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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 March 31, 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 April 28, 2000: Class A common stock $0.01 par value
46,800,043 shares, and Class B common stock $0.01 par value 10,000,000 shares.
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MAIL.COM, INC.
MARCH 31, 2000
FORM 10-Q
INDEX
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Page
Number
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PART I: Financial Information
Item 1: Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2000 (unaudited) and
December 31, 1999.................................................................... 2
Unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999........................................................ 3
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 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................................................................ 17
Item 3: Qualitative and Quantitative Disclosure about Market Risk............................... 24
PART II: Other Information
Item 2: Changes in Securities and Use of Proceeds............................................... 38
Item 6: Exhibits and Reports on Form 8-K........................................................ 39
Item 7: Signatures.............................................................................. 40
</TABLE>
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Item 1 Condensed Consolidated Financial Statements
MAIL.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents.................................................................... $ 113,013 $ 36,870
Marketable securities ....................................................................... 6,989 7,006
Accounts receivable, net of allowance for doubtful accounts of $710 and $197 as of
March 31, 2000 and December 31, 1999, respectively......................................... 7,880 4,138
Prepaid expenses and other current assets.................................................... 4,246 1,940
Notes receivable............................................................................. 2,000 -
Receivable from sale leaseback............................................................... 272 183
----------- -----------
Total current assets..................................................................... 134,400 50,137
----------- -----------
Property and equipment, net...................................................................... 35,206 28,935
Domain assets, net............................................................................... 7,602 7,934
Partner advances, net............................................................................ 10,995 16,809
Investments...................................................................................... 7,729 2,962
Goodwill and other intangible assets, net........................................................ 240,269 28,964
Restricted investments........................................................................... 1,000 1,000
Debt issuance costs, net......................................................................... 3,642 -
Other ......................................................................................... 2,841 526
----------- -----------
Total assets............................................................................. $ 443,684 $ 137,267
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................. $ 9,854 $ 7,546
Accrued expenses............................................................................. 19,496 11,735
Current portion of notes payable............................................................. 3,402 -
Current portion of capital lease obligations................................................. 6,023 5,483
Current portion of domain asset purchase obligations......................................... 126 400
Deferred revenue............................................................................. 646 610
Other current liabilities.................................................................... 1,755 2,562
----------- -----------
Total current liabilities................................................................ 41,302 28,336
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Capital lease obligations, less current portion.................................................. 11,610 12,016
Domain asset purchase obligation, less current portion........................................... 176 176
Deferred revenue................................................................................. 683 725
Notes payable, less current portion.............................................................. 898 -
Convertible notes payable........................................................................ 100,000 -
----------- -----------
Total libilities......................................................................... 154,669 41,253
----------- -----------
Minority interest................................................................................ 1,936 -
Stockholders' equity:
Common stock, $0.01 par value; 130,000,000 shares authorized:
Class A--120,000,000 shares authorized; 46,074,023 and 35,218,461 shares issued and
outstanding at March 31, 2000 and December 31,1999, respectively........................... 461 352
Class B--10,000,000 shares authorized, issued and outstanding at March 31, 2000 and
December 31, 1999 with an aggregate liquidation preference of $1,000.................... 100 100
Additional paid-in capital....................................................................... 393,146 159,759
Deferred compensation............................................................................ (992) (1,117)
Accumulated other comprehensive loss............................................................. (12) -
Accumulated deficit.............................................................................. (105,624) (63,080)
----------- -----------
Total stockholders' equity .............................................................. 287,079 96,014
----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity .............................................. $ 443,684 $ 137,267
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
2
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MAIL.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED MARCH 31,
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2000 1999
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Revenues
Messaging....................................................... $ 9,951 $1,186
Domain development (WORLD.com).................................. - -
---------------- ---------------
Total revenues............................................... 9,951 1,186
---------------- ---------------
Operating expenses:
Cost of revenues
Messaging....................................................... 9,843 1,478
Domain development (WORLD.com).................................. 18 -
---------------- ---------------
Total cost of revenues....................................... 9,861 1,478
---------------- ---------------
Sales and marketing............................................... 14,968 3,590
General and administrative........................................ 8,672 1,365
Product development............................................... 3,591 1,177
Amortization of goodwill and other intangible assets.............. 7,834 --
Write-off of acquired in-process technology....................... 7,650 --
---------------- ---------------
Total operating expenses........................................ 52,576 7,610
---------------- ---------------
Loss from operations......................................... (42,625) (6,424)
---------------- ---------------
Other income (expense):
Interest income................................................... 1,824 115
Interest expense.................................................. (1,807) (99)
---------------- ---------------
Total other income, net......................................... 17 16
---------------- ---------------
Loss before minority interest....................................... (42,608) (6,408)
Minority interest................................................... 64 --
---------------- ---------------
Net loss............................................................ $ (42,544) $ (6,408)
================ ===============
Basic and diluted net loss per share................................ $ (0.86) $ (0.39)
================ ===============
Weighted-average basic and diluted shares outstanding............... 49,343,621 16,468,221
================ ==============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
3
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MAIL.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
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Cash flows from operating activities:
Net loss......................................................................... $ (42,544) $ (6,408)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash charges related to partner agreements............................... 5,814 2,742
Non-cash compensation........................................................ - 11
Depreciation and amortization................................................ 3,225 538
Amortization of goodwill and other intangible assets......................... 7,834 --
Amortization of domain assets................................................ 460 103
Amortization of deferred compensation........................................ 126 91
Provision for doubtful accounts.............................................. 138 38
Amortization of debt issuance costs.......................................... 121 -
Write-off of acquired in-process technology.................................. 7,650 --
Issuance of common stock in lieu of compensation............................. 1,800 --
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net..................................................... (705) (753)
Prepaid expenses and other current assets.................................... (164) (476)
Other assets................................................................. 269 (598)
Accounts payable, accrued expenses and other current liabilities............. (1,605) 2,283
Deferred revenue............................................................. (6) 592
-------------- --------------
Net cash used in operating activities............................ (17,587) (1,837)
--------------- --------------
Cash flows from investing activities:
Purchases of domain assets................................................... (28) --
Notes receivable............................................................. (2,000) --
Proceeds from sale leaseback................................................. 631 2,145
Principal payments of notes payable.......................................... (2,665) -
Purchases of property and equipment.......................................... (1,133) (3,513)
Acquisitions, net of cash paid............................................... 1,364 --
-------------- --------------
Net used in investing activities................................. (3,831) (1,368)
--------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of Class A, C and E preferred stock............... - 15,165
Proceeds from issuance of Class A common stock in
connection with the exercise and purchase of warrants and options........ 1,162 --
Issuance of shares for employee 401(k) plan.................................. 89 --
Proceeds from issuance of convertible notes, net............................. 96,050 -
Payments under capital lease obligations..................................... (1,401) (211)
Proceeds from sale of subsidiary interest.................................... 1,936 -
Payments under domain asset purchase obligations............................. (275) (27)
--------------- --------------
Net cash provided by financing activities............................................ 97,561 14,927
-------------- --------------
Net increase in cash and cash equivalents............................................ 76,143 11,722
Cash and cash equivalents at beginning of the period................................. 36,870 8,414
-------------- --------------
Cash and cash equivalents at the end of the period................................... $ 113,013 $ 20,136
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</TABLE>
4
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Supplemental disclosure of non-cash information:
During the quarters ended March 31, 2000 and 1999, the Company paid
approximately $500,000 and $99,000, respectively, for interest.
