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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 JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26371
MAIL.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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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)
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(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 July 31, 2000: Class A common stock $0.01 par value
49,756,140 shares, and Class B common stock $0.01 par value 10,000,000 shares.
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MAIL.COM, INC.
JUNE 30, 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 June 30, 2000 (unaudited) and
December 31, 1999....................................................................... 2
Unaudited Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2000 and 1999..................................................... 3
Unaudited Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999............................................................ 4
Notes to Unaudited Interim Condensed Consolidated Financial Statements ..................... 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 22
Item 3: Qualitative and Quantitative Disclosure about Market Risk................................... 33
PART II: Other Information
Item 2: Changes in Securities and Use of Proceeds................................................... 51
Item 4: Submission of Matters to a Vote of Security Holders......................................... 51
Item 6: Exhibits and Reports on Form 8-K............................................................ 52
Item 7: Signatures.................................................................................. 53
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MAIL.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 50,498 $ 36,870
Marketable securities 37,326 7,006
Accounts receivable, net of allowance for doubtful accounts
of $827 and $197 as of June 30, 2000 and
December 31, 1999, respectively 9,741 4,138
Prepaid expenses and other current assets 4,630 1,940
Notes receivable 2,000 --
Receivable from sale leaseback 1,265 183
--------- ---------
Total current assets 105,460 50,137
Property and equipment, net 43,713 28,935
Domain assets, net 7,138 7,934
Partner advances, net 8,549 16,809
Investments 14,544 2,962
Goodwill and other intangible assets, net 247,928 28,964
Restricted investments 1,054 1,000
Debt issuance costs, net 3,454 --
Other 2,689 526
--------- ---------
Total assets $ 434,529 $ 137,267
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,978 $ 7,546
Accrued expenses 23,079 11,735
Current portion of notes payable 1,980 --
Current portion of capital lease obligations 7,296 5,483
Current portion of domain asset purchase obligations 197 400
Deferred revenue 1,036 610
Other current liabilities 2,439 2,562
--------- ---------
Total current liabilities 51,000 28,336
Capital lease obligations, less current portion 17,096 12,016
Domain asset purchase obligation, less current portion 103 176
Deferred revenue 927 725
Notes payable, less current portion 754 --
Convertible notes payable 100,000 --
--------- ---------
Total liabilities 169,880 41,253
--------- ---------
Minority interest 1,825 --
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; 130,000,000 shares authorized:
Class A--120,000,000 shares authorized; 49,161,555 and 35,218,461 shares
issued and outstanding at June 30, 2000 and December 31,1999, respectively 492 352
Class B--10,000,000 shares authorized, issued and outstanding at June 30, 2000
and December 31, 1999 with an aggregate liquidation preference of $1,000 100 100
Additional paid-in capital 416,780 159,759
Deferred compensation (780) (1,117)
Subscriptions receivable (202) --
Accumulated other comprehensive loss (45) --
Accumulated deficit (153,521) (63,080)
--------- ---------
Total stockholders' equity 262,824 96,014
--------- ---------
Total liabilities and stockholders' equity $ 434,529 $ 137,267
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
2
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MAIL.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------- ---------------------------------
JUNE 30, JUNE 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
------------- -------------- ---------------- -------------
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Revenues:
Messaging $ 13,592 $ 2,057 $ 23,543 $ 3,243
Domain development (WORLD.com) 1,431 -- 1,431 --
------------ ------------ ------------ ------------
Total revenues 15,023 2,057 24,974 3,243
------------ ------------ ------------ ------------
Operating expenses:
Cost of revenues:
Messaging 12,435 2,179 22,278 3,656
Domain development (WORLD.com) 1,460 -- 1,478 --
------------ ------------ ------------ ------------
Total cost of revenues 13,895 2,179 23,756 3,656
Sales and marketing 16,864 3,906 31,832 7,496
General and administrative 9,724 2,634 18,396 3,999
Product development 5,540 1,409 9,131 2,587
Amortization of goodwill and other intangible assets 16,733 -- 24,567 --
Write-off of acquired in-process technology -- -- 7,650 --
------------ ------------ ------------ ------------
Total operating expenses 62,756 10,128 115,332 17,738
------------ ------------ ------------ ------------
Loss from operations (47,733) (8,071) (90,358) (14,495)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 1,542 189 3,366 304
Interest expense (2,302) (79) (4,109) (178)
------------ ------------ ------------ ------------
Total other income (expense), net (760) 110 (743) 126
------------ ------------ ------------ ------------
Net loss (48,493) (7,961) (91,101) (14,369)
Minority interest 596 -- 660 --
------------ ------------ ------------ ------------
Loss before cumulative dividends (47,897) (7,961) (90,441) (14,369)
Cumulative dividends on settlement of contingent
obligations to preferred stockholders -- 14,556 -- 14,556
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (47,897) $ (22,517) $ (90,441) $ (28,925)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.84) $ (1.09) $ (1.70) $ (1.56)
============ ============ ============ ============
Weighted-average basic and diluted shares outstanding 57,361,379 20,605,412 53,352,500 18,531,509
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
3
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MAIL.COM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
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Cash flows from operating activities:
Net loss $ (90,441) $ (14,369)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Non-cash charges related to partner agreements 8,260 3,474
Non-cash compensation -- 34
Depreciation and amortization 6,786 982
Amortization of goodwill and other intangible assets 24,567 --
Amortization of domain assets 924 313
Amortization of deferred compensation 240 218
Write off of Geocities contract -- 500
Provision for doubtful accounts 255 45
Amortization of debt issuance costs 309 --
Write-off of acquired in-process technology 7,650 --
Non-cash advertising (125) --
Issuance of common stock in lieu of compensation 1,800 --
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable (3,676) (314)
Prepaid expenses and other current assets (444) (127)
Other assets (887) (237)
Accounts payable, accrued expenses and other current liabilities 4,523 9,931
Deferred revenue 628 79
--------- ---------
Net cash (used in) provided by operating activities (39,631) 529
--------- ---------
Cash flows from investing activities:
Purchases of domain assets (28) (943)
Notes receivable (2,000) --
Proceeds from sale leaseback 631 3,691
Principal payments of notes payable (4,230) --
Purchases marketable securities (48,191)
Purchases of intangible assets (1,433) --
Purchases investments (3,000) --
Purchases of restricted investments (54) --
Purchases of property and equipment (4,638) (12,119)
Payments to employees of an acquired company 200 --
Cash paid in connection with acquisitions, net 1,906 --
--------- ---------
Net cash used in investing activities (60,837) (9,371)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of Class A, C and E preferred stock -- 15,165
Net proceeds from issuance of Class A common stock related to
initial public offering -- 43,212
Proceeds from issuance of Class A common stock in connection with the
exercise and purchase of warrants and options 1,783 7,890
Issuance of shares for employee 401(k) plan 241 --
Proceeds from issuance of convertible notes, net 96,050 --
Proceeds from sales of marketable securities 17,916 --
Payments under capital lease obligations (2,959) (403)
Proceeds from sale of subsidiary interest 1,341 --
Payments under domain asset purchase obligations (276) (29)
--------- ---------
Net cash provided by financing activities 114,096 65,835
--------- ---------
Net increase in cash and cash equivalents 13,628 56,993
Cash and cash equivalents at beginning of the period 36,870 8,414
--------- ---------
Cash and cash equivalents at the end of the period $ 50,498 $ 65,407
========= =========
</TABLE>
4
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(Continued)
MAIL.COM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Supplemental disclosure of non-cash information:
During the six months ended June 30, 2000 and 1999, the Company paid
approximately $1.1 million and $178,000, respectively, for interest.
Non-cash investing activities:
During the six months ended June 30, 2000, the Company issued 903,698
shares of its Class A common stock in connection with certain
investments. These transactions resulted in a non-cash investing
activities of $8.6 million. (see Note 5)
During the six months ended June 30, 2000, the Company issued 11,869,575
shares of its Class A common stock in connection with certain
acquisitions. These transactions resulted in non-cash investing
activities of $214.4 million. (see Note 2)
During the six months ended June 30, 2000 the Company made an additional
investment in an Internet company by issuing 255,049 shares of Class A
common stock. This transaction resulted in a non-cash financing
activity of approximately $1.5 million.
During the six months ended June 30,1999, the Company issued 3,126,189
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 $20.1 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 $10.4 million and $3.1 million for the six months
ended June 30, 2000 and 1999, respectively.
The Company is obligated under various agreements to purchase domain
assets. These obligations resulted in non-cash financing activities
aggregating $197,000 for the six months ended June 30, 1999.
See accompanying notes to unaudited condensed consolidated
financial statements.
5
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MAIL.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(a) SUMMARY OF OPERATIONS
Mail.com, Inc. (the "Company" or "Mail.com"), is a global provider of Internet
messaging services. The Company offers its services to both the consumer and
business markets. The Company's basic consumer email services are free to
members. The Company generates revenues from these e-mail services primarily
from advertising related sales, including direct marketing and e-commerce
promotions. The Company also generates revenues in this market from subscription
services, such as a service that allows members to purchase increased storage
capacity for their emails. The Company generates revenues in the business market
from email service fees related to its email system connection services, email
monitoring services, outsourced mailbox fees from facsimile transmission
services, (including desktop to fax, enhanced fax and broadcast fax services);
and from licensing and service fees related to its collaboration software and
services (including group calendaring, document sharing and project management.
In March 2000, Mail.com formed WORLD.com to focus on developing the Company's
extensive portfolio of domain names into major Web properties, such as Asia.com
and India.com, which will serve the worldwide business-to-business and
business-to-consumer marketplace. World.com through its subsidiaries generates
revenues primarily from sales of information technology products and revenues
generated from services from various Company owned web sites.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim condensed consolidated financial statements as of June 30, 2000 and
for the three and six-month periods ended June 30, 2000 and 1999 have been
prepared by the Company and are unaudited. In the opinion of management, the
unaudited interim condensed consolidated financial statements have been prepared
on the same basis as the annual consolidated financial statements and reflect
all adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position of Mail.com as of June 30, 2000 and the
results of operations for the three and six months ended June 30, 2000 and 1999,
and cash flows for the six months ended June 30, 2000 and 1999. The results of
operations for any interim period are not necessarily indicative of the results
of operations for any other future interim period or for a full fiscal year. The
consolidated balance sheet at December 31, 1999 has been derived from audited
consolidated financial statements at that date.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. It is suggested that these unaudited interim
consolidated financial statements be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
December 31, 1999 as included in the Company's Form 10-K filed with the
Securities and Exchange Commission in March 2000.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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(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 92% 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 operations and condensed
consolidated balance sheets. All intercompany balances and transactions have
been eliminated in consolidation.
(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 June 30, 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
June 30, 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 U.S. 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.
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(i) INVESTMENTS
Investments in which the Company owns less than 20% of a company's stock are
accounted for on the cost basis. Such investments are stated at the lower of
cost or market value. The equity method of accounting is used for companies and
other investments in which the Company has significant influence; generally this
represents common stock ownership of at least 20% but not more than 50%.
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 periods of benefit ranging from three to five years
(see Notes 2 and 3). The Company allocates a portion of the purchase price to
the fair market value of the acquired assets and liabilities assumed as of the
acquisition date
(k) REVENUE RECOGNITION
The Company's advertising 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. The Company recognizes this revenue based upon
notification by the third party e-commerce site.
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 recognizes the revenues over the term of the agreement.
The Company trades advertisements on its Web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or received;
whichever is more determinable in the circumstances. Revenue from barter
transactions is recognized as income when
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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 June 30, 2000 and December 31, 1999, the Company has recorded a
liability of approximately $0, and $27,000, respectively, for barter advertising
to be delivered. Barter revenue, which is a component of advertising revenue,
amounted to $388,000 and $111,000 for the three months ended June 30, 2000 and
1999 and $434,000 and $255,000 for the six months ended June 30, 2000 and 1999,
respectively. For the three and six month periods ended June 30, 2000 and 1999,
barter expenses were approximately $263,000 and $87,000, and $282,000 and
$212,000 respectively.
