technology into commercially
viable products over the next year. Remaining development efforts are focused on
addressing security issues, architecture stability and electronic commerce
capabilities, and completion of these projects will be necessary before revenues
are produced. Mail.com expects to begin to benefit from the purchased in-process
research and development by its fiscal year 2000. If these projects are not
successfully developed, Mail.com may not realize the value assigned to the
in-process research and development projects. In addition, the value of the
other acquired intangible assets may also become impaired.
In addition to the rollover of existing options contemplated by the merger
agreement, NetMoves' former President, Chief Executive Officer and Chairman of
the board of directors, as an employee of Mail.com received 231,201 options from
Mail.com on February 8, 2000 to purchase Mail.com Class A common stock with an
exercise price equal to $17.50 per share, the then fair value of Mail.com's
Class A common stock. All such options were issued immediately after the
NetMoves acquisition.
ELONG.COM, INC.
On March 14, 2000, Mail.com acquired eLong.com, Inc., a Delaware corporation
("eLong.com") for approximately $62 million including acquisition costs of
$365,000. eLong.com, through its wholly owned subsidiary in the People's
Republic of China ("PRC"), operates the Web Site www.eLong.com, which is a
provider of local content and other internet services. Concurrently with the
merger, eLong.com changed its name to Asia.com, Inc. ("Asia.com"). In the
merger, Mail.com issued to the former stockholders of eLong.com an aggregate of
3,599,491 shares of Mail.com Class A common stock valued at approximately $57.2
million, based upon the Company's average trading price at the date of
acquisition. All outstanding options to purchase eLong.com common stock were
converted into options to purchase an aggregate of 279,289 shares of Mail.com
Class A common stock. The value of the options was approximately $4.4 million.
In addition, Mail.com is obligated to issue up to an additional 719,899 shares
of Mail.com Class A common stock in the aggregate to the former stockholders of
eLong.com if Mail.com or Asia.com acquires less than $50.0 million in value of
businesses engaged in developing, marketing or providing consumer or business
internet portals and related services focused on the Asian market or a portion
thereof, or businesses in furtherance of such a business, prior to March 14,
2001. The actual amount of shares issued will be based upon the amount of any
shortfall in acquisitions below the $50.0 million target amount.
In the Merger, certain former stockholders of eLong.com retained shares of Class
A common stock of Asia.com, representing approximately 4.0% of the outstanding
common stock of Asia.com. Under a Contribution Agreement with Asia.com these
stockholders contributed an aggregate of $2.0 million in cash to Asia.com in
exchange for additional shares of Class A common stock of Asia.com, representing
approximately 1.9% of the outstanding common stock of Asia.com. Pursuant to the
Contribution Agreement, Mail.com (1) contributed to Asia.com the domain names
Asia.com and Singapore.com and $10.0 million in cash and (2) agreed to
contribute to Asia.com up to an additional $10.0 million in cash over the next
12 months and to issue, at the request of Asia.com, up to an aggregate of
242,424 shares of Mail.com Class A common stock for future acquisitions. As of
June 30, 2000, Mail.com has fulfilled this obligation. See also "Asia.com
Acquisitions", below. As a result of the transactions effected pursuant to the
Merger Agreement and the Contribution Agreement, Mail.com initially owned shares
of Class B common stock of Asia.com representing approximately 94.1% of the
outstanding common stock of Asia.com. Mail.com's ownership percentage has
11
<PAGE> 13
decreased to 92% as of September 30, 2000. Asia.com granted to management
employees of Asia.com options to purchase Class A common stock of Asia.com
representing as of September 30, 2000, 9% of the outstanding shares of common
stock after giving effect to the exercise of such options.
The acquisition has been accounted for as a purchase business combination. The
excess of the purchase price over the fair market value of the acquired assets
and assumed liabilities of Asia.com has been allocated to goodwill ($62
million). Goodwill is being amortized over a period of 3 years, the expected
estimated period of benefit.
ASIA.COM ACQUISITIONS
During the second quarter of 2000, Asia.com acquired three companies for
approximately $18.4 million, including acquisition costs. Payment consisted of
cash approximating $500,000, 1,926,180 shares of Mail.com Class A common stock
valued at approximately $11.6 million and 4,673,448 shares of Asia.com Class A
common stock valued at approximately $6.1 million, all of which were based upon
the Company's average trading price at the date of acquisition. These
acquisitions have been accounted for as purchase business combinations. The
excess of the purchase price over the fair market value has been allocated to
goodwill ($17.8 million) and amortized over a period of three years, the
expected estimated period of benefit.
Under a stock purchase agreement associated with one of the acquisitions, the
Company agreed to pay a contingent payment of up to $5 million if certain
wireless revenue targets are reached after the closing. The contingent payment
was payable in Mail.com Class A common stock, cash or, under certain
circumstances, Asia.com Class A common stock. Subsequent to June 30, 2000 the
parties under the stock purchase agreement have agreed, subject to execution and
delivery of final documentation, to settle the contingent payment obligation.
Under the settlement, Mail.com has agreed to issue 200,000 shares of Mail.com
Class A common stock upon completion of documentation and up to 800,000
additional shares of Mail.com Class A common stock on August 31, 2001 based on
the price of such stock at that time. The Company will adjust goodwill at that
time. In lieu of issuing any such additional shares of Mail.com Class A common
stock on August 31, 2001, Mail.com may satisfy such obligation by paying cash
or, under certain circumstances, by transferring shares of Asia.com Class A
common stock owned by Mail.com.
12
<PAGE> 14
MAURITIUS ENTITY
On March 31, 2000, the Company acquired 100% of a Mauritius entity, which in
turn owns 80% of an Indian subsidiary. The terms were $400,000 in cash and a $1
million 7% note payable one year from closing. The acquisition was accounted for
as a purchase business combination. The excess of the purchase price over the
fair market value of the assumed liabilities of the Mauritius entity has been
allocated to goodwill ($2.1 million). Goodwill is being amortized over a period
of five years, the expected estimated period of benefit.
In June 2000, the Company acquired through the Mauritius entity the remaining
20% of the Indian subsidiary for $2.2 million. The acquisition was accounted for
as a purchase business combination. The excess of the purchase price over the
fair market value of the net assets acquired has been allocated to goodwill
($2.2 million), and is being amortized over a period of five years, the expected
estimated period of benefit.
In connection with the Mauritius acquisition, the Company incurred a $1.8
million charge related to the issuance of 104,347 shares of Class A common
stock, as compensation for services performed and to be performed, $200,000 cash
and an additional $200,000 payable in Mail.com Class A common stock as
compensation for employees.
MESSAGING ACQUISITIONS
During the third quarter of 2000 the Company acquired two companies by issuing
710,195 shares of Mail.com Class A common stock valued at approximately $4.3
million based upon the Company's average trading price at the date of
acquisition. These acquisitions were account for as a purchase business
combination.
PROFORMA INFORMATION
The following unaudited proforma consolidated amounts give effect to the
acquisitions as if they had occurred on January 1, 1999, by consolidating their
results of operations with the results of Mail.com for the three and nine months
ended September 30, 2000 and 1999. Consolidated results are not necessarily
indicative of the operating results that would have been achieved had the
transactions been in effect as of the beginning of the periods presented and
should not be construed as being representative of future operating results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues......................................... $ 18,538 $ 10,644 $ 45,789 $ 30,426
Net loss attributable to common stockholders..... $ (53,485) $ (34,506) $ (160,082) $ (109,445)
Basic and diluted net loss per common share...... $ (0.88) $ (0.61) $ (2.71) $ (2.72)
Weighted average shares used in net
loss per common share calculation (1)........ 60,804 56,938 59,463 40,560
</TABLE>
(1) The Company computes net loss per share in accordance with provisions
of SFAS No. 128, "Earnings per Share". Basic net loss per share is
computed by dividing the net loss for the period by the
weighted-average number of common shares outstanding during the period.
The calculation of the weighted average number of shares outstanding
assumes that 13,834,748 shares of Mail.com's common stock issued in
connection with its acquisitions were outstanding for the entire period
or date of inception, if later. The weighted average common shares used
to compute pro forma basic net loss per share includes the actual
weighted average common shares outstanding for the periods presented,
respectively, plus the common shares issued in connection with the
acquisitions from January 1, 1999 or date of inception if later.
Diluted net loss per share is equal to basic net loss per share as
common stock issuable upon exercise of the Company's employee stock
options and upon exercise of outstanding warrants are not included
because they are antidilutive. In future periods, the weighted-average
shares used to compute diluted earnings per share will include the
incremental shares of common stock relating to outstanding options and
warrants to the extent such incremental shares are dilutive.
13
<PAGE> 15
(3) INVESTMENTS
On March 16, 2000, the Company acquired a domain name and made a 10% investment
in Software Tool and Die, a Massachusetts company, in exchange for $2.0 million
in cash and 185,686 shares of Class A common stock valued at approximately $2.9
million. Software Tool and Die is an Internet Service Provider and provides Web
hosting services.
On April 17, 2000, in exchange for $500,000 in cash, Mail.com acquired certain
source code technologies, trademarks and related contracts relating to the
InTandem collaboration product ("InTandem") from IntraACTIVE, Inc., a Delaware
corporation (now named Bantu, Inc., "Bantu"). On the same date, Mail.com also
paid Bantu an upfront fee of $500,000 for further development and support of the
InTandem product. On the same date, pursuant to a Common Stock Purchase
Agreement, Mail.com acquired shares of common stock of Bantu representing
approximately 4.6 % of Bantu's outstanding capital stock in exchange for $1
million in cash and 462,963 shares of Class A common stock, valued at
approximately $4.1 million. Pursuant to the Common Stock Purchase Agreement,
Mail.com also agreed to invest up to an additional $8 million in the form of
shares of Mail.com Class A common stock in Bantu in three separate increments,
of $4 million, $2 million and $2 million, respectively, based upon the
achievement of certain milestones in exchange for additional shares of Bantu
common stock representing 3.7%, 1.85% and 1.85%, respectively, of the
outstanding common stock of Bantu as of April 17, 2000. The number of shares of
Mail.com Class A common stock issuable at each closing date will be based on the
greater of $9 per share or the average of the closing prices of Mail.com's Class
A common stock over the five trading days prior to such closing dates. In July
2000, Mail.com issued an additional 92,592 shares of Class A common stock valued
at approximately $590,000 to Bantu, in accordance with a true-up provision in
the Common Stock Purchase Agreement. In September 2000, Mail.com issued an
additional 444,444 shares of our Class A common stock valued at approximately
$2.9 million as payment for the achievement of a milestone indicated above. The
Company accounts for this as a cost investment.
Mail.com is amortizing the $500,000 associated with the source code
technologies, trademarks and related contracts relating to the InTandem
collaboration product over a 3 year period, the expected useful life. Mail.com
has capitalized, in other assets, the $500,000 associated with the development
and support of the InTandem product until such product is available for use and
will then amortize such amount over its expected useful life.
On June 30, 2000, the Company made an additional investment in 3Cube, Inc. by
issuing 255,049 shares of Class A common stock valued at approximately $1.5
million in exchange for 50,411 shares of 3Cube Series C Preferred Stock. At
September 30, 2000, Mail.com owned preferred stock of 3Cube, representing an
ownership interest of 21% of the combined common and preferred stock outstanding
of 3Cube, Inc. Accordingly, the Company accounts for this investment under the
equity method of accounting.
On July 25, 2000, Mail.com issued 102,215 shares of its Class A common stock
valued at approximately $872,000 as an investment in Madison Avenue Technology
Group, Inc. (CheetahMail). The investment has been accounted for under the cost
method of accounting as Mail.com owns less than 20% of the outstanding stock of
CheetahMail. In consideration thereof, Mail.com received 750,000 shares of
Series B convertible preferred stock and a warrant to purchase 75,000 shares of
common stock of CheetahMail.
On July 25, 2000, Mail.com entered into a strategic relationship with
BulletN.net, Inc. The investment has been accounted for under the cost method of
accounting, as Mail.com owns less than 20% of the outstanding stock of
BulletN.net. As part of this agreement BulletN.net issued 666,667 shares of its
common stock and a warrant to purchase up to 666,667 shares of BulletN.net
common stock to Mail.com in exchange for 364,431 shares of Mail.com Class A
common stock valued at approximately $3.1 million.
(4) CONVERTIBLE SUBORDINATED NOTES
On January 26, 2000, the Company issued $100 million of 7% Convertible
Subordinated Notes ("the Notes"). Interest on the Notes is payable on February 1
and August 1 of each year, beginning on August 1, 2000. The Notes are
convertible by holders into shares of Mail.com Class A common stock at a
conversion price of $18.95 per share (subject to adjustment in certain events)
beginning 90 days following the issuance of the Notes.
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<PAGE> 16
The notes will mature on February 1, 2005. Prior to February 5, 2003 the Notes
may be redeemed at the Company's option ("the Provisional Redemption"), in whole
or in part, at any time or from time to time, at certain redemption prices, plus
accrued and unpaid interest to the date of redemption if the closing price of
the Class A common stock shall have equaled or exceeded specified percentages of
the conversion price then in effect for at least 20 out of 30 consecutive days
on which the NASDAQ national market is open for the transaction of business
prior to the date of mailing the notice of Provisional Redemption. Upon any
Provisional Redemption, the Company will be obligated to make an additional
payment in an amount equal to the present value of the aggregate value of the
interest payments that would thereafter have been payable on the notes from the
Provisional Redemption Date to, but not including, February 5, 2003. The present
value will be calculated using the bond equivalent yield on U.S. Treasury notes
or bills having a term nearest the length to that of the additional period as of
the day immediately preceding the date on which a notice of Provisional
Redemption is mailed.
On or after February 5, 2003, the Notes may be redeemed at the Company's option,
in whole or in part, in cash at the specified redemption prices, plus accrued
interest to the date of redemption.
In connection with the issuance of these Notes, the Company incurred
approximately $3.8 million of debt issuance costs. Such costs have been
capitalized and are being amortized ratably over the original term of the Notes.
The Company incurred approximately $1.9 million and $5.3 million of interest
expense including accrued interest and amortization of the debt issuance costs
in the three and nine months ended September 30, 2000 relating to the Notes.