Non-cash investing activities:
During the quarter ended March 31, 2000, the Company issued 185,686
shares of its Class A common stock in connection with an
investment. This transaction resulted in a non-cash
investing activity of $2.9 million. (see Note 5)
During the quarter ended March 31, 2000, the Company issued
9,943,395 shares of its Class A common stock in connection
certain acquisitions. These transactions resulted in
non-cash investing activities of $202.9 million. (see
Note 2)
During the quarter ended March 31,1999, the Company issued
471,076 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 $2.4 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 $177,000 and $1.5
million for the quarters ended March 31, 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"), formerly known as iName, Inc., 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 its
consumer email services primarily from advertising related sales, including
direct marketing and e-commerce promotion. The Company also generates revenues
in the consumer 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 and email monitoring services and from
facsimilie transmission services, including desktop to fax, enhanced fax and
broadcast fax services. In March 2000, Mail.com formed WORLD.com to focus on
developing the Company's extensive portfolio of domain names into major Web
properties which will serve the worldwide business-to-business and
business-to-consumer marketplace.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim condensed consolidated financial statements as of March 31, 2000 and
for the three months ended March 31, 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 financial statements and reflect all adjustments, which include
only normal recurring adjustments, necessary to present fairly the financial
position of Mail.com as of March 31, 2000 and the results of operations and cash
flows for the three months ended March 31, 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
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
financial statements be read in conjunction with the Company's audited 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, owns 94.1% of Asia.com (see Note 2). The interest of shareholders
other than those of Mail.com is recorded as minority interest in the
accompanying condensed consolidated statements of income and condensed
consolidated balance sheets. All intercompany balances and transactions have
been eliminated in consolidation.
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(e) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities, with original maturities of
three months or less, to be cash equivalents.
(f) MARKETABLE SECURITIES
Marketable securities are carried at fair value with the changes in fair value
reported in other comprehensive loss. Realized gains and losses as well as the
amortization of premiums and accretion of discounts are recorded in earnings.
The specific identification method is used to determine the cost of securities
sold.
(g) LETTER OF CREDIT AND RESTRICTED INVESTMENT
At March 31, 2000, the Company maintained a $1 million letter of credit ("LC")
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. Through
March 31, 2000 there were no drawings under the LC.
(h) 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.
The Company pays domain name registration fees in advance to InterNIC, a
cooperative activity between the US government and Network Solutions, Inc.,
which is the national registry for domain names in the US. Payment of these fees
ensures legal ownership and registration of domain names. The initial
registration period is for a two-year period with subsequent one-year renewal
periods. These costs are deferred and amortized over the related registration
period.
(i) INVESTMENTS
Investments which are not publicly traded are accounted for on the cost basis,
as the Company owns less than 20% of each company's stock. Such investments are
stated at the lower of cost or market value. Investments that are publicly
traded are treated as available-for-sale and are available to support current
operations or to take advantage of other investment opportunities and are stated
at their fair value based upon publicly available market quotes. Unrealized
gains and losses are computed on the basis of specific identification and are
included within accumulated other comprehensive loss in stockholders' equity.
(j) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are stated net of accumulated amortization.
Goodwill and other intangible assets are being amortized on a straight-line
basis over their expected period of benefit ranging from three to five years
(see Notes 2 and 3).
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(k) REVENUE RECOGNITION
The Company's revenues are derived principally from the sale of banner
advertisements and electronic message management services. 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 attempts to sell all available 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.
On some occasions, the Company receives upfront "placement" fees from
advertising related to direct marketing and e-commerce promotion. 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 recognize 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 March 31, 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 $46,000 and $143,000 for the three
months ended March 31, 2000 and 1999, respectively. For the three months ended
March 31, 2000 and 1999, barter expenses were approximately $19,000 and
$124,000, respectively.
The Company generates revenues in the business market by providing businesses
with facsimilie transmission services and Internet email services. These
services include desktop to fax, enhanced fax, 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.
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.
Facsimilie license revenue is recognized over the average estimated customer
life of 3 years.
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
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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.
Other revenues include revenue from the sale or lease of domain names, which are
recognized at the time when the ownership of the domain name is transferred
provided that no significant Company obligation remains and collection of the
resulting receivable is probable.
(l) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash, cash equivalents, restricted
investments, marketable securities, accounts receivable, notes payable and
convertible notes payable. At March 31, 2000 and December 31, 1999, the fair
value of these instruments approximated their financial statement carrying
amount because of the short-term maturity of these instruments. Substantially
all of the Company's cash equivalents were invested in money market accounts,
commercial paper, and taxable municipal obligations. The Company has not
experienced any significant credit loss to date. No single customer exceeded 10%
of either revenue or accounts receivable as of and for the quarter ended March
31, 2000. One customer accounted for 32% of the Company's revenue and 22% of the
accounts receivable as of and for the quarter ended March 31, 1999. Revenues
from the Company's five largest advertisers accounted for an aggregate of 11%
and 51% of the Company's revenues for the three months ended March 31, 2000 and
1999, respectively.
(m) 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 issuance of
common stock. Diluted net loss per share is equal to basic loss per share since
all common stock equivalents are anti-dilutive for each of the periods
presented.
Diluted net loss per common share for the three months ended March 31, 2000 and
1999, does not include the effects of employee options to purchase 12,197,302
and 7,547,967 shares of common stock, respectively, 1,251,233, and 3,031,317,
common stock warrants, respectively, and 0, and 13,161,558 shares of convertible
preferred stock on an "as if" basis, respectively.
(n) SEGMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way that public enterprises report information
about operating segments. It also establishes standards for related disclosures
about products, and services, geographic area and major customers. The Company
has determined that it has two business segments which are presented in Note 10.
(o) COMPUTER SOFTWARE
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and guidance
on accounting for the
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proceeds of computer software originally developed or obtained for internal use
and then subsequently sold to the public. It also provides guidance on
capitalization of the costs incurred for computer software developed or obtained
for internal use. The Company adopted SOP 98-1 in 1999 and its effects are not
significant.
(p) 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 will be required to
adopt the accounting provisions of SAB No. 101, no later than the second quarter
of 2000. The Company does not believe that the implementation of SAB No. 101
will have a significant effect on its results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting For Certain
Transactions Involving Stock Compensation" ("FIN No. 44") which provides
guidance for applying APB Opinion No. 25, "Accounting For Stock Issued To
Employees." With certain exceptions, FIN No. 44 applies prospectively to new
awards, exchanges of awards in a business combination, modifications to
outstanding awards and changes in grantee status on or after July 1, 2000. The
Company does not believe that the implementation of FIN No. 44 will have
significant effect on its results of operations.