The Company generates revenues in the business market by providing businesses
with Internet email services, facsimile transmission services and collaboration
software and services. These services include email to fax, fax to email,
enhanced fax, and broadcast fax; email system connection services, email hosting
services and email monitoring services, (including virus scanning, attachment
control, spam control, legal disclaimers and other legends affixed to outgoing
emails and real time Web-based reporting); and collaboration software and
services such as group calendar, document sharing and project management. Most
of these services are billed on a usage or per seat basis. Revenue from business
fax and email services is recognized as the services are performed. Facsimile
license revenue is recognized over the average estimated customer life of 3
years.
Subscription services are deferred and recognized ratably over the term of the
subscription periods of one, two and five years as well as eight years for its
lifetime subscriptions. Commencing March 10, 1999, the Company no longer offered
lifetime memberships and only offers monthly and annual subscriptions. The
eight-year amortization period for lifetime subscriptions is based on the
weighted-average expected usage period of a lifetime member. The Company offers
30-day trial periods for certain subscription services. The Company only
recognizes revenue after the 30-day trial period. Deferred revenues principally
consist of subscription fees received from members for use of the Company's
premium email services. The Company is obligated to provide any enhancements or
upgrades it develops and other support in accordance with the terms of the
applicable Mail.com Partner agreements. The Company provides an allowance for
credit card chargebacks and refunds on its subscription services based upon
historical experience. The Company provides pro rated refunds and chargebacks to
subscription members who elect to discontinue their service. The actual amount
of refunds and chargebacks approximated management's expectations for all
periods presented.
Domain development revenues include revenues generated by World.com and consist
primarily of sales of information technology products and revenues generated
from the provision of local content and other Internet services. Revenue is
recognized at the time of the sale.
(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 and, accounts receivable, notes payable and
convertible notes payable. At June 30, 2000 and December 31, 1999, the fair
value of cash, cash equivalents, restricted investments, marketable securities
and accounts receivable approximated their financial statement carrying amount
because of the short-term maturity of these instruments. The recorded values of
notes payable and convertible notes payable approximate their fair values, as
interest approximates market rates. 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 six months ended June 30, 2000.
One customer accounted for 13% of the Company's revenue and 16% of the accounts
receivable as of and for the six months ended June 30, 1999. Revenues from the
Company's five largest customers accounted for an aggregate of 11% and 48% of
the Company's revenues for the six months ended June 30, 2000 and 1999,
respectively.
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(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.
(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. See 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 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 has adopted the
accounting provisions of SAB No. 101 as of April 1, 2000.
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." The Company adopted FIN No.44 during the second quarter of 2000. See
Note 11.
In March 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which
provides guidance on when to capitalize versus expense costs incurred to develop
a web site. The Company has elected early adoption of this EITF and has
implemented the provisions as of April 1, 2000.
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(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.
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<PAGE> 13
The acquisition has been accounted for using the purchase method of accounting.
Mail.com has allocated a portion of the purchase price to the fair market value
of the acquired assets and assumed liabilities of NetMoves as of February 8,
2000. The excess of the purchase price over the fair market value of the
acquired assets and assumed liabilities of NetMoves has been allocated to
goodwill ($147.1 million), and assembled employee workforce ($3.1 million) and
technology ($5.5 million). Goodwill is being amortized over a period of 5 years,
the expected estimated period of benefit and assembled employee workforce are
being amortized over a period of 3 years, the expected estimated period of
benefit.
In performing the purchase price allocation, Mail.com considered, among other
factors, the attrition rate of the active users of the technology at the date of
acquisition and the research and development projects in-process at the date of
acquisition. With regard to the in-process research and development projects,
Mail.com considered, among other factors, the stage of development of each
project at the time of acquisition, the importance of each project to the
overall development plan, and the projected incremental cash flows from the
projects when completed and any associated risks. Associated risks included the
inherent difficulties and uncertainties in completing each project and thereby
achieving technological feasibility and risks related to the impact of potential
changes in future target markets.
Approximately $7.7 million of the purchase price of NetMoves was allocated to
in-process technology based upon an independent appraisal which determined that
the new versions of the various fax technologies acquired from NetMoves had not
been developed into the platform required by Mail.com as of the acquisition
date. The fair value of purchased existing and in-process technologies was
determined by management using a risk-adjusted income valuation approach. As a
result, Mail.com is required to expend significant capital expenditures to
successfully integrate and develop the new versions of various fax technologies,
for which there is considerable risk that such technologies will not be
successfully developed, and if such technologies are not successfully developed,
there will be no alternative use for the technologies. The various fax
technologies are enabling technologies for fax communications and include
message management and reporting. Accordingly, on the date of acquisition,
Mail.com's statements of operations reflected a write-off of the amount of the
purchase price allocated to in-process technology of approximately $7.7 million.
Because such in-process technologies did not reach technological feasibility as
of the acquisition date and are 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.
In addition to the rollover of existing options contemplated by the merger
agreement, NetMoves' former President, Chief Executive Officer and Chairman of
the board of directors, as an employee of Mail.com received 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.
eLONG.com, INC.
On March 14, 2000, Mail.com acquired eLong.com, Inc., a Delaware corporation
("eLong.com") for approximately $62 million including acquisition costs of
$365,000. eLong.com, through its wholly owned subsidiary in the People's
Republic of China ("PRC"), operates the Web Site www.eLong.com, which is a
provider of local content and other internet services. Concurrently with the
merger, eLong.com changed its name to Asia.com, Inc. ("Asia.com"). In the
merger, Mail.com issued to the former stockholders of eLong.com an aggregate of
3,599,491 shares of Mail.com Class A common stock valued at approximately $57.2
million. 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
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<PAGE> 14
million. In addition, Mail.com is obligated to issue up to an additional 719,899
shares of Mail.com Class A common stock in the aggregate to the former
stockholders of eLong.com if Mail.com or Asia.com acquires less than $50.0
million in value of businesses engaged in developing, marketing or providing
consumer or business internet portals and related services focused on the Asian
market or a portion thereof, or businesses in furtherance of such a business,
prior to March 14, 2001. The actual amount of shares issued will be based upon
the amount of any shortfall in acquisitions below the $50.0 million target
amount.
In the Merger, certain former stockholders of eLong.com retained shares of Class
A common stock of Asia.com, representing approximately 4.0% of the outstanding
common stock of Asia.com. Under a Contribution Agreement with Asia.com these
stockholders contributed an aggregate of $2.0 million in cash to Asia.com in
exchange for additional shares of Class A common stock of Asia.com, representing
approximately 1.9% of the outstanding common stock of Asia.com. Pursuant to the
Contribution Agreement, Mail.com (1) contributed to Asia.com the domain names
Asia.com and Singapore.com and $10.0 million in cash and (2) agreed to
contribute to Asia.com up to an additional $10.0 million in cash over the next
12 months and to issue, at the request of Asia.com, up to an aggregate of
242,424 shares of Mail.com Class A common stock. As of June 30, 2000, Mail.com
has fulfilled this obligation. See also "Asia.com Acquisitions", below. As a
result of the transactions effected pursuant to the Merger Agreement and the
Contribution Agreement, Mail.com initially owned shares of Class B common stock
of Asia.com representing approximately 94.1% of the outstanding common stock of
Asia.com. Mail.com's ownership percentage has decreased to 92% as of June 30,
2000. Asia.com granted to management employees of Asia.com options to purchase
Class A common stock of Asia.com representing as of June 30, 2000, 9% of the
outstanding shares of common stock after giving effect to the exercise of such
options.
The acquisition has been accounted for as a purchase business combination. The
excess of the purchase price over the fair market value of the acquired assets
and assumed liabilities of Asia.com has been allocated to goodwill ($62
million). Goodwill is being amortized over a period of 3 years, the expected
estimated period of benefit.
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.
ASIA.COM ACQUISITIONS
During the second quarter of 2000, Asia.com acquired three companies for
approximately $18.4 million, including acquisition costs. Payment consisted of
cash approximating $500,000, 1,926,180 shares of Mail.com Class A common
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<PAGE> 15
stock valued at approximately $11.6 million and 4,673,448 shares of Asia.com
Class A common stock valued at approximately $6.1 million. These acquisitions
have been accounted for as purchase business combinations. The excess of the
purchase price over the fair market value has been allocated to goodwill ($17.8
million) and amortized over a period of three years, the expected estimated
period of benefit.
Under a stock purchase agreement associated with one of the acquisitions, the
Company agreed to pay a contingent payment of up to $5 million if certain
wireless revenue targets are reached after the closing. The contingent payment
was payable in Mail.com Class a common stock, cash or, under certain
circumstances, Asia.com Class A common stock. Subsequent to June 30, 2000 the
parties under the stock purchase agreement have agreed, subject to execution and
delivery of final documentation, to settle the contingent payment obligation.
Under the settlement, Mail.com has agreed to issue 200,000 shares of Mail.com
Class A common stock upon completion of documentation and up to 800,000
additional shares of Mail.com Class A common stock on August 31, 2001 based on
the price of such stock at that time. In lieu of issuing any such additional
shares of Mail.com Class A common stock on August 31, 2001, Mail.com may satisfy
such obligation by paying cash or, under certain circumstances, by transferring
shares of Asia.com Class A common stock owned by Mail.com.
MAURITIUS ENTITY
On March 31, 2000, the Company acquired 100% of a Mauritius entity, which in
turn owns 80% of an Indian subsidiary. The terms were $400,000 in cash and a $1
million 7% note payable one year from closing. The acquisition was accounted
for as a purchase business combination. The excess of the purchase price over
the fair market value of the assumed liabilities of the Mauritius entity has
been allocated to goodwill ($2.1 million). Goodwill is being amortized over a
period of five years, the expected estimated period of benefit.
In June 2000, the Company acquired through the Mauritius entity the remaining
20% of the Indian subsidiary for $2.2 million. The acquisition was accounted
for as a purchase business combination. The excess of the purchase price over
the fair market value of the net assets acquired has been allocated to goodwill
($2.2 million), and is being amortized over a period of five years, the
expected estimated period of benefit.
In connection with the Mauritius acquisition, the Company incurred a $1.8
million charge related to the issuance of 104,347 shares of Class A common
stock, as compensation for services performed and to be performed, $200,000 cash
and an additional $200,000 payable in Mail.com Class A common stock as
compensation for employees.
PROFORMA INFORMATION
The following unaudited pro-forma consolidated amounts give effect to the
acquisitions as if they had occurred on January 1, 1999, by consolidating their
results of operations with the results of Mail.com for the three and six months
ended June 30, 2000 and 1999. Consolidated results are not necessarily
indicative of the operating results that would have been achieved had the
transactions been in effect as of the beginning of the periods presented and
should not be construed as being representative of future operating results.
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<PAGE> 16
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 2000 1999
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 15,023 $ 10,467 $ 27,251 $ 19,782
Net loss attributable to common stockholders $ (47,897) $ (46,373) $(105,957) $ (74,299)
Basic and diluted net loss per common share $ (0.82) $ (1.37) $ (1.82) $ (2.35)
Weighted average shares used in net loss per
common share calculation (1) 58,647 33,730 58,074 31,656
</TABLE>
(1) The Company computes net loss per share in accordance with provisions of
SFAS No. 128, "Earnings per Share". Basic net loss per share is computed by
dividing the net loss for the period by the weighted-average number of
common shares outstanding during the period. The calculation of the weighted
average number of shares outstanding assumes that 13,124,553 shares of
Mail.com's common stock issued in connection with its acquisitions were
outstanding for the entire 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 from
January 1, 1999 or date of inception if later. Diluted net loss per share is
equal to basic net loss per share as common stock issuable upon exercise of
the Company's employee stock options and upon exercise of outstanding
warrants are not included because they are antidilutive. In future periods,
the weighted-average shares used to compute diluted earnings per share will
include the incremental shares of common stock relating to outstanding
options and warrants to the extent such incremental shares are dilutive.