(5) PARTNER AGREEMENTS
The Company has entered into many partner agreements. Included in these
agreements are 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.
Prior to 2000, the Company had issued stock to some of its Mail.com Partners and
capitalized such issuances when the measurement date for such stock grants was
fixed and there was 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 $887,000. 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
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 $49,000 and $271,000 of
amortization expense in the three and nine month periods, ended September 30,
2000, and approximately $184,000 and $406,000 in the comparable periods in 1999.
During the first nine months of 1999, the Company issued 485,616 shares of its
Class A common stock at varying prices in connection with certain strategic
partnership agreements. When stock issuances were either contingent upon the
achievement of certain targets or the measurement date was not fixed, the
Company expensed the issuance of such stock at the time such stock was issued or
the targets were achieved at the then fair market value of the Company's stock.
Such amounts aggregated approximately $50,000 and $2.5 million for the three and
nine months ended September 30, 1999 and are included in sales and marketing
expenses in the statements of operations. The Company no longer issues stock in
connection with its strategic partnership agreements.
Prior to May 1, 1999, the Company was required to issue to CNET, Snap and NBC
Multimedia shares of its Class A common stock for each member who registers at
their sites. On May 1, 1999, the Company entered into an agreement to settle in
full its contingent obligation to issue shares of its Class A common stock to
CNET, Snap and NBC Multimedia as described above. Pursuant to this agreement,
the Company issued upon the closing of its initial public offering in June 1999,
2,368,907 shares of Class A common stock at a value of $7.00 per share in the
aggregate to CNET and Snap and 210,000 shares of Class A common
15
<PAGE> 17
stock at a value of $7.00 per share to NBC Multimedia. The Company capitalized
$18 million in connection with the issuance of these shares and is ratably
amortizing the amount over the period from the closing of the initial public
offering (June 23, 1999) through May 2001. The Company recorded approximately
$2.3 million and $6.9 million of amortization expense for the three and nine
months ended September 30, 2000, and approximately $2.3 million and $2.7 million
of amortization expense for the three and nine months ended September 30, 1999.
(6) LEASES
On March 30, 2000, the Company entered into a $12 million Master Lease Agreement
with GATX Technology Services Corporation ("GATX") for equipment lease financing
(hardware and software). Terms of individual leases signed under the Master
Lease Agreement will call for a 36-month lease term with rent payable monthly in
advance. The effective interest rate is 12.1% and is adjustable based on prime.
GATX holds a first priority security interest in the equipment under the
facility. For certain leases entered into under the $12 million master lease
agreement, the Company has exercised an option to extend the term for an
additional 24 months.
Under terms of the Master Lease Agreement, the Company has the option to
purchase the equipment at the then fair market value of the equipment at lease
expiration. At September 30, 2000, approximately $9.6 million was outstanding.
On March 31, 2000, the Company entered into a $2 million Master Lease Agreement
with Leasing Technologies International, Inc. The lease line provides for the
lease of new, brand name computers, office automation and other equipment. Terms
of individual leases signed under the Master Lease Agreement call for a 36-month
lease term, rent payable monthly in advance. The effective interest rate is
14.7% and is adjustable based on prime. In addition, a security deposit equal to
one month's rent is payable at individual lease inception.
Under terms of the Master Lease Agreement at the end of the lease term, the
Company has the option to either purchase or return the equipment at a set
percent of the original price, or extend the lease term by twelve months. In the
latter case, the lease terms provide for a discounted monthly rental and a
bargain purchase option at the expiration of the twelve-month extension.
(7) AT&T WARRANT
Under a letter agreement dated May 26, 1999, AT&T Corp. ("AT&T") and the Company
agreed to negotiate in good faith to complete definitive agreements to establish
a strategic relationship. On July 26, 1999, the Company entered into an interim
agreement to provide email services as part of a package of AT&T or third party
branded communication services that AT&T may offer to some of its small business
customers. The Company has not entered into a definitive agreement to establish
the proposed strategic relationship, and, effective March 30, 2000, the May 26,
1999 letter agreement and the July 26, 1999 interim agreement was terminated.
Under the May 26, 1999 letter agreement, the Company issued warrants to purchase
1.0 million shares of Class A common stock at $11.00 per share. AT&T may
exercise the warrants at any time on or before December 31, 2000. If AT&T
exercises the warrants, they may not sell or otherwise transfer to a third party
the warrants or the shares issuable upon exercise of the warrants until May 26,
2004. If AT&T does not exercise the warrants on or before December 31, 2000, the
warrants will expire and be cancelled.
The Company had recorded a deferred cost of approximately $4.3 million in the
aggregate as a result of the issuance of these warrants to AT&T. The Company had
amortized approximately $980,000 through December 31, 1999. As a result of the
termination of the May 26 letter agreement and the July 26 interim agreement,
the remaining $3.3 million of non-cash charges was expensed in the first quarter
of 2000 and is included in sales and marketing expenses in the accompanying
condensed consolidated statements of operations.
(8) BUSINESS SEGMENTS
The Company's two business segments are Messaging and Domain Development, the
latter being attributable to the formation of WORLD.com. WORLD.com was formed
during the first quarter of 2000 to develop the Company's extensive portfolio of
domain names, such as Asia.com and India.com, which serve the worldwide
business-to-business and business-to-consumer marketplace.
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<PAGE> 18
World.com through its subsidiaries generates revenues primarily from sales of
information technology products and from services from various Company owned web
sites. Messaging includes activities related to all aspects of both business and
consumer messaging, which includes email, facsimile transmission and
collaboration services to businesses and consumers.
The following table presents summarized financial information related to the
business segments for the three and nine months ended September 30, 2000 and
1999 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Messaging ................................ $ 15,078 $ 3,350 $ 38,621 $ 6,593
Domain development:
Product sales ......................... 2,010 -- 3,210 --
Services .............................. 1,450 -- 1,681 --
-------- -------- -------- --------
Domain development ................. 3,460 -- 4,891 --
-------- -------- -------- --------
Total revenue ......................... $ 18,538 $ 3,350 $ 43,512 $ 6,593
======== ======== ======== ========
Cost of revenues:
Messaging ................................ $ 13,945 $ 4,199 $ 36,222 $ 7,720
Domain development:
Products .............................. 1,835 -- 3,081 --
Services .............................. 795 -- 1,027 --
-------- -------- -------- --------
Domain development ................. 2,630 -- 4,108 --
-------- -------- -------- --------
Total cost of revenue ................. $ 16,575 $ 4,199 $ 40,330 $ 7,720
======== ======== ======== ========
Operating expenses, excluding cost of revenue
Messaging ................................ $ 39,888 $ 16,341 $115,893 $ 30,558
-------- -------- -------- --------
Domain development ....................... 14,586 -- 30,159 --
-------- -------- -------- --------
Total operating expenses,
excluding cost of revenue .......... $ 54,474 $ 16,341 $146,052 $ 30,558
======== ======== ======== ========
</TABLE>
(9) STOCK OPTION REPRICING
In March 2000, the Financial Accounting Standard Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"). Among other
issues, FIN 44 clarifies (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. Pursuant
to FIN 44, stock options repriced after December 15, 1998 are subject to
variable plan accounting treatment. This guidance requires the Company to
remeasure compensation cost for outstanding repriced options each reporting
period based on changes in the market value of the underlying common stock.
Depending upon movements in the market value of the Company's Class A common
stock, this accounting treatment may result in significant non-cash compensation
charges in future periods.
On May 31, 2000, the Board of Directors approved the cancellation and
re-issuance of 500,000 options to an executive at an exercise price of $5.53 per
share based on the closing price of the Company's Class A common stock on May
31, 2000. The options had an original exercise price of $12.44. The new options
vest at the same rate that they would have vested under previous plans. Pursuant
to FIN 44, stock options repriced after December 15, 1998 are subject to
variable plan accounting. The total compensation charge for the three and nine
months ended September 30, 2000 approximated $4000 and $6,000, respectively.
(10) INDIA.COM FINANCING
During the third quarter of 2000, India.com, Inc. a wholly-owned subsidiary of
Mail.com, issued 13,657,692 shares of Series A convertible preferred stock to
private investors valued at $14.2 million. These shares are convertible into
India.com Class A
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<PAGE> 19
common stock at the initial purchase price of the preferred shares, subject to
certain anti dilution adjustments. In addition, the preferred share conversion
price is also subject to reduction if the effective sales price in India.com's
next significant equity financing does not represent a 33% premium to the
current conversion price. The Company will measure the contingent beneficial
conversion feature at the commitment date and treat this feature as a preferred
dividend but will not recognize this preferred dividend in earnings until the
contingency is resolved, if ever. The holders of the Series A convertible
exchangeable preferred stock are entitled to a one time right exerciseable
during the 60 days after September 14, 2001 to exchange these shares for the
number of shares of Mail.com Class A common stock equal to the original purchase
price of such shares divided by the lesser of the market price of Mail.com's
Class A common stock on September 14, 2001 (but not less than $4.50 and $6.00).
(11) SUBSEQUENT EVENTS
On October 26, 2000, as approved by the Board of Directors the Company announced
its intention to sell its advertising network business and that it will focus
exclusively on its established outsourced messaging business. The Company also
announced that as a result of its decision to focus on its outsourced messaging
business, it is streamlining the organization, taking advantage of lower cost
areas and further integrating its technological and operational infrastructures.
The Company expects that this will result in restructuring and rationalization
charges of $8-$10 million. The Company expects that the majority of these
charges will be taken in the fourth quarter of 2000 and the remainder will be
taken in the first quarter of 2001.
On November 1, 2000, the Company settled its contingent consideration obligation
with TCOM, Inc. (TCOM), which was acquired on October 18, 1999. Mail.com will
pay the former shareholders of TCOM a total of $3.75 million, comprised of a
cash payment of $1 million and $2.75 million in Mail.com Class A common stock,
on April 18, 2001, determined based on the market price at that time, but not
less than $4.00 per share. Upon payment, the Company will adjust the purchase
price and reflect additional goodwill, and will ratably amortize such costs over
the remaining life of the goodwill.
On November 2, 2000, as approved by the Board of Directors the Company announced
that it will sell all assets not related to its core outsourced messaging
business, including its Asia.com Inc., and India.com Inc. subsidiaries, and its
portfolio of category-defining domain names.
On November 2, 2000, the Company settled its contingent consideration obligation
with The Allegro Group, Inc. ("Allegro"), which was acquired on August 20, 1999.
Mail.com will pay to the former shareholders of Allegro 283,185 shares of
Mail.com Class A common stock. Payment shall be made on December 31, 2001. Upon
payment, the Company will adjust the purchase price and reflect additional
goodwill, and will ratably amortize such costs over the remaining life of the
goodwill.
On November 14, 2000, the Company offered to certain employees, officers and
directors, other than Gerald Gorman, the right to reprice certain outstanding
stock options to an exercise price equal to the closing price of the Company's
Class A common stock on NASDAQ on November 14, 2000. Options to purchase an
aggregate of up to 9,000,000 shares are subject to repricing. The repriced
options will vest at the same rate that they would have vested under their
original terms except that shares issuable upon exercise of these options may
not be sold until after November 14, 2001. In March 2000, Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25" ("Interpretation"). Among other issues, this Interpretation
clarifies (a) the definition of employee for purposes of applying Opinion 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. As a result, under the
Interpretation, stock options repriced after December 15, 1998 are subject to
variable plan accounting treatment. This guidance requires the Company to
remeasure compensation cost for outstanding repriced options each reporting
period based on changes in the market value of the underlying common stock.
Depending upon movements in the market value of the Company's common stock, this
accounting treatment may result in significant non cash compensation charges in
future periods.
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ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
We make forward-looking statements within the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 throughout this report. 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," "believes," "estimates," "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 in the "Risk Factors That May Affect Future
Results" section of this report. Mail.com undertakes no obligation to update
publicly any forward-looking statements for any reason even if new information
becomes available or other events occur in the future.
OVERVIEW
Mail.com, Inc., (the "Company", "We", "Us" or "Our") is a leading global
provider of Internet messaging services to businesses, ISPs, Web sites and
direct to consumers. In the business market, we provide outsourced e-mailbox
hosting, and gateway services such as virus scanning, spam blocking and content
filtering; facsimile transmission services including email to fax, fax to email,
enhanced fax and broadcast services; and collaboration software and services
such as group calendar, document sharing and project management. In the consumer
market, we provide Web-based e-mail services or WebMail to Internet Service
Providers (ISPs) including several of the world's top ISPs, and we partner with
top branded Web sites to provide WebMail services to their users. In addition,
we serve the consumer market directly through our flagship web site
www.mail.com.
Our basic consumer email services are free to our members. Prior to our
acquisition of NetMoves, we generated the majority of our revenues from our
consumer email services, primarily from advertising related sales, including
direct marketing and e-commerce promotion. We also generated revenues in the
consumer market sector from subscription services, such as increased storage
capacity. In September 2000, we delivered approximately 438 million page views
and approximately 2 billion advertisements in our consumer email services.
During the three months ended September 30, 2000, we delivered approximately 1.3
billion page views. We generated revenues in the business market from facsimile
transmission services including email to fax, fax to email, enhanced fax,
broadcast services; Internet e-mail services, consisting of services that enable
email networks to connect to the Internet, email hosting services and email
message management services, including virus scanning, attachment control, spam
control, legal disclaimers and real time Web-based reporting and collaboration
software and services such as group calendar, document sharing and project
management; and sales of software licenses.
For the three and nine-months ended September 30, 2000, we generated
approximately 34% and 40% of our revenues from consumer messaging related sales
and approximately 47% and 49% of our revenues from business messaging services.
We also generated approximately 19% and 11% of our revenues from the sales of
information technology products and the provision of local content and other
Internet services associated with WORLD.com. A small portion of our revenues
came from the sale of domain name assets. For the three and nine months ended
September 30, 2000, approximately $12.3 million and $26.5 million of our revenue
was generated by companies we acquired. For the both the three and nine months
ended September 30, 1999, approximately $569,000 of our revenue was generated by
companies we acquired. As indicated in Note 11 of the Notes to Unaudited
Condensed Consolidated Financial Statements, in the future, our focus will be
centered exclusively in the outsourced business messaging market.