In March 2000, the Emerging Issues Task Force 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 consensus is effective for web site development costs in quarters
beginning after June 30, 2000. The Company has not yet analyzed the impact of
this issue on its consolidated financial statements.
(q) RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
presentation.
(2) ACQUISITIONS
NETMOVES
On February 8, 2000, Mail.com acquired NetMoves Corporation ("NetMoves") for
approximately $168.3 million including acquisition costs. Pursuant to the terms
of the merger agreement, Mast Acquisition Corp., which was a wholly owned
subsidiary of Mail.com, merged with and into NetMoves and NetMoves became a
wholly-owned subsidiary of Mail.com. 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.
In addition to the rollover of existing options contemplated by the merger
agreement, Thomas Murawski, NetMoves' President, Chief Executive Officer and
Chairman of the board of directors, as an employee of Mail.com received options
from Mail.com on February 8, 2000 to purchase Mail.com Class A common stock
based on the exchange ratio and equivalent to 600,000 options to purchase
NetMoves' common stock, with an exercise price equal to $17.50 per share, the
then fair value of Mail.com's Class A common stock.
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 ($148.5 million) and assembled employee workforce ($3.1 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.
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.
10
<PAGE> 12
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. Because such in-process technologies did not
reach technological feasibility as of the acquisition date and is expected to
have no alternative future use, this amount was written-off by Mail.com in the
first quarter of 2000.
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.
Mail.com has allocated the excess purchase price over the fair value of net
tangible assets acquired to identified intangible assets including assembled
employee workforce. In performing this 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 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.
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, operates the Web Site www.eLong.com, which is a local content
provider. 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. 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 an additional 792,079 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. 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. Asia.com
granted to management employees of Asia.com options to purchase Class A common
stock of Asia.com representing 10% of the outstanding shares of common stock
after giving effect to the exercise of such options.
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 eLong.com as of March 15,
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 ($62 million). Goodwill is being amortized over a period of 5 years,
the expected estimated period of benefit.
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<PAGE> 13
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.
MAURITIUS ENTITY
On March 31, 2000, the Company acquired 100% of a Mauritius entity 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. The acquisition was accounted for as a
purchase business combination. 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
the Mauritius entity as of March 31, 2000. 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 5 years, the expected estimated period of benefit.
During the first quarter of 2000, 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.
The following unaudited pro-forma consolidated amounts give effect to the
acquisitions of Allegro, Lansoft, NetMoves, the Mauritius entity and eLong as if
they had occurred on January 1, 1999, by consolidating their results of
operations with the results of Mail.com for the quarters ended March 31, 2000
and 1999. The unaudited pro-forma 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. The
pro forma basic and diluted net loss per common share is computed by dividing
the net loss attributable to common stockholders by the weighted-average number
of common shares outstanding. The calculation of the weighted average number of
shares outstanding assumes that 1,102,973 shares, 152,005 shares, 6,343,904
shares, and 3,599,491 shares of Mail.com's common stock issued in connection
with its acquisitions of Allegro, Lansoft, NetMoves and eLong, respectively,
were outstanding for the entire period. Diluted net loss per share equals basic
net loss per share, as common stock equivalents are anti-dilutive for all pro
forma periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
---- ----
<S> <C> <C>
Revenues.................................................. $ 12,228 $ 9,315
Net loss attributable to common stockholders.............. $ (58,060) $ (27,926)
Basic and diluted net loss per common share............... $ (1.04) $ (1.01)
Weighted average shares used in net loss
per common share calculation (1).................... 55,575 27,666
</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 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 of Allegro, Lansoft,
NetMoves and eLong from January 1, 1999 or date of inception if later.
The common stock issued in connection with the acquisitions was
adjusted for the weighted-average period such shares were considered to
be outstanding during the periods presented. In addition, 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.
(3) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases, are stated at
cost and consist of the following, in thousands:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Computer equipment and software, including amounts related to capital leases
of $25,257 and $23,774, respectively............................................ $ 42,762 $ 34,671
Furniture and fixtures............................................................ 1,696 300
Leasehold improvements............................................................ 582 466
--- ---
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C> <C>
45,040 35,437
Less accumulated depreciation and amortization,
including amounts related to capital leases
of $6,040, and $4,056, respectively........................................... 9,834 6,502
---------- -----------
Total................................................................ $ 35,206 $ 28,935
========== ===========
</TABLE>
Domain assets consist of the following, in thousands:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Domain names...................................................................... $ 9,265 $ 9,138
Less accumulated amortization..................................................... 1,663 1,204
----------- ----------
Domain assets, net ...................................................... $ 7,602 $ 7,934
=========== ==========
</TABLE>
Goodwill and other intangible assets consists of the following, in thousands:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Goodwill ......................................................................... $ 232,765 $ 22,276
Other intangible assets........................................................... 18,317 9,667
----------- ----------
251,082 31,943
Less accumulated amortization..................................................... 10,813 2,979
----------- ----------
Total ......................................................................... $ 240,269 $ 28,964
=========== ==========
</TABLE>
Accrued expenses consist of the following, in thousands:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Advertising and customer acquisition costs.......................................... $ 3,723 $ 4,367
Payroll and related costs........................................................... 3,414 1,998
Professional services and consulting fees........................................... 3,128 1,494
Carrier charges..................................................................... 2,296 56
Payments under partner contracts.................................................... 1,953 1,252
Interest on convertible notes....................................................... 1,264 -
Other ........................................................................... 3,718 2,568
--------- ----------
Total...................................................................... $ 19,496 $ 11,735
========= ==========
</TABLE>
Other current liabilities at March 31, 2000 and December 31, 1999 consist of
amounts due for software licenses.
(4) NOTES RECEIVABLE
During the quarter ended March 31, 2000, the Company executed a promissory note
("Note") and loaned $2 million to a company ("Borrower"). Repayment of the Note
along with interest calculated at an annual rate of 7% is due on September 30,
2000. If the Borrower completes debt or equity financing at any time prior to
the payment in full of all principal and interest on the Note, the Borrower
shall immediately apply all of the proceeds of, or the necessary portion of such
financing (net of documented out-of-pocket expenses) on the closing date of
financing to prepay in full the outstanding principal amount of (and related
accrued interest on) this Note.
(5) INVESTMENTS
During the quarter ended March 31, 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 $2.8 million. Software Tool and Die is an Internet
Service Provider and provides Web hosting services.
13
<PAGE> 15
(6) 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.
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 $1.3 million of interest expense including
accrued interest and amortization of the debt issuance costs in the three months
ended March 31, 2000 relating to the Notes.
(7) 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. As of March 31, 2000 and December 31, 1999,
the Company accrued approximately $2.0 million and $1.3 million, respectively,
to various Mail.com Partners under such agreements. Such amounts are included in
accrued expenses in the accompanying balance sheet.
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 $111,000 of amortization
expense in each of the three-month periods ended March 31, 2000 and 1999,
respectively.