(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>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
Computer equipment and software, including amounts related
to capital leases of $34,205 and $23,774, respectively $ 53,396 $ 34,671
Furniture and fixtures 2,703 300
Leasehold improvements 1,011 466
----------- ----------
57,110 35,437
Less accumulated depreciation and amortization, including
amounts related to capital leases of $8,254, and
$4,056, respectively 13,397 6,502
----------- ----------
Total $ 43,713 $ 28,935
=========== ==========
</TABLE>
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Domain assets consist of the following, in thousands:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Domain names $ 9,195 $ 9,138
Less accumulated amortization 2,057 1,204
------------ -----------
Domain assets, net $ 7,138 $ 7,934
============ ===========
</TABLE>
Goodwill and other intangible assets consists of the following, in thousands:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Goodwill $ 253,732 $ 22,276
Other intangible assets 21,742 9,667
------------- -----------
275,474 31,943
Less accumulated amortization 27,546 2,979
------------- -----------
Total $ 247,928 $ 28,964
============= ===========
</TABLE>
Accrued expenses consist of the following, in thousands:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Advertising and customer acquisition costs $ 4,505 $ 4,367
Payroll and related costs 4,412 1,998
Carrier charges 3,369 56
Interest on convertible notes 3,014 --
Payments under partner contracts 2,403 1,252
Professional services and consulting fees 2,372 1,494
Other 3,004 2,568
----------- ----------
Total $ 23,079 $ 11,735
=========== ==========
</TABLE>
(4) NOTES RECEIVABLE
During the six months ended June 30, 2000, the Company loaned $2 million to a
company ("Borrower") and received a promissory note ("Note") as evidence of the
loan. Repayment of the Note along with interest calculated at an annual rate of
7% is due on September 30, 2000. Under the agreement, 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 is to 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.
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<PAGE> 18
(5) INVESTMENTS
On March 16, 2000, the Company acquired a domain name and made a 10% investment
in Software Tool and Die, a Massachusetts company, in exchange for $2.0 million
in cash and 185,686 shares of Class A common stock valued at approximately $2.9
million. Software Tool and Die is an Internet Service Provider and provides Web
hosting services.
On April 17, 2000, in exchange for $500,000 in cash, Mail.com acquired certain
source code technologies, trademarks and related contracts relating to the
InTandem collaboration product ("InTandem") from IntraACTIVE, Inc., a Delaware
corporation (now named Bantu, Inc., "Bantu"). On the same date, Mail.com also
paid Bantu an upfront fee of $500,000 for further development and support of the
InTandem product. On the same date, pursuant to a Common Stock Purchase
Agreement, Mail.com acquired shares of common stock of Bantu representing
approximately 4.6 % of Bantu's outstanding capital stock in exchange for $1
million in cash and 462,963 shares of Class A common stock, valued at
approximately $4.1 million. Pursuant to the Common Stock Purchase Agreement,
Mail.com also agreed to invest up to an additional $8 million in the form of
shares of Mail.com Class A common stock in Bantu in three separate increments,
of $4 million, $2 million and $2 million, respectively, based upon the
achievement of certain milestones in exchange for additional shares of Bantu
common stock representing 3.7%, 1.85% and 1.85%, respectively, of the
outstanding common stock of Bantu as of April 17, 2000. The number of shares of
Mail.com Class A common stock issuable at each closing date will be based on the
greater of $9 per share or the average of the closing prices of Mail.com's Class
A common stock over the five trading days prior to such closing dates.
Subsequent to June 30, 2000, Mail.com issued an additional 92,592 shares of
Class A common stock valued at approximately $635,000 to Bantu, in accordance
with a true-up provision in the Common Stock Purchase Agreement.
Mail.com is amortizing the $500,000 associated with the source code
technologies, trademarks and related contracts relating to the InTandem
collaboration product over a 3 year period, the expected useful life. Mail.com
has capitalized the $500,000 associated with the development and support of the
InTandem product until such product is available for use and will then amortize
such amount over its expected useful life.
On June 30, 2000, the Company received 35,714 shares of common stock of
Onview.com valued at $125,000 as payment for the Company's advertising
services. A director of Mail.com is a principal of Onview.com.
On June 30, 2000, the Company made an additional investment in 3Cube, Inc. by
issuing 255,049 shares of Class A common stock valued at approximately $1.5
million in exchange for 50,411 shares of 3Cube Series C Preferred Stock. At
June 30, 2000, Mail.com owned preferred stock of 3Cube, representing an
ownership interest of 21% of the combined common and preferred stock outstanding
of 3Cube, Inc. Accordingly, the Company now accounts for this investment under
the equity method of accounting.
(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
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<PAGE> 19
value will be calculated using the bond equivalent yield on U.S. Treasury notes
or bills having a term nearest the length to that of the additional period as
of the day immediately preceding the date on which a notice of Provisional
Redemption is mailed.
On or after February 5, 2003, the Notes may be redeemed at the Company's
option, in whole or in part, in cash at the specified redemption prices, plus
accrued interest to the date of redemption.
In connection with the issuance of these Notes, the Company incurred
approximately $3.8 million of debt issuance costs. Such costs have been
capitalized and are being amortized ratably over the original term of the
Notes. The Company incurred approximately $1.9 million and $3.3 million of
interest expense including accrued interest and amortization of the debt
issuance costs in the three and six months ended June 30, 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 June 30, 2000 and December 31, 1999,
the Company had accrued approximately $2.4 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 and $222,000 of
amortization expense in each of the three and six month periods, respectively,
ended June 30, 2000 and 1999.
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 $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.
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<PAGE> 20
During the first six months of 1999, the Company issued 482,282 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 $117,000 and $2.5 million for the
three and six months ended June 30, 1999 and are included in sales and
marketing expenses in the statements of operations. The Company no longer
issues stock in connection with its strategic partnership agreements.
Prior to May 1, 1999, the Company was required to issue to CNET, Snap and NBC
Multimedia shares of its Class A common stock for each member who registers at
their sites. On May 1, 1999, the Company entered into an agreement to settle in
full its contingent obligation to issue shares of its Class A common stock to
CNET, Snap and NBC Multimedia as described above. Pursuant to this agreement,
the Company issued upon the closing of its initial public offering in June
1999, 2,368,907 shares of Class A common stock at a value of $7.00 per share in
the aggregate to CNET and Snap and 210,000 shares of Class A common 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 $790,000 at June 30, 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 $1.6 million during the six
months ended June 30, 2000. The assets were leased back from the purchaser over
3 to 5 years. The Company had not received approximately $1.3 million and
$183,000 from such sales at June 30, 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. On May 30, 2000, the Company entered into an
additional $15 million Master Lease Agreement with GATX for equipment lease
financing (hardware and software). Terms of the agreement are similar to those
described previously except that the effective interest rate is 12.5%. For
certain leases entered into under the $12 million master lease agreement, the
Company has exercised an option to extend the term for an additional 24
months.
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.
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(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, 1999. As a result of
the termination of the May 26 letter agreement and the July 26 interim
agreement, the remaining $3.3 million of non-cash charges was expensed in the
first quarter of 2000 and is included in sales and marketing expenses in the
accompanying condensed consolidated statements of operations.
(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 email,
facsimile transmission and collaboration services to businesses and consumers.
The following table presents summarized financial information related to the
business segments for the three and six months ended June 30, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 2000 1999
--------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Messaging $ 13,592 $ 2,057 $ 23,543 $ 3,243
Domain development 1,431 -- 1,431 --
------------- ------------- ------------- --------------
Total revenue 15,023 2,057 24,974 3,243
------------- ------------- ------------- --------------
Cost of revenues:
Messaging 12,435 2,179 22,278 3,656
Domain development 1,460 -- 1,478 --
------------- ------------- ------------- --------------
Total cost of revenue 13,895 2,179 23,756 3,656
------------- ------------- ------------- --------------
Operating expenses, excluding cost
of revenue
Messaging 36,890 7,949 76,003 14,082
Domain development 11,971 -- 15,573 --
------------- ------------- ------------- --------------
Total operating expenses,
excluding cost of revenue $ 48,861 $ 7,949 $ 91,576 $ 14,082
------------- ------------- ------------- --------------
</TABLE>
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(11) STOCK OPTION REPRICING
On May 31, 2000, the Board of Directors approved the cancellation and
re-issuance of 500,000 options to an executive at an exercise price of $5.53
per share based on the closing price of the Company's Class A common stock on
May 31, 2000. The options had an original exercise price of $12.44. The new
options vest at the same rate that they would have vested under previous plans.
As described below, pursuant to FIN 44, stock options repriced after December
15, 1998 are subject to variable plan accounting. The total compensation
charge for the three months ended June 30, 2000 approximated $2,000.
In March 2000, the Financial Accounting Standard Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("Interpretation").
Among other issues, this Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Pursuant to the Interpretation, stock
options repriced after December 15, 1998 are subject to variable plan
accounting treatment. This guidance requires the Company to remeasure
compensation cost for outstanding repriced options each reporting period based
on changes in the market value of the underlying common stock. Depending upon
movements in the market value of the Company's Class A common stock, this
accounting treatment may result in significant non-cash compensation charges in
future periods.
(12) SUBSEQUENT EVENTS
On July 17, 2000, Mail.com signed two separate master lease agreements totaling
$6 million relating to certain credit facilities, advances or other financial
accommodations that will be made available to certain of its subsidiaries.
On July 25, 2000, Mail.com issued 102,215 shares of its Class A common stock
valued at approximately $872,000 as an investment in Madison Avenue Technology
Group, Inc. (CheetahMail). The investment has been accounted for under the
cost method of accounting as Mail.com owns less than 20% of the outstanding
stock of CheetahMail In consideration thereof, Mail.com received 750,000
shares of Series B convertible preferred stock and a warrant to purchase 75,000
shares of common stock of CheetahMail. The exercise price of the warrants is
$1.00 per share and is exercisable through July 24, 2005. In addition,
Mail.com also entered into a permission marketing agreement with CheetahMail
that will allow Mail.com to sell certain list management services and manage
customer relationships.
On July 25, 2000, Mail.com entered into a strategic relationship with
BulletN.net, Inc. The investment has been accounted for under the cost method
of accounting as Mail.com owns less than 20% of the outstanding stock of
BulletN.net. As part of this agreement BulletN.net issued 666,667 shares of
its common stock and a warrant to purchase up to 666,667 shares of BulletN.net
common stock to Mail.com in exchange for 364,431 shares of Mail.com Class A
common stock valued at approximately $3.1 million. The warrant received by
Mail.com expires on July 1, 2005 and is exercisable at a price of $3.75 per
share. Of the 666,667 shares subject to this warrant, 400,000 are subject to
vesting based upon the messages that pass through the respective services of
the companies. The remaining 266,667 shares subject to the warrant are
immediately vested.
On August 3, 2000, Mail.com committed to issue a convertible promissory note
for $1.8 million payable on December 31, 2000, with one of our commercial
vendors subject to the effectiveness of a registration statement being filed
that would register the underlying number of shares of Mail.com Class A common
stock upon conversion. The Note bears interest at 7% per annum. The lender
has the right to convert the outstanding principal balance of the Note, in
whole or in part, into the number of shares of Mail.com Class A common stock
that would result from dividing the principal amount due by the market price of
the common stock on the Nasdaq National Market at the time of conversion.
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<PAGE> 23
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We make forward-looking statements within the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 throughout this report. These
statements relate to our future plans, objectives, expectations and intentions.
These statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "believes," "estimates," "plans" and similar
expressions. Our actual results could differ materially from those discussed in
these statements. Factors that could contribute to such differences include,
but are not limited to, those discussed in the "Risk Factors That May Affect
Future Results" section of this report. Mail.com undertakes no obligation to
update publicly any forward-looking statements for any reason even if new
information becomes available or other events occur in the future.