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 sell our available advertising space, or
inventory, through a combination of advertisements that we sell on either a
"cost per thousand" ("CPM") basis, or a "cost per action" basis. Advertising
sales billed on a CPM basis require that the advertiser pay us an agreed amount
for each 1,000 advertisements delivered. 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.
We also deliver advertisements to our members through our Special Delivery
permission marketing program. Under this program, members can identify
categories of products and services of interest to them and request that notices
be sent to their e-mailbox about special opportunities, information and offers
from companies in those categories. We recognize revenue as mailings are
delivered.
On some occasions, we receive upfront "placement" fees from advertising related
to direct marketing and e-commerce promotion. These arrangements give the
customer the exclusive right to use our network to promote goods or services
within their category.
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These exclusive arrangements generally last one year. We record placement fees
as deferred revenues, and ratably recognize the revenues over the term of the
agreement.
We also generate advertising related revenues by facilitating transactions for
third party e-commerce sites. Our e-commerce partners may pay acquisition fees
on a per customer basis or commissions on the sale of products or services.
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
translation, the amounts may not be equal in any particular period. 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 under the
circumstances. Barter revenues were approximately 2% of total revenues for the
nine-month period ended September 30, 2000, as compared to 6% for the comparable
period in 1999. We anticipate that barter revenues will remain below 5%
annually, although the actual amount may fluctuate in any given quarter.
Previously, 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. We offer a 30-day trial period for certain subscription services. We do
not recognize any revenue during such period. We provide pro-rated refunds and
chargebacks to subscription members who elect to discontinue their service. The
actual amount of refunds and chargebacks approximated our expectations for all
periods presented. In August 1999, in an effort to increase member sign ups and
retention, we eliminated subscription fees for most of our premium email
addresses.
In the consumer market sector most of our contracts provide Webmail service at
no cost to the partner. In addition to assuming the costs to provide service, we
also pay a percentage (generally up to 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 require us to pay an amount in cash 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
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
e-mailboxes, 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.
We also provide businesses with Internet email services, facsimile transmission
services and collaboration software and services. These services include email
to fax, fax to email, enhanced fax, and, broadcast fax; email system connection
services, email hosting services and email monitoring services, (including virus
scanning, attachment control, spam control, legal disclaimers and other legends
affixed to outgoing emails and real time Web-based reporting); and collaboration
software and services such as group calendar, document sharing and project
management. Most of these services are billed on a usage or per seat basis.
Revenue from email, business fax and collaboration services is recognized as the
services are performed. Facsimile license revenue is recognized over the average
estimated customer life of 3 years. Business revenues for the three and nine
months ended September 30, 2000 were $8.8 million and $20.9 million,
respectively. Business revenues were $569,000 for the three and nine months
ended September 30, 1999.
Domain development revenues include revenues generated by World.com and consist
primarily of sales of information technology products. Revenues are also
generated from system integration and website development, advertising and
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commissions from booking travel arrangements. Revenues for the three and nine
months ended September 30, 2000 were $3.5 million and $4.9 million. There were
no domain development revenues during the comparable periods in 1999.
Historically, some of our contracts have required us to issue shares of Class A
common stock on a contingent basis. The amount of stock we were required to
issue was usually based upon the number of member registrations during the
preceding quarter or upon the achievement of performance targets. We recorded
the non-cash expense as of the date we issued the stock or as of the date the
targets were achieved, at the then fair market value of our stock. These
expenses aggregated approximately $0 and $50,000 for the three months ended
September 30, 2000 and 1999 and $0 and $2.5 million for the nine months ended
September 30, 2000 and 1999 respectively. We no longer issue stock to third
parties in connection with member registrations.
Under an agreement with CNN we issued 253,532 shares of our Class A common stock
upon execution of a contract. We agreed to issue the shares in anticipation of
CNN's fulfillment of promotional obligations under the contract. We capitalized
as a partner advance the market value of the stock we issued and then amortized
that amount over the length of the contract. During the three and nine month
period ended September 30, 2000 we recorded approximately $49,000 and $271,000
of amortization expense for this agreement. During the three and nine month
period ended September 30, 1999, we recorded $184,000 and $406,000 of
amortization expense. This amortization is included in sales and marketing
expenses.
Under a letter agreement dated May 26, 1999, AT&T Corp. ("AT&T") and the Company
agreed to negotiate in good faith to complete definitive agreements to establish
a strategic relationship. On July 26, 1999, we entered into an interim agreement
to provide our email services as part of a package of AT&T or third party
branded communication services that AT&T may offer to some of its small business
customers. We have not entered into a definitive agreement to establish the
proposed strategic relationship, and, effective March 30, 2000, the May 26, 1999
letter agreement and the July 26, 1999 interim agreement were terminated. Under
the May 26, 1999 letter agreement, we issued warrants to purchase 1.0 million
shares of Class A common stock at $11.00 per share. AT&T may exercise the
warrants at any time on or before December 31, 2000. If AT&T exercises the
warrants, they may not sell or otherwise transfer to a third party the warrants
or the shares issuable upon exercise of the warrants until May 26, 2004. If AT&T
does not exercise the warrants on or before December 31, 2000, the warrants will
expire and be cancelled.
The Company had recorded a deferred cost of approximately $4.3 million in the
aggregate as a result of the issuance of these warrants to AT&T. The Company had
amortized approximately $980,000 through December 31, 1999. As a result of the
termination of the May 26 letter agreement and the July 26 interim agreement,
the remaining $3.3 million of non-cash charges was expensed in the first quarter
of 2000.
On February 8, 2000, we acquired NetMoves Corporation, a provider of Internet
fax transmission services for approximately $168.3 million including acquisition
costs of approximately $2.1 million. The acquisition was accounted for as a
purchase business combination. We issued 6,343,904 shares of Class A common
stock valued at approximately $145.7 million based upon our average trading
price at the date of acquisition. In addition, we assumed outstanding options
and warrants of NetMoves which represent the right to purchase 962,443 shares
and 57,343 shares respectively, of our Class A common stock at weighted average
exercise prices of $6.69 and $8.64, respectively. The options and warrants were
valued at an aggregate of approximately $20.5 million.
NetMoves (now named Mail.com Business Messaging Services, Inc.) designs,
develops and markets to businesses a variety of Internet document delivery
services, including e-mail-to-fax, fax-to-e-mail, fax-to-fax and broadcast fax
services. We expect that this acquisition will enhance our presence in the
domestic and international business service market, provide us with an
established sales force and international distribution channels and expand our
offering of Internet-based messaging services.
On March 14, 2000, we acquired eLong.com, Inc., a Delaware corporation
("eLong.com") for approximately $62 million including acquisition costs of
approximately $365,000. eLong.com, through its wholly owned subsidiary in the
People's Republic of China, operates the Web Site www.eLong.com, which is a
provider of local content and other internet services. The acquisition was
accounted for as a purchase business combination. Concurrently with the merger,
eLong.com changed its name to Asia.com, Inc. ("Asia.com"). In the merger, we
issued to the former stockholders of eLong.com an aggregate of 3,599,491 shares
of Mail.com Class A common stock valued at approximately $57.2 million, based
upon our average trading at the date of acquisition. All outstanding options to
purchase eLong.com common stock were converted into options to purchase an
aggregate
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of 279,289 shares of Mail.com Class A common stock. The options were valued at
approximately $4.4 million. In addition, we are obligated to issue up to an
additional 719,899 shares of Mail.com Class A common stock in the aggregate to
the former stockholders of eLong.com if Mail.com or Asia.com acquires less than
$50.0 million in value of businesses engaged in developing, marketing or
providing consumer or business internet portals and related services focused on
the Asian market or a portion thereof, or businesses in furtherance of such a
business, prior to March 14, 2001. The actual amount of shares issued will be
based upon the amount of any shortfall in acquisitions below the $50.0 million
target amount. We will adjust the purchase price at that time and amortize such
costs over the remaining life of the goodwill.
In the merger, certain former stockholders of eLong.com retained shares of Class
A common stock of Asia.com representing approximately 4.0% of the outstanding
common stock of Asia.com. Under a separate Contribution Agreement with Asia.com
these stockholders contributed an aggregate of $2.0 million in cash to Asia.com
in exchange for additional shares of Class A common stock of Asia.com,
representing approximately 1.9% of the outstanding common stock of Asia.com.
Pursuant to the Contribution Agreement, Mail.com (1) contributed to Asia.com the
domain names Asia.com and Singapore.com and $10.0 million in cash and (2) agreed
to contribute to Asia.com up to an additional $10.0 million in cash over the
next 12 months and to issue, at the request of Asia.com, up to an aggregate of
242,424 shares of Mail.com Class A common stock for future acquisitions. As a
result of the transactions effected pursuant to the Merger Agreement and the
Contribution Agreement, Mail.com owns shares of Class B common stock of Asia.com
representing approximately 94.1% of the outstanding common stock of Asia.com.
Our ownership percentage decreased to 92% as of June 30, 2000. Asia.com granted
to management employees of Asia.com options to purchase Class A common stock of
Asia.com representing, as of September 30, 2000, 9% of the outstanding shares of
common stock after giving effect to the exercise of such options.
The shares of Class A common stock of Asia.com are entitled to one vote per
share and the shares of Class B common stock of Asia.com are entitled to 10
votes per share. The shares of Class A common stock and Class B common stock are
otherwise subject to the same rights and restrictions.
On March 16, 2000 in exchange for $2 million in cash and 185,686 shares of our
Class A common stock valued at approximately $2.9 million, we acquired a domain
name from and made a 10% investment in Software Tool and Die, a Massachusetts
Corporation. Software Tool and Die is an Internet Service Provider and provides
Web hosting services.
On March 31, 2000, we acquired a Mauritius entity, which in turn owned 80% of an
Indian subsidiary, to facilitate future investments in India. The terms were
$400,000 in cash and a $1 million 7% note payable due one year from closing. In
June 2000, the Company acquired through the Mauritius entity the remaining 20%
of the Indian subsidiary for $2.2 million in cash.
In connection with the Mauritius acquisition, we incurred a $1.8 million charge
related to the issuance of 104,347 shares of Class A common stock, as
compensation for services performed, we paid $200,000 cash and an additional
$200,000 payable in our Class A common stock as compensation for employees.
During the third quarter of 2000, India.com Inc, a subsidiary of Mail.com,
issued 13,657,692 shares of Series A convertible exchangeable preferred stock
for proceeds of approximately $14.2 million. These shares are convertible into
India.com Class A common stock at the initial purchase price of the preferred
shares, subject to certain anti dilution adjustments. In addition, the preferred
share conversion price is also subject to reduction if the effective sales price
in India.com's next significant equity financing does not represent a 33%
premium to the current conversion price. We will measure the contingent
beneficial conversion feature at commitment date and treat this feature as a
preferred dividend but will not recognize this preferred dividend in earnings
until the contingency is resolved, if ever. The holders of the Series A
convertible exchangeable preferred stock are entitled to a one time right
exerciseable during the 60 days after September 14, 2001 to exchange these
shares for the number of shares of Mail.com Class A common stock equal to the
original purchase price of such shares divided by the lesser of the market price
of Mail.com's Class A common stock on September 14, 2001 (but not less than
$4.50) and $6.00.
On April 17, 2000, in exchange for $500,000 in cash, we acquired certain source
code technologies, trademarks and related contracts relating to the InTandem
collaboration product ("InTandem") from IntraACTIVE, Inc., a Delaware
corporation (now named Bantu, Inc., "Bantu"). On the same date, we also paid
Bantu an upfront fee of $500,000 for further development and support of the
InTandem product. On the same date, pursuant to a Common Stock Purchase
Agreement, Mail.com acquired shares of common stock of Bantu representing
approximately 4.6 % of Bantu's outstanding capital stock in exchange for $1
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million in cash and 462,963 shares of Class A common stock, valued at
approximately $4.1 million. Pursuant to the Common Stock Purchase Agreement,
Mail.com also agreed to invest up to an additional $8 million in the form of
shares of Mail.com Class A Common stock in Bantu in three separate increments of
$4 million, $2 million and $2 million, respectively, based upon the achievement
of certain milestones in exchange for additional shares of Bantu common stock
representing 3.7%, 1.85% and 1.85%, respectively, of the outstanding common
stock of Bantu as of April 17, 2000. The number of shares of our Class A common
stock issuable at each closing will be based on the greater of $9 per share and
the average of the closing prices of our Class A common stock over the five
trading days prior to such closing date. In July 2000, we issued an additional
92,592 shares of our Class A common stock valued at approximately $590,000 to
Bantu in accordance with a true-up provision in the Common Stock Purchase
Agreement. In September 2000, we issued an additional 444,444 shares of our
Class A common stock valued at approximately $2.9 million as payment for the
achievement of a milestone indicated above. We account for this investment under
the cost method.
During the second quarter of 2000, Asia.com acquired three companies for
approximately $18.4 million, including acquisition costs. Payments consisted of
cash approximating $500,000, 1,926,180 shares of Mail.com Class A common stock
valued at approximately $11.6 million and 4,673,448 shares of Asia.com Class A
common stock valued at approximately $6.1 million, all of which were based upon
our average trading price on the date of acquisition.
Under a stock purchase agreement associated with one of the acquisitions, the
Company agreed to pay a contingent payment of up to $5 million if certain
wireless revenue targets are reached after the closing. The contingent payment
was payable in Mail.com Class a common stock, cash or, under certain
circumstances, Asia.com Class A common stock. Subsequent to June 30, the parties
under the stock purchase agreement have agreed, subject to execution and
delivery of final documentation, to settle the contingent payment obligation.
Under the settlement, Mail.com has agreed to issue 200,000 shares of Mail.com
Class A common stock upon completion of documentation and up to 800,000
additional shares of Mail.com Class A common stock on August 31, 2001 based on
the price of such stock at that time. In lieu of issuing any such additional
shares of Mail.com Class A common stock on August 31, 2001, Mail.com may satisfy
such obligation by paying cash or, under certain circumstances, by transferring
shares of Asia.com Class A common stock owned by Mail.com. We will adjust the
purchase price at that time and amortize such costs over the remaining life of
the goodwill.