In September 1998, the Company entered into an agreement with GeoCities. In
consideration of the advertising, subscription and customer acquisition
opportunities under this agreement, GeoCities received 1,000,000 shares of Class
A common stock upon the commencement of the contract valued at $3.50 per share,
the fair market value of Mail.com's common stock on the date of grant, or $3.5
million. The Company was also required to pay GeoCities
14
<PAGE> 16
$1.5 million in three installments, the first of which was paid in December
1998. The value of the stock issuance and cash payments was recorded in the
balance sheet as partner advances and would have been amortized ratably to
amortization expense over the contract term commencing upon the launch of the
services under the agreement. After the Company entered into the agreement,
Yahoo! announced its agreement to acquire GeoCities. In May 1999, the Company
and GeoCities cancelled and rescinded their agreement. As a result of the
cancellation and rescission of the agreement, GeoCities retained the $500,000
non-refundable fee that the Company paid under the contract, but returned to the
Company the 1,000,000 shares of Class A common stock issued to them.
Accordingly, the Company reversed the issuance of 1,000,000 shares and recorded
the $500,000 write-off in May 1999. In addition, the Company has agreed to
deliver advertisements over its network on behalf of GeoCities and GeoCities has
agreed to pay the Company $125,000 per month for sixteen months, representing $2
million in the aggregate.
During the first quarter of 1999, the Company issued 471,076 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 $2.4 million for the quarter ended March
31, 1999 and are included in sales and marketing expenses in the statement 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 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.
Certain Mail.com Partner agreements require minimum cash payments, which
aggregated $1.4 million at March 31, 2000, all of which are due in 2000.
Additional amounts become payable to certain Mail.com partners upon achieving
varying member levels.
(8) LEASES
The Company sold certain assets for approximately $448,000 for the three months
ended March 31, 2000. The assets were leased back from the purchaser over 3 to 5
years. There were no sale-leaseback transactions during the first quarter of
1999. The Company had not received approximately $272,000 and $183,000 from such
sales at March 31, 2000 and December 31, 1999, respectively.
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.
The Company is obligated to draw down 80% of the facility or be subject to a
non-utilization fee equal to 1.25% of the unused portion of the facility. 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.
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.
(9) 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,
15
<PAGE> 17
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 statements of operations.
(10) 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 and will focus on developing the Company's
extensive portfolio of domain names, including USA.com, Asia.com, Europe.com,
India.com, lawyer.com and doctor.com, among many others, into major Web
properties which will serve the worldwide business-to-business and
business-to-consumer marketplaces. Messaging includes activities related to all
aspects of both business and consumer messaging, which includes
business-to-business Internet and facsimilie transmission services to consumers.
The following table presents summarized financial information related to the
business segments for the three months ended March 31, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------
2000 1999
---- ----
<S> <C> <C>
Revenue:
Messaging................................................... $ 9,951 $ 1,186
Domain development - -
-------- --------
Total revenue..................................................... 9,951 1,186
-------- --------
Cost of revenues:
Messaging................................................... 9,843 1,478
Domain development 18 -
-------- --------
Total cost of revenue............................................. $ 9,861 $ 1,478
-------- --------
</TABLE>
(11) SUBSEQUENT EVENTS
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 ("IntraActive"). On the same date, Mail.com also paid IntraActive 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 IntraActive representing
approximately 4.6 % of IntraActive'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 IntraActive 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
IntraActive common stock representing 3.7%, 1.85% and 1.85%, respectively, of
the outstanding common stock of IntraActive as of April 17, 2000. The number of
shares of Mail.com 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
Mail.com's Class A common stock over the five trading days prior to such closing
date. Mail.com committed to file a registration statement on Form S-3 to
register for resale the shares of Class A common stock issued or issuable to
IntraActive. Mail.com is committed to issue up to an additional 92,592 shares of
Class A common stock to IntraActive if the average of the closing prices of
Mail.com's Class A common stock over the five days ending on the second day
prior to the filing of the registration statement is less than $10.80.
16
<PAGE> 18
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 and facsimilie transmission services including desktop to fax,
enhanced fax and broadcast services. 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 site at 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 March 2000, we delivered approximately 352 million page views and
approximately 1 billion advertisements in our consumer email services. During
the three months ended March 31, 2000, we delivered approximately 948 million
page views. We generated revenues in the business market from facsimilie
transmission services including desktop to fax, enhanced fax, broadcast
services, and 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.
For the three-months ended March 31, 2000, we generated approximately 48% of our
revenues from consumer messaging related sales and approximately 48% of our
revenues from business messaging services. We also generated a small portion of
our revenues from the sale of domain name assets and from email service
outsourcing fees paid by Web sites. With our expansion into the business market
and recent acquisition of NetMoves, Inc. on February 8, 2000, we expect that
business service revenues may represent a larger percentage of our revenues in
the future.
We price advertisements based on a variety of factors, including whether the
advertising is targeted to a specific category of members or whether it is run
across our entire network. We attempt to sell all of our available advertising
space, or inventory, through a combination of advertisements that we sell on
either a "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.
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. 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.
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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.
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 1% of total revenues for the
three-month period ended March 31, 2000, as compared to 12% for the comparable
period in 1999. We anticipate that barter revenues will remain below 5%,
although the actual amount may fluctuate in any given quarter.
Prior to 1998, we generated most of our revenues from subscription services and
trading of domain names. We collected subscriptions by charging members' credit
cards in advance, usually after a 30-day trial period. 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.
We also provide businesses with facsimilie transmission services and Internet
email services. These services include desktop to fax, enhanced fax, 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. 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. Facsimilie license revenue is recognized over the
average estimated customer life of 3 years. Business revenues for the three
months ended March 31, 2000 were $4.7 million as compared with $0.0 in the
comparable period in 1999.
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.
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
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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 $2.4 million for the three months
ended March 31, 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 each of the quarters
ended March 31, 2000 and 1999 we recorded approximately $111,000 of amortization
expense for this agreement. This amortization is included in sales and marketing
expenses.
Under our agreement with GeoCities entered into in September 1998, GeoCities
received 1.0 million shares of Class A common stock upon the commencement of the
contract in consideration of the advertising, subscription and customer
acquisition opportunities. In addition to our obligation to share revenue
generated from the partnership with GeoCities, we were required to pay GeoCities
a $1.5 million fee in three installments, the first of which was paid in
December 1998. On May 1, 1999, GeoCities and Mail.com agreed to cancel and
rescind the contract. Under this agreement, GeoCities retained the first
$500,000 non-refundable payment that we paid to them under the original
agreement and we are not required to pay the remaining $1 million. In addition,
GeoCities returned to us the 1.0 million shares of Class A common stock issued
to them. We have also agreed to deliver advertisements over our network on
behalf of GeoCities for the sixteen-month period commencing May 1999. The total
payments by GeoCities for this advertising will be $125,000 per month or $2
million in the aggregate over the sixteen-month period. In the second quarter of
1999, we reversed the issuance of shares and expensed the non-refundable fee
previously paid to GeoCities.
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. 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.
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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
local content provider. 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. 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 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.
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 an additional 792,079 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. 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. Asia.com
granted to management employees of Asia.com options to purchase Class A common
stock of Asia.com representing 10% 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 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.
During the first quarter of 2000, 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.