OVERVIEW
Mail.com, Inc., (the "Company", "We", "Us" or "Our") is a leading global
provider of Internet messaging services to businesses, ISPs, Web sites and
direct to consumers. In the business market, we provide outsourced e-mailbox
hosting, and gateway services such as virus scanning, spam blocking and content
filtering; facsimile transmission services including email to fax, fax to email,
enhanced fax and broadcast services; and collaboration software and services
such as group calendar, document sharing and project management. In the consumer
market, we provide Web-based e-mail services or WebMail to Internet Service
Providers (ISPs) including several of the world's top ISPs, and we partner with
top branded Web sites to provide WebMail services to their users. In addition,
we serve the consumer market directly through our flagship web site
www.mail.com.
Our basic consumer email services are free to our members. Prior to our
acquisition of NetMoves, we generated the majority of our revenues from our
consumer email services, primarily from advertising related sales, including
direct marketing and e-commerce promotion. We also generated revenues in the
consumer market sector from subscription services, such as increased storage
capacity. In June 2000, we delivered approximately 410 million page views and
approximately 1.5 billion advertisements in our consumer email services. During
the three months ended June 30, 2000, we delivered approximately 1.1 billion
page views. We generated revenues in the business market from facsimile
transmission services including email to fax, fax to email, enhanced fax,
broadcast services; Internet e-mail services, consisting of services that enable
email networks to connect to the Internet, email hosting services and email
message management services, including virus scanning, attachment control, spam
control, legal disclaimers and real time Web-based reporting and collaboration
software and services such as group calendar, document sharing and project
management.
For the three and six-months ended June 30, 2000, we generated approximately 40%
and 43% of our revenues from consumer messaging related sales and approximately
49% and 49% of our revenues from business messaging services. We also generated
a portion of our revenues from the sale of domain name assets and from the sales
of information technology products and the provision of local content and other
internet services associated with WORLD.com. 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.
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<PAGE> 24
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.
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 2% of total revenues for the
six-month period ended June 30, 2000, as compared to 8% for the comparable
period in 1999. We anticipate that barter revenues will remain below 5%
annually, although the actual amount may fluctuate in any given quarter.
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 Internet email services, facsimile transmission
services and collaboration software and services. These services include email
to fax, fax to email, enhanced fax, and, broadcast fax; email system connection
services, email hosting services and email monitoring services, (including virus
scanning, attachment control, spam control, legal disclaimers and other legends
affixed to outgoing emails and real time Web-based reporting); and collaboration
software and services such as group calendar, document sharing and project
management. Most of these services are billed on a usage or per seat basis.
Revenue from email, business fax and collaboration services is recognized as the
services are performed. Facsimile license revenue is recognized over the average
estimated customer life of 3 years. Business revenues for the three and six
months ended June 30, 2000 were $7.4 million and $12.1 million, respectively.
There were no business revenues during the comparable periods 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
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<PAGE> 25
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.
Domain development revenues include revenues generated by World.com and consist
primarily of sales of information technology products and revenues generated
from the provision of local content and other internet services.
Historically, some of our contracts have required us to issue shares of Class A
common stock on a contingent basis. The amount of stock we were required to
issue was usually based upon the number of member registrations during the
preceding quarter or upon the achievement of performance targets. We recorded
the non-cash expense as of the date we issued the stock or as of the date the
targets were achieved, at the then fair market value of our stock. These
expenses aggregated approximately $0 and $117,000 for the three months ended
June 30, 2000 and 1999 and $0 and 2.5 million for the six months ended June 30,
2000 and 1999 respectively. We no longer issue stock to third parties in
connection with member registrations.
Under an agreement with CNN we issued 253,532 shares of our Class A common
stock upon execution of a contract. We agreed to issue the shares in
anticipation of CNN's fulfillment of promotional obligations under the
contract. We capitalized as a partner advance the market value of the stock we
issued and then amortized that amount over the length of the contract. During
the each of the three and six month periods ended June 30, 2000 and 1999 we
recorded approximately $111,000 and $222,000 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 are $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
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<PAGE> 26
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.
On March 14, 2000, we acquired eLong.com, Inc., a Delaware corporation
("eLong.com") for approximately $62 million including acquisition costs of
approximately $365,000. eLong.com, through its wholly owned subsidiary in the
People's Republic of China, operates the Web Site www.eLong.com, which is a
provider of local content and other internet services. The acquisition was
accounted for as a purchase business combination. Concurrently with the merger,
eLong.com changed its name to Asia.com, Inc. ("Asia.com"). In the merger, we
issued to the former stockholders of eLong.com an aggregate of 3,599,491 shares
of Mail.com Class A common stock valued at approximately $57.2 million. 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 additional shares of Class A common stock of Asia.com,
representing approximately 1.9% of the outstanding common stock of Asia.com.
Pursuant to the Contribution Agreement, Mail.com (1) contributed to Asia.com the
domain names Asia.com and Singapore.com and $10.0 million in cash and (2) agreed
to contribute to Asia.com up to an additional $10.0 million in cash over the
next 12 months and to issue, at the request of Asia.com, up to an aggregate of
242,424 shares of Mail.com Class A common stock. As a result of the transactions
effected pursuant to the Merger Agreement and the Contribution Agreement,
Mail.com owns shares of Class B common stock of Asia.com representing
approximately 94.1% of the outstanding common stock of Asia.com. Our ownership
percentage decreased to 92% as of June 30, 2000. Asia.com granted to management
employees of Asia.com options to purchase Class A common stock of Asia.com
representing, as of June 30, 2000, 9% of the outstanding shares of common stock
after giving effect to the exercise of such options.
The shares of Class A common stock of Asia.com are entitled to one vote per
share and the shares of Class B common stock of Asia.com are entitled to 10
votes per share. The shares of Class A common stock and Class B common stock
are otherwise subject to the same rights and restrictions.
On March 16, 2000 in exchange for $2 million in cash and 185,686 shares of our
Class A common stock valued at approximately $2.9 million, we acquired a domain
name from and made a 10% investment in Software Tool and Die, a Massachusetts
Corporation. Software Tool and Die is an Internet Service Provider and provides
Web hosting services.
On March 31, 2000, we acquired a Mauritius entity, which in turn owns 80% of an
Indian subsidiary, to facilitate future investments in India. The terms were
$400,000 in cash and a $1 million 7% note payable due one year from closing.
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<PAGE> 27
In June 2000, the Company acquired through the Mauritius entity the remaining
20% of the Indian subsidiary for $2.2 million in cash.
In connection with the Mauritius acquisition, we incurred a $1.8 million charge
related to the issuance of 104,347 shares of Class A common stock, as
compensation for services performed $200,000 cash and an additional $200,000
payable in our Class A common stock as compensation for employees.
During the six months ended June 30, 2000, we loaned $2 million to a company
("Borrower") and received a promissory note ("Note") as evidence of the loan.
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, we acquired certain source
code technologies, trademarks and related contracts relating to the InTandem
collaboration product ("InTandem") from IntraACTIVE, Inc., a Delaware
corporation (now named Bantu, Inc., "Bantu"). On the same date, we also paid
Bantu an upfront fee of $500,000 for further development and support of the
InTandem product. On the same date, pursuant to a Common Stock Purchase
Agreement, Mail.com acquired shares of common stock of Bantu representing
approximately 4.6 % of Bantu's outstanding capital stock in exchange for $1
million in cash and 462,963 shares of Class A common stock, valued at
approximately $4.1 million. Pursuant to the Common Stock Purchase Agreement,
Mail.com also agreed to invest up to an additional $8 million in the form of
shares of Mail.com Class A Common stock in Bantu in three separate increments of
$4 million, $2 million and $2 million, respectively, based upon the achievement
of certain milestones in exchange for additional shares of Bantu common stock
representing 3.7%, 1.85% and 1.85%, respectively, of the outstanding common
stock of Bantu as of April 17, 2000. The number of shares of our Class A common
stock issuable at each closing will be based on the greater of $9 per share and
the average of the closing prices of our Class A common stock over the five
trading days prior to such closing date. We are 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 Bantu. Subsequent to June 30, 2000, we issued an
additional 92,592 shares of our Class A common stock valued at approximately
$635,000 to Bantu in accordance with a true-up provision in the Common Stock
Purchase Agreement.
During the second quarter of 2000, Asia.com acquired three companies for
approximately $18.4 million, including acquisition costs. Payment consisted of
cash approximating $500,000, 1,926,180 shares of Mail.com Class A common stock
valued at approximately $11.6 million and 4,673,448 shares of Asia.com Class A
common stock valued at approximately $6.1 million.
Under a stock purchase agreement associated with one of the acquisitions, the
Company agreed to pay a contingent payment of up to $5 million if certain
wireless revenue targets are reached after the closing. The contingent payment
was payable in Mail.com Class a common stock, cash or, under certain
circumstances, Asia.com Class A common stock. Subsequent to June 30, the
parties under the stock purchase agreement have agreed, subject to execution
and delivery of final documentation, to settle the contingent payment
obligation. Under the settlement, Mail.com has agreed to issue 200,000 shares
of Mail.com Class A common stock upon completion of documentation and up to
800,000 additional shares of Mail.com Class A common stock on August 31, 2001
based on the price of such stock at that time. In lieu of issuing any such
additional shares of Mail.com Class A common stock on August 31, 2001, Mail.com
may satisfy such obligation by paying cash or, under certain circumstances, by
transferring shares of Asia.com Class A common stock owned by Mail.com.
On June 30, 2000, the Company made an additional investment in 3Cube, Inc by
issuing 255,049 shares of Class A common stock valued at approximately $1.5
million in exchange for 50,411 shares of 3Cube Series C Preferred Stock. As of
June 30, 2000 Mail.com owned preferred stock of 3Cube, representing an ownership
interest of 21% of the combined common and preferred stock outstanding of 3Cube,
Inc. Accordingly, we now account for this investment under the equity method
of accounting.
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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 June 30, 2000, we
had an accumulated deficit of approximately $153.5 million. We intend to
continue to invest heavily in sales and marketing and continued development and
enhancements to our computer systems and service offerings. We also intend to
continue 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
and $183,000 for each of the three and six-month periods ended June 30, 2000
and 1999, respectively, in connection with the grant of stock options to one of
our officers. This deferral, which totaled $1.1 million at the date of the
grant, represents the difference between the deemed fair value of our common
stock for accounting purposes and the exercise price of the options at the date
of grant. This amount is represented as a reduction of stockholders' equity and
amortized over the three-year vesting period. Amortization of deferred stock
compensation is charged to sales and marketing expense on the statement of
operations. We will amortize the remaining deferred compensation of
approximately $478,000 over the remaining vesting periods through December
2001.
We have recorded amortization of deferred compensation of approximately
$197,000 and $35,000 during the three months ended June 30, 2000 and 1999 and
$232,000 and $35,000 during the six months ended June 30, 2000 and 1999,
respectively, in connection with the grant of 40,400 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 $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.
On May 31, 2000, the Board of Directors approved the cancellation and
re-issuance of 500,000 options to an executive at an exercise price of $5.53
per share based on the closing price of the Company's Class A common stock on
May 31, 2000. The options had an original exercise price of $12.44. The new
options vest at the same rate that they would have vested under previous plans.
As described below, pursuant to FIN 44, stock options repriced after December
15, 1998 are subject to variable plan accounting. The total compensation
charge for the three months ended June 30, 2000 approximated $2,000.
In March 2000, the Financial Accounting Standard Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("Interpretation").
Among other issues, this Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Pursuant to the Interpretation, stock
options repriced after December 15, 1998 are subject to variable plan
accounting treatment. This guidance requires the Company to remeasure
compensation cost for outstanding repriced options each reporting period based
on changes in the market value of the underlying common stock. Depending upon
movements in the market value of the Company's Class A common stock, this
accounting treatment may result in significant non-cash compensation charges in
future periods.