On June 30, 2000, the Company made an additional investment in 3Cube, Inc by
issuing 255,049 shares of Class A common stock valued at approximately $1.5
million in exchange for 50,411 shares of 3Cube Series C Preferred Stock. As of
September 30, 2000 Mail.com owned preferred stock of 3Cube, representing an
ownership interest of 21% of the combined common and preferred stock outstanding
of 3Cube, Inc. Accordingly, we account for this investment under the equity
method of accounting.
Although we have experienced substantial growth in revenues in recent periods,
we have incurred substantial operating losses since inception and will continue
to incur substantial losses for the foreseeable future. As of September 30,
2000, we had an accumulated deficit of approximately $221.3 million. In October
and November 2000, we announced our intention to focus our business exclusively
on the outsourced messaging business and sell all assets not related to our core
outsourced messaging business, including Asia.com, India.com and our portfolio
of category-defining domain names. Our prospects should be considered in 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 That May Affect Future Results"
We have recorded amortization of deferred compensation of approximately $91,000
and $274,000 for each of the three and nine-month periods ended September 30,
2000 and 1999, respectively, in connection with the grant of stock options to
one of our officers. This deferral, which totaled $1.1 million at the date of
the grant, represents the difference between the deemed fair value of our common
stock for accounting purposes and the exercise price of the options at the date
of grant. This amount is represented as a reduction of stockholders' equity and
amortized over the three-year vesting period. Amortization of deferred stock
compensation is charged to sales and marketing expense on the statement of
operations. We will amortize the remaining deferred compensation of
approximately $387,000 over the remaining vesting periods through December 2001.
We have recorded amortization of deferred compensation of approximately $103,000
and $40,000 during the three months ended September 30, 2000 and 1999,
respectively, and $335,000 and $75,000 during the nine months ended September
30, 2000 and 1999, respectively, in connection with the grant of 40,400 stock
options to some employees during 1999, net of forfeitures or
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cancellations in connection with employees who left the Company. This deferral
represents the difference between the deemed fair value of our common stock for
accounting purposes, in this case $11.00 per share, and the $5.00 per share
exercise price of the options at the date of grant. We will amortize the
deferred compensation over the four-year vesting period of the applicable
options.
In March 2000, the Financial Accounting Standard Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"). Among other
issues, FIN 44 clarifies (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. Pursuant
to FIN 44, stock options repriced after December 15, 1998 are subject to
variable plan accounting treatment. This guidance requires the Company to
remeasure compensation cost for outstanding repriced options each reporting
period based on changes in the market value of the underlying common stock.
Depending upon movements in the market value of the Company's Class A common
stock, this accounting treatment may result in significant non-cash compensation
charges in future periods.
On May 31, 2000, the Board of Directors approved the cancellation and
re-issuance of 500,000 options to an executive at an exercise price of $5.53 per
share based on the closing price of the Company's Class A common stock on May
31, 2000. The options had an original exercise price of $12.44. The new options
vest at the same rate that they would have vested under previous plans. Pursuant
to FIN 44, stock options repriced after December 15, 1998 are subject to
variable plan accounting. The total compensation charge for the three and nine
months ended September 30, 2000 approximated $4,000 and $6,000, respectively.
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.
STOCK OPTION REPRICING
On November 14, 2000, the Company offered to certain employees, officers and
directors, other than Gerald Gorman, the right to reprice certain outstanding
stock options to an exercise price equal to the closing price of the Company's
Class A common stock on NASDAQ on November 14, 2000. Options to purchase an
aggregate of up to 9,000,000 shares are subject to repricing. The repriced
options will vest at the same rate that they would have vested under their
original terms except that shares issuable upon exercise of these options may
not be sold until after November 14, 2001. In March 2000, Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25" ("Interpretation"). Among other issues, this Interpretation
clarifies (a) the definition of employee for purposes of applying Opinion 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. As a result, under the
Interpretation, stock options repriced after December 15, 1998 are subject to
variable plan accounting treatment. This guidance requires the Company to
remeasure compensation cost for outstanding repriced options each reporting
period based on changes in the market value of the underlying common stock.
Depending upon movements in the market value of the Company's common stock, this
accounting treatment may result in significant non cash compensation charges in
future periods.
RESTRUCTURING AND RATIONALIZATION CHARGE
On October 26, 2000, we announced our intention to sell our advertising network
business and that we will focus exclusively on our established outsourced
messaging business. We also announced that as a result of our decision to focus
on our outsourced messaging business, we are streamlining the organization,
taking advantage of lower cost areas and further integrating our technological
and operational infrastructures. We expect that this will result in
restructuring and rationalization charges of $8-$10 million. We expect that the
majority of these charges will be taken in the fourth quarter of 2000 and the
remainder will be taken in the first quarter of 2001.
On November 2, 2000, we announced that we will sell all assets not related to
our core outsourced messaging business, including our Asia.com Inc. and
India.com Inc. subsidiaries, and our portfolio of category-defining domain
names.
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RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE
Revenues for the three and nine months ended September 30, 2000 were $18.5
million and $43.5 million, respectively, as compared to $3.4 million and $6.6
million, respectively for the comparable periods in 1999. The increase of $15.1
million and $36.9 million was due primarily to revenues from the business
messaging market, which we entered during the third quarter of 1999, an increase
in the growth in our number of seats and corresponding page views, and revenues
generated from the sales of information technology products and the provision of
local content and other Internet services associated with WORLD.com, which we
commenced during the first quarter of 2000. Our members established
approximately 2.3 million seats during the third quarter of 2000 as compared to
2.2 million in the third quarter of 1999. The cumulative total of seats
established approximates 20 million as of September 30, 2000, as compared to 8.5
million at September 30, 1999.
Business messaging revenues for the three and nine months ended September 30,
2000 were $8.8 million and $20.9 million respectively. Business messaging
revenues for both the three and nine month periods ended September 30, 1999 were
$569,000. Business messaging revenues were derived from facsimile transmission
services including email to fax, fax to email, enhanced fax, broadcast services;
Internet email services, consisting of services that enable networks to connect
to the Internet, email hosting services and email message management services
including virus scanning, attachment control, spam control, legal disclaimers
and real time Web-based reporting and collaboration, software and services such
as group calendar, document sharing and project management; and sales of
software licenses.
Consumer revenues for the third quarter of 2000 were $6.3 million as compared to
$2.7 million in the third quarter of 1999. Consumer revenue for the nine months
ended September 30, 2000 was $17.2 million as compared to $5.7 million for the
comparable period in 1999. Advertising, permission marketing and e-commerce
revenues for the three and nine months ended September 30, 2000 were $6.1
million and $16.5 million as compared to $2.5 million and $5.3 million in the
comparable periods of 1999. Included in advertising revenues are barter revenues
of $707,000 and $107,000 for the three months ended September 30, 2000 and 1999,
respectively, and $1 million and $361,000 for the nine months ended September
30, 2000 and 1999, respectively. Revenues from subscription services were
$186,000 and $160,000 for the three months ended September 30, 2000 and 1999,
respectively and $538,000 and $434,000 for the nine months ended September 30,
2000 and 1999 respectively.
Domain development revenues were $3.5 million and $4.9 million for the three and
nine months ended September 30, 2000. These revenues were generated by WORLD.com
and consist primarily of sales of information technology products. Revenues were
also generated from system integration and website development for companies,
advertising and commissions for booking travel arrangements. There were no
domain development revenues during 1999.
Other revenues from the sale or lease of domain names and consulting revenue was
$12,000 and $412,000 during the three and nine months ended September 30, 2000
as compared to $164,000 and $289,000 for the comparable periods in 1999.
As previously mentioned, we announced our intention to sell our advertising
network business and focus exclusively on its established outsourced messaging
business. We also announced that as a result of our decision to focus on its
outsourced messaging business, we are streamlining the organization, taking
advantage of lower cost areas and further integrating our technological and
operational infrastructures. Additionally, we announced that we will sell all
assets not related to our core outsourced messaging business, including our
Asia.com Inc. and, India.com Inc. subsidiaries, and our portfolio of
category-defining domain names. Upon the completion of the sale of these assets
we anticipate that future revenues will be derived from our outsourced business
messaging operations.
OPERATING EXPENSES
COST OF REVENUES
Cost of revenues for the three and nine months ended September 30, 2000 was
$16.6 million and $40.3 million, as compared to $4.2 million and $7.7 million
for the comparable periods in 1999. Cost of revenues consists primarily of costs
incurred in the delivery and support of our email and facsimile services,
including depreciation of equipment used in our computer systems, the cost of
telecommunications services including local access charges, leased network
backbone circuit costs and long distance domestic and international termination
charges, 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
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transactions, amortization of certain domain assets, and the cost of domain
names that have been sold in cost of revenues. During 1999 and through the first
nine months of 2000, we purchased and leased significant amounts of capital
equipment for our computer systems to accommodate the current growth and in
anticipation of the future growth in the number of e-mailboxes. As a result,
depreciation expense increased significantly during the period. Cost of revenues
was also significantly impacted during the first nine months of 2000 as compared
to the first nine months of 1999 due to our entry into the business messaging
market and the development of WORLD.com. In addition, we substantially increased
headcount in the technology related departments during the first nine months of
2000 as compared to the first nine months of 1999. We anticipate that costs of
revenue will decrease upon the sale of our advertising network and domain
properties, but will continue to increase in the outsourced messaging business.
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SALES AND MARKETING EXPENSES
Sales and marketing expenses were $18.4 million and $50.2 million for the three
and nine months ended September 30, 2000 as compared to $9.6 million and $17.1
million for the comparable periods in 1999. The $8.8 million and $33.1 million
increase was primarily due to the expansion of sales and marketing efforts and
the establishment of partner agreements with third party Web sites. The primary
component of sales and marketing expenses are customer acquisition costs. The
costs related to customer acquisitions paid in cash were $3.0 million and $8.3
million in the three and nine months ended September 30, 2000 as compared to
$2.4 million and $5.4 million in the comparable periods of 1999. The costs
related to customer acquisitions through the issuance of Class A common stock
were none and $2.5 million during the three and nine months ended September 30,
1999, respectively. The Company is no longer incurring customer acquisition
costs through the issuance of stock. An amendment to the CNET, Snap and NBC
agreement signed during the second quarter of 1999 eliminated the monthly
issuance of shares, but required us to issue the remaining shares under the
contract simultaneously with our initial public offering. The value of these
shares ($18.1 million) is being amortized over the subsequent two-year period.
We recorded approximately $2.3 million and $6.9 million of amortization expense
in connection with the issuance of these shares during the three and nine months
ended September 30, 2000, respectively, as compared to $2.3 million and $2.7
million in the comparable periods of 1999. We also recorded approximately
$49,000 and $271,000 in amortization of partner advances of shares to CNN during
the three and nine-month period ended September 30, 2000 and $184,000 and
$406,000 in the comparable periods in 1999, respectively. As previously
mentioned, the Company expensed the remaining unamortized balance of
approximately $3.3 million related to the AT&T warrants during the first quarter
of 2000. Also included in this category are advertising expenses related to the
launch of our advertising campaign to build our brand. The remainder of the
costs in this category relates to salaries and commissions for sales, marketing,
and business development personnel. Sales and marketing costs were also impacted
during the three and nine-month periods ended September 30, 2000 as a result of
our entry into the business messaging market and the development of WORLD.com.
We anticipate that sales and marketing costs will decrease in the future based
upon our strategy of focusing on our outsourced messaging business.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $13.6 million and $32.0 million during
the three and nine months ended September 30, 2000 as compared to $3.2 million
and $7.2 million during the comparable periods of 1999. The $10.4 million and
$24.8 million increase was attributable to increased personnel and related
costs, including recruiting fees, and increased facilities costs. At September
30, 2000, the number of employees was 1,462, as compared to 202 at September 30,
1999. General and administrative expenses consist primarily of compensation and
other employee costs including customer support and other corporate functions as
well our provision for doubtful accounts and overhead expenses. In addition,
general and administrative expenses increased during the three and nine months
ended September 30, 2000 as compared to the comparable periods of 1999 due to
our entry into the business messaging market and the development of WORLD.com.
In connection with the Mauritius acquisition, we incurred a $1.8 million charge
related to the issuance of 104,347 shares of Class A common stock as
compensation for services performed and $200,000 cash and an additional $200,000
payable in Mail.com Class A common stock as compensation for employees. We
anticipate that general and administrative costs will decrease upon the sale of
our advertising network and domain properties, but will continue to increase in
the outsourced messaging business.
PRODUCT DEVELOPMENT
Product development costs were $4.7 million and $13.9 million during the three
and nine months ended September 30, 2000 as compared to $1.9 million and $4.6
million in comparable periods of 1999. The $2.8 million and $9.3 million
increase was primarily due to increased staffing and consulting costs to add new
features, design new services and upgrade existing services. Product development
costs consist primarily of personnel and consultants' time and expense to
research, conceptualize, and test product launches and enhancements to e-mail
products and our partners' and our email web site. Additionally, product
development costs have increased during the three and nine-month periods ended
September 30, 2000 as compared to the comparable periods of 1999 due to our
entry into the business messaging market and development of WORLD.com. We
anticipate that product development costs will decrease upon the sale of our
advertising network and domain properties, but will continue to increase in the
outsourced messaging business.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS AND WRITE-OFF OF ACQUIRED
IN-PROCESS TECHNOLOGY
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Amortization of goodwill and other intangible assets and the write-off of
acquired in-process technology resulted from the acquisitions made during the
first nine months of 2000 and the second half of 1999. Goodwill represents the
excess of the purchase price over the fair market value of the net assets
acquired and is being amortized over a 3 to 5 year period. Purchased in-process
technology was none and $7.7 million for the three and nine months ended
September 30, 2000 as compared to $900,000 for both the three and nine months
ended September 30, 1999. Amortization of goodwill and other intangible assets
for the three and nine months ended September 30, 2000 was $17.8 and $42.3
million. Amortization of goodwill and other intangible assets for both the three
and nine months ended September 30, 1999 was $725,000.
OTHER INCOME (EXPENSE), NET
Other income (expense), net includes interest income from our cash investments
and marketable securities, and interest expense related to our convertible note
offering, notes payable and capital lease obligations.
Interest income for the three and nine months ended September 30, 2000 was $1.0
million and $4.4 million as compared to $795,000 and $1.1 million during the
comparable periods of 1999. The increase in interest income in 2000 was
principally due to higher cash balances after we completed our convertible note
offering in January 2000.