During the quarter ended March 31, 2000, the Company executed a promissory note
("Note") and loaned $2 million to a company ("Borrower"). Repayment of the Note
along with interest calculated at an annual rate of 7% is due on September 30,
2000. If the Borrower completes debt or equity financing at any time prior to
the payment in full of all principal and interest on the Note, the Borrower
shall immediately apply all of the proceeds of, or the necessary portion of such
financing (net of documented out-of-pocket expenses) on the closing date of
financing to prepay in full the outstanding principal amount of (and related
accrued interest on) this Note.
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 ("IntraActive"). On the same date, Mail.com also paid IntraActive 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 IntraActive representing
approximately 4.6 % of IntraActive'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
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stock in IntraActive 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 IntraActive common stock representing 3.7%,
1.85% and 1.85%, respectively, of the outstanding common stock of IntraActive as
of April 17, 2000. The number of shares of Mail.com 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 Mail.com's Class A common stock over the five
trading days prior to such closing date. Mail.com committed to file a
registration statement on Form S-3 to register for resale the shares of Class A
common stock issued or issuable to IntraActive. Mail.com is committed to issue
up to an additional 92,592 shares of Class A common stock to IntraActive if the
average of the closing prices of Mail.com's Class A common stock over the five
days ending on the second day prior to the filing of the registration statement
is less than $10.80.
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 March 31, 2000, we
had an accumulated deficit of approximately $105.6 million. We intend to invest
heavily in sales and marketing and continued development and enhancements to our
computer systems and service offerings. We also intend to invest in
international expansion. 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
for each of the three month periods ended March 31, 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 $569,000 over the
remaining vesting periods through December 2001.
We have recorded amortization of deferred compensation of approximately $35,000
and $0 during the three months ended March 31, 2000 and 1999 respectively, in
connection with the grant of 97,244 stock options to some employees during 1999,
net of cancellations. This deferral represents the difference between the deemed
fair value of our common stock for accounting purposes, in this case
$7.00-$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 light of the evolving nature of our business and our limited operating
history, we believe that period-to-period comparisons of our revenues and
operating results are not meaningful and should not be relied upon as
indications of future performance. We believe that advertising sales in
traditional media, such as television and radio, generally are lower in the
first calendar quarter. Our revenues are also affected by seasonal patterns in
advertising, which would become more noticeable if our revenue growth does not
continue at its recent rate. We do not believe that our historical growth rates
are indicative of future results.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUE
Revenues for the three months ended March 31, 2000 were $10 million as compared
to $1.2 million for the comparable period in 1999. The increase of $8.8 million
was due primarily to revenues from the business messaging market, which we
entered during the third quarter of 1999, as well as an increase in the growth
in our number of e-mailboxes and corresponding page views. Our members
established approximately 3 million e-mailboxes during the first quarter of 2000
as compared to 1 million in the first quarter of 1999. The cumulative total of
e-mailboxes established approximates 14 million as of March 31, 2000.
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Consumer revenues for the first quarter of 2000 were $4.8 million as compared to
$1.1 million in the first quarter of 1999. Advertising, permission marketing and
e-commerce revenues for the first quarter of 2000 were $4.6 million as compared
to $1 million in the comparable period of 1999. For the three months ended March
31, 2000 and 1999, revenues from the Company's five largest advertisers
accounted for approximately 11% and 51% of total revenues, respectively. No
advertisers exceeded 10% of our revenue during the first quarter of 2000.
Approximately 32% of our revenues came from one advertiser during the first
quarter of 1999. Included in advertising revenues is barter revenues of $46,000
and $143,000 for the three months ended March 31, 2000 and 1999, respectively.
Revenues from subscription services were $171,000 and $128,000 for the three
months ended March 31, 2000 and 1999, respectively.
Business messaging revenues for the first quarter of 2000 was $4.7 million.
There were no business messaging revenues during the first quarter of 1999.
Other revenues, primarily from the sale or lease of domain names and consulting
revenue, was $397,000 and $51,000 for the three months ended March 31, 2000 and
1999, respectively.
There were no domain development revenues for any period presented.
OPERATING EXPENSES
COST OF REVENUES
Cost of revenues for the first quarter of 2000 was $9.9 million, as compared to
$1.5 million during the first quarter of 1999. Cost of revenues consists
primarily of costs incurred in the delivery and support of our facsimile and
email 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 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 quarter 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 quarter of 2000 as compared to
the first quarter of 1999 due to our entry into the business messaging market.
In addition, we substantially increased headcount in the above groups during the
first quarter of 2000 as compared to the first quarter of 1999. We anticipate
additional purchases and leasing significant amounts of hardware and software
and to continuing to hire technical personnel.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $15.0 million for the first three months of
2000 as compared to $3.6 million for the comparable period in 1999. The $11.4
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 to partners were
$1.4 million in the first quarter of 2000 as compared to $407,000 in the first
quarter of 1999. The costs related to customer acquisitions through the issuance
of Class A common stock were approximately $0 and $2.2 million during the first
quarter of 2000 and 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 $0 of amortization expense in
connection with the issuance of these shares during the first quarter of 2000
and 1999, respectively. We also recorded approximately $111,000 in amortization
of partner advances of shares to CNN during the first quarter of 2000 and 1999.
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. The next largest cost is advertising and promotion that was
$3.1 million and $189,000 during the first quarter of 2000 and 1999
respectively. The increase reflects costs associated with online advertising for
customer
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acquisitions. 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 first quarter of 2000 as a
result of our entry into the business messaging market. We expect to increase
our sales and marketing efforts throughout 2000 and expect sales and marketing
expenses to continue to increase as we continue to invest in sales and marketing
personnel, expand our business messaging activities, and build our brand name.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $8.7 million during the first quarter
of 2000 as compared to $1.4 million during the first quarter of 1999. The $7.3
million increase was attributable to increased personnel and related costs,
including recruiting fees, primarily due to an increase in the number of
employees and increased facilities costs. At March 31, 2000, the number of
employees was 735, as compared to 103 at March 31, 1999. General and
administrative expenses consist primarily of compensation and other employee
costs not included in other line items, as well as overhead expenses, customer
support and bad debt expense. In addition, general and administrative expenses
increased during the first quarter of 2000 as compared to the first quarter of
1999 due to our entry into the business messaging market. We expect these
expenses to continue to grow as necessary to support the growth of our business
and to operate as a public company. During the first quarter of 2000, we
incurred a $1.8 million charge related to the issuance of 104,347 shares of
Class A common stock to an individual as compensation for services performed.
PRODUCT DEVELOPMENT
Product development costs were $3.6 million during the first quarter of 2000 as
compared to $1.2 million in the first quarter of 1999. The $2.4 million increase
was primarily due to increased staffing and consulting costs to add new
features, design new services and redesign existing services. Product
development costs consist primarily of salaries and consulting services.
Additionally, product development costs have increased during the first quarter
of 2000 as compared to the first quarter of 1999 due to our entry into the
business messaging market. To date, we have expensed all of our product
development costs as incurred. We need to continue to invest in product
development to attain our goals and, as a result, we expect product development
expenses to increase significantly.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS AND WRITE-OFF OF ACQUIRED
IN-PROCESS TECHNOLOGY
Amortization of goodwill and other intangible assets and the write-off of
acquired in-process technology resulted from the acquisitions made during the
first quarter 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 $7.7 million for the first quarter of 2000 and relates to the
acquisition of NetMoves in February 2000. Amortization of goodwill and other
intangible assets for the first quarter of 2000 was $7.8 million. There was no
amortization of goodwill or write-off of purchased in-process technology during
the first quarter of 1999.