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 AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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REVENUE
Revenues for the three and six months ended June 30, 2000 were $15 million and
$25 million, respectively, as compared to $2.1 million and $3.2 million,
respectively for the comparable periods in 1999. The increase of $12.9 million
and $21.8 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 seats and corresponding page views. Our
members established approximately 3.3 million seats during the second quarter
of 2000 as compared to 1.3 million in the second quarter of 1999. The
cumulative total of seats established approximates 17.5 million as of June 30,
2000, as compared to 6.3 million at June 30, 1999.
Consumer revenues for the second quarter of 2000 were $6.1 million as compared
to $1.9 million in the second quarter of 1999. Consumer revenue for the six
months ended June 30, 2000 was $10.9 million as compared to $3.1 million for
the comparable period in 1999. Advertising, permission marketing and
e-commerce revenues for the three and six months ended June 30, 2000 were $5.9
million and $10.5 million as compared to $1.8 million and $2.8 million in the
comparable periods of 1999. Included in advertising revenues are barter
revenues of $263,000 and $111,000 for the three months ended June 30, 2000 and
1999, respectively, and $309,000 and $255,000 for the six months ended June 30,
2000 and 1999, respectively. Revenues from subscription services were $181,000
and $146,000 for the three months ended June 30, 2000 and 1999, respectively
and $352,000 and $274,000 for the six months ended June 30, 2000 and 1999
respectively.
Business messaging revenues for the three and six months ended June 30, 2000
were $7.4 million and $12.1 million respectively. There were no business
messaging revenues during either period in 1999.
Domain development revenues were $1.4 million for the three and six months ended
June 30, 2000. These revenues were generated by World.com and consist primarily
of sales of information technology products and revenues generated from the
provision of local content and other internet services. There were no domain
development revenues for either period in 1999.
Other revenues from the sale or lease of domain names and consulting revenue
was $100,000 and $400,000 during the three and six months ended June 30, 2000
as compared to $74,000 and $125,000 for the comparable periods in 1999.
OPERATING EXPENSES
COST OF REVENUES
Cost of revenues for the three and six months ended June 30, 2000 was $13.9
million and $23.8 million, as compared to $2.2 million and $3.7 million for the
comparable periods in 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 half 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 six months of 2000 as compared to the
first six months of 1999 due to our entry into the business messaging market
and the development of WORLD.com. In addition, we substantially increased
headcount in the technology related departments during the first six months of
2000 as compared to the first six months of 1999. We anticipate additional
purchases and leasing significant amounts of hardware and software and to
continuing to hire technical personnel.
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SALES AND MARKETING EXPENSES
Sales and marketing expenses were $16.9 million and $31.8 million for the three
and six months ended June 30, 2000 as compared to $3.9 million and $7.5 million
for the comparable periods in 1999. The $13.0 million and $24.3 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 and $2.8 million in the three and six months ended June 30, 2000 as
compared to $582,000 and $989,000 in the comparable periods of 1999. The costs
related to customer acquisitions through the issuance of Class A common stock
were approximately $200,000 and $2.4 million during the three and six months
ended June 30, 1999, respectively. The Company is no longer incurring customer
acquisition costs through the issuance of stock. An amendment to the CNET, Snap
and NBC agreement signed during the second quarter of 1999 eliminated the
monthly issuance of shares, but required us to issue the remaining shares under
the contract simultaneously with our initial public offering. The value of
these shares ($18.1 million) is being amortized over the subsequent two-year
period. We recorded approximately $2.3 million and $4.6 million of amortization
expense in connection with the issuance of these shares during the three and
six months ended June 30, 2000, respectively, as compared to $384,000 and
$384,000 in the comparable periods of 1999. We also recorded approximately
$111,000 and $222,000 in amortization of partner advances of shares to CNN
during the each of the three and six-month periods ended June 30, 2000 and
1999, respectively. As previously mentioned, the Company expensed the
remaining unamortized balance of approximately $3.3 million related to the AT&T
warrants during the first quarter of 2000. The next largest cost is advertising
which was $4.1 million and $7.2 million for the three and six months ended June
30, 2000 as compared to $1.7 million and $1.9 million during the comparable
periods of 1999. The increase reflects costs associated with online advertising
for customer 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 three and
six-month periods ended June 30, 2000 as a result of our entry into the
business messaging market and the development of WORLD.com. 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 build our brand
name, expand our business messaging activities and invest in sales and
marketing personnel.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $9.7 million and $18.4 million during
the three and six months ended June 30, 2000 as compared to $2.6 million and
$4.0 million during the comparable periods of 1999. The $7.1 million and $14.4
million increase was attributable to increased personnel and related costs,
including recruiting fees, and increased facilities costs. At June 30, 2000,
the number of employees was 1,229, as compared to 136 at June 30, 1999. General
and administrative expenses consist primarily of compensation and other
employee costs including customer support and other corporate functions as well
our provision for doubtful accounts and overhead expenses. In addition,
general and administrative expenses increased during the three and six months
ended June 30, 2000 as compared to the comparable periods of 1999 due to our
entry into the business messaging market and the development of WORLD.com. We
expect these expenses to continue to grow as necessary to support the growth of
our business and to operate as a public company. In connection with the
Mauritius acquisition, we incurred a $1.8 million charge related to the
issuance of 104,347 shares of Class A common stock as compensation for services
performed and 200,000 cash and an additional $200,000 payable in Mail.com Class
A common stock as compensation for employees.
PRODUCT DEVELOPMENT
Product development costs were $5.5 million and $9.1 million during the three
and six months ended June 30, 2000 as compared to $1.4 million and $2.6 million
in comparable periods of 1999. The $4.1 million and $6.5 million increase was
primarily due to increased staffing and consulting costs to add new features,
design new services and upgrade existing services. Product development costs
consist primarily of salaries and consulting services. Additionally, product
development costs have increased during the three and six month periods ended
June 30, 2000 as compared to the comparable periods of 1999 due to our entry
into the business messaging market and development of WORLD.com. We
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need to continue to invest in product development to attract and retain
customers and, as a result, we expect product development expenses to continue
to increase significantly.
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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 half 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 half of 2000 and relates to the acquisition of
NetMoves in February 2000. Amortization of goodwill and other intangible assets
for the three and six months ended June 30, 2000 was $16.8 and 24.6 million.
There was no amortization of goodwill or write-off of purchased in-process
technology during the first half 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, notes payable and capital lease obligations. Interest income for the
three and six months ended June 30, 2000 was $1.5 million and $3.4 million as
compared to $189,000 and $304,000 during the comparable periods of 1999. The
increase in interest income in 2000 was due to higher cash balances after we
completed our convertible note offering in January 2000.
Interest expense was $2.3 million and $4.1 million for the three and six months
ended June 30, 2000 as compared to $79,000 and $178,000 in the comparable
periods of 1999. The increase was primarily due to interest related to our
convertible note offering as well as new capital lease obligations. Our
computer equipment purchases are financed under capital leases.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have obtained financing through private placements of
equity securities and our initial public offering including the exercise of the
over-allotment option and more recently through our convertible debt offering.
In March 1999, we received net proceeds of $15.2 million from the sale of our
Class E convertible preferred stock. In June 1999, we received net proceeds of
approximately $50.6 million from our initial public offering and the concurrent
share issuance to CNET and NBC Multimedia for the exercise of their warrants to
purchase Class A common stock. In July 1999, we received an additional $6.7
million when the underwriters exercised their over-allotment option. In January
2000, we received net proceeds of $96.1 million from our convertible debt
offering. We also finance a portion of our capital expenditures through lease
lines.
On March 30, 2000, we entered into a $12 million Master Lease Agreement with
GATX Technology Services Corporation ("GATX") for equipment lease financing
(hardware and software). Terms of individual leases signed under the Master
Lease Agreement will call for a 36-month lease term, with rent payable monthly
in advance. The effective interest rate is 12.1% and is adjustable based on
prime. GATX holds a first priority security interest in the equipment under the
facility. On May 30, 2000, we entered into an additional $15 million Master
Lease Agreement with GATX Technology Services Corporation ("GATX") for
equipment lease financing (hardware and software). Terms of the agreement are
similar to those described previously except that the effective interest rate
is 12.5%. For certain leases entered into under the $12 million master lease
agreement, the Company has exercised an option to extend the term for an
additional 24 months.
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
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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, 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 $39.6 million for the six months
ended June 30, 2000, and $529,000 for the six months ended June 30, 1999. Cash
used in operating activities was impacted by the net loss from operations,
offset in part by a write-off of in-process technology, non-cash charges
principally related to partner agreements, and depreciation of fixed assets and
amortization of goodwill and other intangible assets.
Net cash used in investing activities was $60.8 million for the six months
ended June 30, 2000 and $9.4 million for the six months ended June 30, 1999.
Net cash used in investing activities consisted primarily of purchases of
marketable securities and fixed assets . 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 $114.1 million for the six months
June 30, 2000 and $65.8 million for the six months ended June 30, 1999. During
the six months ended June 30, 2000, $96.1 million was received from our
convertible note offering, net of issuance costs and $17.9 million was received
from the sales and maturities of marketable securities. During the first six
months of 1999, $51.1 million was received from our initial public offering,
the exercise of Class A common stock warrants from CNET and NBC Multimedia and
from the exercise of some employee stock options. Additionally, $15.2 million
was received in net proceeds from the sale of Class E preferred stock in 1999.
At June 30, 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 June 30, 2000 there were
no drawings under the LC.
At June 30, 2000, we had $50.5 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 has adopted the
accounting provisions of SAB No. 101 as of April 1, 2000.
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." The Company adopted FIN No.44 during the second quarter of 2000.
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In March 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which
provides guidance on when to capitalize versus expense costs incurred to
develop a web site. The Company has elected early adoption of this EITF and has
implemented the provisions as of April 1, 2000.
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 June 30,
2000, unrealized losses of $17,000 were recorded.
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. In March 2000, we formed WORLD.com to develop and operate
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 and collaboration 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, beginning with Asia.com and India.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 attributable to common stockholders of
$90.4 million for the six months ended June 30, 2000. We had an accumulated
deficit of $153.5 million as of June 30, 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 continue to make strategic acquisitions
and investments, which may result in significant amortization of goodwill and
other expenses. We are making these expenditures in anticipation of higher
revenues, but there will be a delay in realizing higher revenues even if we are
successful. If we do not succeed in substantially increasing our revenues, our
losses will continue indefinitely and will increase.
IF WE ARE UNABLE TO RAISE NECESSARY CAPITAL IN THE FUTURE, WE MAY BE UNABLE TO
FUND NECESSARY EXPENDITURES.
We anticipate the need to raise additional capital in the future. However, we
may not be able to raise on terms favorable to us, or at all, amounts necessary
to fund our 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.
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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.
WE INTEND TO CONTINUE TO ACQUIRE, OR MAKE STRATEGIC INVESTMENTS IN, OTHER
BUSINESSES AND ACQUIRE OR LICENSE TECHNOLOGY AND OTHER ASSETS AND WE MAY HAVE
DIFFICULTY INTEGRATING THESE BUSINESSES OR GENERATING AN ACCEPTABLE RETURN.
We have completed a number of acquisitions and strategic investments
since our initial public offering. For example, we 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 two investments 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. and Huelink
Corporation Ltd. in connection with the formation of Asia.com, Inc. and Multiple
Zones in connection with the formation of India.com. We also recently acquired
technology related assets from IntraACTIVE, Inc. (now named Bantu, Inc.) and
made a strategic investment in Bantu and committed to make additional
investments in them. We will continue our efforts to acquire or make strategic
investments in businesses and to acquire or license technology and other assets,
and any of these acquisitions may be material to us. We cannot assure you that
acquisition or licensing opportunities will continue to be available on terms
acceptable to us or at all. Such acquisitions involve risks, including:
- inability to raise the required capital;
- difficulty in assimilating the acquired operations and personnel;
- inability to retain any acquired member or customer accounts;
- disruption of our ongoing business;
- the need for additional capital to fund losses of acquired
businesses;
- inability to successfully incorporate acquired technology into our
service offerings and maintain uniform standards, controls,
<PAGE> 36
- procedures and policies; and
- lack of the necessary experience to enter new markets.