Interest expense was $2.7 million and $6.8 million for the three and nine months
ended September 30, 2000 as compared to $177,000 and $355,000 in the comparable
periods of 1999. The increase was primarily due to interest related to our
convertible note offering as well as new capital lease obligations. Most of our
computer equipment purchases are financed under capital leases.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have obtained financing through private placements of
equity securities and our initial public offering including the exercise of the
over-allotment option and more recently through our convertible debt offering.
In March 1999, we received net proceeds of $15.2 million from the sale of our
Class E convertible preferred stock. In June 1999, we received net proceeds of
approximately $50.6 million from our initial public offering and the concurrent
share issuance to CNET and NBC Multimedia for the exercise of their warrants to
purchase Class A common stock. In July 1999, we received an additional $6.7
million when the underwriters exercised their over-allotment option. In January
2000, we received net proceeds of $96.1 million from our convertible debt
offering. We also finance the majority of our capital expenditures through lease
lines.
On March 30, 2000, we entered into a $12 million Master Lease Agreement with
GATX Technology Services Corporation ("GATX") for equipment lease financing
(hardware and software). Terms of individual leases signed under the Master
Lease Agreement will call for a 36-month lease term, with rent payable monthly
in advance. The effective interest rate is 12.1% and is adjustable based on
prime. GATX holds a first priority security interest in the equipment under the
facility. For certain leases entered into under the $12 million master lease
agreement, the Company has exercised an option to extend the term for an
additional 24 months.
Under terms of the Master Lease Agreement, we have the option to purchase the
equipment at the then fair market value of the equipment at lease expiration. At
September 30, 2000 approximately $9.6 million was outstanding.
On March 31, 2000, we entered into a $2 million Master Lease Agreement with
Leasing Technologies International, Inc. The lease line provides for the lease
of new computers, office automation and other equipment. Terms of individual
leases signed under the Master Lease Agreement call for a 36-month lease term,
rent payable monthly in advance. The effective interest rate is 14.7% and is
adjustable based on prime. In addition, a security deposit equal to one months
rent is payable at individual lease inception.
Under terms of the Master Lease Agreement at the end of the lease term, the
Company has the option to either purchase, return the equipment, or extend the
lease term by twelve months, at a set percent of the original price. In the
latter case, the lease terms provide for a discounted monthly rental and a
bargain purchase option at the expiration of the twelve-month extension.
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Net cash used in operating activities was $116.8 million for the nine months
ended September 30, 2000, and $8.2 million for the nine months ended September
30, 1999. Cash used in operating activities was impacted by the net loss from
operations, offset in part by a write-off of in-process technology, non-cash
charges principally related to partner agreements, depreciation and amortization
of fixed assets, amortization of goodwill and other intangible assets purchases,
sales and redemptions of marketable securities, and changes in operating assets
and liabilities. In 1999, cash used in operating activities was impacted by the
net loss from operations, offset in part by non-cash charges related to partner
and vendor service agreements, depreciation and amortization of fixed assets and
intangible assets and changes in operating assets and liabilities.
Net cash used in investing activities was $13.0 million for the nine months
ended September 30, 2000 and $18.8 million for the nine months ended September
30, 1999. Net cash used in investing activities consisted primarily of purchases
of property and equipment and purchases of investments. In 1999, net cash used
in investing activities was impacted by purchases of property and equipment and
cash paid for acquisition, net of cash acquired partially offset by proceeds
from sale and leaseback.
Net cash provided by financing activities was $104.9 million for the nine months
ended September 30, 2000 and $72.1 million for the nine months ended September
30, 1999. During the nine months ended September 30, 2000, $96.1 million was
received from our convertible note offering, net of issuance costs, and $16.2
million was received from the sale of a subsidiary interest. During the first
nine months of 1999, $57.8 million was received from our initial public
offering, the exercise of Class A common stock warrants from CNET and NBC
Multimedia and from the exercise of some employee stock options. Additionally,
$15.2 million was received in net proceeds from the sale of Class E preferred
stock in 1999.
At September 30, 2000, the Company maintained approximately $1.7 million in
letters of credit ("LC") with various parties. One LC approximating $1.1 million
is with a bank to secure obligations under an office space lease. The LC expires
on January 31, 2001 and will automatically renew for additional periods of one
year but not beyond January 31, 2006. The bank may choose not to extend the LC
by notifying the Company not less than 30 days but not more than 60 days prior
to an expiry date. The Company is required to maintain a $1 million balance on
deposit with the bank in an interest bearing account, which is included in
restricted investments in the accompanying consolidated balance sheet. The other
LC's are related to the leasing of telecommunications equipment and for
consulting services. Through September 30, 2000, there were no drawings under
the LC.
At September 30, 2000, we had $12.0 million of cash and cash equivalents and
$53.3 million of marketable securities. Our principal commitments consist of a
convertible note, notes payable, obligations under capital leases, domain asset
purchase obligations, and commitments for capital expenditures. Based on our
existing capital resources and revenue streams, we expect that we will require
additional capital to fund our operations and capital needs through the year
2001. As previously mentioned, we announced our intention to sell our
advertising network business and focus exclusively on our established outsourced
messaging business. We have retained SG Cowen to assist us with this sale. We
also announced that as a result of our decision to focus on our outsourced
messaging business, we are streamlining the organization, taking advantage of
lower cost areas and further integrating our technological and operational
infrastructures. Additionally, we announced that we will seek to sell all assets
not related to our core outsourced messaging business, including our Asia.com
Inc. and India.com Inc. subsidiaries, and our portfolio of domain names. No
assurance can be given that the company will be successful in selling these
businesses or otherwise raising the amount of capital needed to fund our
operations. The proceed from the sale of these assets may not supply enough cash
to fund our operations, and we may experience delays in the completion of these
sales or receiving or converting into cash the consideration received in these
sales. We will need to obtain additional equity or debt financing in the future.
Sales of additional equity securities could result in additional dilution to our
stockholders. In addition, on an ongoing basis, we continue to evaluate
potential acquisitions to complement our business messaging services. In order
to complete these potential acquisitions, we may need additional equity or debt
financing in the future.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. During June 1999, SFAS No. 137 was issued which delayed the
effective date of SFAS No. 133. SFAS No. 137 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to affect the Company, as it does not have any derivative
instruments or hedging activities.
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In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition In Financial Statements" ("SAB No. 101") which summarizes certain of
the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company has adopted the
accounting provisions of SAB No. 101 as of April 1, 2000.
In March 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which
provides guidance on when to capitalize versus expense costs incurred to develop
a web site. The Company has elected early adoption of this EITF and has
implemented the provisions as of April 1, 2000.
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ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
Market Risk - Our accounts receivables are subject, in the normal course of
business, to collection risks. We regularly assess these risks and have
established policies and business practices to protect against the adverse
effects of collection risks. As a result we do not anticipate any material
losses in this area.
Interest Rate Risk - Investments that are classified as cash and cash and
equivalents have original maturities of three months or less. Changes in the
market's interest rates do not affect the value of these investments. Marketable
securities are comprised of U.S. Treasury Notes and are classified as
available-for-sale and subject to interest rate fluctuations. At September 30,
2000, unrealized gains of approximately $63,000 were recorded.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Before you invest in our Class A common stock, you should carefully
consider the risks described below and the other information included or
incorporated by reference in this prospectus.
WE HAVE ONLY A LIMITED OPERATING HISTORY, WE ARE INVOLVED IN A NEW AND UNPROVEN
INDUSTRY AND WE HAVE DETERMINED TO FOCUS ON OUR CORE OUTSOURCED MESSAGING
BUSINESS.
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. In February 2000, we acquired NetMoves Corporation, a
provider of a variety of Internet document delivery services to businesses. In
March 2000, we formed WORLD.com to develop and operate our domain name
properties as independent Web sites. We recently announced our intention to
focus exclusively on our outsourced messaging business and to sell all assets
not related to this business. Our success will depend in part upon the
development of a viable market for fee-based Internet messaging and
collaboration services and outsourcing, our ability to compete successfully in
those markets and our ability to successfully sell our non-core assets on
favorable terms. 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 SUBSTANTIAL 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 attributable to common stockholders of
$143.7 million for the nine months ended September 30, 2000. We had an
accumulated deficit of $221.3 million as of September 30, 2000. We expect to
continue to incur substantial net losses and negative operating cash flow for
the foreseeable future. We have begun and may 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 intend to continue to make strategic acquisitions and
investments, which may result in significant amortization of goodwill and other
expenses. 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 will increase.
IF WE ARE UNABLE TO RAISE NECESSARY CAPITAL IN THE FUTURE, WE MAY BE UNABLE TO
FUND NECESSARY EXPENDITURES.
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 anticipated expenditures or future expansion, develop new
or enhanced services, respond to competitive pressures, promote our brand name
or acquire complementary businesses, technologies or services. Some of our
stockholders 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.
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WE INTEND TO SELL ALL OF OUR ASSETS NOT RELATED TO OUR CORE OUTSOURCED MESSAGING
BUSINESS BUT MAY EXPERIENCE DIFFICULTY COMPLETING ANY OR ALL OF SUCH SALES ON
FAVORABLE TERMS OR AT ALL.
We recently announced our intention to sell all of our non-core assets,
including our advertising network business, our Asia.com, Inc. and India.com,
Inc. subsidiaries and our portfolio of Internet domain names. We cannot assure
you that we will be able to sell all or any of these assets on favorable terms
or at all. We also cannot assure you as to the timing or the terms and
conditions of the sale of any of these assets or the form or amount of
consideration (if any) that may be received. The realizable value of these
assets may ultimately prove to be less than the carrying value currently
reflected in our consolidated financial statements. Moreover, if the sales are
not successfully completed, the market price of our common stock may decline to
the extent that the current market price reflects a market assumption that such
sales will be successfully completed. To the extent that we receive non-cash
consideration in any of these sales, we may not be able to liquidate this
consideration or otherwise turn it into cash for a period of time after we
receive it or at all.
WE INTEND TO CONTINUE TO ACQUIRE, OR MAKE STRATEGIC INVESTMENTS IN, OTHER
BUSINESSES AND ACQUIRE OR LICENSE TECHNOLOGY AND OTHER ASSETS AND WE MAY HAVE
DIFFICULTY INTEGRATING THESE BUSINESSES OR GENERATING AN ACCEPTABLE RETURN.
We have completed a number of acquisitions and strategic investments since
our initial public offering. For example, we acquired NetMoves Corporation, a
provider of a variety of Internet document delivery services to businesses, and
The Allegro Group, Inc., a provider of email and email related services, such as
virus blocking and content screening, to businesses. We also made two
investments in 3Cube, Inc., a company specializing in Internet fax and other
technology, and acquired TCOM, Inc., a software technology consulting firm, and
Lansoft U.S.A., Inc., a provider of email management, e-commerce and Web hosting
services to businesses. We also recently acquired technology related assets from
IntraACTIVE, Inc. (now named Bantu, Inc.) and made a strategic investment in
Bantu and committed to make additional investments in them. We will continue our
efforts to acquire or make strategic investments in businesses and to acquire or
license technology and other assets, and any of these acquisitions may be
material to us. We cannot assure you that acquisition or licensing opportunities
will continue to be available on terms acceptable to us or at all. Such
acquisitions involve risks, including:
- inability to raise the required capital;
- difficulty in assimilating the acquired operations and personnel;
- inability to retain any acquired member or customer accounts;
- disruption of our ongoing business;
- the need for additional capital to fund losses of acquired
businesses;
- inability to successfully incorporate acquired technology 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 impair our
operating results by diluting our stockholders' equity, causing us to incur
additional debt or requiring us to amortize acquisition expenses and acquired
assets.
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THE ISSUANCE OF OUR CONVERTIBLE SUBORDINATED NOTES SIGNIFICANTLY INCREASED OUR
LEVERAGE.
In January 2000, we issued $100 million of convertible subordinated notes
due 2005. The sale of our convertible notes has increased our debt as a
percentage of total capitalization. We may incur substantial additional
indebtedness in the future. The level of our indebtedness, among other things,
could (1) make it difficult for us to make payments on our convertible notes,
(2) make it difficult to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements or other
purposes, (3) limit our flexibility in planning for, or reacting to changes in,
our business, and (4) make us more vulnerable in the event of a downturn in our
business.
WE MAY BE UNABLE TO PAY DEBT SERVICE ON OUR CONVERTIBLE NOTES AND OTHER
OBLIGATIONS.
We had an operating loss and negative cash flow during the nine months
ended September 30, 2000 and 1999 and expect to incur substantial losses and
negative cash flows for the foreseeable future. Accordingly, cash generated by
our operations would have been insufficient to pay the amount of interest
payable annually on our convertible notes. We cannot assure you that we will be
able to pay interest and other amounts due on our convertible notes on the
scheduled dates or at all. If our cash flow and cash balances are inadequate to
meet our obligations, we could face substantial liquidity problems. We cannot
assure you that our proposed sale of our non-core assets will not negatively
impact our cash flow available to service the notes. If we are unable to
generate sufficient cash flow or otherwise obtain funds necessary to make
required payments, or if we otherwise fail to comply with any covenants in our
indebtedness, we would be in default under these obligations, which would permit
these lenders to accelerate the maturity of the obligations and could cause
defaults under our indebtedness. Any such default could have a material adverse
effect on our business, results of operations and financial condition. We cannot
assure you that we would be able to repay amounts due on our convertible notes
if payment of the convertible notes were accelerated following the occurrence of
an event of default under, or certain other events specified in, the indenture
for the convertible notes, including any deemed sale of all or substantially all
of our assets.
WEBMAIL AND INTERNET MESSAGING AND COLLABORATION SERVICES OUTSOURCING MAY NOT
PROVE TO BE VIABLE BUSINESSES.