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 and capital lease obligations. Interest income for the quarter ended
March 31, 2000 was $1.8 million as compared to $115,000 during the quarter ended
March 31, 1999. The increase in interest income in 2000 was due to higher cash
balances after we completed a private placement of preferred stock in March
1999, our initial public offering in June 1999, additional proceeds from the
exercise of the underwriters over-allotment of shares in July 1999 as it related
to our initial public offering, the proceeds relating to the exercise of
warrants and the proceeds from our convertible note offering in January 2000.
Interest expense was $1.8 million in the first quarter of 2000 as compared to
$99,000 in the first quarter of 1999. The increase was primarily due to interest
related to our convertible note offering and our capital lease obligations, as
we continue to finance our computer equipment purchases.
LIQUIDITY AND CAPITAL RESOURCES
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Since our inception, we have obtained financing through private placements of
equity securities, equipment leases, 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, 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 of
shares. In January 2000, we received net proceeds of $96.1 million from our
convertible debt offering.
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.
We are obligated to draw down 80% of the facility or be subject to a
non-utilization fee equal to 1.25% of the unused portion of the facility. 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.
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, 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, 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.
Net cash used in operating activities was $17.6 million for the quarter ended
March 31, 2000, and $1.8 million for the quarter ended March 31, 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 related to
partner agreements, and depreciation of fixed assets and amortization of
goodwill and other intangible assets.
Net cash used in investing activities was $3.8 million for the quarter ended
March 31, 2000 and $1.4 million for the quarter ended March 31, 1999. Net cash
used in investing activities consisted primarily of purchases of computer
equipment, the increase in notes receivable, partially offset by the net cash
received from acquisitions. We expect that net cash used in investing activities
will increase as we acquire significant new hardware and software in the future.
Net cash provided by financing activities was $97.6 million for the quarter
ended March 31, 2000 and $14.9 million for the quarter ended March 31, 1999.
During the quarter ended March 31, 2000, $96.1 million was received from our
convertible note offering, net of issuance costs.
At March 31, 2000, the Company maintained a $1 million letter of credit ("LC")
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 us not less than 30 days but not more than 60 days prior to an expiry
date. We are 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 consolidated balance sheet. Through March 31, 2000 there were no drawings
under the LC.
At March 31, 2000 we had $113 million of cash and cash equivalents. Our
principal commitments consist of a convertible note, notes payable, obligations
under capital leases, domain asset purchase obligations, and commitments for
capital expenditures. We believe that the existing cash and cash equivalents and
cash generated from our operations will be sufficient to meet our working
capital and capital expenditure requirements for at least the next 12 months.
Our operating and investing activities may require us to obtain additional
equity or debt financing. In addition, we continue to evaluate potential
acquisitions of other businesses, products, and technologies on an ongoing
basis. In order to complete these potential acquisitions, we may need additional
equity or debt financing in the future. Sales of additional equity securities
could result in additional dilution to our stockholders.
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 will be required to
adopt the accounting provisions of SAB No. 101, no later than the second
quarter of 2000. The Company does not believe that the implementation of SAB
No. 101 will have a significant effect on its results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting For Certain
Transactions Involving Stock Compensation" ("FIN No.44") provides guidance for
applying APB Opinion No. 25, "Accounting For Stock Issued To Employees." With
certain exceptions, FIN No. 44 applies prospectively to new awards, exchanges
of awards in a business combination, modifications to outstanding awards and
changes in grantee status on or after July 1, 2000. The Company does not
believe that the implementation of FIN No. 44 will have significant effect on
its results of operations.
In March 2000, the Emerging Issues Task Force 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 consensus is effective for web site development costs in quarters
beginning after June 30, 2000. The Company has not yet analyzed the impact of
this issue on its consolidated financial statements.
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 March 31, 2000,
unrealized losses of $12,000 were recorded.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE ONLY A LIMITED OPERATING HISTORY, AND WE ARE INVOLVED IN A NEW AND
UNPROVEN INDUSTRY.
We have only a limited operating history upon which you can evaluate our
business and our prospects. We have offered a commercial email service since
November 1996 under the name iName. We changed our company name to Mail.com,
Inc. in January 1999. Also on March 28, 2000, we formed WORLD.com for the
purpose of developing and operating our domain name properties as independent
Web sites. Our success will depend in part upon the development of a viable
market for email advertising and fee-based Internet messaging services and
outsourcing, and upon our ability to compete successfully in those markets. Our
success will also depend on our ability to successfully develop and operate our
domain name properties under WORLD.com, and the acceptance by businesses and
consumers of the services offered at these Web sites. 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 of $42.5 million for the quarter ended
March 31, 2000. We had an accumulated deficit of $105.6 million as of March 31,
2000. We expect to continue to incur substantial net losses and negative
operating cash flow for the foreseeable future. We have begun and will continue
to significantly increase our operating expenses in anticipation of future
growth. We intend to expand our sales and marketing operations, upgrade and
enhance our technology, continue our international expansion, and improve and
expand our management information and other internal systems. We intend 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.
WE FACE VARIOUS RISKS AND UNCERTAINTIES IN CONNECTION WITH OUR ACQUISITION OF
NETMOVES.
NetMoves has sustained losses since inception. NetMoves incurred a net
loss of $12.0 million for the year ended December 31, 1999. In addition,
NetMoves had negative earnings before interest and expects to continue to
sustain losses.
Unless we can successfully integrate NetMoves' business into our own, the
merger may not produce the benefits we expect. We may have difficulty
integrating and assimilating NetMoves' business and operation into our own. It
is our intention to acquire or make strategic investments in other businesses
and to acquire or license technology and other assets, and we may have
difficulty integrating Allegro, NetMoves or other businesses or generating an
acceptable return from acquisitions.
THE ISSUANCE OF $100 MILLION CONVERTIBLE NOTES SIGNIFICANTLY INCREASED OUR
LEVERAGE.
In January 2000, we issued $100 million in Convertible Subordinated Notes
due 2005. The sale of the Notes has increased our debt as a percentage of total
capitalization. Along with the Notes, 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 the Notes, (2) make it
difficult for us 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
cannot assure you that we will be able to meet our debt service obligations,
including our obligations under the Notes.
WE MAY BE UNABLE TO PAY DEBT SERVICE ON THE CONVERTIBLE NOTES AND OTHER
OBLIGATIONS.
We had an operating loss and negative cash flow during the quarters
ended March 31, 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
anticipated to be payable annually on the
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Notes. We cannot assure you that we will be able to pay interest and other
amounts due on the Notes on the scheduled dates or at all. In the event our cash
flow and cash balances are inadequate to meet our obligations, we could face
substantial liquidity problems. 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 the Notes if payment of the Notes were to be
accelerated following the occurrence of an Event of Default.