We may not successfully overcome problems encountered in connection with
potential acquisitions. In addition, an acquisition could materially impair our
operating results by diluting our stockholders' equity, causing us to incur
additional debt or requiring us to amortize acquisition expenses and acquired
assets.
THE ISSUANCE OF OUR CONVERTIBLE SUBORDINATED NOTES SIGNIFICANTLY INCREASED OUR
LEVERAGE.
In January 2000, we issued $100 million of convertible subordinated notes
due 2005. The sale of our convertible notes has increased our debt as a
percentage of total capitalization. We may incur substantial additional
indebtedness in the future. The level of our indebtedness, among other things,
could (1) make it difficult for us to make payments on our convertible notes,
(2) make it difficult to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements or other
purposes, (3) limit our flexibility in planning for, or reacting to changes in,
our business, and (4) make us more vulnerable in the event of a downturn in our
business.
WE MAY BE UNABLE TO PAY DEBT SERVICE ON OUR CONVERTIBLE NOTES AND OTHER
OBLIGATIONS.
We had an operating loss and negative cash flow during the six months
ended June 30, 2000 and 1999 and expect to incur substantial losses and negative
cash flows for the foreseeable future. Accordingly, cash generated by our
operations would have been insufficient to pay the amount of interest payable
annually on our convertible notes. We cannot assure you that we will be able to
pay interest and other amounts due on our convertible notes on the scheduled
dates or at all. If our cash flow and cash balances are inadequate to meet our
obligations, we could face substantial liquidity problems. If we are unable to
generate sufficient cash flow or otherwise obtain funds necessary to make
required payments, or if we otherwise fail to comply with any covenants in our
indebtedness, we would be in default under these obligations, which would permit
these lenders to accelerate the maturity of the obligations and could cause
defaults under our indebtedness. Any such default could have a material adverse
effect on our business, results of operations and financial condition. We cannot
assure you that we would be able to repay amounts due on our convertible notes
if payment of the convertible notes were accelerated following the occurrence of
an event of default under the indenture for the convertible notes.
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 have required us to pay significant fees or to make minimum payments
to the partner without regard to the revenues we realize. If we are unable to
generate sufficient revenues at our partner sites, these fees and minimum
payments can cause the partner's effective share of our revenues to approach or
exceed 100%. We intend to reduce or eliminate the payment of these fees or
minimum payments made without regard to the revenues realized. We cannot assure
you that we will be able to renew partner contracts on the basis of reducing or
eliminating these payments or if renewed that the revised terms of such
contracts will be favorable to us.
THE FAILURE TO RENEW OUR PARTNER CONTRACTS, WHICH HAVE LIMITED TERMS, CAN RESULT
IN THE LOSS OF MEMBERS AND IMPAIR OUR CREDIBILITY.
Our partner contracts generally have one or two year terms. A partner can
decide not to renew at the end of the term for a variety of reasons, including
dissatisfaction with our service, a desire to switch to one of our outsourcing
competitors, or a decision to provide email service themselves. Partners can
also choose not to renew our contract because they have entered into a merger or
other strategic relationship with another company that can provide email
service. This last factor is becoming increasingly common in light of the
consolidation taking place among Web sites, ISPs and other Internet-related
businesses. For example, XOOM recently combined with Snap, which is jointly
owned by CNET and NBC Multimedia, to create a new Internet services company
named NBC Internet, Inc., or NBCi. XOOM offers a free email service at its
xoom.com Web site. We cannot assure you that these partners will not seek to
terminate their contractual relationships with us. A partner may also fail to
renew our contract with them because we decide not to continue making payments
to them without regard to the revenue that we generate from their site. The loss
of a partner can be very disruptive for us for a number of reasons:
We may lose a substantial number of members. When members register for
our service at a partner's Web site, the default domain name members use for
their email address is typically a domain name that is owned by the partner. As
of June 30, 2000, we estimate that approximately 28% of our established
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emailboxes have email addresses at partner-owned domain names. Upon expiration,
most partners can require us to relinquish existing members with addresses at
partner-owned domain names. Even those members who have selected addresses using
our domain names may find it more convenient to switch to whatever replacement
email service may be available at the partner's site. The loss of members due to
expiration or non-renewal of partner contracts may materially reduce our
revenues. Moreover, as of June 30, 2000, we estimate that approximately 16% of
our emailboxes established are at the email.com domain. If CNET and NBCi
exercise their rights to terminate our agreement, which includes the right to
terminate for convenience after May 13, 2001, we would be obligated to transfer
the email.com domain name and related member information to them. If CNET and
NBCi terminate for convenience, they would be obligated to pay us the greater of
$5.0 million or 120% of the fair market value of the email.com user data based
on the projected economic benefit of the users and either return to us the
shares that we issued to them for the establishment of emailboxes or pay us the
then fair market value of these shares. If CNET and NBCi terminate for other
reasons, the amount of compensation they must pay to us varies depending on the
reason for termination. NBC Multimedia may elect to exercise similar rights
relating to email.com emailboxes established through their sites under our
agreement with them.
Losing relationships with prominent partners can impair our credibility
with 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 emailboxes. The following four
partners accounted for 34% of our new emailboxes established in June 2000:
<TABLE>
<CAPTION>
PERCENTAGE
OF NEW DATE THAT OUR
E-MAILBOXES CONTRACT WITH
IN THE PARTNER
PARTNER JUNE 2000 EXPIRES
------------ ------------ -------------
<S> <C> <C>
Juno.............................. 11% December 2001
Snap.............................. 10% *
Iwon.............................. 7% October 2000
EarthLink......................... 7% April 2001
</TABLE>
------------
* Snap may terminate its contracts for convenience after May 13, 2001.
If any of the Web sites operated by these parties were to experience
lower than anticipated traffic, or if our relationships with any of these
parties were disrupted for any reason, our revenues could decrease and the
growth of our business would be impeded. Lower than anticipated traffic could
result in decreased advertising related revenues because those revenues are in
part dependent on the number of members and the level of member usage.
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 emailboxes
regularly, and many do not use them at all. We believe that a substantial
majority of our members do not access their emailboxes regularly or at all.
Moreover, we believe that many of our emailboxes that are accessed were first
established during a recent period prior to access. We expect our proportion of
active members to decrease as our total number of established emailboxes
increases. On an ongoing basis, we believe that a significant number of members
will cease using our service each month. We cannot assure you that we will be
able to add enough new members to compensate for this anticipated loss of usage.
We have only a limited ability to generate advertising revenues from
forwarding and POP3 accounts, which represent a significant percentage of our
emailboxes. Members who choose our forwarding service or subscribe to our POP3
service do not need to come to our partners' or our Web sites to access their
email. Therefore, we do not deliver Web-based advertisements to these members.
Forwarding and POP3 accounts represented approximately 25% of our total
emailboxes as of June 30, 2000, and 9% of the emailboxes that were established
during June 2000. If a disproportionate percentage of members choose either of
these options, it will adversely affect our ability to generate advertising
related revenues.
Our database contains inaccuracies that could reduce the value of our
information. Although we attempt to collect basic demographic information about
members at the time they establish their accounts, we do not verify the accuracy
of this information. Moreover, even if the information is correct when we
receive it, members may move, change jobs or die without our knowledge. As a
result, our database contains inaccuracies that could make our information less
appealing to advertisers.
We do not know how many members have established multiple emailboxes.
Because we do not charge for our basic service, individuals can easily establish
multiple emailboxes. This makes it impossible for us to determine the number of
separate individuals registering for our service, which may reduce the
advertising rates we can command.
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WEBMAIL, EMAIL ADVERTISING AND INTERNET MESSAGING AND COLLABORATION SERVICES
OUTSOURCING MAY NOT PROVE TO BE VIABLE BUSINESSES.
We operate in an industry that is only beginning to develop. Our success
will 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 Internet messaging and collaboration services outsourcing. Outsourcing is
one of the principal methods by which we will attempt to reach the size we
believe is necessary to be successful. Security and the reliability of the
Internet, however, are likely to be of concern to Web sites, ISPs, schools,
businesses and organizations deciding whether to outsource their email or fax
services or to continue to provide it themselves. These concerns are likely to
be particularly strong at larger businesses, which are better able to afford the
costs of maintaining their own systems. We provide a range of email and fax
services to businesses and organizations. We currently generate revenues in the
business market primarily from email service fees related to our email system
connection services, email monitoring services and fax transmission services. We
cannot be sure that we will be able to expand our business customer base,
attract additional customers in other segments or acquire a sufficient base of
customers for whom we would provide hosting and other outsourced services. In
addition, the sales cycle for hosting services is lengthy and could delay our
ability to generate revenues in the business email services market. 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 six months ended June 30, 2000 and 1999, revenues from our five largest
advertisers accounted for an aggregate of 11% and 48%, 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.
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<PAGE> 39
We may not be able to sell as much advertising on a "cost per thousand"
basis or to charge as much under this type of arrangement as we have in the
past. To date, we have generated a significant portion of our advertising
revenues on a "cost per thousand" basis. These agreements require the advertiser
to pay us a fixed fee for every 1,000 advertisements that we deliver to our
members. We believe that this type of agreement is the most effective for us,
but we may not be able to charge as much for these agreements, or to continue to
sell as much advertising on this basis, in the future.
We face greater risks when selling advertising on a "cost per action"
basis. The two types of "cost per action" contracts are "cost per click" and
"cost per conversion." In cost per click contracts, an advertiser agrees to pay
us a fee for each occasion on which a member "clicks" on the advertisement. Cost
per conversion contracts provide that we receive a fee only when a member both
"clicks" on the advertisement and proceeds to purchase an item, order a catalog
or take some other step specified by the advertiser. In general, these
arrangements do not yield as much revenue for us for each advertisement that we
deliver to our members. Moreover, cost per conversion contracts present
additional risks for us because we have no control over the advertiser's ability
to convert a "click" into a sale or other action. We also must rely on the
advertiser to report to us the number of conversions. These reports may not be
accurate, and they may not be timely, both of which can adversely affect our
revenues. Notwithstanding these risks, we may have to sell more of our
advertising on a cost per click or cost per conversion basis in the future.
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,
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
emailboxes 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: telecommunication companies,
such as AT&T, WorldCom, Sprint, the regional Bell operating companies and
telecommunications resellers, ISPs, such as UUnet and NETCOM On-Line
Communications Services, Inc.; on-line services providers, such as Microsoft and
America Online and direct fax delivery competitors, including Premiere Document
Distribution (formerly Xpedite Systems, Inc.) and IDT Corporation. In 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. Our domain properties developed by WORLD.com will compete
with the major business and consumer portals and other providers of internet
services in the markets in which they operate. See "Business - Competition."
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<PAGE> 40
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 Internet messaging and
collaboration 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 Chief Operating Officer, Thomas Murawski, our Chief Executive
Officer, Mail.com Business Messaging Services, Inc. and Courtney Nichols,
General Manager Mail.com Consumer Messaging Services. The loss of the services
of Messrs. Gorman, Millin, Otremba, Kline, and Murawski or of Ms. McClister and
Ms. Nichols, 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.
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 AND TO ACCOMMODATE INCREASES IN THE USAGE OF OUR COLLABORATION
SERVICES, BUT WE MAY NOT BE ABLE TO DO SO WHILE MAINTAINING OUR CURRENT LEVEL OF
SERVICE, OR AT ALL.
We must continue to expand and adapt our computer systems as the number
of members and customers and the amount of information they wish to transmit
increases and as their requirements change, and as we develop our business
messaging and collaboration services. Because we have only been providing our
services for a limited time, and because our computer systems have not been
tested at greater capacities, we cannot guarantee the ability of our computer
systems to connect and manage a substantially larger number of members or meet
the needs of business customers at high transmission speeds. If we cannot
provide the necessary service while maintaining expected performance, our
business would suffer and our ability to generate revenues through our services
would be impaired.