We operate in an industry that is only beginning to develop. Our success
will depend on the development of viable markets for the outsourcing of
messaging and collaboration services to businesses, Web sites, ISPs and other
organizations. Our success will also require the widespread acceptance by
consumers of Webmail. For a number of reasons, each of these developments is
somewhat speculative:
There are significant obstacles to the development of a sizable market for
Internet messaging and collaboration services 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, businesses and
organizations deciding whether to outsource their email or fax services or to
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. We provide a range of email and fax services to
businesses and organizations. We currently generate revenues in the business
market primarily from email service fees related to our email system connection
services, email monitoring services and fax transmission services. While we
intend to focus exclusively on our outsourced messaging services, we cannot be
sure that we will be able to expand our business customer base, attract
additional customers in other segments or acquire a sufficient base of customers
for whom we would provide hosting and other outsourced services. In addition,
the sales cycle for hosting services is lengthy and could delay our ability to
generate revenues in the business email services market. As part of our business
strategy, we plan to offer additional outsourced messaging and other services to
existing customers. We cannot assure you that these customers will purchase
these services or will purchase them at prices that we wish to charge.
Furthermore, we may not be able to generate significant additional revenues by
providing our outsourced email and collaboration services to businesses.
Standards for pricing in the business email and collaboration services market
are not yet well defined and some businesses, schools and other organizations
may not be willing to pay the fees we wish to charge. We cannot assure you that
the fees we intend to charge will be sufficient to offset the related costs of
providing these services.
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 about 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
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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 an advertising
supported 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. In August 1999, we discontinued
charging our members for virtually all of our premium domain names. Moreover, if
our competitors choose to provide POP3 access, greater storage capacity or other
services without charge or as part of a bundled offering, we may be forced to do
the same.
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, the emerging nature of our industry
and our planned sale of our non-core assets, 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:
- incurrence of other cash and non-cash accounting charges, including
charges resulting from acquisitions;
- non-cash charges associated with repriced stock options;
- system outages, delays in obtaining new equipment or problems with
planned upgrades;
- disruption or impairment of the Internet;
- demand for outsourced messaging services;
- attracting and retaining customers and maintaining customer
satisfaction;
- introduction of new or enhanced services by us or our competitors;
- changes in our pricing policy or that of our competitors;
- changes in governmental regulation of the Internet and messaging in
particular; and
- general economic and market conditions.
Other such factors in our non-core businesses include:
- incurrence of additional expenditures without receipt of offsetting
revenues as a result of the development of our domain name
properties;
- 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; and
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- seasonality in the demand for advertising, or changes in our own
advertising rates or advertising rates in general, both on and off
the Internet.
WE EXPECT SIGNIFICANT STOCK BASED COMPENSATION CHARGES RELATED TO
REPRICED OPTIONS.
In light of the decline in our stock price and in an effort to retain our
employee base, on November 14, 2000, the Company offered to certain of its
employees, officers and directors, other than Gerald Gorman, the right to
reprice certain outstanding stock options to an exercise price equal to the
closing price of the Company's Class A common stock on NASDAQ on November 14,
2000. Options to purchase an aggregate of up to 9,000,000 shares are subject to
repricing. The repriced options will vest at the same rate that they would have
vested under their original terms except that shares issuable upon exercise of
these options may not be sold until after November 14, 2001. In March 2000,
Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25" ("Interpretation"). Among other issues,
this Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. As a result, under the Interpretation, stock options repriced after
December 15, 1998 are subject to variable plan accounting treatment. This
guidance requires the Company to remeasure compensation cost for outstanding
repriced options each reporting period based on changes in the market value of
the underlying common stock. Depending upon movements in the market value of the
Company's common stock, this accounting treatment may result in significant non
cash compensation charges in future periods.
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.
In offering email services to businesses, schools and other organizations, we
compete with MCI Mail, USA.NET, Critical Path and others. Our current and
prospective competitors in the facsimile transmission services market generally
fall into the following groups: telecommunication companies, such as AT&T,
WorldCom, Sprint, the regional Bell operating companies and telecommunications
resellers, ISPs, such as UUnet and NETCOM On-Line Communications Services, Inc.,
on-line services providers, such as Microsoft and America Online and direct fax
delivery competitors, including Premiere Document Distribution (formerly Xpedite
Systems, Inc.) and IDT Corporation. In offering outsourced Webmail services to
Web sites and ISPs, we compete with email service providers such as USA.NET,
Inc., Critical Path, Inc. and CommTouch Software, Ltd. In offering Webmail
services directly to consumers, our and our partners' competitors include such
large and established companies as Microsoft, America Online, Yahoo!,
Excite@Home, Disney (which owns the GO Network) and Lycos. Microsoft offers free
Webmail through its Hotmail Web site, and has dominant market share with over 40
million emailboxes according to Microsoft. See "Business - Competition."
Some of our competitors provide a variety of Web-based services such as
Internet access, browser software, homepage design and Web site hosting, 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.
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 for which we now
charge our members at or below cost or for free. If our competitors choose to
offer premium or other services at or below cost or for free, we may be forced
to do the same for our comparable services. If this occurs, our ability to
generate revenues from our subscription services would be materially impaired.
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.
TO GENERATE INCREASED REVENUES FROM OUR CONSUMER SERVICES, WE WILL HAVE TO
SUBSTANTIALLY INCREASE THE NUMBER OF OUR MEMBERS, WHICH WILL BE DIFFICULT TO
ACCOMPLISH.
To achieve our objective of generating revenues through our consumer email
services, we will have to retain our existing members and acquire a large number
of new members. We have relied upon strategic alliances with third party Web
sites to attract the majority of our current members.
We believe that our success in our consumer business 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. We believe, however, that the
opportunity to form alliances with third party Web sites that are capable of
producing a substantial number of new members is diminishing. Many third party
Web sites that we have identified as potential sources for significant
quantities of new members already offer their visitors an email service similar
to ours. We cannot assure you that we will be able to enter into successful
alliances with third party Web sites or ISPs on acceptable terms or at all.
OUR CONTRACTS WITH OUR WEB SITE AND ISP PARTNERS REQUIRE US TO INCUR SUBSTANTIAL
EXPENSES.
In nearly all cases our Web site and ISP partners do not pay us to provide
our services. We bear the costs of providing our services. We currently generate
revenues by selling subscription services to our members and by selling
advertising space to advertisers who want to target these members. We pay the
partner a share of the revenues we generate. In addition, a number of
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our contracts have required 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%. We intend to reduce or eliminate the payment of these
fees or minimum payments made without regard to the revenues realized. We cannot
assure you that we will be able to renew partner contracts on the basis of
reducing or eliminating these payments or if renewed that the revised terms of
such contracts will be favorable to us.
THE FAILURE TO RENEW OUR PARTNER CONTRACTS, WHICH HAVE LIMITED TERMS, CAN RESULT
IN THE LOSS OF MEMBERS AND IMPAIR OUR CREDIBILITY.
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. For example, XOOM combined with Snap, which is jointly owned by CNET
and NBC Multimedia, to create a new Internet services company named NBC
Internet, Inc., or NBCi. XOOM offers a free email service at its xoom.com Web
site. We cannot assure you that these partners will not seek to terminate their
contractual relationships with us. A partner may also fail to renew our contract
with it because we decide not to continue making payments to it without regard
to the revenue that we generate from their site. The loss of a partner can be
very disruptive for us for a number of reasons:
We may 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. As of
September 30, 2000, we estimate that approximately 28% of our established
emailboxes 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. Even those members who have selected addresses using
our domain names may find it more convenient to switch to whatever replacement
email service may be available at the partner's site. The loss of members due to
expiration or non-renewal of partner contracts may materially reduce our
revenues. Moreover, as of September 30, 2000, we estimate that approximately 16%
of our emailboxes established are at the email.com domain. If CNET and NBCi
exercise their rights to terminate our agreement, which includes the right to
terminate for convenience after May 13, 2001, we would be obligated to transfer
the email.com domain name and related member information to them. If CNET and
NBCi terminate for convenience, they would be obligated to pay us the greater of
$5.0 million or 120% of the fair market value of the email.com user data based
on the projected economic benefit of the users and either return to us the
shares that we issued to them for the establishment of emailboxes or pay us the
then fair market value of these shares. If CNET and NBCi terminate for other
reasons, the amount of compensation they must pay to us varies depending on the
reason for termination. NBC Multimedia may elect to exercise similar rights
relating to email.com emailboxes established through their sites under our
agreement with them.
Losing relationships with prominent partners can impair our credibility
with other partners and with advertisers. We believe that partnerships with Web
sites and ISPs that have prominent brand names help give us credibility with
other partners and with advertisers. The loss of our better-known Web site and
ISP partners could damage our reputation and adversely affect the advertising,
direct marketing, e-commerce and subscription rates we charge.
BECAUSE WE ARE DEPENDENT ON A SMALL NUMBER OF PARTNER SITES FOR A SUBSTANTIAL
PERCENTAGE OF OUR ANTICIPATED NEW MEMBERS, A DISRUPTION IN OUR RELATIONSHIP WITH
ANY OF THESE PARTNERS OR A DECREASE IN TRAFFIC AT ANY OF THESE SITES COULD
REDUCE OUR SUBSCRIPTION REVENUES AND ADVERTISING RELATED REVENUES.
Most of our partner sites, including most of those with well-known brand
names, do not generate significant numbers of new emailboxes. The following four
partners accounted for 38% of our new emailboxes established in September 2000:
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<TABLE>
<CAPTION>
PERCENTAGE
OF NEW DATE THAT OUR
E-MAILBOXES CONTRACT WITH
IN THE PARTNER
PARTNER SEPTEMBER 2000 EXPIRES
-------- -------------- ------------------
<S> <C> <C>
Juno................................................. 13% December 2001
NBCi................................................. 9% *
iWon................................................. 9% Expired
EarthLink............................................ 7% April 2001
</TABLE>
* NBCi may terminate its contracts for convenience after May 13, 2001.
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 revenues could decrease and the growth of our
business would be impeded. Lower than anticipated traffic could result in
decreased advertising related revenues because those revenues are in part
dependent on the number of members and the level of member usage. Our contract
with iWon will not renew upon expiration.
OUR RAPID EXPANSION IS STRAINING OUR EXISTING RESOURCES, AND IF WE ARE NOT ABLE
TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS AND OPERATING RESULTS WILL
SUFFER.
We have aggressively expanded our operations in anticipation of an
increasing number of strategic alliances and a corresponding increase in the
number of members as well as development of our business customer base. We have
entered into agreements with additional partners and have upgraded our email
services. We have also developed the technology and infrastructure to offer a
range of services in the business Internet messaging and collaboration services
market. 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.
IT IS DIFFICULT TO RETAIN KEY PERSONNEL AND ATTRACT ADDITIONAL QUALIFIED
EMPLOYEES IN OUR BUSINESS AND THE LOSS OF KEY PERSONNEL AND THE BURDEN OF
ATTRACTING ADDITIONAL QUALIFIED EMPLOYEES MAY IMPEDE THE OPERATION AND GROWTH OF
OUR BUSINESS AND CAUSE OUR REVENUES TO DECLINE.
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 Chairman, Thomas Murawski, our Chief
Executive Officer, Brad Schrader, our President, Debra McClister, our Executive
Vice President and Chief Financial Officer, and Sam Kline, our Chief Operating
Officer. The loss of the services of Messrs. Gorman, Murawski, Schrader or Kline
or of Ms. McClister, or several other key employees, would impede the operation
and growth of our business. The success of our non-core businesses depends on
the continued services of Gary Millin, Chief Executive Officer of World.com, and
Courtney Nichols, President of Mail.com Personal Communications Services.
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. We will also need to hire and retain additional
experienced and skilled technical personnel in order to meet the increasing
technical demands of our expanding business. 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.
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The performance of our computer systems is critical to the quality of
service we are able to provide to our members and to our business customers. If
our services are unavailable or fail to perform to their 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 several 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 NEED TO UPGRADE OUR COMPUTER SYSTEMS TO ACCOMMODATE INCREASES IN EMAIL AND
FAX TRAFFIC AND TO ACCOMMODATE INCREASES IN THE USAGE OF OUR COLLABORATION
SERVICES, 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 computer systems as the number of
members and customers and the amount of information they wish to transmit
increases and as their requirements change, and as we develop our business
messaging and collaboration services. Because we have only been providing our
services for a limited time, and because our computer systems have not been
tested at greater capacities, we cannot guarantee the ability of our computer
systems to connect and manage a substantially larger number of members or meet
the needs of business customers at high transmission speeds. If we cannot
provide the necessary service while maintaining expected performance, our
business would suffer and our ability to generate revenues through our services
would be impaired.
The expansion and adaptation of our computer systems 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 computer systems 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 COMPUTER SYSTEMS MAY FAIL AND INTERRUPT OUR SERVICE.
Our members and customers have in the past experienced interruptions in our
services. 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 computer system failures. In
particular, we have experienced outages and delays in email delivery and access
to our email service related to disk failures, the implementation of changes to
our computer system, insufficient storage capacity and other problems. These
failures have resulted and may continue to result in significant disruptions to
our service. Although we plan to install backup computers and implement
procedures to reduce the impact of future malfunctions in these systems, the
presence of these and other single points of failure in our network increases
the risk of service interruptions. Some aspects of our computer systems are not
redundant. These include our member database system and our email storage
system, which stores emails and other data for our members. In addition,
substantially all of our computer and communications systems relating to our
email services are currently located in our primary data centers in Manhattan,
Edison, New Jersey and Dayton, Ohio. We currently do not have alternate sites
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 if any of our
primary data centers was severely damaged or destroyed. We might also lose
stored emails and other member or customer files, causing significant member
dissatisfaction and possibly giving rise to claims for monetary damages.
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 business and 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 and business customers.
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 computer systems on a timely basis or without degrading the
performance of our existing services. We cannot be sure that, once integrated,
new technology will
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function as expected. Delays in introducing effective new 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.
If we are unable to maintain the security of our service, our reputation
and our ability to attract and retain business customers and members may suffer,
and we may be exposed to liability. Third parties may attempt to breach our
security or that of our business customers whose networks we may maintain or for
whom we provide services to or that of our members. If they are successful, they
could obtain information that is sensitive or confidential to a business
customer or otherwise disrupt a business customer's operations or obtain our
members' confidential information, including our members' profiles, passwords,
financial account information, credit card numbers, stored email or other
personal information. Our business customers or members may assert 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
expose us to liability and may adversely affect our ability to attract and
retain members and develop our business market.