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 advertising related revenues and
subscription 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 generate
revenues by selling advertising space to advertisers who want to target our
members and by selling subscription services to these members. We pay the
partner a share of the revenues we generate. In addition, a number of our
contracts require us to pay significant fees or to make minimum payments to the
partner without regard to the revenues we realize. If we are unable to generate
sufficient revenues at our partner sites, these fees and minimum payments can
cause the partner's effective share of our revenues to approach or exceed 100%.
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, NBC Multimedia announced on May 10, 1999, that it
reached an agreement with XOOM to create a new Internet services company named
NBC Internet, Inc. or NBCi. Under the terms of the agreement, XOOM combined with
Snap in the fourth quarter of 1999, which is jointly owned by CNET and NBC
Multimedia. XOOM currently 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. 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 March 31, 2000, we estimate that approximately 28% of our established
e-mailboxes 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
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our revenues. Moreover, as of March 31, 2000, we estimate that approximately 17%
of our e-mailboxes 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 e-mailboxes 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 e-mailboxes established through their sites under our
agreement with them.
Losing relationships with prominent partners can impair our credibility
with advertisers and other partners. We believe that partnerships with Web sites
that have prominent brand names help give us credibility with other partners and
with advertisers. The loss of our better-known Web site 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 ADVERTISING RELATED REVENUES AND SUBSCRIPTION REVENUES.
Most of our partner sites, including most of those with well-known brand
names, do not generate significant numbers of new e-mailboxes. The following
four partners accounted for 39% of our new emailboxes established in March 2000:
<TABLE>
<CAPTION>
PERCENTAGE
OF NEW DATE THAT OUR
E-MAILBOXES CONTRACT WITH
IN THE PARTNER
PARTNER FEBRUARY 1999 EXPIRES
- ------- ------------- -------
<S> <C> <C>
Juno...................................................... 13% December 2001
Snap...................................................... 9% *
Earthlink................................................. 9% April 2001
IWon...................................................... 8% October 2000
</TABLE>
* Snap may terminate their 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.
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, 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 e-mailboxes regularly, and
many do not use them at all. We do not have the computer systems necessary to
regularly monitor e-mailbox usage by our members. We do have information for
selected Web sites for the 28 day period ending May 11, 2000, which excludes ISP
members, email.com members, members who automatically forward their email from
their e-mailbox provided by Mail.com to another e-mailbox and members that
subscribe for our upgrade "POP3" access. During this 28 day period, no more than
30% of e-mailboxes in the sample were accessed by our members. Moreover, up to
20% of those e-mailboxes that were accessed were first established during that
period. We expect our proportion of active members to decrease as our total
number of established e-mailboxes increases. On an ongoing basis, we believe
that a
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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 e-mailboxes.
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 29% of our total
e-mailboxes as of March 31, 2000, and 9% of the e-mailboxes that were
established during March 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 e-mailboxes. Because
we do not charge for our basic service, individuals can easily establish
multiple e-mailboxes. 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.
WEBMAIL, EMAIL ADVERTISING AND EMAIL OUTSOURCING MAY NOT PROVE TO BE VIABLE
BUSINESSES.
We operate in an industry that is only beginning to develop. Our success
will require the widespread acceptance by consumers of Webmail. We are also
dependent on the development of viable markets for email advertising and the
outsourcing of email services to businesses and other organizations. For a
number of reasons, each of these developments is somewhat speculative:
Consumers may not be willing to use Webmail in large numbers. As a Web-based
messaging service, Webmail is subject to the same concerns and shortcomings as
the Internet itself. Concerns 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 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.
There are significant obstacles to the development of a sizable market for email
outsourcing. Outsourcing is one of the principal methods by which we will
attempt to reach the size we believe is necessary to be successful. Security and
the reliability of the Internet, however, are likely to be of concern to Web
sites, ISPs, schools, 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 have begun
to 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. We cannot be sure that we will be able to expand
our business customer base, attract additional customers in other segments or
acquire
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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. Furthermore, we may not be able to generate significant
additional revenues by providing our email services to businesses. Standards for
pricing in the business email 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.
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
may fall, in part because of diminishing "click" or response rates. Advertisers
may also request 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 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:
A limited number of advertisers account for a high percentage of our revenues,
our contracts with our advertisers typically have terms of only one or two
months, and we may be unable to renew these contracts. We are dependent on a
limited number of advertisers to derive a substantial portion of our revenues.
For the quarter ended March 31, 2000 and 1999, revenues from our five largest
advertisers accounted for an aggregate of 11% and 51%, 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. Our existing contracts with advertisers
generally have terms of only one or two months and we may be unable to renew
them. The loss of one of our major advertisers or our inability to attract new
advertisers would cause our revenues to decline.
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
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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.
WE MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF FLUCTUATIONS IN OUR QUARTERLY
OPERATING RESULTS, WHICH WOULD CAUSE OUR STOCK PRICE TO DECLINE.
Although we intend to steadily increase our spending and investment to
support our planned growth, our revenues (and some of our costs) will be much
less predictable. This is likely to result in significant fluctuations in our
quarterly results, and to limit the value of quarter-to-quarter comparisons.
Because of our limited operating history and the emerging nature of our
industry, we anticipate that securities analysts will have difficulty in
accurately forecasting our results. It is likely that our operating results in
some quarters will be below market expectations. In this event, the price of our
Class A common stock is likely to decline.
The following are among the factors that could cause significant
fluctuations in our operating results:
- incurrence of other cash and non-cash accounting charges resulting
from acquisitions, including charges resulting from acquisitions;
- 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;
- system outages, delays in obtaining new equipment or problems with
planned upgrades;
- disruption or impairment of the Internet;
- introduction of new or enhanced services by us or our competitors;
- changes in our pricing policy or that of our competitors;
- seasonality in the demand for advertising, or changes in our own
advertising rates or advertising rates in general, both on and off
the Internet;
- changes in governmental regulation of the Internet and email in
particular; and
- general economic and market conditions, and particularly those
affecting email advertising.
SEVERAL OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER RESOURCES, LONGER
OPERATING HISTORIES, LARGER CUSTOMER BASES AND BROADER PRODUCT OFFERINGS.
Our business is, and we believe will continue to be, intensely
competitive. Our competitors with respect to email services include such large
and established companies as Microsoft, America Online, 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
e-mailboxes according to Microsoft. We also compete for partners with email
service providers such as USA.NET, Inc., Critical Path, Inc. and CommTouch
Software, Ltd. In offering email services to businesses, schools and other
organizations, we expect to compete with MCI Mail, USA.NET and Critical Path.
Our current and prospective competitors in the facsimile transmission services
market generally fall into the following groups: (i) telecommunication
companies, such as AT&T, WorldCom, Sprint, the regional Bell
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operating companies and telecommunications resellers, (ii) ISPs, such as UUnet
and NETCOM On-Line Communications Services, Inc.; (iii) on-line services
providers, such as Microsoft and America Online and (iv) direct fax delivery
competitors, including Premiere Document Distribution (formerly Xpedite Systems,
Inc.) and IDT Corporation. In addition, we compete for advertisers with
DoubleClick, 24/7 Media, and other Internet advertising networks. We also
compete for advertisers with other Internet publishers as well as traditional
media such as television, radio, print and outdoor advertising. See "Item 1
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. In
addition, some competitors who have other sources of revenue do not, or in the
future may not, place advertising on their Webmail pages. Consumers may prefer a
service that does not include advertisements.