The expansion and adaptation of our computer systems will require
substantial financial, operational and managerial resources. We may not be able
to accurately project the timing of increases in email traffic or other customer
requirements. In addition, the very process of upgrading our computer systems is
likely to cause service disruptions. This is because we will have to take
various elements of the network out of service in order to install some
upgrades.
OUR COMPUTER SYSTEMS MAY FAIL AND INTERRUPT OUR SERVICE.
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<PAGE> 41
Our members have in the past experienced interruptions in our services.
We believe that these interruptions will continue to occur from time to time.
These interruptions are due to hardware failures, unsolicited bulk emails that
overload our system and other computer system failures. In particular, we have
experienced outages and delays in email delivery and access to our email service
related to disk failures, the implementation of changes to our computer system
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 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, Web sites, ISPs and other organizations may block email from all or some
of our members.
OUR DEPENDENCE ON LICENSED TECHNOLOGY EXPOSES US TO THE RISK THAT WE MAY NOT BE
ABLE TO INTEGRATE OUR TECHNOLOGY, WHICH MAY RESULT IN LESS DEVELOPMENT OF OUR
OWN TECHNOLOGY AND MAY INCREASE OUR COSTS.
We license a significant amount of technology from third parties,
including technology related to our Web servers, email monitoring services,
billing processes, database and Internet fax services. We anticipate that we
will need to license additional technology to remain competitive. We may not be
able to license these technologies on commercially reasonable terms or at all.
Third-party licenses expose us to increased risks, including risks relating to
the integration of new technology, the diversion of resources from the
development of our own proprietary technology, a greater need to generate
revenues sufficient to offset associated license costs, and the possible
termination of or failure to renew an important license by the third-party
licensor.
IF THE INTERNET AND OTHER THIRD-PARTY NETWORKS ON WHICH WE DEPEND TO DELIVER OUR
SERVICES BECOME INEFFECTIVE AS A MEANS OF TRANSMITTING DATA, THE BENEFITS OF OUR
SERVICE MAY BE SEVERELY UNDERMINED.
Our business depends on the effectiveness of the Internet as a means of
transmitting data. The recent growth in the use of the Internet has caused
frequent interruptions and delays in accessing and transmitting data over the
Internet. Any deterioration in the performance of the Internet as a whole could
undermine the benefits of our services. Therefore, our success depends on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion. We also depend on telecommunications network
suppliers such as MFS, BBN Planet and UUNET to transmit and receive email
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messages on behalf of our members and our business customers. We are also
affected by service outages at our partners' Web sites. If service at a
partner's site is unavailable for a period of time, we will be unable to sign up
new members and generate page views and revenue at that site during the outage.
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 June 30, 2000 Class A and Class B common stock representing
approximately 68.5% of the voting power of our outstanding common stock. Each
share of Class B common stock entitles the holder to 10 votes on any matter
submitted to the stockholders. As a result of his share ownership, Mr. Gorman
will be able to determine the outcome of all matters requiring stockholder
approval, including the election of directors, amendment of our charter and
approval of significant corporate transactions. Mr. Gorman will be in a position
to prevent a change in control of Mail.com even if the other stockholders were
in favor of the transaction.
Mail.com and Mr. Gorman have agreed to permit our stockholders who
formerly held our preferred stock to designate a total of three members of our
board of directors.
Our charter contains provisions that could deter or make more expensive a
takeover of Mail.com. These provisions include the ability to issue "blank
check" preferred stock without stockholder approval.
OUR GOAL OF BUILDING BRAND IDENTITY IS LIKELY TO BE DIFFICULT AND EXPENSIVE.
We believe that a quality brand identity will be essential if we are to
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.
REGULATION OF EMAIL AND INTERNET USE IS EVOLVING AND MAY ADVERSELY IMPACT OUR
BUSINESS.
There are currently few laws or regulations that specifically regulate
activity on the Internet. However, laws and regulations may be adopted in the
future that address issues such as user privacy, pricing, and the
characteristics and quality of products and services. For example, the
Telecommunications Act of 1996 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.
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Moreover, the extent to which existing laws relating to issues such as
property ownership, pornography, libel and personal privacy are applicable to
the Internet is uncertain. We could face liability for defamation, copyright,
patent or trademark infringement and other claims based on the content of the
email transmitted over our system. We do not and cannot screen all the content
generated and received by our members. Some foreign governments, such as
Germany, have enforced laws and regulations related to content distributed over
the Internet that are more strict than those currently in place in the United
States. We may be subject to legal proceedings and damage claims if we are found
to have violated laws relating to email content.
We are subject to regulation by various state public service and public
utility commissions and by various international regulatory authorities with
respect to our fax services. We are licensed by the FCC as an authorized
telecommunications company and are classified as a "non-dominant interexchange
carrier." Generally, the FCC has chosen not to exercise its statutory power to
closely regulate the charges or practices of non-dominant carriers.
Nevertheless, the FCC acts upon complaints against such carriers for failure to
comply with statutory obligations or with the FCC's rules, regulations and
policies. The FCC also has the power to impose more stringent regulatory
requirements on us and to change its regulatory classification. There can be no
assurance that the FCC will not change its regulatory classification or
otherwise subject us to more burdensome regulatory requirements.
On August 7, 1997, the FCC issued new rules which may significantly
reduce the cost of international calls originating in the United States. Such
rules are scheduled to be phased in over a five-year period starting on January
1, 1998. To the extent that these new regulations are implemented and result in
reductions in the cost of international calls originating in the United States,
we will face increased competition for our international fax services which may
have a material adverse effect on our business, financial condition or results
in operations.
In connection with the deployment of Internet-capable nodes in countries
throughout the world, we are required to satisfy a variety of foreign regulatory
requirements. We intend to explore and seek to comply with these requirements on
a country-by-country basis as the deployment of Internet-capable facsimile nodes
continues. There can be no assurance that we will be able to satisfy the
regulatory requirements in each of the countries currently targeted for node
deployment, and the failure to satisfy such requirements may prevent us from
installing Internet-capable facsimile nodes in such countries. The failure to
deploy a number of such nodes could have a material adverse effect on its
business, operating results and financial condition.
Our facsimile nodes and our faxLauncher service utilize encryption
technology in connection with the routing of customer documents through the
Internet. The export of such encryption technology is regulated by the United
States government. We have authority for the export of such encryption
technology other than to Cuba, Iran, Iraq, Libya, North Korea, and Rwanda.
Nevertheless, there can be no assurance that such authority will not be revoked
or modified at any time for any particular jurisdiction or in general. In
addition, there can be no assurance that such export controls, either in their
current form or as may be subsequently enacted, will not limit our ability to
distribute our services outside of the United States or electronically. While we
take precautions against unlawful exportation of our software, the global nature
of the Internet makes it virtually impossible to effectively control the
distribution of our services. Moreover, future Federal or state legislation or
regulation may further limit levels of encryption or authentication technology.
Any such export restrictions, the unlawful exportation of our services, or new
legislation or regulation could have a material adverse effect on our business,
financial condition and results of operations.
The legal structure and scope of operations of our subsidiaries in some
foreign countries may be subject to restrictions which could result in severe
limits to our ability to conduct business in these countries and this could have
a material adverse effect on our financial position, results of operations and
cash flows. We have 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, our ability
to raise capital in the private and public markets may be adversely affected and
the value of our investments and acquisitions in these markets may decline.
Moreover, to the extent we are limited in our ability to engage in certain
activities or are required to contract for these services from a licensed or
authorized third party, our costs of providing our services will increase and
our ability to generate profits may be adversely affected.
OUR INTELLECTUAL PROPERTY RIGHTS ARE CRITICAL TO OUR SUCCESS, BUT MAY BE
DIFFICULT TO PROTECT.
We regard our copyrights, service marks, trademarks, trade secrets,
domain names and similar intellectual property as critical to our success. We
rely on trademark and copyright law, trade secret protection and confidentiality
and/or license agreements with our employees, members, strategic partners and
others to protect our proprietary rights. Despite our precautions, unauthorized
third parties may improperly obtain and use information that we regard as
proprietary. Third parties may submit false registration data attempting to
transfer key domain names to their control. Our failure to pay annual
registration fees for key domain names may result in the loss of these domains
to third parties. Third parties have challenged our rights to use some of our
domain names, and we expect that they will continue to do so.
The status of United States patent protection for software products is
not well defined and will evolve as additional patents are granted. We do not
know if our current or future patent applications will be issued with the scope
of the claims we seek, if at all. Current United States law does not adequately
protect our database of member contact and demographic information. In addition,
the laws of some foreign countries do not protect proprietary rights to the same
extent as do the laws of the United States. Our means of protecting our
proprietary rights in the United States or abroad may not be adequate and
competitors may independently develop similar technology.
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Third parties may infringe or misappropriate our copyrights, trademarks
and similar proprietary rights. In addition, other parties have asserted and may
in the future assert infringement claims against us. We cannot be certain that
our services do not infringe issued patents. Because patent applications in the
United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to our services.
We have been and may continue to be subject to legal proceedings and
claims from time to time in the ordinary course of our business, including
claims related to the use of our domain names and claims of alleged infringement
of the trademarks and other intellectual property rights of third parties. Third
parties have challenged our rights to register and use some of our domain names
based on trademark principles and on the recently enacted Anticybersquatting
Consumer Protection Act. As domain names become more valuable to businesses and
other persons, we expect that third parties will continue to challenge some of
our domain names and that the number of these challenges may increase. In
addition, the existing or future laws of some countries, in particular countries
in Europe, may limit or prohibit our ability to use in those countries or
elsewhere some of our geographic names that contain the names of a city in those
countries or the name of those countries. Intellectual property litigation is
expensive and time-consuming and could divert management's attention away from
running our business.
THE SUCCESS OF OUR GLOBAL OPERATIONS IS SUBJECT TO SPECIAL RISKS AND COSTS.
We have begun, and intend to continue, to expand our operations outside
of the United States. This international expansion will require significant
management attention and financial resources. We face substantial risks in doing
business globally, including unexpected changes in regulatory requirements,
export restrictions, difficulties in staffing and managing foreign operations,
difficulties in protecting intellectual property rights, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates and exchange rate controls, difficulties in enforcing contracts and
potentially adverse consequences. In addition, as described elsewhere in this
prospectus, governments in foreign jurisdictions may regulate the Internet or
other online services in such areas as content, privacy, network security,
encryption or distribution, which may also affect our ability to conduct
business internationally.
THE LIMITED INSTALLED PERSONAL COMPUTER BASE AND HIGH COST OF ACCESSING THE
INTERNET IN CHINA AND INDIA LIMITS THE POOL OF POTENTIAL CUSTOMERS FOR ASIA.COM
AND INDIA.COM.
The market penetration rates of personal computers and on-line access in
China and India are far lower than such rates in the United States. Alternate
methods of obtaining access to the Internet, such as through cable television
modems or set-top boxes for televisions, are currently unavailable in India and
China. There can be no assurance that the number or penetration rate of personal
computers in China and India will increase rapidly or at all or that alternate
means of accessing the Internet will develop and become widely available in
China and India.
Our growth is limited by the cost to Chinese and Indian consumers of
obtaining the hardware, software and communications links necessary to connect
to the Internet in China and India. If the costs required to access the Internet
do not significantly decrease, most of China's and India's population will not
be able to afford to use our services. The failure of a significant number of
additional Chinese and Indian consumers to obtain affordable access to the
Internet would make it very difficult to execute our business plan.
We believe that wireless access to the Internet through a variety of
hand-held and other devices such as mobile phones will become increasingly
important in Asia. Accordingly, our Asia.com subsidiary has made wireless
Internet services for businesses an important part of its business focus. We
cannot assure you that wireless access to the Internet will in fact develop and
reach wide use and acceptance in Asia as we expect.