Security measures taken by others may interfere with the efficient
operation of our service, which may harm our reputation, adversely impact our
ability to attract and retain members and impede the delivery of advertisements
from which we currently generate revenues. "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, Web sites, ISPs and other organizations may block email from all or
some of our members.
OUR DEPENDENCE ON LICENSED TECHNOLOGY EXPOSES US TO THE RISK THAT WE MAY NOT BE
ABLE TO INTEGRATE OUR TECHNOLOGY, WHICH MAY RESULT IN LESS DEVELOPMENT OF OUR
OWN TECHNOLOGY AND MAY INCREASE OUR COSTS.
We license a significant amount of technology from third parties, including
technology related to our Web servers, email monitoring services, billing
processes, database and Internet fax services. 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, a greater need to generate
revenues sufficient to offset associated license costs, and the possible
termination of or failure to renew an important license by the third-party
licensor.
IF THE INTERNET AND OTHER THIRD-PARTY NETWORKS ON WHICH WE DEPEND TO DELIVER OUR
SERVICES BECOME INEFFECTIVE AS A MEANS OF TRANSMITTING DATA, THE BENEFITS OF OUR
SERVICE MAY BE SEVERELY UNDERMINED.
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 and receive email
messages on behalf of our members and our business customers. We are also
affected by service outages at our partners' Web sites. If service at a
partner's site is unavailable for a period of time, we will be unable to sign up
new members and generate page views and revenue at that site during the outage.
GERALD GORMAN CONTROLS MAIL.COM AND WILL BE ABLE TO PREVENT A CHANGE OF CONTROL.
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Gerald Gorman, our Chairman, beneficially owned as of September 30, 2000
Class A and Class B common stock representing approximately 67.06% 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 our stockholders who formerly
held our preferred stock to designate a total of three 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.
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
develop our business services market and increase membership traffic on our
sites and revenues. We do not have experience with some of the types of
marketing that we are currently using. If our marketing efforts cost more than
anticipated or if we cannot increase our brand awareness, our losses will
increase and our ability to succeed will be seriously impeded.
OUR EXPANSION INTO INTERNATIONAL MARKETS IS SUBJECT TO SIGNIFICANT RISKS AND OUR
LOSSES MAY INCREASE AND OUR OPERATING RESULTS MAY SUFFER IF OUR REVENUES FROM
INTERNATIONAL OPERATIONS DO NOT EXCEED THE COSTS OF THOSE OPERATIONS.
We intend to continue to expand into international markets and to expend
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 losses will increase and our operating results will suffer. We
face significant risks inherent in conducting business internationally, such as:
- uncertain demand in foreign markets for email outsourcing, 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;
- regulatory limitations on the activities in which we can engage and
foreign ownership limitations on our ability to hold an interest in
entities through which we wish to conduct business, and
- political instability, unexpected changes in regulatory
requirements, and reduced protection for intellectual property
rights in some countries.
REGULATION OF EMAIL AND INTERNET USE IS EVOLVING AND MAY ADVERSELY IMPACT OUR
BUSINESS.
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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 restricts the types of information and content
transmitted over the Internet. Several telecommunications companies have
petitioned the FCC to regulate ISPs and online service 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.
We are subject to regulation by various state public service and public
utility commissions and by various international regulatory authorities with
respect to our fax services. We are licensed by the FCC as an authorized
telecommunications company and are classified as a "non-dominant interexchange
carrier." Generally, the FCC has chosen not to exercise its statutory power to
closely regulate the charges or practices of non-dominant carriers.
Nevertheless, the FCC acts upon complaints against such carriers for failure to
comply with statutory obligations or with the FCC's rules, regulations and
policies. The FCC also has the power to impose more stringent regulatory
requirements on us and to change its regulatory classification. There can be no
assurance that the FCC will not change its regulatory classification or
otherwise subject us to more burdensome regulatory requirements.
On August 7, 1997, the FCC issued new rules which may significantly reduce
the cost of international calls originating in the United States. Such rules are
scheduled to be phased in over a five-year period starting on January 1, 1998.
To the extent that these new regulations are implemented and result in
reductions in the cost of international calls originating in the United States,
we will face increased competition for our international fax services which may
have a material adverse effect on our business, financial condition or results
in operations.
In connection with the deployment of Internet-capable nodes in countries
throughout the world, we are required to satisfy a variety of foreign regulatory
requirements. We intend to explore and seek to comply with these requirements on
a country-by-country basis as the deployment of Internet-capable facsimile nodes
continues. There can be no assurance that we will be able to satisfy the
regulatory requirements in each of the countries currently targeted for node
deployment, and the failure to satisfy such requirements may prevent us from
installing Internet-capable facsimile nodes in such countries. The failure to
deploy a number of such nodes could have a material adverse effect on its
business, operating results and financial condition.
Our facsimile nodes and our faxLauncher service utilize encryption
technology in connection with the routing of customer documents through the
Internet. The export of such encryption technology is regulated by the United
States government. We have authority for the export of such encryption
technology other than to Cuba, Iran, Iraq, Libya, North Korea, and Rwanda.
Nevertheless, there can be no assurance that such authority will not be revoked
or modified at any time for any particular jurisdiction or in general. In
addition, there can be no assurance that such export controls, either in their
current form or as may be subsequently enacted, will not limit our ability to
distribute our services outside of the United States or electronically. While we
take precautions against unlawful exportation of our software, the global nature
of the Internet makes it virtually impossible to effectively control the
distribution of our services. Moreover, future Federal or state legislation or
regulation may further limit levels of encryption or authentication technology.
Any such export restrictions, the unlawful exportation of our services, or new
legislation or regulation could have a material adverse effect on our business,
financial condition and results of operations.
The legal structure and scope of operations of our subsidiaries in some
foreign countries may be subject to restrictions which could result in severe
limits to our ability to conduct business in these countries and this could have
a material adverse effect on our financial position, results of operations and
cash flows. We have formed WORLD.com, Inc. for the purpose of developing our
portfolio of domain names, including Asia.com and India.com. In connection with
the formation of Asia.com, Inc., we acquired eLong.com, Inc. which operates
through its wholly-owned subsidiary the Web site www.elong.com in the Peoples
Republic of China or the PRC. We have also announced that we intend to expand
our Internet messaging business in
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international markets. To the extent that we develop and operate web sites or
offer Internet messaging services in foreign countries, we will be subject to
the laws and regulations of these countries. The laws and regulations relating
to the Internet in many countries are evolving and in many cases are unclear as
to their application. For example, in India, the PRC and other countries we may
be subject to licensing requirements with respect to the Internet activities in
which we propose to engage and we may also be subject to foreign ownership
limitations or other approval requirements that preclude our ownership interests
or limit our ownership interests to up to 49% of the entities through which we
propose to conduct any regulated activities. If these limitations apply to our
activities, including our activities conducted through our subsidiaries, our
opportunities to generate revenue will be reduced, our ability to compete
successfully in these markets will be adversely affected, our ability to raise
capital in the private and public markets may be adversely affected and the
value of our investments and acquisitions in these markets may decline.
Moreover, to the extent we are limited in our ability to engage in certain
activities or are required to contract for these services from a licensed or
authorized third party, our costs of providing our services will increase and
our ability to generate profits may be adversely affected.
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.
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 have asserted and may in
the future assert infringement claims against us. We cannot be certain that our
services do not infringe issued patents. 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 services.
We have been and may continue to be subject to legal proceedings and claims
from time to time in the ordinary course of our business, including claims
related to the use of our domain names and claims of alleged infringement of the
trademarks and other intellectual property rights of third parties. Third
parties have challenged our rights to register and use some of our domain names
based on trademark principles and on the recently enacted Anticybersquatting
Consumer Protection Act. As domain names become more valuable to businesses and
other persons, we expect that third parties will continue to challenge some of
our domain names and that the number of these challenges may increase. In
addition, the existing or future laws of some countries, in particular countries
in Europe, may limit or prohibit our ability to use in those countries or
elsewhere some of our geographic names that contain the names of a city in those
countries or the name of those countries. Intellectual property litigation is
expensive and time-consuming and could divert management's attention away from
running our business.
THE SUCCESS OF OUR GLOBAL OPERATIONS IS SUBJECT TO SPECIAL RISKS AND COSTS.
We have begun, and intend to continue, to expand our operations outside of
the United States. This international expansion will require significant
management attention and financial resources. We face substantial risks in doing
business globally, including unexpected changes in regulatory requirements,
export restrictions, difficulties in staffing and managing foreign operations,
difficulties in protecting intellectual property rights, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates and exchange rate controls, difficulties in enforcing contracts and
potentially adverse
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consequences. In addition, as described elsewhere in this prospectus,
governments in foreign jurisdictions may regulate the Internet or other online
services in such areas as content, privacy, network security, encryption or
distribution, which may also affect our ability to conduct business
internationally.
A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK MAY COME ONTO THE MARKET IN THE FUTURE,
WHICH COULD DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of our common stock in the public
market could cause the market price of our Class A common stock to decline. As
of September 30, 2000, we had an aggregate of 61,616,196 shares of Class A and
Class B common stock and options to purchase 14,512,529 and warrants to purchase
1,231,233 shares of Class A common stock outstanding. As of such date,
approximately 52,657,495 shares of Class A common stock and Class B common stock
were freely tradable, in some cases subject to the volume and manner of sale
limitations contained in Rule 144. As of such date, approximately 8,958,701
shares of Class A common stock will become available for sale at various later
dates upon the expiration of one-year holding periods or upon the expiration of
any other applicable restrictions on resale. 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.
As of September 30, 2000 the holders of up to 21,211,911 shares of Class A
common stock, had the right, subject to various 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, including the shelf registration statement we are required to file
with respect to our convertible notes. 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. An undetermined number of these shares have been
sold publicly pursuant to Rule 144.
OUR STOCK PRICE HAS BEEN VOLATILE AND WE EXPECT THAT IT WILL CONTINUE TO BE
VOLATILE.
Our stock price has been volatile since our initial public offering and we
expect that it will continue to be volatile. 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. As a result of volatility in our stock price, 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.
WE INTEND TO SELL OUR ADVERTISING NETWORK BUSINESS. UNTIL A SALE OR OTHER
DISPOSITION IS COMPLETED, THE FOLLOWING RISKS WILL CONTINUE TO APPLY TO THESE
OPERATIONS:
WE HAVE ONLY LIMITED INFORMATION ABOUT OUR MEMBERS AND THEIR USAGE, WHICH MAY
LIMIT OUR POTENTIAL REVENUES.
Our ability to generate revenue from advertising related sales is directly
related to our members' activity levels and the quality of our demographic data.
To be successful in our advertising network business, we will have to increase
members' usage of our service. 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 believe that a substantial majority of our
members do not access their emailboxes regularly or at all. Moreover, we believe
that many of our emailboxes that are accessed were first established during a
recent period prior to access. 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 23% of our total
emailboxes as of September 30,
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2000, and 10% of the emailboxes that were established during September 2000. If
a disproportionate percentage of members choose either of these options, it will
adversely affect our ability to generate advertising related 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
separate individuals registering for our service, which may reduce the
advertising rates we can command.
EMAIL ADVERTISING MAY NOT PROVE TO BE VIABLE BUSINESSES.
The email advertising industry is only beginning to develop. The success of
our advertising network business will depend on the development of viable
markets for email advertising. For a number of reasons, this development is
somewhat speculative:
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, we will still need large numbers of advertisers to purchase space on
our Webmail service. We currently do not sell advertisements in connection with
our business email services.
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. Prices for banner advertisements on the Internet
have begun to fall, in part because of diminishing "click" or response rates.
Advertisers are also requesting fewer "cost per thousand advertisements" pricing
arrangements and more "cost per click" pricing, which could effectively lower
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 ability to generate
advertising related revenues.
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 seriously threaten the commercial viability of email advertising and our
ability to generate advertising revenues.
THERE ARE SIGNIFICANT OBSTACLES TO OUR ABILITY TO INCREASE ADVERTISING REVENUES.
Our success in our advertising network business will largely depend on our
ability to substantially increase our advertising related revenues, which we
currently generate only in connection with our consumer services. Several
factors will make it very difficult for us to achieve this objective:
Our contracts with our advertisers typically have terms of only one or two
months, and we may be unable to renew these contracts. For the nine months ended
September 30, 2000 and 1999, revenues from our five largest advertisers
accounted for an aggregate of 8% and 36%, respectively, 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. The loss of one of our major advertisers or our inability
to attract new advertisers would cause our revenues to decline.
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We may not be able to sell as much advertising on a "cost per thousand"
basis or to charge as much under this type of arrangement as we have in the
past. To date, we have generated a significant portion of our advertising
revenues on a "cost per thousand" basis. These agreements require the advertiser
to pay us a fixed fee for every 1,000 advertisements that we deliver to our
members. 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 action"
basis. The two types of "cost per action" contracts are "cost per click" and
"cost per conversion." 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 only when a member both
"clicks" on the advertisement and 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 advertisement that we
deliver to our members. 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 or other action. 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.
IF THE THIRD PARTY THAT WE DEPEND ON FOR THE ACTUAL DELIVERY OF THE
ADVERTISEMENTS WE SELL EXPERIENCES TECHNICAL DIFFICULTIES OR OTHERWISE FAILS TO
PERFORM, OUR REVENUES FROM ADVERTISING MAY BE ADVERSELY AFFECTED.
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 revenues from advertising 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 FACE INTENSE COMPETITION IN OUR NON-CORE BUSINESSES.
The email advertising business is, and we believe will continue to be,
intensely competitive. Some of our competitors include large and established
companies with more resources than us. 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. 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. Also, some of our competitors may offer
advertisement-free email on a subscription basis or for free, which could
adversely affect our ability to attract and retain members unless we do the
same. We may not be able to compete successfully against our current or future
competitors in the email advertising business.
Also, our domain properties developed by WORLD.com compete with the major
business and consumer portals and other providers of Internet services in the
markets in which they operate.
WE INTEND TO SELL OUR ASIA.COM, INC. AND INDIA.COM, INC. SUBSIDIARIES AND OUR
PORTFOLIO OF DOMAIN NAMES. UNTIL A SALE OR OTHER DISPOSITION IS COMPLETED, THE
FOLLOWING SPECIAL RISKS WILL CONTINUE TO APPLY TO THESE OPERATIONS:
THE LIMITED INSTALLED PERSONAL COMPUTER BASE AND HIGH COST OF ACCESSING THE
INTERNET IN CHINA AND INDIA LIMITS THE POOL OF POTENTIAL CUSTOMERS FOR ASIA.COM
AND INDIA.COM.