The level of competition is likely to increase as current competitors
increase the sophistication of their offerings and as new participants enter the
market. In the future, as we expand our service offerings, we expect to
encounter increased competition in the development and delivery of these
services. Further, some of our competitors may offer services 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.
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. 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.
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 begun aggressively expanding 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 begin
offering a range of services in the business email services market. In addition,
we have formed WORLD.com for the purpose of developing our portfolio of domain
names. 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 and Chief
Executive Officer, Gary Millin, CEO of WORLD.com, Lon Otremba, our President,
Debra McClister, our Executive Vice President and Chief Financial Officer, Sam
Kline, our Executive Vice President, Technology, Thomas Murawski, our Chief
Executive Officer, Mail.com Business Messaging Services, Inc., and Aaron
Fessler, President of Allegro. The loss of the services of Messrs. Gorman,
Millin, Otremba, Kline, Murawski and Fessler or of Ms. McClister, or several
other key employees, would impede the operation and growth of our business.
To manage our existing business and handle any future growth, we will
have to attract, retain and motivate additional highly skilled employees. In
particular, we will need to hire and retain qualified salespeople if we are to
meet our sales goals. 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.
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OUR BUSINESS IS HEAVILY DEPENDENT ON TECHNOLOGY, INCLUDING TECHNOLOGY THAT HAS
NOT YET BEEN PROVEN RELIABLE AT HIGH TRAFFIC LEVELS AND TECHNOLOGY THAT WE DO
NOT CONTROL.
The performance of our 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, 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 email
and fax 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 have in the past experienced interruptions in our email
service. We believe that these interruptions will continue to occur from time to
time. These interruptions are due to hardware failures, unsolicited bulk emails
that overload our system and other 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 and insufficient storage capacity. 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 either of our primary data centers was
severely damaged or destroyed. We might also lose stored emails and other member
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 consumer and business demand
and add new features to our services very rapidly. We also have to regularly
upgrade our software to ensure that it remains compatible
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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 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 members and business customers may suffer, and we
may be exposed to liability. Third parties may attempt to breach our security or
that of our members or any business customers whose networks we may maintain or
for whom we provide services. If they are successful, they could obtain our
members' confidential information, including our members' profiles, passwords,
financial account information, credit card numbers, stored email or other
personal information, or obtain information that is sensitive or confidential to
a business customer or otherwise disrupt a business customer's operations. Our
members or any business customers 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 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, 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 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.
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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.
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.
GERALD GORMAN CONTROLS MAIL.COM AND WILL BE ABLE TO PREVENT A CHANGE OF CONTROL.
Gerald Gorman, our Chairman and Chief Executive Officer, beneficially
owned as of March 31, 2000 Class A and Class B common stock representing
approximately 69% 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.
It is our intention to acquire or make strategic investments in other businesses
and to acquire or license technology and other assets, and we may have
difficulty integrating Allegro, NetMoves or other businesses or generating an
acceptable return from acquisitions.
We recently 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 an investment in 3Cube, Inc., a
company specializing in Internet fax 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 eLong.com, Inc., in connection with the formation of Asia.com,
Inc. 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
business;
- inability to successfully incorporate acquired technology into our
service offerings and maintain uniform standards, controls,
procedures, and policies; and
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<PAGE> 36
- 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.
OUR GOAL OF BUILDING BRAND IDENTITY IS LIKELY TO BE DIFFICULT AND EXPENSIVE.
We believe that a quality brand identity will be essential if we are to
increase membership, traffic on our sites and revenues, and to develop our
business services market. 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 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.
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 planned expansion, develop new or enhanced
services, respond to competitive pressures, promote our brand name or acquire
complementary businesses, technologies or services. Some of our 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.
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 facsimilie 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
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<PAGE> 38
have a material adverse effect on our financial position, results of operations
and cash flows. We have announced the formation of 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
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 eLong.com, Inc. or other
subsidiaries, our opportunities to generate revenue will be reduced, our ability
to compete successfully in these markets will 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 may 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.
Intellectual property litigation is expensive and time-consuming and could
divert management's attention away from running our business.
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 March 31, 2000, we had an aggregate of 56,074,023 shares of Class A and Class
B common stock and 12,197,302 options and 1,251,233 warrants to purchase an
aggregate of 13,448,535 shares of Class A common stock outstanding. As of such
date, approximately 46,649,061 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 9,256,433
shares of Class A
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<PAGE> 39
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 March 31, 2000 the holders of up to 20,423,748 shares of Class A
common stock, have 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 the 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.
PART II OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
During the three months ended March 31, 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 and Rule 701 or Regulation S
promulgated thereunder or otherwise not subject to registration in various
transactions as follows:
During the three months ended March 31, 2000, we issued 5,531 shares of Class A
common stock to employees at a weighted average price of $15.97 per share
representing the Company's matching contribution to its 401(k) plan.
On February 13, 2000, we issued 6,343,904 shares of Class A common stock to the
shareholders of NetMoves Corporation as part of the purchase price for the
acquisition of NetMoves Corporation by Mail.com. We also assumed NetMoves
Corporation stock options and warrants which represent the right to purchase
962,443 shares and 57,343 shares, respectively of Mail.com Class A common stock
at a weighted-average exercise price of $6.69 and $8.64 per share, respectively.
On March 14, 2000, we issued 3,599,491 shares of Class A common stock to the
shareholders of eLong.com, Inc. as part of the purchase price for the
acquisition of eLong.com Inc. by Mail.com. We also assumed eLong.com Inc. stock
options that represent the right to purchase 279,289 shares of Mail.com Class A
common stock at a weighted average exercise price of $1.25 per share.
On March 24, 2000, we issued 104,347 shares of Class A common stock to an
individual under a restricted stock agreement.
On March 29, 2000, we issued 185,686 shares of Class A common stock to the
shareholders of Standard Tool and Die as part of a 10% investment in that
company.
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ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed as part of this report:
(27) Financial Data Schedule
Reports on Form 8-K - Mail.com, Inc. filed three reports on Form 8-K
during the three months ended March 31, 2000.
- The report dated January 21, 2000 and filed January 24,
2000 announced that the Company issued a press release
announcing the pricing of its previously announced Rule
144A offering of Convertible Subordinated Notes.
- The report dated February 8, 2000 and filed February 11,
2000 reported that the Company completed its acquisition of
NetMoves Corporation pursuant to an Agreement and Plan of
Merger dated as of December 11, 1999.
- The report dated March 14, 2000 and filed March 28, 2000
announced that the Company acquired eLong.com, Inc., a
Delaware corporation, pursuant to an Agreement and Plan of
Merger dated as of March 14, 2000.
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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
------------------------------------
Debra McClister
Executive Vice President and Chief Financial Officer
May 15, 2000
40
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