WE ARE RELYING ON ELECTRONIC COMMERCE AS A SIGNIFICANT PART OF OUR FUTURE
REVENUE, BUT THE INTERNET HAS NOT YET BEEN PROVEN AS AN EFFECTIVE COMMERCE
MEDIUM IN CHINA AND INDIA.
Our revenue growth depends in part on the increasing acceptance and use
of electronic commerce in China and India. The Internet may not become a viable
commercial marketplace in Asia for various reasons, many of which are beyond our
control, including:
- inexperience with the Internet as a sales and distribution
channel;
- inadequate development of the necessary infrastructure to
facilitate electronic commerce;
- concerns about security, reliability, cost, ease of deployment,
administration and quality of service associated with conducting
business over the Internet; and
- inexperience with credit card usage or with other means of
electronic payment.
UNDERDEVELOPED TELECOMMUNICATIONS INFRASTRUCTURE HAS LIMITED AND MAY CONTINUE TO
LIMIT THE GROWTH OF THE INTERNET MARKET IN CHINA AND INDIA.
The telecommunications infrastructure in China and India is not well
developed. The underdeveloped Internet infrastructure in China and India has
limited the growth of Internet usage there. If the necessary Internet
infrastructure is not developed, or is not developed on a timely basis, future
growth of the Internet in China and India will be limited and our business could
be harmed.
OUR ASIA.COM BUSINESS MAY BE ADVERSELY AFFECTED BY CHINESE GOVERNMENT REGULATION
OF INTERNET COMPANIES.
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China has recently begun to regulate its Internet sector by making
pronouncements or enacting regulations regarding the legality of foreign
investment in the Chinese Internet sector, the existence and enforcement of
content restrictions on the Internet and the availability of securities
offerings by companies operating in the Chinese Internet sector. There are
substantial uncertainties regarding the proper interpretation of current and
future Chinese Internet laws and regulations.
Issues, risks and uncertainties relating to Chinese government regulation
of the Chinese Internet sector include the following:
A prohibition of foreign investment in businesses providing value-added
telecommunication services, including computer information services or
electronic mail box services, may be applied to Internet businesses such as
ours. Some officials of the Chinese Ministry of Information and Industry, or
MII, have taken the position that foreign investment in the Internet sector is
prohibited.
The MII has also stated recently that it intends to adopt new laws or
regulations governing foreign investment in the Chinese Internet sector in the
near future. If these new laws or regulations forbid foreign investment in the
Internet sector, our business in China will be severely impaired.
Under the agreement reached in November 1999 between China and the United
States concerning the United States' support of China's entry into the World
Trade Organization, or WTO, foreign investment in Chinese Internet services will
be liberalized to allow for 30% foreign ownership in key telecommunication
services, including Chinese Internet ventures, for the first year after China's
entry into the WTO (subject to certain geographic limitations), 49% in the
second year (with expanded geographic coverage) and 50% thereafter (with no
geographic limitations). The implementation of this agreement is subject to
approval by the U.S. Congress, China's completion of bilateral negotiations with
other WTO members, the multilateral negotiation of China's accession protocol
with the WTO and the completion of China's own domestic procedures for
accession. Within the United States, China's WTO accession faces opposition from
trade unions, environmentalists and human rights organization.
The MII has also stated recently that the activities of Internet content
providers are also subject to regulation by various Chinese government
authorities, depending on the specific activities conducted by the Internet
content provider. Various government authorities have stated publicly that they
are in the process of preparing new laws and regulations that will govern these
activities. The areas of regulation may include online advertising and online
news reporting. In addition, the new laws and regulations may require various
Chinese government approvals for securities offerings by companies engaged in
the Internet sector in China.
The interpretation and application of existing Chinese laws and
regulations, the stated positions of the MII and the possible new laws or
regulations have created substantial uncertainties regarding the legality of
existing and future foreign investments in, and the businesses and activities
of, Chinese Internet businesses, including our Asia.com business.
Accordingly, it is possible that the relevant Chinese authorities could,
at any time, assert that any portion or all of Asia.com's existing or future
ownership structure and businesses violates Chinese laws and regulations. It is
also possible that the new laws or regulations governing the Chinese Internet
sector that may be adopted in the future will prohibit or restrict foreign
investment in, or other aspects of, any of Asia.com's current or proposed
businesses and operations. In addition, these new laws and regulations may be
retroactively applied to Asia.com.
If Asia.com is found to be in violation of any existing or future Chinese
laws or regulations, the relevant Chinese authorities would have broad
discretion in dealing with such a violation, including, without limitation, the
following:
- levying fines;
- revoking our business license;
- requiring us to restructure our ownership structure or operations;
and
- requiring us to discontinue any portion or all of our Internet
business.
EVEN IF ASIA.COM COMPLIES WITH CHINESE GOVERNMENTAL REGULATIONS, THE CHINESE
GOVERNMENT MAY PREVENT US FROM DISTRIBUTING, AND WE MAY BE SUBJECT TO LIABILITY
FOR, CONTENT THAT IT BELIEVES IS INAPPROPRIATE.
China has enacted regulations governing Internet access and the
distribution of news and other information. Even if we comply with Chinese
governmental regulations relating to licensing and foreign investment
prohibitions, if the Chinese government takes any action to limit or prohibit
the distribution of information through our network or to limit or regulate any
current or future content or services available to users on our network, our
Asia.com business would be harmed.
SOME OF OUR OPERATIONS ARE BASED IN INDIA, WHICH PRESENTS SPECIAL REGULATORY AND
OTHER RISKS TO OUR BUSINESS.
India has also recently begun to regulate its Internet sector by making
pronouncements or enacting regulations regarding various Internet activities in
India and the legality of foreign investment in the Indian Internet sector.
There are substantial uncertainties regarding the proper interpretation of
current and future Indian Internet laws and regulations. Issues, risks and
uncertainties relating to Indian government regulation of the Indian Internet
sector include risks similar to those in China, in particular with respect to
limitations on foreign investment.
Political instability related to the formation of a new government in
India could halt or delay the liberalization of the Indian economy and adversely
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affect business and economic conditions in India generally and our business in
particular. During the past decade, the government of India has pursued policies
of economic liberalization, including significantly relaxing restrictions on the
private sector. Nevertheless, the role of the Indian central and state
governments in the Indian economy has remained significant. The government of
India recently changed for the fifth time since 1996. A significant change in
India's economic liberalization and deregulation policies could adversely affect
business and economic conditions in India generally and our India.com business
in particular.
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 June 30, 2000, we had an aggregate of 59,161,555 shares of Class A and Class
B common stock and 14,361,356 options and 1,251,233 warrants to purchase an
aggregate of 15,612,589 shares of Class A common stock outstanding. As of such
date, approximately 50,746,846 shares of Class A common stock and Class B common
stock were freely tradable, in some cases subject to the volume and manner of
sale limitations contained in Rule 144. As of such date, approximately 8,414,709
shares of Class A common stock will become available for sale at various later
dates upon the expiration of one-year holding periods or upon the expiration of
any other applicable restrictions on resale. We are likely to issue large
amounts of additional Class A common stock, which may also be sold and which
could adversely affect the price of our stock.
As of June 30, 2000 the holders of up to 21,211,911 shares of Class A
common stock, had the right, subject to various conditions, to require us to
file registration statements covering their shares, or to include their shares
in registration statements that we may file for ourselves or for other
stockholders, including the shelf registration statement we are required to file
with respect to our convertible notes. By exercising their registration rights
and selling a large number of shares, these holders could cause the price of the
Class A common stock to fall. An undetermined number of these shares have been
sold publicly pursuant to Rule 144.
OUR STOCK PRICE HAS BEEN VOLATILE AND WE EXPECT THAT IT WILL CONTINUE TO BE
VOLATILE.
Our stock price has been volatile since our initial public offering and
we expect that it will continue to be volatile. As discussed above, our
financial results are difficult to predict and could fluctuate significantly. In
addition, the market prices of securities of Internet-related companies have
been highly volatile. A stock's price is often influenced by rapidly changing
perceptions about the future of the Internet or the results of other Internet or
technology companies, rather than specific developments relating to the issuer
of that particular stock. As a result of volatility in our stock price, a
securities class action may be brought against us. Class-action litigation could
result in substantial costs and divert our management's attention and resources.
PART II OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
During the three months ended June 30, 2000, Mail.com issued Class A common
stock to third parties in connection with business transactions or granted
options to employees in reliance upon the exemption from registration pursuant
to Section 4 (2) of the Securities Act of 1933 and Rule 701 or Regulation S
promulgated thereunder or otherwise not subject to registration in various
transactions as follows:
During the three months ended June 30, 2000, we issued 22,777 shares of Class A
common stock to employees at a weighted average price of $8.27 per share
representing the Company's matching contribution to its 401(k) plan.
On April 17, 2000, we issued 462,963 shares of Class A common stock to the
shareholders of Bantu as part of a 4.6% investment in that company.
During the three months ended June 30, 2000, we issued 1,926,180 shares of Class
A common stock as part of the purchase price for certain Asia.com acquisitions.
On June 30, 2000, we issued 225,049 shares of Class A common stock to 3Cube, Inc
representing an additional investment in that company.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on May 18, 2000.
(b) Each of the persons named in the Proxy Statement as a nominee for
Director was elected.
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(c) The following are the voting results on each of the matters which
were submitted to the shareholders
<TABLE>
<CAPTION>
Withheld or Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
Election of Directors
---------------------
Gerald Gorman 138,977,521 61,276 - -
Gary Millin 138,977,521 61,276 - -
Lon Otremba 138,977,521 61,276 - -
Thomas Murawski 138,977,521 61,276 - -
Charles Walden 138,977,521 61,276 - -
William Donaldson 138,977,521 61,276 - -
Stephen Ketchum 138,977,521 61,276 - -
Jack Kuehler 138,977,521 61,276 - -
Resolutions
-----------
To approve the Mail.com, Inc.
2000 stock option plan 124,648,400 586,608 44,103 13,759,686
To approve the Mail.com, Inc.
employee stock purchase plan 125,050,916 167,032 40,353 13,780,496
Authorization to amend the Company's
Amended Restated Certificate of Incorporation
Classes A and B common stock 123,342,701 1,880,346 37,054 13,778,696
Class A common stock voting as a separate class 23,342,701 1,880,346 37,054 13,778,696
To ratify the appointment of KPMG, LLP
as independent auditor for 2000 136,969,657 2,038,618 30,522 -
</TABLE>
The text of the matters referred to under this Item 4 is set forth in the Proxy
Statement dated April 18, 2000 previously filed with the Commission and
incorporated herein by reference.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed as part of this report:
(4) Instruments defining the rights of security holders, including
indentures
1 Amended and Restated Certificate of Incorporation of Mail.com,
Inc is hereby incorporated by reference to Exhibit 4.1 to
Form S-8 (Registration No. 333-39586) filed on June 19,
2000.
2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Mail.com, Inc. is hereby incorporated by
reference to Exhibit 4.2 to Form S-8 (Registration No.
333-39586) filed on June 19, 2000.
3 Bylaws of Mail.com, Inc. are hereby incorporated by reference to
Exhibit 4.3 of Form S-8 (Registration No. 333-39586)
filed on June 19, 2000.
(10) Material Contracts
ii (d)
(1) Lease agreement between Mail.com as guarantor and Newcourt
Leasing Corporation.
(2) Lease agreement between Mail.com as guarantor and Newcourt
Leasing Corporation.
(3) Master Lease agreement between Mail.com and Leasing
Technologies International, Inc.
(4) Master Lease agreement between Mail.com and GATX
Technology Services Corporation.
(5) Master Lease agreement between Mail.com and Newcourt
Leasing Corporation
(27) Financial Data Schedule
Reports on Form 8-K - Mail.com, Inc. did not file any reports on Form 8-K during
the three months ended June 30, 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
August 14, 2000
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