The market penetration rates of personal computers and on-line access in
China and India are far lower than such rates in the United States. Alternate
methods of obtaining access to the Internet, such as through cable television
modems or set-top boxes for televisions, are currently unavailable in India and
China. There can be no assurance that the number or penetration rate of personal
computers in China and India will increase rapidly or at all or that alternate
means of accessing the Internet will develop and become widely available in
China and India.
Our growth is limited by the cost to Chinese and Indian consumers of
obtaining the hardware, software and communications links necessary to connect
to the Internet in China and India. If the overall costs required to access the
Internet do not
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significantly decrease, most of China's and India's population will not be able
to afford to use our services. The failure of a significant number of additional
Chinese and Indian consumers to obtain affordable access to the Internet would
make it very difficult to execute our business plan.
We believe that wireless access to the Internet through a variety of
hand-held and other devices such as mobile phones will become increasingly
important in Asia. Accordingly, our Asia.com subsidiary has made wireless
Internet services for businesses an important part of its business focus. We
cannot assure you that wireless access to the Internet will in fact develop and
reach wide use and acceptance in Asia as we expect.
WE ARE RELYING ON ELECTRONIC COMMERCE AS A SIGNIFICANT PART OF WORLD.COM'S
FUTURE REVENUE, BUT THE INTERNET HAS NOT YET BEEN PROVEN AS AN EFFECTIVE
COMMERCE MEDIUM IN CHINA AND INDIA.
WORLD.com's revenue growth depends in part on the increasing acceptance and
use of electronic commerce in China and India. The Internet may not become a
viable commercial marketplace in Asia for various reasons, many of which are
beyond our control, including:
- inexperience with the Internet as a sales and distribution channel;
- inadequate development of the necessary infrastructure to facilitate
electronic commerce;
- concerns about security, reliability, cost, ease of deployment,
administration and quality of service associated with conducting
business over the Internet; and
- inexperience with credit card usage or with other means of
electronic payment.
UNDERDEVELOPED TELECOMMUNICATIONS INFRASTRUCTURE AND UNCLEAR TELECOMMUNICATIONS
REGULATIONS HAVE LIMITED AND MAY CONTINUE TO LIMIT THE GROWTH OF THE INTERNET
MARKET IN CHINA AND INDIA.
The telecommunications infrastructure in China and India is not well
developed. The underdeveloped Internet infrastructure in China and India has
limited the growth of Internet usage there. If the necessary Internet
infrastructure is not developed, or is not developed on a timely basis, future
growth of the Internet in China and India will be limited and our business could
be harmed.
On September 25, 2000, the Chinese government promulgated PRC
Telecommunication Regulations ("Telecom Regulations"). The Telecom Regulations
define two types of telecommunication business, basic telecommunication business
and value-added telecommunication business. The Telecom Regulations also provide
that the State Council will promulgate separate rules to regulate foreign
entities' investment and operation of telecommunication business in China. We
cannot predict the effect of the new laws and regulations to be promulgated by
the State Council in this regard.
OUR ASIA.COM BUSINESS MAY BE ADVERSELY AFFECTED BY CHINESE GOVERNMENT REGULATION
OF INTERNET COMPANIES.
China has recently begun to regulate its Internet sector by making
pronouncements or enacting regulations regarding the legality of foreign
investment in the Chinese Internet sector, the existence and enforcement of
content restrictions on the Internet and the availability of securities
offerings by companies operating in the Chinese Internet sector. There are
substantial uncertainties regarding the proper interpretation of current and
future Chinese Internet laws and regulations.
Issues, risks and uncertainties relating to Chinese government regulation
of the Chinese Internet sector include the following:
A prohibition of foreign investment in businesses providing value-added
telecommunication services, including computer information services or
electronic mail box services, may be applied to Internet businesses such as
ours. Some officials of the Chinese Ministry of Information and Industry, or
MII, have taken the position that foreign investment in the Internet sector is
prohibited.
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The MII has also stated recently that it intends to adopt new laws or
regulations governing foreign investment in the Chinese Internet sector in the
near future. If these new laws or regulations forbid foreign investment in the
Internet sector, our business in China will be severely impaired.
On September 25, 2000, the Chinese government promulgated Administrative
Measures on Internet Information Services ("Administrative Measures"). The
Administrative Measures require commercial Internet information service
providers to apply for an Internet information service value-added
telecommunication business license from the telecommunication administration
authority to be able to engage in Internet information service businesses and
activities in China. The Administrative Measures also provide that any initial
public offering and listing project or any equity or contractual joint venture
project with foreign investors by a commercial Internet information service
provider requires a prior consent from the central information industry
authority. It remains uncertain what percentage will be allowed for foreign
investment in the Internet information service business under existing laws and
regulations. We operate our business in China through our subsidiaries, and are
currently in the process of applying for an Internet information service
value-added telecommunication business license. We cannot predict whether this
application will be successful.
Under the agreement reached in November 1999 between China and the United
States concerning the United States' support of China's entry into the World
Trade Organization, or WTO, foreign investment in Chinese Internet services will
be liberalized to allow for 30% foreign ownership in key telecommunication
services, including Chinese Internet ventures, for the first year after China's
entry into the WTO (subject to certain geographic limitations), 49% in the
second year (with expanded geographic coverage) and 50% thereafter (with no
geographic limitations). The implementation of this agreement is subject to
approval by the U.S. Congress, China's completion of bilateral negotiations with
other WTO members, the multilateral negotiation of China's accession protocol
with the WTO and the completion of China's own domestic procedures for
accession. Within the United States, China's WTO accession faces opposition from
trade unions, environmentalists and human rights organization.
The MII has also stated recently that the activities of Internet content
providers are also subject to regulation by various Chinese government
authorities, depending on the specific activities conducted by the Internet
content provider. Various government authorities have stated publicly that they
are in the process of preparing new laws and regulations that will govern these
activities. The areas of regulation may include online advertising and online
news reporting. In addition, the new laws and regulations may require various
Chinese government approvals for securities offerings by companies engaged in
the Internet sector in China.
The interpretation and application of existing Chinese laws and
regulations, the stated positions of the MII and the possible new laws or
regulations have created substantial uncertainties regarding the legality of
existing and future foreign investments in, and the businesses and activities
of, Chinese Internet businesses, including our Asia.com business.
Accordingly, it is possible that the relevant Chinese authorities could, at
any time, assert that any portion or all of Asia.com's existing or future
ownership structure and businesses violates Chinese laws and regulations. It is
also possible that the new laws or regulations governing the Chinese Internet
sector that may be adopted in the future will prohibit or restrict foreign
investment in, or other aspects of, any of Asia.com's current or proposed
businesses and operations. In addition, these new laws and regulations may be
retroactively applied to Asia.com.
If Asia.com is found to be in violation of any existing or future Chinese
laws or regulations, the relevant Chinese authorities would have broad
discretion in dealing with such a violation, including, without limitation, the
following:
- levying fines;
- revoking our business license;
- requiring us to restructure our ownership structure or operations;
and
- requiring us to discontinue any portion or all of our Internet
business.
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EVEN IF ASIA.COM COMPLIES WITH CHINESE GOVERNMENTAL REGULATIONS, THE CHINESE
GOVERNMENT MAY PREVENT US FROM DISTRIBUTING, AND WE MAY BE SUBJECT TO LIABILITY
FOR, CONTENT THAT IT BELIEVES IS INAPPROPRIATE.
China has enacted regulations governing Internet access and the
distribution of news and other information. Even if we comply with Chinese
governmental regulations relating to licensing and foreign investment
prohibitions, if the Chinese government takes any action to limit or prohibit
the distribution of information through our network or to limit or regulate any
current or future content or services available to users on our network, our
Asia.com business would be harmed.
SOME OF OUR OPERATIONS ARE BASED IN INDIA, WHICH PRESENTS SPECIAL REGULATORY AND
OTHER RISKS TO OUR BUSINESS.
India has also recently begun to regulate its Internet sector by making
pronouncements or enacting regulations regarding various Internet activities in
India and the legality of foreign investment in the Indian Internet sector.
There are substantial uncertainties regarding the proper interpretation of
current and future Indian Internet laws and regulations. Issues, risks and
uncertainties relating to Indian government regulation of the Indian Internet
sector include risks similar to those in China, in particular with respect to
limitations on foreign investment.
The Indian government is attempting to liberalize this sector and has
enacted or is currently considering enacting new legislation in that regard. For
example, Press Note No. 7 (2000 series) dated July 14, 2000, permits 100%
foreign investment in business-to-business e-commerce companies, subject to the
condition that "such investing companies" divest 26% of their equity in favor of
the Indian public in five years, if "these companies" are listed in other parts
of the world. It remains unclear as to whether the referenced listing is of the
Indian subsidiary or of the investor company. For retail e-commerce companies,
51% foreign equity investment is permitted. Press Note No. 8 (2000 series) dated
August 29, 2000, removes the earlier restriction on automatic approvals in cases
where a foreign investor had a previous or existing joint venture or technology
transfer/trade mark agreements in the same or allied field in India for all
proposals relating to information technology.
In the telecom sector, the present cap on foreign equity is 49% and a
license is required to provide such services. However, the license required for
ISPs has been waived until October 31, 2003. Also, in Press Note No. 9 (2000
series) dated September 8, 2000 the Indian government recently permitted 100%
foreign direct investment in relation to certain activities including:
- ISPs not providing gateways (applicable both for satellite and
submarine cables);
- Infrastructure providers providing dark fiber (IP category 1);
- Electronic mail; and
- Voice mail.
However, the above activities are still subject to the 26% divestment rule,
certain security restrictions and other regulations.
The government has also recently passed the Information Technology Act,
2000 which focuses on recognizing and regulating electronic transactions and
records, affecting:
- authentication of digital records;
- legal recognition of electronic records and digital signatures;
- attribution, acknowledgment and dispatch of electronic records;
- secure electronic records and digital signatures; and
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- regulation of certifying authorities.
More legislation that is presently being discussed is a draft Information
Communication and Entertainment Bill, 2000 ("ICE Bill") that would govern the
rapid convergence of broadcasting, telecommunications and information
technologies. The ICE Bill contemplates the establishment of a Communication
Commission to license and regulate the provision of network facilities, network
services, application services or content application services and ownership of
wireless apparatus.
It is unclear how the ICE Bill, if enacted, or any of the legislation previously
discussed, will affect India.com's business and operations. Further, political
instability could halt or delay the liberalization of the Indian economy and
adversely affect business and economic conditions in India generally and our
business in particular. Although during the past decade, the government of India
has pursued policies of economic liberalization, including significantly
relaxing restrictions on the private sector and further reforms are still
expected under the current policy to promote the information technology and
software industries, political uncertainty still exists and a significant change
in India's economic liberalization and deregulation policies could adversely
affect business and economic conditions in India generally and our India.com
business in particular.
PART II OTHER INFORMATION
ITEM 2: Changes in Securities and Use of Proceeds
RECENT SALES OF UNREGISTERED SECURITIES
During the three months ended September 30, 2000, Mail.com issued Class
A common stock to third parties in connection with business transactions or
granted options to employees in reliance upon the exemption from registration
pursuant to Section 4 (2) of the Securities Act of 1933 or Regulation S
promulgated thereunder or otherwise not subject to registration in various
transactions as follows:
During the three months ended September 30, 2000, we issued 20,892
shares of Class A common stock to employees at a weighted average price of $6.90
per share representing the Company's matching contribution to its 401(k) plan.
On July 1, 2000 we issued 15,302 shares of Class A common stock to an
employee of an acquired company as part of a retainer agreement.
On July 11, 2000, and September 8, 2000 we issued 92,593 shares and
444,444 shares, respectively, of Class A common stock to the shareholders of
Bantu as part of a cost investment in that company.
On July 25, 2000 we issued 102,215 shares and 364,431 shares of Class A
common stock in connection with certain cost investments made.
On July 26, we issued 13,750 shares of Class A common stock in
connection with the purchase of an asset.
On July 31, 2000, we issued 16,888 shares of Class A common stock as
partial payment for software licenses.
On August 1, 2000, we issued 20,917 shares of Class A common stock to a
former employee for software.
On August 17, 2000, we issued 278,638 shares of Class A common stock as
partial payment for software licenses.
During the three months ended September 30, 2000, we issued 710,195
shares of Class A common stock as part of the purchase price for
certain acquisitions.
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ITEM 6 Exhibits and Reports on Form 8-K
The following exhibits are filed as part of this report:
(4) Instruments defining the rights of security holders, including
indentures
(v) The Corporation hereby agrees to furnish to the
Commission, upon request, a copy of any instruments
defining the rights of security holders issued by
Mail.com, Inc. or its subsidiaries.
(27) Financial Data Schedule
Reports on Form 8-K - Mail.com, Inc. filed one report on Form 8-K during the
three months ended September 30, 2000.
- The report dated September 22, 2000 reported that an indirect
wholly-owned subsidiary of Mail.com, Inc. completed a private
placement of an aggregate of $14.2 million of its Series A
convertible preferred stock to private investors.
- The report dated October 27, 2000 reported that the Company
retained SG Cowen to sell its advertising network business and
that it will focus exclusively on its outsourced messaging
business; that the Company had appointed Thomas Murawski as
Chief Executive Officer and Brad Schrader as President of
Mail.com, Inc.; and that, as a result of its decision to focus
on its outsourced messaging business and its drive to
profitability, it is streamlining the organization, taking
advantage of lower cost areas and further integrating its
technology and operational infrastructures, which will result
in restructuring and rationalization charges of $8-10 million.
- The report dated November 3, 2000 reported that the Company
would seek to sell all of its non-core assets, including its
Asia.com, Inc. and India.com, Inc. subsidiaries and its
portfolio of domain names.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereto duly authorized.
Mail.Com, Inc.
/s/ DEBRA MCCLISTER
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Executive Vice President and
Chief Financial Officer
November 14, 2000
51
